McPhail and Ors v Doulton and Ors
[1971] A.C. 424(Judgment by: Lord Hodson)
Between: McPhail and Ors - Appellants
And: Doulton and Ors - Respondents
Judges:
Lord Reid
Lord HodsonLord Guest
Viscount Dilhorne
Lord Wilberforce
Subject References:
TRUSTS
DISCRETIONARY
Power of selection
Fund for employees
Trustees 'shall' apply income
Trustees not bound to exhaust income of any year
Power to apply accumulations as though income
Whether trust or power
Whether same or different test applicable in determining validity
Judgment date: 6 May 1970
Judgment by:
Lord Hodson
My Lords, the question under appeal is whether on its true construction the provisions of clause 9 (a) of a deed dated July 17, 1941, by which one Bertram Baden established a fund to provide benefits for the staff of Matthew Hall & Co. Ltd., and their relatives and dependants, constitutes a trust binding the trustees to distribute income in accordance with its provisions or are a mere power not imposing any such duty. Clause 9 provided:
- "(a)
- The trustees shall apply the net income of the fund in making at their absolute discretion grants ... in such amounts at such times and on such conditions (if any) as they think fit ...
- (b)
- The trustees shall not be bound to exhaust the income of any year or other period in making such grants ... and any income not so applied shall be ... [placed in a bank or invested].
- (c)
- The trustees may realise any investments representing accumulations of income and apply the proceeds as though the same were income of the fund and may also ... at any time prior to the liquidation of the fund realise any other part of the capital of the fund ... in order to provide benefits for which the current income of the fund is insufficient."
Clause 10 provided that all benefits being at the discretion of the trustees, no person had any interest in the fund otherwise than pursuant to the exercise of that discretion.
Of the preceding clauses, clause 6 (a) provided that all moneys in the hands of the trustees and not required for the immediate service of the fund may be placed in a deposit or current account with any bank or banking house in the name of the trustees or may be invested as hereinafter provided; clause 7 dealt with the trustees' power of investment.
The settlor died in April, 1960, and his executors, the present appellants, claim that, the deed being wholly void, payment of the fund is due to the settlor's estate. This claim is resisted by those whose interest it is to establish that, whether there is a trust or a mere power under which they may benefit, in neither case is the provision which they seek to support void for uncertainty.
The importance to the parties of the particular question under appeal lies in the circumstance that as the law stands on the authorities it appears at least probable that the prospects of success for the appellants upon the question whether the deed is void for uncertainty are considerably greater if the effect of clause 9 is to constitute a trust than if, on the other hand, it only has the effect of giving to the trustees a mere power not amounting to a trust.
At first instance Goff J. held that nothing more than a power imposing no duty was contained in the provision contained in clause 9. On appeal the majority of the Court of Appeal sustained his judgment without being able to find any certainty in their conclusion, in view of the even balance, as it seemed to them, of the arguments presented. The majority felt able to sustain the judgment by relying on the doctrine ut res magis valeat quam pereat in order that the terms of the deed might have a chance of being effective since, without flying in the teeth of its provisions, the view of the trial judge might prevail, thus giving a better opportunity to those upon whom the testator wished to confer benefit.
There is no doubt that the primary trust here is expressed in a mandatory form. True that this is not necessarily conclusive: cf. In re Hain's Settlement [1961] 1 W.L.R. 440 , 443, per Lord Evershed M.R., but it is a powerful foundation for the argument that a trust so created in its inception is not converted into a power by the mere addition in a later clause of a power to accumulate surplus income. Notwithstanding the different views expressed by the learned judges who have considered the matter in the courts, I cannot for myself resist the conclusion reached by Russell L.J. that clause 9 is a provision for the distribution of the whole with power to accumulate. There is a complete disposition with a primary duty to distribute, a trust for the whole period of its existence with a power to carry forward from year to year.
Clause 10 is relied upon by the respondents as showing that no member of the class was to be entitled to benefit from the fund otherwise than by the exercise of the discretion of the trustees. So it is said that there cannot be a trust of the income but only a power over it. I do not accept this. I agree with Russell L.J. that clause 10 correctly recites the effect of clause 9, viz., that all benefits are at the discretion of the trustees.
The remainder of the clause states the legal result. If this makes clause 10 superfluous it does not justify, in my opinion, the conclusion that it produces a resulting trust to the settlor of income over which the trustees might not exercise their discretion in the event of accumulation being no longer permissible. On the face of it, clause 9 (b) is no more than a provision for retention of moneys unexpended during the lifetime of the trust and as Russell L.J. pointed out it has no other function. True, that the language of clause 9 (c) using the word "accumulation" which often has a technical significance, denoting capital, followed by the permission to apply the proceeds as though the same were income and the succeeding reference to any other part of the capital of the fund suggest and lend support to the contrary conclusion. I am, I admit, unable to account for this language except on the footing of attributing to the draftsman a failure to give accurate expression to the intention of the settlor.
I am, however, satisfied after construing this deed as a whole that the appellants are right in their first contention, viz., that clause 9 (a) constitutes a trust or power coupled with a duty under which the trustees are bound to distribute the whole estate. Clause 9 (a) and (b) together are mandatory, the latter being assisted by an administrative provision including provision for the retention and investment of unexhausted income. Clause 9 (c), notwithstanding its references to capital, is concerned only with those investments which it is to be noted can be realised only with the consent of all the trustees. This treatment is in contrast with powers given to two (or more) trustees as to the trust fund generally (see cl. 6 (b)). For these reasons I am of opinion that the order of the Court of Appeal should be reversed in so far as it affirmed that part of the order of Goff J. dated July 12, 1967, which declared that the provisions of clause 9 (a) constitute a power and not a trust. Unfortunately this does not settle the dispute between the parties.
Goff J. had in addition held that the power was valid and was not void for uncertainty, and on that footing had held that an amending deed dated December 21, 1962, was also valid. This additional holding was discharged by the Court of Appeal, which ordered remission to the Chancery Division for further hearing of the question whether upon the true construction of the deed of July 17, 1941, the provision for the benefit of officers and employees and ex-employees of the company and relatives or dependants of such persons are (a) valid or (b) void for uncertainty or for any other reason.
This latter part of the order of the Court of Appeal should stand together with a declaration that the provisions of clause 9 (a) constitute a trust, not a power.
There remains the vexed question, much canvassed before your Lordships not only in this case but in In re Gulbenkian's Settlements (Whishaw v. Stephens) [1970] A.C. 508 , as to the distinction, if any, between trusts and bare powers in favour of a class of persons when the court has to consider whether a disposition fails by reason of uncertainty.
Of late years a number of dispositions have been considered by the courts in which donors have sought to make elaborate provisions in favour of beneficiaries including such persons as the employees of limited companies and their wives and widows. Such a case was Inland Revenue Commissioners v. Broadway Cottages Trust decided in the Court of Appeal and reported in [1955] CH. 20 . It was there recognised that the accepted test of the validity of a trust was that it must be such as the court can control. The authority for this proposition is to be found in Morice v. Bishop of Durham (1805) 10 Ves.Jr. 522 as stated by Lord Eldon, where he said, at pp. 539, 540:
"As it is a maxim, that the execution of a trust shall be under the control of the court, it must be of such a nature, that it can be under that control; so that the administration of it can be reviewed by the court; or, if the trustee dies, the court itself can execute the trust: a trust therefore, which, in case of maladministration could be reformed; and a due administration directed; and then, unless the subject and the objects can be ascertained, upon principles, familiar in other cases, it must be decided, that the court can neither reform maladministration, nor direct a due administration."
In a sentence there is no trust over which the court cannot assume control. If the inability arises from inability to ascertain the objects of the alleged trust, it is said to be void for uncertainty.
The language used on this topic may have varied from time to time but is, I think, consistent with that used in Inland Revenue Commissioners v. Broadway Cottages Trust [1955] CH. 20 , where, in holding that the trusts of income were not such as the court could enforce, the court based itself upon the judgment of Lord Tomlin (sitting at first instance) in In re H. J. Ogden [1933] CH. 678 , who held that a trust for such members of a given class of objects as the trustees shall select is void for uncertainty, unless the whole range of objects eligible for selection is ascertained or capable of ascertainment.
I adhere to the view expressed in the Court of Appeal in the Broadway Cottages Trust case [1955] CH. 20 that this proposition is based on sound reasoning. The Broadway Cottages Trust case has stood for many years. Disquiet has, however, now arisen about a strict adherence to the requirement of certainty there propounded. This disquiet is due to the narrow distinction between trust, on the one hand, where certainty is required and mere powers, on the other hand, where something less is needed. This matter was discussed before your Lordships in In re Gulbenkian's Settlements [1970] A.C. 508 and disquiet at the effect of the Broadway Cottages Trust decision is, I think, to be discerned in the speech of my noble and learned friend Lord Reid in the Gulbenkian case; and was clearly expressed by the two learned Lords Justices, both experienced equity lawyers, in the Court of Appeal in this case. The observations upon the distinction to which I have referred were not strictly necessary to the discussion in the Gulbenkian case but the matter does become of crucial importance in the instant case in view of the ratio decidendi which prevailed in the Court of Appeal.
The problem itself is not new. I may, I hope, be forgiven for referring to the leading case of Brown v. Higgs, twice heard before the Rolls Court by Sir Richard Arden and finally in your Lordships' House by Lord Eldon (see (1799) 4 Ves.Jr. 707; (1800) 5 Ves.Jr. 495; (1803) 8 Ves.Jr. 561, 576). At the rehearing (5 Ves.Jr. 495, 505) Sir Richard is reported as admitting that the distinction between trust and power was very nice. He illustrated the nicety by reference to the case of the Duke of Marlborough v. Lord Godolphin (1750) 2 Ves.Sen. 61.
The distinction between a trust and a mere power can be stated shortly although the short statement will require some explanation. It is that where there is a trust there is a duty imposed upon the trustees who can be controlled if necessary in the exercise of their duty. Whether the trust is discretionary or not the court must be in a position to control its execution in the interests of the objects of the trust. Where there is a mere power entirely different considerations arise. The objects have no right to complain. Where by the instrument creating the power the discretion is made absolute and uncontrollable the court cannot interfere (Gisborne v. Gisborne (1877) 2 App.Cas. 300). The trust in default controls and he to whom the trust results in default of exercise of the power is in practice the only one competent to object to a wrongful exercise of the power by the donee. Counsel did not profess to know of any successful application to the court by a person claiming to be an apparent object of a bare power. I exclude from consideration cases in which bad faith may be alleged.
I do not deny that what I have said about powers is, so to speak, blurred at the edges by cases in which powers of donees who refuse to exercise their discretion have been treated by the courts as trusts. These powers have been described as intermediate between trusts and powers and are described in detail in Farwell on Powers, 3rd ed. (1916), p. 525, where he cites from the judgment of Lord Eldon in Brown v. Higgs, 8 Ves.Jr. 561 the following passage:
"Where there is a mere power of disposing and it is not executed, the court cannot execute it; but wherever a trust is created and the execution of that trust fails by the death of the trustee or by accident, the court will execute the trust. But there are not only a mere trust and a mere power, but there is also known to the court a power which the party to whom it is given is intrusted and required to execute; and with regard to that species of power, the court considers it as partaking so much of the nature and qualities of a trust, that if the person who has that duty imposed on him does not discharge it, the court will to a certain extent discharge the duty in his room and place. The principle is that if the power is one which it is the duty of the donee to execute, made his duty by the requisition of the will, put upon him as such by the testator, who has given him an interest extensive enough to enable him to discharge it, he is a trustee for the exercise of the power, and has not a discretion whether he will exercise it or not. The court adopts the principle as to trusts, and will not permit his negligence, accident, or other circumstances to disappoint the interests of those for whose benefit he is called upon to execute it."
This passage as quoted by the learned author is to the same effect but not verbatim the same as that which appears in the report of Vesey Junior (8 Ves.Jr. 561, 570-574). It does, however, show that where powers of a fiduciary character, as opposed to being mere powers not coupled with a duty, are concerned the court's position differs in no way from that which it occupies in the case of trusts generally. Lord Eldon in the same case (8 Ves.Jr. 561, 576) said that it was difficult to reconcile all the cases.
Examples of interference by the court are to be found in such cases as Gower v. Mainwaring (1750) 2 Ves.Sen. 87, which shows that the court, where a rule has been laid down for the guidance of donees of powers, will act upon it in the same way as the donees might have done. If trustees disclaim the power, the court may execute it - see Hewett v. Hewett (1765) 2 Ed. 332. In In re Hodges (1878) 7 Ch.D. 754 the court interfered where trustees were considered to be acting capriciously. Where duty and power are coupled the court can compel the trustees to perform the duty - see Gisborne v. Gisborne, 2 App.Cas. 300 and Tempest v. Lord Camoys (1882) 21 Ch.D. 571.
In the Gulbenkian case [1970] A.C. 508 the majority of your Lordships held the view that where there is a valid gift over in default of appointment a mere or bare power of appointment among classes is valid if it can be said with certainty whether any given individual is or is not a member of a class and that the power did not fail simply because of the impossibility of determining every member of the class.
In my opinion a mere power is a different animal from a trust and the test of certainty in the case of trusts which stems from Morice v. Bishop of Durham, 10 Ves.Jr. 522 is valid and should not readily yield to the test which is sufficient in the case of mere powers.
The unhappy results which may follow from incompetent drafting may be, in the case of an instrument held to impose a trust, that it is so much waste-paper, whereas in the case of an instrument differing perhaps on the face of it very little from the invalid trust instrument a good gift of a power to benefit objects may emerge. Thus it is said that in order to avoid fine distinctions the test should be the same for both.
One persuasive argument used is that, in applying the principle that where there is a trust the court must be in a position to exercise it, the court cannot exercise the trustees' discretion in the event of their failing to do so. The discretion being conferred on and exercisable by the trustees alone, the court cannot do other than authorise a distribution in equal shares. This, in cases comparable with the present, must lead to a result tending towards absurdity and makes the strict test of certainty open to serious criticism. This disability of the courts to exercise the discretion reposed in trustees was referred to in the recitation of the argument for the Crown in the judgment of the court in the Broadway Cottages Trust case [1955] CH. 20 , 30. It was not referred to specifically in the conclusion reached by the court although it would be fair to say that the arguments of the Crown set out in the judgment were implicitly accepted. For myself I do not deny that there is force in the argument based on the absurdity of an equal division especially as it has not always been accepted.
In what are called the relations cases, Mosely v. Moseley (1673) Fin. 53, Clarke v. Turner (1694) Free.Ch. 198 and Warburton v. Warburton (1702) 4 Bro.P.C. 1, the court did exercise its own discretionary judgment against equal division. Similarly, in a different context the same principle was applied in the case of Richardson v. Chapman (1760) 7 Bro.P.C. 318, where it appears from the reported argument that the court decreed the proper act to be done not by referring the matter to the trustee's discretion but by directing him to perform as a mere instrument the thing decreed (pp. 326-327). These cases may be explained as cases where there were indications which acted as pointers or guides to the trustees and enabled the court to substitute its own discretion for that of the trustees.
This practice, however, has fallen into desuetude and the modern, less flexible, practice has, it appears, been followed since 1801, when Sir Richard Arden M.R. in Kemp v. Kemp (1801) 5 Ves.Jr. 849 stated that the court now disclaims the right to execute a power and gives the fund equally. The basis of this change of policy appears to be that the court has not the same freedom of action as a trustee and must act judicially according to some principle or rule and not make a selection giving no reason as the trustees can. The court, it is said, is driven in the end to the principle that equity is equality unless, as in the relations cases, the court finds something to aid it. Where there is no guide given the court, it is said, has no right to substitute its own discretion for that of the designated trustees.
I regret that the court is driven to adopt a non possumus attitude in cases where trustees fail to exercise a trust power. In this connection it is perhaps not irrelevant to note that the court has not shown itself helpless in cases of failure and uncertainty where an order has been made to distribute part and pay the balance into court (see In re Benjamin [1902] 1 CH. 723 ). Difficulties of fact in these cases must often arise especially after the passage of time when it is not known what has happened to members of a class who have gone abroad or disappeared and should be capable of solution. Certainty of description, however, if required, must be required at the moment when a trust instrument operates.
I have had the advantage of reading the speech which has been prepared by my noble and learned friend Lord Wilberforce, whose opinion particularly on this topic is of very strong persuasive power. I cannot, however, bridge the gulf which still, I think, yawns between us. If one bases oneself, as I do, on the passage from Lord Eldon's judgment in Morice v. Bishop of Durham, 10 Ves.Jr. 522, 540 as defining the features of a trust, it is, in my opinion, impermissible to sanction, in the case of an uncertain disposition in the sense of the passage quoted, the authorisation by the court of a scheme of distribution such as he suggests. I cannot accept that this is justified by stating that a wider range of inquiry is called for in the case of trust powers than in the case of powers (meaning "mere" as opposed to "trust powers"). To adopt this solution is, I think, to do the very thing which the court cannot do. As was pointed out by my noble and learned friend Lord Upjohn in the Gulbenkian case [1970] A.C. 508 , 524:
"The trustees have a duty to select the donees of the donor's bounty from among the class designated by the donor; he has not entrusted them with any power to select the donees merely from among claimants who are within the class, for that is constituting a narrower class and the donor has given them no power to do this."
I have read and re-read the speech of my noble and learned friend Lord Wilberforce with, I hope, a readiness to change my mind and to temper logic with convenience, but having given the best consideration I can to the problem, I still adhere to the view I have previously expressed in the Broadway Cottages case [1955] CH. 20 and in the Gulbenkian case [1970] A.C. 508 as to the requirements for certainty in the case of the objects of a trust.
I agree with Russell L.J. that the appeal should be allowed and would declare that the provision of clause 9 (a) constitutes a trust, and remit the case to the Chancery Division for determination whether clause 9 is (subject to the effects of section 164 of the Law of Property Act, 1925) valid or void for uncertainty.