McPhail and Ors v Doulton and Ors
[1971] A.C. 424(Judgment by: Lord Guest)
Between: McPhail and Ors - Appellants
And: Doulton and Ors - Respondents
Judges:
Lord Reid
Lord Hodson
Lord GuestViscount 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 Guest
My Lords, I have had the advantage of reading the speech of my noble and learned friend Lord Hodson. I agree with it. I only make a few observations of my own.
Upon the question of construction I have no doubt, in agreement with Russell L.J. in the Court of Appeal, that this is a trust and must be so construed. Clause 9 (a) is mandatory and provides that the trustees shall apply the net income of the fund in making at their absolute discretion grants to or for the benefit of certain persons. By clause 9 (b) they are not bound to exhaust the income of any one year or period in making such grants. Any income not so applied is to be dealt with according to clause 6 (c), which provides that moneys in the hands of the trustees not required for the immediate service of the fund are to be placed on deposit or current account or invested. There is a distinction made between the fund as defined by clause 1 and consisting of the capital of the fund and the income which according to clause 9 (a) is to be distributed among the beneficiaries. It was argued for the respondents that the terms of the deed imported an accumulation of income with power to distribute. I prefer the appellants' description as a direction to distribute income with a power to withhold income.
There is, in my view, a complete answer to the argument that clause 9 (c) contains a mere power and not a trust in that if it was a power the trustees would not be bound to distribute one penny of the income. This is quite contrary to the plain intentions of the settlor that all the income of the fund should be distributed with a power to withhold.
If I understand English law correctly there is a basic distinction between a deed containing a power and a deed containing a trust. The distinction may be difficult to draw, but once drawn the effect is different. In the former case there is a resulting trust in favour of the settlor upon failure to exercise the power or in the case of an invalid exercise. In the case of a trust the beneficiaries are the objects of the trustee's bounty. The trustees are acting in a fiduciary capacity. If the trustees fail to exercise their discretion, the court can compel them to exercise the trust. This distinction has been recognised in the authorities over the years (see Gisborne v. Gisborne, 2 App.Cas. 300) and finally confirmed by a majority of your Lordships in In re Gulbenkian's Settlements [1970] A.C. 508 . In that case the deed admittedly contained a power and the test accordingly was whether in the case of any individual the trustees could safely say that he did or did not come within the category of objects of the power and it was held that the deed was valid (see Lord Upjohn at p. 523). But my noble and learned friend Lord Upjohn, having dealt with the question of a mere power, proceeded to make some general observations upon the question where there was a trust and not a power. The distinction between a power and a trust was clearly recognised in those observations, albeit obiter, by Lord Upjohn. My noble and learned friend Lord Hodson and I concurred in his opinion. But I do not detect in the opinions of the other noble Lords in that case any disagreement with the distinction.
Upon the assumption that this is a deed containing a trust power and not a mere power - as I understand all your Lordships agree - the question then arises what test is to be applied in order to determine the validity of the trust. Up till the present day the test in each case has been different. In the case of a power it is only necessary for the trustees to know whether a particular individual does or does not come within the ambit of the power (In re Gulbenkian's Settlements). In the case of a trust power it is necessary for the validity of the trust that the class among whom the trustees are to exercise their discretion must be ascertainable. This is the result of the decisions in In re H. J. Ogden [1933] CH. 678 (a decision of Lord Tomlin) and latterly in Broadway Cottages Trust [1955] CH. 20 as confirmed in the opinions of the majority of your Lordships in Gulbenkian's case [1970] A.C. 508 .
It is now suggested for the first time that so far as the test of validity is concerned a mere power and a trust power can be assimilated. It is worth observing at the outset that this is a change of direction from the opinion expressed by the majority as recently as 1968. This is justified not upon the ground that the arguments in the previous case were not fully canvassed nor upon the ground that the previous decision was plainly wrong, but upon the basis of expediency.
I will now attempt to analyse the basis of the view of those who consider that there should be an assimilation of the tests for validity. As I have already said, the distinction between a mere power and a trust power is fundamental. The court, apart from a mala fide exercise of a mere power, has no control over the exercise of the power by the donee or trustees, as the case may be. If it is not exercised or fails for invalidity the fund goes to those entitled in default, under the settlement or on a resulting trust. It is very different in the case of a trust power. There the trustees are under a fiduciary duty to exercise the power. The beneficiaries can compel the trustees to exercise the power by application to the court if necessary. If the beneficiaries agreed among themselves to equal divisions they could compel the trustees to distribute the whole fund: see Harman L.J. in In re Gestetner Settlement [1953] CH. 672 , 686.
One of the reasons which, it is said, requires complete ascertainment of the class of objects is that if the court has to administer the trust, then, as it is only the trustees who have discretionary powers, the court can only make an equal division. "Equity is equality." This basic conception is challenged by reference to what is known as the "relation" cases. It is said that the court in these cases has, instead of making an equal division, made a selection in the exercise of its discretion. This shows, it is said, that the principle of equal division is not a necessary result of the exercise of a trust power by the court. I regard the "relation" cases as special for this reason, that in all of them some guide or pointer was given to the trustees as to the manner in which that discretion was to be exercised. The settlor entrusted a discretion to his trustee with certain guide lines and in these circumstances the court did not find it difficult to exercise its own discretion in accordance with the supposed intention of the settlor. For example, in Clarke v. Turner, Free.Ch. 198 the devise was to "such of the relations of the testator as he should think best, and most reputable for his family." The court chose the heir-at-law as the most reputable.
In Warburton v. Warburton (1702) 4 Bro.P.C. 1, "a very extraordinary" case as described by the Master of the Rolls (Sir Richard Arden) in Kemp v. Kemp, 5 Ves. Jr. 849, 859, the discretion was among the executors, their brothers and sister according to their needs. The court gave a double share to the heir. Richardson v. Chapman, 7 Bro.P.C. 318 was not a "relation" case but depended on its own very special facts. Granted that the court did not in these cases direct an equal division, it by no means follows that in a non-relation case where the trustees are given the discretion to distribute amongst a wide class of objects with no guide lines the court would exercise a power of selection. The court has no discretion and is given no guide lines upon which to exercise a discretion. It is on the trustees that the settlor has conferred the discretion. The court can in these circumstances only order an equal division. I consider that the reliance on the "relation" cases is based upon an insecure foundation. Moreover, in none of those cases was it ever suggested that the class of objects was not ascertainable. The test of validity never therefore arose.
A more fundamental objection, however, to the reliance on these cases as a basis for a change in the law is not only their great antiquity - all in the eighteenth century - but also that they were all decided before Kemp v. Kemp (1801) 5 Ves.Jr. 849 and Morice v. Bishop of Durham, 10 Ves.Jr. 522, where the principle of equality was firmly established and has, so far as my researches go, never been questioned since. In Kemp v. Kemp the relation cases were cited but were not thought of sufficient importance to alter the practice. I do not re-quote the passage from Lord Eldon's judgment in Morice v. Bishop of Durham, 10 Ves.Jr. 522, 539, 540 referred to in the speech of my noble and learned friend Lord Hodson.
It would be presumptuous on my part to attempt to improve upon the language of my noble and learned friend Lord Upjohn in Gulbenkian [1970] A.C. 508 . I agree with the conclusions he expresses in that part of his speech which has been correctly described as obiter dictum . It seems to be as plain as can be that if all the objects are not ascertainable, then to distribute amongst the known objects is to take a narrower class than the settlor has directed and so to conflict with his intention.
It has been suggested that it is not in conformity with the court's duty to administer a trust that the settlor's intentions are to be defeated by this "narrow distinction" between mere power and trust power. As I have already said, I regard the distinction as basic. It is also suggested that it is in the public interest that trusts of the nature of the present should be saved, if possible, because of the great benefit conferred on the beneficiaries. I agree, but if this is desirable the remedy is by legislation and not by judicial reform.
For these reasons, I adhere to my concurrence with the whole of the opinion of my noble and learned friend Lord Upjohn in Gulbenkian.
I would allow the appeal.