Equity and Trusts is a cornerstone of the English legal system, developing from the Court of Chancery to mitigate the harshness of the common law. This guide provides a comprehensive overview for UK law students, particularly those preparing for the SQE, covering the core principles from the creation of trusts to remedies for their breach.
The Nature of Equity and Trusts
Equity is a body of law that operates on the conscience of individuals. A trust is the primary mechanism through which equity works, separating legal ownership from equitable (or beneficial) ownership. The settlor transfers property to a trustee, who holds it for the benefit of a beneficiary. The trustee has legal title, while the beneficiary has the equitable interest.
Express Trusts: The Three Certainties
For an express trust to be valid, three certainties must be present, as established in Knight v Knight (1840) 49 ER 58.
- Certainty of Intention: The settlor must have intended to create a trust. This is a matter of substance, not form. The court looks for imperative words, not precatory ones (e.g., "in full confidence"). See Lambe v Eames [1871] LR 6 Ch App 597.
- Certainty of Subject Matter: The property subject to the trust must be clearly identifiable. This includes both the trust property itself and the respective interests of the beneficiaries. In Palmer v Simmonds (1854) 2 Drew 221, "the bulk of my estate" was held to be uncertain. However, in Re London Wine Co (Shippers) Ltd [1986] PCC 121, wine that had not been segregated from a larger stock was uncertain, but a different conclusion was reached for intangible assets like shares in Hunter v Moss [1994] 1 WLR 452.
- Certainty of Objects: The beneficiaries of the trust must be certain. The test varies depending on the type of trust. For a fixed trust, the "complete list" test applies (IRC v Broadway Cottages Trust [1955] Ch 20). For discretionary trusts, the "is or is not" test is used (McPhail v Doulton [1971] AC 424).
💡 Key Takeaway
The three certainties are the bedrock of any valid express trust. A failure in any one of them will cause the trust to fail. If certainty of intention is lacking, the donee takes the property absolutely. If subject matter is uncertain, there is no trust. If objects are uncertain, the property is held on a resulting trust for the settlor.
Resulting and Constructive Trusts
Unlike express trusts, resulting and constructive trusts arise by operation of law, without the need for express intention.
Resulting Trusts
Resulting trusts arise in two main situations, as outlined by Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669:
- Apparent Gifts: Where A makes a voluntary payment to B or pays for property vested in B's name, there is a presumption that B holds the property on a resulting trust for A. This is the presumption of a resulting trust. Key cases include Dyer v Dyer (1788) 2 Cox Eq Cas 92 and The Venture [1908] P 218. This presumption can be rebutted by the presumption of advancement (e.g., from father to child).
- Failed Trusts: Where a trust fails for any reason (e.g., uncertainty of objects), the property results back to the settlor. A classic example is Re Vandervell's Trusts (No 2) [1974] Ch 269.
Constructive Trusts
A constructive trust is imposed by the court where it would be unconscionable for the legal owner of property to assert their own beneficial interest. They are often described as the "formula for justice".
A constructive trust is a trust which is imposed by equity in order to satisfy the demands of justice and good conscience, without reference to any express or presumed intention of the parties. - Carl Zeiss Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch 276
Common scenarios include unauthorised profits by a fiduciary (Boardman v Phipps [1967] 2 AC 46), and the common intention constructive trust in the context of shared family homes (Lloyds Bank plc v Rosset [1991] 1 AC 107, and more recently, Stack v Dowden [2007] 2 AC 432 and Jones v Kernott [2011] UKSC 53).
📝 Exam Tip
For problem questions involving cohabiting couples and property disputes, the common intention constructive trust is crucial. Start with the principles in Stack v Dowden and Jones v Kernott. Distinguish between sole and joint legal ownership cases and analyse the parties' "whole course of conduct" to infer their common intention.
Breach of Trust and Remedies
When a trustee fails to perform their duties, they are in breach of trust. These duties are found in the trust instrument, statute (e.g., the Trustee Act 2000), and case law.
Duties of a Trustee
- Duty of Care: Trustees must exercise reasonable care and skill. The standard is set out in s.1 of the Trustee Act 2000.
- Duty to Invest: Trustees have a duty to invest the trust fund. The Trustee Act 2000 provides a general power of investment (s.3) and requires trustees to have regard to the "standard investment criteria" (s.4) and take advice (s.5). See Cowan v Scargill [1985] Ch 270.
- Fiduciary Duties: Trustees are fiduciaries and must not allow their personal interests to conflict with their duties. This includes the "no-profit" rule (Keech v Sandford (1726) Sel Cas Ch 61) and the "self-dealing" rule (Tito v Waddell (No 2) [1977] Ch 106).
Remedies for Breach
If a breach causes a loss to the trust fund, the trustee is personally liable to compensate the beneficiaries. This is known as an "account". If the breach results in an unauthorised gain for the trustee, they must "disgorge" it. Beneficiaries may also seek proprietary remedies against the trust property itself or its traceable proceeds.
⚠️ Common Mistake
A frequent error is to confuse personal and proprietary remedies. A personal remedy is a claim against the trustee themselves, which is useless if the trustee is bankrupt. A proprietary remedy is a claim to the property itself, which gives the beneficiary priority over the trustee's general creditors.
Tracing
Tracing is a process by which a beneficiary identifies their property which has been taken in breach of trust. It is a prerequisite to a proprietary claim. The rules differ at common law and in equity.
Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. - Lord Millett in Foskett v McKeown [2001] 1 AC 102.
Equity allows tracing into a mixed fund, which the common law does not. Key principles for tracing into mixed funds include the rule in Re Hallett's Estate (1880) 13 Ch D 696 (presumption of honesty) and Re Oatway [1903] 2 Ch 356. Where the trustee mixes trust money with their own and dissipates some, they are presumed to have spent their own money first.
Proprietary Estoppel
Proprietary estoppel is another equitable doctrine. It can provide a remedy where a person has acted to their detriment in reliance on an assurance that they will acquire an interest in property. The three key elements are:
- Assurance: A representation or assurance made to the claimant. See Thorner v Major [2009] 1 WLR 776.
- Reliance: The claimant must have relied on the assurance. See Greasley v Cooke [1980] 1 WLR 1306.
- Detriment: The claimant must have suffered a detriment as a result of their reliance. See Gillett v Holt [2001] Ch 210.
If the elements are established, the court has discretion to award a remedy that is proportionate to the detriment suffered, as confirmed in Jennings v Rice [2002] EWCA Civ 159.
Key Concepts Compared
| Concept | Basis | Key Case |
|---|---|---|
| Common Intention Constructive Trust | Inferred common intention regarding property ownership | Stack v Dowden [2007] 2 AC 432 |
| Proprietary Estoppel | Detrimental reliance on an assurance | Thorner v Major [2009] 1 WLR 776 |
| Trust Type | Certainty of Objects Test | Key Case |
|---|---|---|
| Fixed Trust | "Complete List" Test | IRC v Broadway Cottages Trust [1955] Ch 20 |
| Discretionary Trust | "Is or Is Not" Test | McPhail v Doulton [1971] AC 424 |
Frequently Asked Questions (FAQ)
What happens if a trust fails for uncertainty of objects?
If an express trust fails because the beneficiaries (objects) are not certain, the trust property is held on an automatic resulting trust for the settlor (or their estate if they are deceased). The trustee cannot take the property for themselves.
Can a trustee also be a beneficiary?
Yes, a trustee can also be one of the beneficiaries. However, a sole trustee cannot be the sole beneficiary, as this would merge the legal and equitable titles and extinguish the trust.
What is the rule in Saunders v Vautier?
The rule in Saunders v Vautier (1841) 4 Beav 115 allows beneficiaries who are of full age (18), sound mind, and together entitled to the whole beneficial interest, to direct the trustees to transfer the trust property to them and thereby terminate the trust.
What are the key provisions of the Trustee Act 2000?
The Trustee Act 2000 modernised the law of trusts. Its key provisions include a statutory duty of care (s.1), a general power of investment (s.3), requirements to consider standard investment criteria (s.4) and to take advice (s.5), and the power to acquire land (s.8). It is highly relevant to the SQE syllabus.
How does the Human Rights Act 1998 affect trusts?
The Human Rights Act 1998, particularly Article 8 (right to private and family life) and Article 1 of the First Protocol (protection of property), can be relevant. For example, in disputes over the family home, the courts must interpret the law in a way that is compatible with these rights. See cases like Stack v Dowden.