Equity & Trusts is a cornerstone of the English legal system, known for its complexity and doctrinal depth. This guide is designed to demystify core concepts, focusing on the essential knowledge required for exam success. We will explore the foundational 'three certainties' for creating a valid trust, delve into the consequences of a breach of trust, and unpack the powerful remedies of tracing and the imposition of resulting and constructive trusts.
💡 Key Takeaway
Mastering Equity & Trusts requires understanding not just the rules, but the principles of fairness and conscience that underpin them. For exams, focus on the 'three certainties' as the essential starting point for any problem question involving the creation of an express trust. Without them, the trust fails.
The Three Certainties: The Foundation of Express Trusts
For an express trust to be valid, the person creating it (the settlor) must demonstrate certainty in three key areas, as established in the landmark case of Knight v Knight (1840) 3 Beav 148. Failure in any one of these certainties will cause the trust to fail.
1. Certainty of Intention
The settlor must have a clear intention to create a trust, rather than a gift or loan. The court looks for imperative words that impose a mandatory obligation on the trustee. Precatory words (words of hope or desire, like 'in full confidence') are generally insufficient. Compare the outcomes in Lambe v Eames (1871) LR 6 Ch App 597 (no trust) and Comiskey v Bowring-Hanbury [1905] AC 84 (trust found due to mandatory gift over).
2. Certainty of Subject Matter
The property subject to the trust must be clearly identifiable. This includes both the trust property as a whole and the beneficial interests of the beneficiaries. In Palmer v Simmonds (1854) 2 Drew 221, 'the bulk of my estate' was deemed too uncertain. However, the court has shown flexibility. In Hunter v Moss [1994] 1 WLR 452, a trust over 50 of 950 identical shares was upheld, a decision that remains controversial but is practically important.
3. Certainty of Objects (Beneficiaries)
The beneficiaries of the trust must be certain. The test for certainty varies depending on the type of trust:
- Fixed Trusts: The 'complete list' test applies. It must be possible to draw up a complete list of all beneficiaries (IRC v Broadway Cottages Trust [1955] Ch 20).
- Discretionary Trusts: The 'is or is not' test applies. It must be possible to say with certainty whether any given individual is or is not a member of the class of beneficiaries (McPhail v Doulton [1971] AC 424).
Breach of Trust: Duties and Consequences
A trustee owes a fiduciary duty to the beneficiaries. A breach occurs if the trustee fails to perform their duties, acts outside their powers, or fails to meet the required standard of care. The foundational duty is to act in the best interests of the beneficiaries, as outlined in the Trustee Act 2000.
Common Breaches
Breaches can range from fraudulent self-dealing to negligent investment decisions. A key duty is the duty to invest prudently, which now has a statutory basis in the Trustee Act 2000. The case of Speight v Gaunt (1883) 9 App Cas 1 established the standard of care as that of an ordinary prudent man of business. This has been supplemented by statutory duties.
⚠️ Common Mistake
A common error is to assume a trustee is liable for any loss on an investment. This is incorrect. Trustees are not guarantors. If they have acted with the required standard of care and within their powers, they will not be liable for a loss that was simply the result of market fluctuations. See Nestle v National Westminster Bank plc [1993] 1 WLR 1260.
Remedies for Breach
If a breach causes a loss to the trust, the beneficiaries can sue the trustee. The primary remedy is equitable compensation to restore the trust fund to the position it would have been in had the breach not occurred. Beneficiaries may also seek to have the trustee removed or to have a transaction set aside.
Tracing: Following the Trust Property
Tracing is a process that allows beneficiaries to identify and follow trust property as it is converted from one form to another or mixed with other funds. It is a crucial tool where a trustee has misappropriated assets. It is not a remedy in itself, but a precursor to one.
In Foskett v McKeown [2001] 1 AC 102, Lord Millett described tracing as "neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property... and justifies his claim that the proceeds can properly be regarded as representing his property."
| Concept | Description | Key Case |
|---|---|---|
| Tracing at Common Law | Requires a clean substitution. Cannot be used if funds are mixed. | Taylor v Plumer (1815) 3 M&S 562 |
| Tracing in Equity | Possible even when funds are mixed. Requires a fiduciary relationship. | Re Hallett's Estate (1880) 13 Ch D 696 |
| The 'Lowest Intermediate Balance' Rule | If a trustee mixes trust funds with their own and spends some, they are presumed to spend their own money first. However, the claim is limited to the lowest balance in the account. | Roscoe v Winder [1915] 1 Ch 62 |
Resulting and Constructive Trusts
Unlike express trusts, resulting and constructive trusts arise by operation of law, without the need for the three certainties. They are imposed by the court in specific situations to achieve a just outcome.
Resulting Trusts
A resulting trust typically arises in two situations: (1) where an express trust fails, the property 'results' back to the settlor; (2) where a person contributes to the purchase price of a property but is not named on the legal title. Their contribution is presumed to give them a beneficial interest in proportion to their contribution (Dyer v Dyer (1788) 2 Cox Eq Cas 92).
Constructive Trusts
A constructive trust is a more flexible tool, imposed by the court whenever it would be unconscionable for the legal owner of property to deny the beneficial interest of another. A common scenario is in the context of a shared family home, as seen in cases like Lloyds Bank plc v Rosset [1991] 1 AC 107 and the more recent, flexible approach in Stack v Dowden [2007] 2 AC 432.
📝 Exam Tip
In problem questions involving cohabiting couples and property disputes, always consider the possibility of a constructive trust. Start with the legal title, then look for evidence of a common intention (express or inferred) and detrimental reliance. Contrast the strict approach in Rosset with the holistic approach in Stack and Jones v Kernott [2011] UKSC 53.
Frequently Asked Questions (FAQ)
What happens if certainty of intention is unclear?
If the words are not sufficient to create a trust, the arrangement will be treated as an outright gift to the person who would have been the trustee, with no legal obligation to the intended beneficiaries.
Can a trust be created over part of a bulk of goods?
This is a difficult area. While Hunter v Moss allowed a trust over intangible, identical assets (shares), the case of Re London Wine Co (Shippers) Ltd [1986] PCC 121 held that a trust over wine bottles that had not been segregated from the main stock failed for uncertainty of subject matter.
What is the 'prudent person of business' rule?
It is the standard of care expected of a trustee when managing trust affairs, particularly investments. They must act with the care that an ordinary, prudent business person would take with their own affairs. This is now supplemented by the statutory duty of care in the Trustee Act 2000.
Is a fiduciary relationship always required for equitable tracing?
Traditionally, yes. A pre-existing fiduciary relationship (like that between a trustee and beneficiary) was a prerequisite. However, some recent case law has questioned this requirement, suggesting a claim based on unjust enrichment might be sufficient, though the law remains in development.