Chapter 3g: Enforcing a Fully Constituted Trust

If you have worked through the pages of this work-book in order you should understand what is meant when a trust is described as "fully constituted." You should have seen that a trust will be fully constituted if either the settlor has declared himself a trustee of his property or if the settlor has effectively transferred his property to a trustee. If either a purported declaration or transfer are ineffective the trust will remain incompletely constituted.

Where a trust has been completely constituted the beneficiaries are entitled to enforce it in equity, irrespective of whether the trust was created in their favour in return for valuable consideration or not. They can require the trustee to perform their duties under the trust. They are immediately entitled to the beneficial interest in the trust property, which they can assert against the trustee or any third party (other than a bona fide purchaser for value without notice) who obtains the legal title to it.

The Rights of the Beneficiaries of a Fully Constituted Trust

Consider the following situation:

When Mr and Mrs Paul married, Mrs Paul declared a trust of all her property. Under the terms of this marriage settlement the husband and wife were to enjoy a life-interest in the property, with the remainder interest passing to the children of the marriage on their deaths. If there were no children, and Mrs Paul died during the lifetime of her husband, she possessed a general power of appointment over the remainder interest which she could exercise by will. In default of such an appointment the property would pass to her next of kin.

Mr and Mrs Paul eventually separated after almost twenty years of marriage, by which time she was past the age of childbearing. There had been no children of the marriage. They applied to the court to have the capital held under the marriage settlement paid over to themselves. They argued that the only persons with any interest in the capital were her next of kin, who were volunteers.

Do you think that they were entitled to have the capital paid over in these circumstances?

(a) Yes

(b) No

Answer: (b)

Court of Appeal came to the same conclusion in Paul v Paul (1882) 20 Ch D 742.

The mere fact that the next of kin were volunteers was irrelevant. As Cotton LJ explained, the trust had been completely constituted and the next of kin therefore enjoyed rights as beneficiaries of the trust which they were entitled to enforce.

The case demonstrates that the rights of the beneficiaries of a trust crystallise at the moment that the trust was constituted and can be enforced form that moment irrespective of whether they had been volunteers or not.

The Rights of the Beneficiaries of a Fully Constituted Trust

Consider the following situation:

When she became a nun, Catherine executed a voluntary settlement purporting to assign to trustees all the property she might become entitled to on the death of her father, and gave the trustees full power to receive and give receipts for such property in her name. The beneficiaries of the trust were charities. Her father died, and over the following years his executors transferred her share under the will to the trustees. Almost sixty years later Catherine requested that the trustees transfer any remaining funds to her.

Do you think that she was entitled to have the funds paid over to herself?

(a) Yes

(b) No

Answer: (b)

These facts were litigated in Re Bowden [1936] Ch 71 and Bennett J held that she had no right to receive the funds because they were held on trust.

The facts of this case were slightly more complicated than in Paul v Paul because the trust was not constituted immediately. The initial settlement involved a promise to settle future property, and was thus initially incompletely constituted. (If you are still unsure about the meaning of future property click here to go back to the relevant pages). However, when the trustees received what had been bequeathed to Catherine by her father in accordance with the valid power of attorney she had conferred upon them in the settlement to act on her behalf in this respect, the trust became completely constituted.

Her counsel argued that the settlement was unenforceable because of its voluntary character. Bennett J held that the settlement did not need to be enforced because the trust had already been constituted, thus depriving her (as settlor) from any entitlement to the property.

Thus this case also demonstrates that volunteer beneficiaries gain enforceable rights to trust property, which cannot be defeated or overridden by the settlor, as soon as the trust is completely constituted.

What are incompletely constituted trusts?

You should already be aware that a trust does not exist until it is fully constituted. Until such time the beneficiaries have no entitlement to the trust property and the trustee is not subject to any mandatory duties. Until the trust is fully constituted the settlor remains the unencumbered absolute owner of the property.

As you should have learnt from the previous section of this workbook, a trust will be fully constituted where the settlor has either declared himself a trustee of the trust property or has transferred title to it to a third party trustee. Where a purported declaration or attempted transfer were ineffective, a trust is not brought into existence.

Thus in Jones v Lock it was seen that no trust had been created because a father's words in loose conversation were not to be taken to be a declaration of trust. In Milroy v Lord it was seen that the shares concerned were not subject to a trust because the settlor had not transferred the legal title to the trustee.

Enforcing Incompletely Constituted Trusts

Where a trust remains incompletely constituted the beneficiaries are unable to assert their rights to the intended trust property. However if the settlor had promised that he would constitute a trust of the property in favour of the beneficiaries they may be able to enforce the settlor's unfulfilled promise to create the trust. If the promise is enforceable then they will be able to require the settlor to constituted the trust. In effect the beneficiaries may in some cases obtain equitable specific performance of the settlor's promise to create a trust in their favour.

Obviously the enforceability of the settlor's unfilled promise to create a trust is essentially determined by the nature of the promise, and whether it was in the nature of a contract which equity will enforce. A voluntary promise(i.e. a promise which was not made in return for any consideration) will be unenforceable. However a promise which was in the nature of a contract, in the sense that it was a bargain made in return for consideration, may be enforceable in equity. As will be seen in the following section of the workbook equity defines "consideration" differently to the common law. Thus the rules of consideration governing the enforceability of contracts at common law, with which you are probably already familiar, are not identical to the rules in equity.

Enforcing a Promise to Create a Trust

Consider the following situation:

Ethel (E) has two great-nephews, Fred and George (F & G), who are 18 and 19 respectively. She is getting older and wants to be able to transfer some of her property to them now so that it does not form part of her estate for inheritance tax purposes. However she does not want them to be able to use the money immediately, in case they waste it through immaturity. She therefore tells them that on her next birthday she will transfer her entire share-portfolio to their father, Herbert (H), to hold it on trust for them until they reach the age of 25. He next birthday arrives and she does not transfer the shares to Herbert. Two weeks later she says that she wants to sell them and use the money to pay for a round-the-world cruise.
(a) Can F and G enforce her promise to create a trust in their favour? Yes No

Answer: No

(b) What if E had executed a deed promising to transfer the shares for the benefit of F and G?

Yes No

Answer: No

(c) ...or if E had agreed to transfer the shares in return for a peppercorn?

Yes No

Answer: No

(d) ...or if E had agreed to transfer the shares in return for medical insurance cover?
Yes No

Answer: Yes


Equity will not assist a Volunteer

Will Equity Enforce an Incompletely Constituted Trust?

Consider the following situation:

A husband and wife married in 1859. A marriage settlement was executed in which they covenanted to settle any of the wife's after-acquired property worth more than £100 on the terms of the marriage settlement. In 1877 the wife received £285 by way of a present from her mother. This money was paid into her husbands bank account. It was invested in bearer-bonds which were held at the bank until the death of the husband. The question was then raised whether the bonds formed part of the husband's estate, or whether they were subject to the marriage settlement. The trust was clearly incompletely constituted because the bonds had not been declared subject to the marriage settlement.

The trustees of the marriage settlement claimed the bonds from the executor's of the husband's estate on the grounds that they were entitled to enforce the trust in favour of the beneficiaries, who were the couple's children.

Do you think they were entitled to enforce the trust?

(a) Yes, the trustees were entitled to enforce the incompletely constituted trust

(b) No, the trustees were not entitled to enforce the incompletely constituted trust

Answer: (a) Yes, the trustees were entitled to enforce the incompletely constituted trust

You will be pleased to know that Swinfen Eady J reached the same conclusion when this question was litigated in Pullan v Koe [1913] 1 Ch 9.

Whilst the trust was clearly incompletely constituted the beneficiaries were within the scope of the marriage consideration. Thus from the perspective of equity they had provided valuable consideration and equity was therefore able to assist them.

Since the couple had made an enforceable promise to declare a trust of any of the wife's after-acquired property Swinfen Eady J held that it should be treated as having been bound by the trust as soon as it had come into her hands. He followed the judgement of Jessel MR in Smith v Lucas (1881) 18 ChD 531, who had explained that a covenant to settle was specifically enforceable in equity in favour of a beneficiary who had provided consideration. This is an example of the operation of the equitable maxim that "equity treats as done that which ought to be done."

The bonds were therefore held to be subject to the terms of the marriage settlement, and the husband's executors were required to transfer them to the plaintiff trustees.

It would be a good idea if you were now to read the case in full.


Why Won't Equity Enforce the Incompletely Constituted Trust?

The facts of Re Plumptree's Marriage Settlement [1910] 1 Ch 609 were very similar to those of Pullan v Koe which you considered on the previous page:

In 1878 a husband and wife executed a marriage settlement in which they covenanted that any after-acquired property of the wife would be transferred to the trustees and held upon the terms of the marriage settlement. The wife subsequently received a sum of money which was invested in stock in a Canadian railway in her name. In 1909 the wife died intestate, and the stock was transferred into the name of her husband, who had been granted letters of administration to her estate. The trustees claimed that the stock should be transferred to them for the benefit of the beneficiaries of the marriage settlement, who were the next of kin. Eve J held that they were not entitled to enforce the incompletely constituted trust.

Why was a different result reached in this case to that in Pullan v Koe?

(a) Because the intended trust property was stocks and not bonds

(b) Because the husband was still alive and held the title to the stocks

(c) Because the beneficiaries were the wife's statutory next of kin

(d) Because the trustees were volunteers

Answer: (c) Because the beneficiaries were the wife's statutory next of kin

In Re Plumptree's Marriage Settlement [1910] 1 Ch 609 the trustees were seeking to enforce the trust on behalf of the next of kin of the wife, who were the default beneficiaries of the marriage settlement because the couple had had no children. Whilst the property was within the scope of the covenant in the marriage settlement the next of kin were outside of the scope of the marriage consideration, and were thus volunteers. Since equity will not act to assist a volunteer the trustees could not enforce the covenant on their behalf. This was explained by Eve J.


Consideration in Equity

The previous pages have illustrated how equity will act to enforce an incompletely constituted trust in favour of beneficiaries who have provided consideration, but not in favour of beneficiaries who were volunteers. These principles are summarise in the rule that "equity will not assist a volunteer."

In equity a person will be regarded as a volunteer unless they have given what is described as "valuable consideration." The concept of consideration in equity is in some respects narrower, and in others wider, than the parallel concept of consideration at common law.

(1) Money or money's worth

In equity a person will only be regarded as having provided valuable consideration if the consideration for a promise took the form of "money or money's worth." This is intended to exclude mere nominal consideration, which would be sufficient to create a binding contract at common law entitling the parties to recover damages for their loss in the event of breach. However equity will not specifically enforce a contract which was entered for nominal consideration.

Equity does not require the consideration to be adequate. Provided that the consideration takes the form of "money of money's worth" equity does not refuse specific performance merely because the consideration grossly undervalues the benefit which had been promised. This was affirmed by the early case of Bassett v Nosworthy (1673) Cas Temp Finch 102.

While a promise contained in a covenant (deed) is enforceable at common law, unless the deed was granted in return for valuable consideration it will be unenforceable in equity.

(2) Marriage Consideration

In equity "marriage consideration" is treated as "valuable consideration." Thus a promise made in consideration of a couple marrying is enforceable in equity. However only a limited range of persons are regarded as falling within the scope of the "marriage consideration" namely the husband, wife and issue of the marriage. The concept of marriage settlement was examined by Kay LJ in Attorney-General v Jacobs-Smith [1895] 2 QB 341. Thus, as was seen in Re Plumptree's Marriage Settlement [1910] 1 Ch 609, the next of kin of a wife are treated as volunteers and equity will not enforce the terms of a marriage settlement on their behalf.


Enforcement in Equity – Exceptions

Exceptions 1: The Rule in Strong v Bird

It is often thought that the rule in Strong v Bird (1874) LR 18 Eq 315, whereby an imperfect inter vivos gift will be perfected if the donee is the executor or administrator of the deceased donor's estate, provides an exception to the rule that equity will not assist a volunteer.

Whilst at a practical level the operation of the rule does have the effect that a volunteer gains good title to property which was not effectively transferred to him by the owner, doctrinally it is questionable whether equity in fact "assists" the donor in such cases. The perfection of the gift is a result of the operation of law, and not of the active involvement of equity. This view is supported by the comments of the judges who have decided cases where application of the rule was considered.

For this reason we are not of the view that the rule in Strong v Bird is a genuine exception to the rule that equity will not assist a volunteer. The operation of the rule has been considered in detail above, where it has been regarded as a mechanism by which a trust may become completely constituted.

Exceptions 2: Donatio Mortis Causa

Consider the following situation:

Bob was the owner of an unregistered freehold house in London. In 1986 he was admitted into hospital suffering from a terminal disease. He was visited daily by his friend Margaret. They had lived together for 10 years between 1954 and 1964, but since that time they had seen less of each other. Whilst he was in hospital she looked after his house, using her own set of keys which she had always had to it. Three days before his death Bob told Margaret that the house was hers, and gave her the keys to a steel box which contained the deeds of the property. He said to her: "Do what you like. It's all yours." After Bob's death his nephew was granted letters of administration.

In the light of these circumstances do you think that the following propositions are true or false?


(a) B had bequeathed the house to M True ü False (answer: False)

(b) B had not declared a trust of his house in favour of M ü True False (answer: True)

(c) B was entitled to the house by way of a constructive trust û True ü False (answer: False)

(d) B had intended to make an inter vivos gift of the house to M û True False (answer: False)

(e) B's next of kin were entitled to the house True False (???)


What is a Donatio Mortis Causa?

An owner of property has the right to determine who should own it after his death. The law allows him to specify his instructions for its distribution after his death by means of a will. To be valid, a will must comply with the formalities required by statute. The Wills Act 1837 requires that the will must be in writing, signed by the testator, and attested by two witnesses. Thus a letter signed by a deceased person indicating how they would like their property to be distributed would have no validity in law. Where a person has died without leaving a will their property will be distributed according to the statutory rules of intestacy.

The donatio mortis causa (meaning a "gift on account of death") provides a mechanism by which the owner of property can determine who will own it after his death. It arises where an owner wishes to make a gift which is only intended to take effect if he dies. For example, a father might give his son his watch before undergoing a medical operation saying "I want you to have this if I don't make it." The gift is not a valid inter vivos gift, since it is not intended to have immediate effect, nor it is a testamentary gift. However where the requirements of the principle are met the donee is entitled to obtain the full legal ownership of the property from the donor's estate.

Practical Implications of a Valid Donatio Mortis Causa

(1) An exception to the rule that equity will not assist a volunteer

In Sen v Headley Nourse LJ recognised that the donatio mortis causa was an anomaly which operated as an exception to the rule that "equity will not assist a volunteer." This is because the assistance of equity is required to perfect the imperfect title of the donee of the donatio. When the donor dies, all of his property passes at law to his executor(s) or administrator(s). The donor may enjoy possession of the property which was given to him by way of a donatio (for example if the property was personal and tangible, such as a watch) but he will not have good title. He will only be able to acquire good title if it is transferred to him by the executor(s) or administrator(s). Where the requirements of a valid donatio mortis causa are met equity will compel the executor(s) or administrator(s) to transfer the legal title to the property to the donee, in effect fulfilling the intention of the donor. Equity will act in this way irrespective of the fact that the donee was a volunteer who had not provided any valuable consideration to the donor. Thus in Sen v Headley Bob's administrator was required to transfer the legal title to his house to Margaret.

(2) Relationship to the constitution of trusts

In most cases the donor of the donatio mortis causa will intend to make an absolute gift of the property concerned to the donee, as was the case in Sen v Headley. However it is possible that the donor may wish the donee to hold the property given on trust for specified beneficiaries. If so, it is clear that at the date of death the trust will have remained incompletely constituted. However the willingness of equity to compel the donor's executor or administrator to transfer the title to the intended trust property to the trustee will have the effect of constituting the incompletely constituted trust. Thus equity will act to assist the volunteer beneficiaries. In such circumstances the trust operates almost exactly like a secret trust, although the constituting mechanism is the donatio mortis causa and not the testator's will.

The Requirements of a Valid Donatio Mortis Causa

It has been seen how the donatio mortis causa is an anomalous mechanism by which an owner can make a gift which is only intended to take effect in the event of his death. Since this is an exception to the general policy requirement of a valid will, strict criteria must be satisfied before it will be held that a donor has made a valid donatio mortis causa of his property. These criteria were identified by Lord Russell CJ in Cain v Moon [1896] 2 QB 283.

After you have read his judgement in that case, try to identify the three requirements which must be satisfied from the list below:


1. The donor made the gift in expectation of death

2. The subject matter of the gift must have been delivered to the donee

3. The donor must have intended the gift to revert if he did not die

4. The donor must have attempted to transfer title to the property to the donee

5. The donor intended the gift to be effective immediately

6. The donor made the gift in contemplation of death

Answer: 2, 3, 6

The Gift Must Have Been Made in Contemplation of Death

A gift will only take effect as a valid donatio mortis causa if it the donor made in contemplation of his or her death. This is the crucial contextual factor which motivates equity to enforce the gift despite the fact that it was not made by will. However as Lord Russell CJ explained in Cain v Moon, the gift need not be made because the donor is actually expecting to die.

Do you think that Jim made a gift to Kevin if he gave him his watch saying he wanted him to have it in the following circumstances?


Jim had a religious experience making him aware of his mortality Yes No (answer: No)

Jim was about to take a flight to Australia Yes No (answer: No)

Jim was about to undergo cosmetic surgery on his nose Yes No (answer: yes)

Jim was diagnosed with terminal cancer Yes No (answer: Yes)

Jim said he was going to commit suicide ? Yes No (answer: Depends)

The donor must have delivered the subject matter of the gift to the donee

Property will only be subject to a valid donatio mortis causa if the donee delivered the property to the donee before he died. The donee must be given "dominium" or control of the property concerned.

Consider the following situation:

Bernard was about to undergo heart-bypass surgery. Before he was taken to theatre he gave his mistress Candy his Rolex watch, telling her that he wanted her to have if it he died. He did not survive the operation. By will he left all his property to his wife Danielle.


(a) Was there a valid donatio mortis causa of the watch in favour of C? Yes No (answer: yes)

(b) Would it have made any difference if B had given G the key to a safe deposit box in which the watch was held? Yes No (answer: No)

The donor must have delivered the subject matter of the gift to the donee

Where the subject matter of the donatio is a not a chattel the delivery of dominium may be more complex. Consider the following situation:

Imagine that before his operation Bernard had given Candy the keys to a safe deposit box containing the following items: a bank deposit account book; the title deeds of his cottage (title to which was unregistered at the date of his death); a certificate for 1000 shares in British Telecom; a cheque for £10,000 payable to Candy.

Was there a valid donatio mortis causa of...


...the money in the bank deposit account? ü Yes No (answer: Yes)

...the cottage? Yes No (answer: Yes)

...the shares? ? Yes ? No (answer: depends)

...the money represented by the cheque? Yes ü No (answer: No)


The circumstances must show that the property was intended to revert to the donor if he recovered

Property will not be subject to a valid donatio mortis causa unless the donor only wanted the gift to take effect in the event of his death.

Consider the following circumstances:

Terence was diagnosed with cancer. He underwent an operation on the day after his son's twenty-first birthday. Beforehand he handed his son Stephen a bank deposit account pass book. The account contained £100,000. Terence died during the operation. He had bequeathed all his property to the RSPCA in a will he had executed some years before.


Was Stephen entitled to the money in the account? Yes No (answer: Yes)

The circumstances must show that the property was intended to revert to the donor if he recovered

Property will not be subject to a valid donatio mortis causa unless the donor only wanted the gift to take effect in the event of his death.

Consider the following circumstances:

Terence was diagnosed with cancer. He underwent an operation on the day after his son's twenty-first birthday. Beforehand he handed his son Stephen a bank deposit account pass book. The account contained £100,000. Terence died during the operation. He had bequeathed all his property to the RSPCA in a will he had executed some years before.


Was Stephen entitled to the money in the account? Yes No (answer: Yes)

Would it have made any difference if T had given S the passbook saying "now you are of age I want you to have this"? Yes No (answer: Yes)

...or if T died 14 days later having executed a new will leaving all his property to Rachel? Yes No (answer: No)

...or if T died on the way home before his father? Yes No (answer: Yes)

Exceptions 3: Conveyance to a Minor

A further exception to the rule that equity will not assist a volunteer is provided by statute in the context of a conveyance of a legal estate of land to a minor. Section 1(6) Law of Property Act 1925 provides that a conveyance of a legal estate to a minor operates as a declaration of trust of the land on behalf of the minor. Thus if a donor purports to convey a legal estate in his land to a minor the ineffective conveyance will be treated as an effective declaration of trust in the minor's favour. The minor is entitled to enforce the trust despite the fact that he was a volunteer.

Obviously this exception has little impact upon the general operation of the equitable maxim.


Exceptions 4: Promissory Estoppel

For the sake of completeness it should be noted that the principles of proprietary estoppel are a further exception to the general rule that equity will not assist a volunteer. Proprietary estoppel provides a means by which a person may obtain an interest in property where the owner had not expressly granted it. Where a legal owner of property has encouraged a person that they have, or will obtain, some rights to the property, and that person has acted to his detriment on the basis of the induced belief, he will be entitled to a remedy by way of proprietary estoppel because it would be unconscionable for the legal owner to assert his strict entitlement to the property against them.

The doctrine of proprietary estoppel will apply where there was no contract between the owner and the claimant, but merely a representation. The claimant will often have been a volunteer in the eyes of equity because the requirement of 'detriment' is not synonymous with the requirement of 'valuable consideration' in equity. Thus when equity acts to provide a remedy by way of proprietary estoppel (which some cases have held may include an interest by way of a trust) equity is often acting to assist a volunteer.

Common Law Remedies

1) Settlor Covenanted with the Beneficiary

Consider the following situation:

Bernard was married to Violet. They had a daughter, Joyce. They decided to separate. They executed a deed of separation to which Joyce was a party. In this deed Bernard covenanted that he would settle any property he received under the wills of his parents exceeding £1000 in value on trust for himself for life, and subject to this life interests on trust for Joyce absolutely. Three years after the deed of separation was executed Bernard inherited a fund of £50,000 on the death of his father. He refused to execute any settlement in favour of Joyce.

Do you think that the following statements are true or false?


(a) Joyce was the beneficiary of a fully constituted trust of the fund? True False

(b) Joyce was entitled to enforce the incompletely constituted trust because she was within the marriage consideration? True False

(c) Joyce was not entitled to recover damages for breach of covenant from her father because she was a volunteer? True False

Answer: All False

Beneficiary Entitled to Damages for Breach of Covenant at Common Law

Cannon v Hartley illustrates how the beneficiary of an incompletely constituted trust may be able to obtain damages at common law for breach of covenant even though unable to enforce the trust in equity because she was a volunteer. A beneficiary will only be entitled to do so if she was a party to the covenant.

It should be noted that where such damages are obtained they are paid to the beneficiary absolutely. They are not held subject to the terms of the incompletely constituted trust. Thus the availability of the common law remedy does not indirectly constitute the incompletely constituted trust, but instead compensates the beneficiary for the fact that the trust was never fully constituted in her favour. This distinction was recognised and explained by Romer J.

2) Settlor Covenants with the Trustees

Consider the following situation:

A settlor owned land in Canada. He executed a deed in favour of the intended trustees covenanting that he would transfer the land to them on trust for specified beneficiaries, who were volunteers. The settlor failed to transfer the land.

Do you think that the following statements are true or false?


(a) The beneficiaries were entitled to enforce the trust in equity? True False

(b) The settlor held the land on trust for the beneficiaries? True False

(c) The beneficiaries were entitled to sue the settlor for breach of covenant? True False

(d) The trustees could sue on the covenant but were only entitled to recover nominal damages for their loss? True False

Answer: All False

Should Trustees be Directed to Sue?

It has been seen that in Re Cavendish Browne's Settlement the court held that the trustee were entitled to sue the settlor for breach of his covenant to settle, thereby recovering substantial damages which they held on trust for the beneficiaries.

However in many cases the intended trustees have sought the direction of the court before embarking upon potentially expensive and lengthy proceedings. Imagine that a settlor has covenanted to transfer specific property to trustees, who were party to the covenant. The trustees wonder what to do and seek the direction of the court.

Do you think that the court will direct the trustees to sue the settlor at common law for breach of his covenant?

(a) Yes

(b) No

(c) Don't Know

Answer: NO

Why will the court direct the trustees not to sue?

You should already have read Re Pryce and Re Kay's Settlement. Which of the following statements do you think best summarises why the court will direct a trustee who was a party to a settlor's covenant not to sue for damages for breach at common law?

(a) Because the trustee should be free to make up his own mind whether to sue

(b) Because the trustees would only recover nominal damages anyway

(c) Because the beneficiaries could not have enforced the incompletely constituted trust

(d) Because it would be too expensive to sue

Answer: (c)

What if the trustees sue on their own initiative?

Re Pryce and Re Kay's Settlement establish that where a trustee, with whom the settlor had covenanted, seeks the direction of the court whether to sue the settlor for breach of covenant, the court will direct the trustee not to sue. However it is also a matter of debate whether such a trustee is entitled to recover substantial damages for the breach of covenant if he chooses to sue on his own initiative. In other words, there is some doubt whether the decision in Re Cavendish Browne's Settlement was correct. The central question concerns the quantum of the damages which a trustee is able to recover in such circumstances.

(1) Trustee entitled to recover substantial damages

Some academics, including Elliott, support the view that the trustee can recover substantial damages of the value of the property which the settlor should have transferred to them. Such damages will then be held on trust for the beneficiaries. The entitlement of the trustees to recover substantial damages was also supported by Rickett.

(2) Trustee only entitled to recover nominal damages

However it can also be argued that a trustee is only entitled to recover nominal damages where he was a party to the settlor's covenant, since he suffered no personal loss in consequence of the breach. He would not have derived any personal benefit from the property which had not been transferred as he would have been required to hold it subject to the trust. This view may also be supported by analogy with the decision of the House of Lords in Woodar Investment Developments Ltd v Wimpey Construction (U.K.) Ltd [1980] 1 WLR 277, where it was held that a contracting party was not entitled to recover damages for loss suffered by third parties who were intended to benefit from performance thereof. This understanding was advocated by Marshall.

One difficulty with this approach is that the cases of Re Pryce and Re Kay's Settlement Trusts appear to presuppose that a trustee suing as a party to the settlor's covenant will be able to obtain substantial damages, otherwise the argument that the trustees would obtain indirectly what the beneficiaries could not gain in equity would have no validity. If trustees are only able to recover nominal damages in such circumstances it would have been be easier to direct the trustees not to sue simply because it would have been pointless.

(3) Trustee holds any substantial damages recovered on resulting trust for the settlor

David Hayton has argued that even if a trustee is entitled to sue the settlor for breach of covenant and recover substantial damages to the value of the property which should have been transferred to constitute the trust, the trustee will hold the damages recovered on a resulting trust for the settlor, and not for the beneficiaries. If this analysis is correct, then the ability of the trustees to recover substantial damages is of theoretical value only, since it will not benefit the intended beneficiaries. Again, this is inconsistent with Re Pryce and Re Kay's Settlement, both of which assume that any damages recovered would have been held under the terms of he trust.

Conclusion

It should be clear from the previous page that the status of Re Cavendish Browne's Settlement is in some doubt. Subsequently decided cases such as Re Pryce, Re Kay's Settlement and Re Cook demonstrate a marked unwillingness to allow a trustee to sue a settlor for breach of covenant so as to recover substantial damages which will be held on trust for the beneficiaries. Academic opinion is divided as to whether the trustees should be entitled to recover substantial damages at all in such circumstances, and even if they can, whether they should be held on trust for the beneficiaries or the settlor by means of a resulting trust.

There is no clear authority which can resolve these uncertainties. In our opinion the best solution would be to conclude that a trustee who was a party to the settlor's covenant should only be entitled to recover damages to compensate for any loss he has personally suffered. He would thus only be entitled to recover nominal damages and not substantial damages of the value of the trust property. However you must judge the merits of our view for yourself against the competing analyses.

One thing is clear. Where a trustee is a party to the settlor's covenant, and holds the benefit of that covenant on trust for the beneficiaries, the trustees will be able to sue to recover substantial damages, and can be forced to sue by the beneficiaries. This doctrine will be examined in the following pages, but it should be noted that Rickett has argued that Re Cavendish Browne's Settlement was in fact decided on the grounds that the trustee held the benefit of the settlor's covenant on trust for the beneficiaries. If this is correct there is no authority supporting the view that a trustee can recover substantial damages at law in consequence of a settlor's breach of covenant unless he was a trustee of the benefit of the covenant.

3) Enforcing A Settlor's Covenant at Common Law

Consider the following situation:

Ellis executed a deed some four or five years before his death. He covenanted with five named trustees that if Jacob, his illegitimate son, survived him and attained the age of 21, his executors or administrators should pay over £60,000 to be held on trust for him. Ellis retained the deed in his possession. Some years later he died. He had been survived by Jacob, who attained the age of 21. By will he had bequeathed all his property to wife, his illegitimate children and his legitimate children. The deed was found amongst his papers after his death. Jacob claimed that he was entitled to be paid £60,000 by the executors, but the trustees refused to take any proceedings at law or in equity to recover that sum on his behalf.

When the court was asked to consider these facts, do you think that the following proposition were held to be true or false?


(a) Jacob was the beneficiary of a fully constituted trust of £60,000
 û True ü False

(b) Jacob was entitled to claim the money by virtue of the rule in Strong v Bird
 û True ü False

(c) Jacob was a party to the covenant and entitled to recover damages
 û True ü False

(d) The deed was unenforceable because it was a testamentary paper
 û True ü False

(e) Jacob was entitled to recover the money from the estate of the testator
 ü True û False

Answer: False (a) to (d); True (e)


What is a trust of a promise?

You should now be aware that in Fletcher v Fletcher the court held that the intended beneficiary of a trust was entitled to recover damages where the settlor had broken his covenant to transfer money to named trustees in his favour, even where he was not a party to the covenant, which had been named with the trustees. He was able to do so because the court found that the trustees were holding the benefit of the covenant on trust for him.

Whilst this might sound a rather strange idea, the concept of the trust of a benefit of a covenant (or of a contract) is well established in English law. Such trusts operate so as to defeat the doctrine of privity of contract.

Where A contracts with B to provide a benefit for C, C cannot usually enforce the contract directly against A because he was not privy to it. However if it can be shown that B held the benefit of the contract on trust for C, C will be entitled to enforce the contract against A, suing in his own name and joining B to his action as either co-plaintiff or co-defendant, depending upon whether B is willing to perform his duty as "trustee" to enforce the contract on C's behalf. The operation of a trust of the benefit of a promise was explained by Lord Reid in Beswick v Beswick [1968] AC 58.

An example of such a trust of the benefit of a contract was found in Les Affreteurs Reunis Societe Anonyme v Leopold Walford (London) Ltd [1919] AC 801. The case concerned a ship charter-party. The respondents had acted as broker for the charterers. The charterparty, which had been entered between the charterer and the owners, provided that the owners were to pay a 3% commission of the hire due to the brokers. The House of Lords held that although the broker was not party to the contract the charterer was a trustee of the owner's promise on the broker's behalf. The broker was thus entitled to enforce the promise against the owner despite the fact that he was not privy to the contract.

How can a "promise" form the subject matter of a trust?

The concept of a "trust of a promise" is often difficult to understand because there appears to be no property which is capable of forming he subject matter of a trust. However such a trust is only possible because a binding promise at common law (whether in the form of a contract or a voluntary covenant) is itself a species of property. The benefit of a contract is a form of intangible property right termed a chose in action. The benefit of a contract is thus capable of being transferred by the promisee by means of an assignment.

The proprietary character of a contractual right is the essential foundation of the concept of a trust of a promise. This was recently re-iterated in Don King Productions v Warren [1998] 2 All ER 608 where Lightman J stated:

"The scope of trusts recognised in equity is unlimited. There can be a trust of a chattel, or of a right or obligation under an ordinary legal contract, just as much as a trust of land."

If A contracts with B for the benefit of C, and B holds the benefit of the promise on trust for C, there is already a completely constituted trust of that promise in favour of C. This fully constituted trust entitles C to enforce the promise against A.

Trusts of promises and incompletely constituted trusts

It has been seen how the concept of a trust of a promise may enable a third party to enforce a contract despite the fact that he was not privy to it. The concept may have application in the context of an incompletely constituted trust where the settlor has voluntarily covenanted to transfer property to trustees and the intended beneficiary was not a party to the covenant.

Imagine that S voluntarily covenanted to transfer land worth £50,000 to T, to be held on trust for B. S fails to make any such transfer. The trust is therefore incompletely constituted. B cannot enforce the trust in equity because he is a volunteer. B is not a party to the covenant and cannot sue S directly. In the absence of a trust of a covenant T will not be required to sue S, and even if he were to do so it is far from certain that he would recover substantial damages which he would then hold on trust for B. However if T holds the benefit of S's covenant on trust for B, B can force T to recover damages at common law, which will be held on trust for him.

The doctrine of a trust of a promise may thus operate to help a volunteer beneficiary obtain a common law remedy for breach of covenant. It does not enable him to enforce constitution of the trust. As is clear from the example above, the end result is not that T holds the land on trust for B, but that T holds an equivalent sum of money on trust for B. This amounts to indirect enforcement of the trust through the medium of a common law remedy and a fully constituted trust of the benefit of a covenant!

This is exactly what was held to have happened in Fletcher v Fletcher. However it remains to be considered when a promisee will be held to have become a trustee of the promise.

When will a promisee hold the benefit of the promise on trust for a third party?

Whilst English law undoubtedly recognises the concept of a "trust of a promise" as a means of avoiding the limitations of the doctrine of privity, it remains to be seen whether the doctrine has a widespread impact. This question was discussed in the following three cases:

i. Vandepitte v Preferred Accident Insurance Corp of New York [1933] AC 70

ii. Re Schebsman [1944] Ch 83

iii. Swain v Law Society [1983] 1 AC 598

In the light of these cases, which of the following statements do you think best summarises when a promisee will be taken to have become a trustee of the benefit of the promise for a third party?


(a) A trust is implied because the promise was for the benefit of a third party

(b) The parties explicitly declared that the benefit of the promise was to be held on trust

(c) The parties clearly intended that the benefit of the promise was to be held on trust

(d) The benefit of the promise will never be held on trust

Answer: (c)

Who should declare the trust of a covenant?

One further difficult associated with the doctrine of a trust of a promise concerns the identity of the party capable of declaring such a trust. Imagine that S enters into a covenant with T, the performance of which will benefit B.

In this simple scenario, who is the person capable of declaring a trust of the covenant?

(a) S

(b) T

(c) B

Answer: ??? (a) & (b) are questionable. There is some controversy whether the appropriate person to declare a trust of a covenant is T or S. You will have to judge the arguments for yourself.

As a matter of theory a trust can only be declared by the person who owns property. The person who "owns" the benefit of the covenant is T, since he was the party to it. In cases such as Vandepitte v Preferred Accident Insurance Corp of New York [1933] AC 70 and Swain v Law Society [1983] 1 AC 598 the question was whether the promisee of an insurance contract held the benefit thereof on trust. In other words, whether the person in the position of T in our hypothetical example had expressed an intention to hold the property on trust.

If T is the only person who can declare a trust of the benefit of the covenant, it is hard to see how the finding that there was a trust of a covenant in Fletcher v Fletcher could have been justified. The trustees in that case did not even know of the existence of the covenant until after the death of the covenantor, let alone declared that they were holding the benefit on trust for the covenantor's illegitimate son.

However, despite the logic of this argument some academics have argued that in the case of voluntary covenants (i.e. executed without consideration from the covenantee) the covenantor is capable of declaring that the benefit of the covenant should be held on trust by the covenantee. This position has been advocated by Rickett.

Even if this is the case, there must be a clear manifestation of the intention to subject the benefit of the covenant to a trust at the time that it was executed. For this reason, even if the father was the appropriate person to declare a trust of his covenant in Fletcher v Fletcher, it is hard to maintain that he did so.

Answer: (c) is wrong. B is the person who will benefit from the performance of the covenant. He is not a party to the covenant and thus cannot be the person who subjects it to a trust in his own favour!

The benefit of the covenant can only be subjected to a trust by T or by S. Which of them do you think is capable of creating such a trust?

Was Fletcher v Fletcher rightly decided?

You will remember that in Fletcher v Fletcher it was held that the benefit of a father's covenant to transfer £60,000 on trust for his illegitimate son was held on trust for his son, so that he was entitled to enforce the covenant against his father's estate.

Do you think that a court would come to the same conclusion if identical facts were brought before it today?

(a) Yes, the court would find that the benefit of the covenant was held on trust

(b) No, the court would be unlikely to find that there was a trust of a covenant

Answer: (b)

You will be pleased to know that we agree with your opinion. We are of the view that Wigram V-C was wrong to find that there was a trust of a covenant in Fletcher v Fletcher, and we think that a different conclusion would be reached if the facts were present before a court today.

In Fletcher v Fletcher there was no evidence which would "affirmatively prove" an intention to create a trust of a covenant. In fact the deed containing the covenant was not even discovered until after the death of the father. Thus neither the intended trustees, nor the intended beneficiary, knew of the existence of the covenant. How could they be said to have been holding the benefit of the covenant on trust when they were unaware of its existence? There was no evidence form the deed itself that the father intended them to hold the benefit on trust.

In the light of such cases as Re Schebsman, Fletcher v Fletcher cannot be regarded as good authority for the circumstances in which a trust of a covenant will be found to have been constituted, although it remains good authority for the theoretical possibility that the benefit of a covenant may be subjected to a trust.

Covenants to settle future property

The facts of Re Cook's Settlement [1965] Ch 902 were as follows:

Sir Francis Cook was the owner of a number of valuable paintings. In 1934 he covenanted with trustees that if he sold them during his lifetime he would pay the proceeds to them to be held on trust for his children. In 1962 he gave one of the paintings to his wife and she proposed to sell it. The trustees sought the direction of the court as to the steps they should take if the picture was sold and the proceeds were not paid to them.

Read the judgement of Buckley J (which is relatively short!) and then consider whether the following statements are true or false.

(a) The children were entitled to have the trust enforced because they were within the marriage consideration
 True ü False

(b) F's covenant was not held on trust for his children because there was insufficient intention
 True ü False

(c) The benefit of F's covenant was incapable of being held on trust
 True False

(d) The trustees were directed that they could sue for breach of the voluntary covenant if they wished
 True ü False

Answer: False, False True, False