School Papers

This not much deliberation required in ascertaining the

This question requires us to evaluate the assertion that the test for certainty of objects should be the same for discretionary trusts and powers of appointment. In order to elaborate on this particular notion we will have to discuss each type of discretion in detail and finally deliberate if the particular test proposed in the statement is suitable for both types. In my opinion, Lord Wilberforce’s assertion appropriately defines the course of action required in this particular situation, because, as I shall elaborate, the two devices, although distinct, have a lot a similarities and the extent of the discretion may make it feasible to deliberate using a single test, in particular the ‘is or is not’ test. For this discussion we are primarily concerned with the dispositive powers arising under fixed trusts, discretionary trusts and the powers of appointment. I shall discuss each mode of instruction with reference to the issue of certainty of objects; starting with fixed trusts. The situation under fixed trusts is relatively straightforward, as compared to the others. Typically there may be no difficulty is ascertaining the prescribed role of the trustee, since the settlor’s intentions are expressly promulgated. The terms provide ample specificity as to the distribution and the class of objects may thus be clearly ascertainable. As such a direct test can be used to determine the class of objects; a ‘complete list’ test may thus be a favourable recourse. There may be not much deliberation required in ascertaining the list of beneficiaries in fixed trust, however, there might be some complications involved when considering the dispositive powers available under discretionary trusts and powers of appointment. The directions provided to the trustee and the power holder in discretionary trusts and powers of appointment, respectively, may be more loosely termed than in fixed trusts. In other words, both involve a ‘discretion’ in their use, however, apart from this similarity, they are only tangentially related, and this precise consideration that will be used, and elaborated upon, throughout the debate. Before moving on to consider the distinctive features of these devices, it may be worthwhile to first consider the generally adopted principle regarding certainty of objects and the background as to why this step is imperative to accord efficacy. Before the ruling in McPhail v. Doulton1 the courts utilized the basic distinction between discretionary trusts and powers of appointment to deduce the consequences of inaction in each case. Since the former imposed a duty, failure to comply made the trust invalid, and the court would subsequently order a distribution of the property; whereas, since the latter consisted of a ‘right but not a duty’ it simply would be termed invalid. Before the case of Kemp v. Kemp2 the courts exercised a discretion similar to that of the trustee allotting unequal share, however, as a consequence of the ruling of this case the courts signified the importance of the maxim, ‘Equality is Equity’ in distributing the property equally amongst the objects.3 McPhail altered the test of certainty that applied to the objects of discretionary trusts. Historically the test used for both fixed and discretionary trust was a ‘complete list’ test, that is, for the trust to be valid, every beneficiary must be ascertainable. Its application in the case of powers of appointment was decided in Re Gestetner Settlement4. It was held that the power was valid even though the fluctuating and large group in question could not be deduced to a list. Harman J enunciated, ‘…there is no obligation on the trustees to do more than consider – from time to time, I suppose – the merits of such persons … I cannot see that such a duty makes it essential for these trustees …in ascertaining whether any given postulant is a member of the specified class…’, 5 This particular assertion gave birth to the ‘is or is not’ test, for powers of appointment. Since there was no duty on the power holder to distribute the property, the only relevant consideration was misfeasance, that is, if he appoints property at all, he must only apply to those contained with a class of objects, a complete list was thus not necessary and he only needed to know with certainty if a person was within a class. In IRC v. Broadway Cottages Trust6 the Court of Appeal was faced the conundrum of deliberating the test for certainty of objects in the case of discretionary trusts. Keeping with this agenda both tests for certainty, the ‘complete list’ and the ‘is or is not test’ were closely contrasted, weighing their effects in the case of discretionary trusts. Initial support drawn for the ‘complete list’ test was the principle cited by Lord Eldon in Morice v. Bishop of Durham that in order to be a valid, a trust must be one that the court can control and execute.7 This statement again reiterates the subtle technicalities that differentiate a trust from mere powers. Furthermore, the court stressed the significance of a ‘duty’ imposed on the trustee in contrast to a power of the power-holder, which was primarily highlighted in the argument that an indiscernible class of objects in the case of a discretionary trust may make the principle in Saunders v. Vautier – that a beneficiary takes the trust property sui juris – fastidious, reducing the duties of the trustee to a mere illusion, because a trustee by using the ‘is or is not test’ will reduce the class to a subset of the whole and the rule stated should not be unjustly applied to a part of the whole class of objects. All the more, a vague selection with the use of the ‘is or is not’ test could also include the complication of the trustees belligerent disregard of his duties. It is a core of the trustee’s duties that he must know precisely the class of object and not some of the members that belong to it, which is precisely what this test implies. Consequently, it would be hard for the court to mend the invalidity of a trust where one class may not be the exact class and may be discernibly different than what the settlor intended. This case failed to create a common generalization for discretionary trusts and powers of appointment. Jenkins LJ made the following comments on the failure of the trust: ‘ We think the submissions… to the effect that the trust is not one which the courts could control or execute, and that this objection cannot be met by urging the improbability of assistance by the court ever becoming necessary, are well founded. We also agree that … the court would not be executing the trust merely by ordering a change in trusteeship’.8 This statement prescribes an inherent reluctance of the courts to treat trust powers and regular powers on equal footing. There were however, some favourable responses to the use of the ‘is or is not’ test in this particular case. These following benefits associated with the test may lend further support to the proposition that the same test should apply to both, powers and discretionary trust. First, it was argued that the adoption of this particular test would absolve the trustee of all the difficulties in conducting his duties; therefore, it may be undoubtedly assumed that the trustee will be willing and considerably able to carry out his duties. Secondly, in the case of misfeasance this test would afford the trustees sufficient certainty in distributing property amongst qualified beneficiaries. All the more, distribution to non-objects can also be appropriately ascertained. Furthermore, it would create a more transparent picture for the courts to exercise their own discretion if and when needed in such circumstances. Finally, this test would absolve the difficulties of the courts to prescribe alternative trustees in the case of nonfeasance by the individuals holding the office at that time. Although these were not implemented in the final decision of this case, they do shed sufficient light on the merits of the ‘is or is not’ test, and demonstrate the utilitarian nature of maintaining such a test in the case of discretionary trust. The later amalgamation taken by the later case of McPhail v Doulton was thus a fortunate attempt in unifying the two devices under a single head, as is apparent from the decision of the case. In McPhail v Doulton Lord Wilberforce attempted to take a step towards unifying the test under a single criterion. Recognizing the ‘common sense’ arguments put in Broadway Cottages Trust popularly stated that the distinction between a power and trust, ‘…may be one of degree rather than of principle…’, and that the courts inability to remedy the effects of misfeasance has no probable cause in effectuating a completely decisive test, as the ‘complete list’ test for discretionary trusts. He powerfully stated that the disctinction between the practical tasks faced by the trustee and alternatively the power-holders was a matter of degree. In his exact words he stated, ‘Any trustee holding a mere power would surely make it his duty to know what is the permissible area of selection and then consider responsibly, in individual cases, whether a contemplated beneficiary was within the power and whether, in relation to other possible claimants, a particular grant was appropriate’. This particular assertion may qualify the argument regarding ‘fiduciary duties’ that I will make in the following paragraphs. Conclusively, the essence of Lord Wilberforce’s judgment concluded that the ‘powers’ and ‘trust powers’ should be governed with the ‘is or is not’ test. In deducing whether the same test should apply to both discretionary trusts and powers of appointment it may now be necessary to consider the implications of fiduciary duties. Previously we have discussed the amount of discretion involved and how it differentiates each device, however, as I shall now demonstrate the distinction between the two may be more complicated and miniscule which would in turn make it intelligible to use a single test for both. Let us consider the reasons for this assertion. I shall now move on to a more in-depth classification of duties and powers. As per the rules of equity there are a number of ways in which a person may be instructed by the terms of a trust to transfer property. These instructions are not simply restricted to trustees but may be given to anyone. Furthermore, each operator of instructions may be under a fiduciary obligation; categorized as those arising under duties and those under powers. First of all, let us consider duties virtute officii, whereby the trustee by virtue of holding the office of trusteeship is under a fiduciary duty to the objects to the extent of their discretion. Any replacement trustee will be bound by the same obligation. This is relatively simple and pretty much intuitive and naturally self-explanatory, however, the next may diminish the distinction between discretionary trusts and powers of appointment, i.e. power given ‘in the nature of a trust’. These are the powers given to individuals by name (‘nominatum’), as opposed to a trustee, but on a true construction of the terms of the trust the individual holder of the ‘power’ is under a duty to exercise he power.9 Thus, if a person in this position fails to act, the courts will act for the person, in the same way as the courts will enforce a trust should the trustees themselves fail to act.10 Furthermore, the power holder in this situation will, like a trustee, have a fiduciary obligation to exercise this power taking only the best interests of objects into account, thereby becoming a ‘one-off’ trustee. The same prescribed notion applies for powers virtue officii and powers nominatum. This particular notion may aptly resonate with the ‘question of degree’ argued upon by Lord Wilberforce in McPhail v Doulton, due to the special circumstances that may be attached by virtue of the different relative positions of the trustee or power-holder in certain situations. This particular addition shows a convolution of the roles to the extent that trustees, under a discretionary trust, and power holders, under powers of appointment, have similar directive instructions subsuming the same ‘duties’ under different labels. Taking this inference together with the powerful judgment by Lord Wilberforce, particularly his contention of ‘matter of degree, it may be appropriate to say that the statement provided in the question is correct to suggest that a similar test may be more appropriate each instance. Furthermore, considering the

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