Chapter 4: The Three Certainties Flashcards
1 Introduction
This chapter explores the three certainties. Certainty is an essential component of an express
trust. Rights and obligations need to be certain to be enforceable:
* If a trustee does not know what their obligations are, how can they comply with them?
* If a beneficiary does not know what their rights are, how can they tell whether they are being
breached?
* If the court is not able to determine those rights and obligations, how can it enforce them?
Requirements to create a valid express trust
In order to create a valid express trust, it is necessary to comply with the rules known as the three
certainties. They are:
(a) Certainty of intention
(b) Certainty of objects
(c) Certainty of subject matter
This chapter will explore each of the three certainties in more detail.
2 Certainty of intention
Certainty of intention is one of the three certainties necessary for the creation of an express trust. Its rationale is quite simple. By definition, an express trust is one which is brought into existence by
an intention to create it (unlike, for example, some resulting and constructive trusts which arise
independently of the parties’ intention). Thus, an intention to create a trust is a necessary
requirement for (in fact, it is the defining feature of) an express trust.
2.1 Requisite intention
For these purposes, the requisite intention is an intention to impose or assume the duty which is
characteristic of a trust, ie a duty to hold property for, or apply it for the benefit of, a beneficiary (or purpose). Re Oldfield [1904] 1 Ch 549 is a simple illustration. By her will, a woman gave property to her
daughters and expressed her ‘desire’ that they should make some provision for her son. Kekewich
J held that the woman had not created a trust, saying: A desire carries no obligation except a moral one. To desire a person to do a thing is entirely different from telling him to do it.
2.2 Ascertaining intention
A person’s intention can be ascertained from their words (spoken or written) and conduct. Most trusts (other than trusts of land and testamentary trusts) have no prescribed formalities, meaning
they can be created formally or informally, whether in writing or otherwise.
The courts adopt an objective approach in determining whether a person intended to create a trust. If they manifest an intention to impose or assume the duty which is characteristic of a trust, they intend to create a trust. It is irrelevant that they do not actually (ie subjectively) intend to create a trust or are unaware that such a thing even exists.
2.2.1 Written documents
In some situations, intention is reduced to writing; for example, in a contract or a will. The intention
of the author(s) of a document is ascertained by identifying the meaning of the words which they
have used. And the meaning of words is ascertained by reference to:
* Their natural and ordinary meaning
* Any relevant contextual features of the document
* The facts which were known to or assumed by the author(s) of the document when it was created
* Common sense
2.2.2 Use of the word ‘trust’
Generally, the use of the word ‘trust’ is a good indicator that a person intends to create one. However, it is not determinative, either by its presence or its absence.
* In particular, the fact that a transaction is characterised by the transacting parties as a trust
is not conclusive as to its nature.
* Conversely, the fact that a transaction is characterised as something other than a trust does
not prevent it taking effect as a trust if it generates the duty which is characteristic of a trust. Crucially, the nature of a relationship or transaction is determined by reference to the substantive
rights and duties which it creates and not by reference to how it has been characterised by the parties.
2.2.3 Segregating/earmarking assets
A key determining factor in several important cases has been the segregation of funds in a
separate bank account which has been earmarked for a particular person or purpose. This is often good evidence of an intention to create a trust but is neither necessary for the creation of a trust nor is it conclusive evidence that a trust is intended. Like all other factors, segregation and earmarking of assets must be considered within the specific factual context.
2.2.4 Importance of context
In the seminal case Paul v Constance [1977] 1 WLR 527 (discussed in further detail below), the
court was persuaded that a bank account was held on trust (jointly for the legal owner and his
partner) based largely on the repeated use of the words ‘this money is as much yours as mine’.
Another significant factor was the way in which the account was used (with the couple paying joint bingo winnings in and withdrawing funds for joint use). Of particular importance to the decision was the fact that the couple were ordinary people who were unfamiliar with the legal concept of a trust.
The account holder could not be expected to use terminology he did not understand but this did not preclude a finding that he intended a trust relationship. This decision provides an important reminder that certainty of intention is a question which will turn on the very specific facts of a case. Words and conduct must be interpreted in context.
2.3 Relationship with other certainties
In some situations, there is a significant interaction between certainty of intention and the two
other certainties. More particularly, there are cases where the subject matter or objects of an
alleged trust are so vague or uncertain that the only sensible inference is that there was no
intention to create a trust at all.
A trust creates a duty. It is unlikely that a person intends to impose a duty if the alleged duty is so
vague that the person required to discharge it is unable to identify what they are required to do.
Mussoorie Bank Ltd v Raynor (1882) 7 App Cas 321
The testator gave all his property
to his wife ‘feeling confident that she will act justly to our children in dividing the same when no
longer required by her’. It was argued that the wife was a trustee of the property. The Privy Council rejected this argument. The indeterminate nature of both the (alleged) trust property and the quantum of the (alleged) beneficiaries’ interests had ‘a reflex action’ which demonstrated that the testator did not intend to create a trust at all.
2.4 Certainty of intention: Key case law
Key case: Lyell v Kennedy (1889) 14 App Cas 437
Facts: Ann Duncan owned land which was let to tenants. Kennedy collected rent on Ann’s behalf. Ann died intestate. There was a dispute about the identity of her heir. Kennedy continued to collect the rent. He paid the money into a separate bank account (rather than his own). And he told various people that the sum credited to the account belonged to Ann’s heir and would be paid
to them immediately they were ascertained. Kennedy later claimed the sum for himself.
Key case: Lyell v Kennedy (1889) 14 App Cas 437 Judgement
Held: Kennedy held the sum credited to the account on trust for Ann’s heir. The fact that Kennedy had paid the money into a separate bank account was ‘indicative of some sort of trust’ and was ‘certainly not indicative of a personal right, claim, or interest on the part of Kennedy’.
Earl of Selborne
A man who receives the money of another on his behalf, and places it specifically to an account with a banker ear-marked and separate from his own moneys, though under his control, is […] a trustee of the fund standing to the credit of that account. For the constitution
of such a trust no express words are necessary; anything which may satisfy a Court of Equity that the money was received in a fiduciary character is enough
Key case: Paul v Constance [1977] 1 WLR 527
Facts: Dennis Constance and Doreen Paul started cohabiting in 1967. In 1973, Dennis received a
cheque for £950. When he received the cheque, he said to Doreen: ‘The money is as much yours
as mine.’ They agreed to pay the cheque into a bank account. Dennis opened an account in his
name and paid the cheque into it. The bank manager advised Dennis to open the account in his
name on the basis that a joint account was inappropriate because Dennis and Doreen were not
married. Dennis made enquiries of the manager to ensure that Doreen was able to draw on the
account
Key case: Paul v Constance [1977] 1 WLR 527
On various occasions in the following year, Dennis repeated his statement to Doreen that the sum
credited to the account was as much hers as his. Dennis and Doreen paid additional sums into the
account which they had won playing bingo. (They played bingo as a joint venture and regarded
any winnings as theirs jointly.) The sums withdrawn from the account were applied for Dennis and
Doreen’s joint benefit. Dennis died intestate in 1974. The issue was whether Dennis had declared a
trust of the sum credited to the account, or whether Dennis’s estranged wife was entitled to it as
his statutory next of kin.
Key case: Paul v Constance [1977] 1 WLR 527 Judgement
Held: Dennis had declared a trust of the sum credited to the account for Doreen and himself and
Doreen was entitled to half that sum as the beneficiary of the trust.
* Scarman LJ noted that Dennis was a simple, unsophisticated man and that in ascertaining his
intention the court ‘should consider the various things that were said and done by [Doreen]
and [Dennis] during their time together against their own background and in their own
circumstances.’
* He conceded that it was a ‘borderline’ case and that it was ‘not easy to pin-point a specific
moment of declaration’. Nevertheless, he concluded that Dennis’s repeated use of the words
‘This money is as much yours as mine’ evidenced an intention to create a trust of the sum
credited to the account for himself and Doreen.
* And he considered that this conclusion was supported by the various background features,
especially Dennis’s conversation with the bank manager and the treatment of the bingo
winnings and withdrawals from the account.
Key case: Re Kayford Ltd (in liquidation) [1975] 1 WLR 279
Facts: Kayford Ltd was a mail order company. Its managing director, Kay, was concerned about its solvency and about customers who were paying for goods which the company might be unable to supply. He consulted an insolvency specialist, Wainwright, about these concerns.
* In relation to the customers, Wainwright advised Kay to open a separate bank account and to
call it the ‘Customers’ Trust Deposit Account’ and to pay into the account any further payments received from customers. The purpose of doing this was to ensure that, if the company went into liquidation, it would be able to refund those customers’ payments. Kay accepted and implemented Wainwright’s advice. Later, the company went into voluntary liquidation.
* The issue was whether the sum credited to the separate bank account was held on trust for
customers or was one of the company’s general assets
Key case: Re Kayford Ltd (in liquidation) [1975] 1 WLR 279 Judgement
Held: The sum credited to the account was held on trust for customers. Megarry J made the
following two points:
* A trust can be created without using the word ‘trust’. ‘The question is whether in substance a
sufficient intention to create a trust has been manifested’.
* Although the payment of money into a separate bank account is a good indicator of an
intention to create a trust, it is neither necessary nor conclusive.
On the facts of this case, the company intended to create a trust of the sum credited to the
account because ‘[t]he whole purpose of what was done was to ensure that the moneys remained
in the beneficial ownership of those who sent them, and a trust is the obvious means of achieving
this’
Key case: Re Lehman Brothers International (Europe) (in administration) [2009]
EWHC 2545 (Ch)
Facts: Lehman provided various brokerage services, including the acquisition and custody of
securities. Lehman agreed to hold securities acquired for its clients on trust for them. Lehman also
received various payments in respect of the securities it held on trust.
Lehman and its client agreed (by cl 5.2) that: (i) Lehman was to have ‘full ownership’ of any such
payments; (ii) Lehman would use the sums received ‘in the course of its business’; and (iii) the
client would ‘rank as a general creditor’ in respect of such payments. Clients typically instructed
Lehman to use the money owed to them to acquire new securities on their behalf and Lehman did
so.
Key case: Re Lehman Brothers International (Europe) (in administration) [2009]
EWHC 2545 (Ch)
Lehman went into administration and, as a result, was unable to implement its clients’ instructions.
Post-administration, Lehman received payments of $1.8 billion in respect of trust securities. The
issue was whether clients were mere creditors in respect of post-administration payments attributable to their securities.
Key case: Re Lehman Brothers International (Europe) (in administration) [2009]
EWHC 2545 (Ch) Judgement
Held: The clients were not mere creditors. Rather, Lehman held post-administration receipts on
trust for them. It was an implied term of the agreement that if Lehman was unable to carry on its
business cl 5.2 would cease to operate because the purpose of cl 5.2 was to enable Lehman to use
the payments it received in the course of its business. Since the administration order prevented Lehman from carrying on its business, cl 5.2 ceased to operate immediately the order was made
Briggs J
Held that it was a further implied term that Lehman held post-administration receipts on trust for clients whose securities generated them. He said: The involuntary conversion of a [client] from a beneficiary with proprietary interests in securities into an unsecured creditor would be likely to take place at precisely the time when
the preservation of its proprietary rights mattered most. The existence and safeguarding of those rights was an important feature of the agreement […] and the destruction of those rights […] cannot therefore be consistent with the agreement, read as a whole
Key case: Modelboard Ltd v Outer Box Ltd (in liquidation) [1993] BCLC 623
Facts: The plaintiff sold cardboard sheets to the defendant. The parties agreed that:
(a) The plaintiff would retain ownership of sheets delivered to the defendant until they were paid
for.
(b) The defendant would pay the purchase price within 30 days of delivery.
(c) The defendant could use sheets which had not been paid for in its manufacturing process.
(d) If the defendant sold any products incorporating sheets which had not been paid for, the
defendant would hold ‘the entire proceeds thereof […] in trust for the plaintiff’.
The defendant used sheets which it had not paid for in its manufacturing process and sold the resultant products to third parties. The issue was whether the defendant held the proceeds of sale on trust for the plaintiff.
Key case: Modelboard Ltd v Outer Box Ltd (in liquidation) [1993] BCLC 623 Judgement
Held: There was no trust but the plaintiff had a charge over those proceeds.
Key case: Modelboard Ltd v Outer Box Ltd (in liquidation) [1993] BCLC 623 Judgement
- Michael Hart QC held that the issue must be resolved by ascertaining the correct relationship
between the plaintiff’s interest in the sale proceeds and the defendant’s obligation to pay the purchase price. - He used the example of the plaintiff selling sheets to the defendant for £1,000, with the defendant selling products incorporating the sheets for £1,200 before paying the defendant.
- He rejected the view that the defendant’s obligation was discharged on receipt of the £1,200,
with the defendant holding the money on trust for the plaintiff. This would be ‘odd in business terms, since it would allow the plaintiff to enjoy the defendant’s business profits in respect of sales by the latter during the credit period’.
Key case: Modelboard Ltd v Outer Box Ltd (in liquidation) [1993] BCLC 623 Judgement
- The only solution which made ‘business sense’ and was consistent with ‘commercial reality’
was that the plaintiff’s interest in the £1,200 extended only so far as was necessary to discharge the defendant’s payment obligation. - The plaintiff’s interest in the sale proceeds was capable of being defeated by payment of the
purchase price. The plaintiff was therefore a secured creditor, not a beneficiary of a trust. This
conclusion was not precluded by the fact that the parties had described the relationship as a
trust. The fact that a transaction is characterised by the transacting parties as a trust is not
conclusive as to its nature.
3 Certainty of subject matter
Certainty of subject matter is one of the three certainties necessary for the creation of an express
trust. It comprises two distinct requirements:
(a) The trust property requirement: It must be possible to identify the trust property.
(b) The beneficial entitlement requirement: It must be possible to ascertain the beneficiary’s
interest in the trust property.
3.1 The trust property requirement
The trust property requirement has a simple rationale. A trust is characterised by two principal
features: a duty and a property right. The duty to hold property for beneficiaries or to apply it for
their benefit is meaningless unless it is possible to identify the property to which it relates. Similarly, the assertion of an equitable property right is futile unless it is possible to identify the property against which the right is being asserted.
3.1 The trust property requirement
In cases where a trust is created by transferring assets to a trustee, the trust property can be easily identified: it is the assets which are transferred. In other cases, the trust property requirement can be problematic. Problems have been commonly encountered in two situations:
(a) A person attempts to identify the trust property by description.
(b) A person attempts to create a trust of a specific number of items from a larger quantity of
similar items without identifying those to be held on trust.
3.1.1 Identifying subject matter by description
In cases where the trust property is identified by description, the trust will fail for uncertainty if it is not possible to ascertain the trust property from the description.
Example
For example, a person cannot create a testamentary trust of the ‘bulk’ of their residuary estate because, although the residuary estate can be ascertained, it is not possible to ascertain how much of it constitutes the ‘bulk’: Palmer v Simmonds (1854) 2 Drewry 221, 227.
Example
And a company cannot create a trust of its ‘net assets’ because ‘net assets’ does not describe any specific property of the company: Wilkinson v North [2018] EWCA Civ 161. Rather, the ‘net assets’ of a company is an abstract monetary sum representing the difference between the value of its assets and its liabilities.
3.1.2 Identifying subject matter out of larger mass
An issue which has resulted in a large body of case law is the question of whether it is possible to
create a trust over some items from a larger quantity of similar (or identical) items without identifying the specific items which are to be held on trust.
Exercise: Engage
Consider the following examples. In each case, do you think it should be possible to declare a
trust over the assets without going further and identifying the specific shares or diamonds which
are to be held on trust?
(a) 20 of the settlor’s 100 ordinary shares in a company
(b) 20% of the settlor’s 100 ordinary shares in a company
(c) One of the settlor’s five one-carat diamonds
(d) 20% of the settlor’s five one-carat diamonds
Fractional interests
Two of the examples above present no difficulties at all when it comes to certainty of subject
matter (providing the wider mass of assets has been clearly identified):
(a) 20% of the settlor’s 100 ordinary shares in a company
(b) 20% of the settlor’s five one-carat diamonds. There is no problem with creating a trust over a fractional interest of a wider mass, regardless of the nature of the property.
In the first example, the 100 shares are the subject matter of the trust,
and the beneficiary has a 20% interest in each of them. Similarly, in the second example, the five
diamonds are the trust property, and the beneficiary has a 20% share of each. This situation is quite different from the two other examples, which relate to trusts of specific items
from a larger mass, as opposed to trusts of a specified percentage of such a mass
Specific number of items from larger mass
The difficulty arises when a settlor purports to declare a trust over a specified number of items
from a larger mass. Let’s remind ourselves of our remaining two examples:
(a) 20 of the settlor’s 100 ordinary shares in a company
(b) One of the settlor’s five one-carat diamonds
Do you think there is a practical difference between these examples and the trusts over 20% of
each of the assets?
Specific number of items from larger mass
You may think that there is no difference between a trust over a fractional share of the assets and
a specified number of those assets but consider the following:
(a) The trustee sells 20 shares at a profit
(b) The trustee sells the remaining 80 shares at a loss
(c) Four of the five diamonds are stolen
Practical considerations
If the beneficiary has a 20% fractional share in every asset:
(a) They share in any profits or losses every time the trustee sells shares.
(b) They had a 20% share of each of the stolen diamonds and still have a 20% share of the
remaining diamond.
In contrast, if the beneficiary is only intended to have a specified number of shares or diamonds,
it is important to know which are held on trust for them and which are not. If the beneficiary has a
specified number of shares, it will clearly matter to them whether their shares are amongst the 20
sold at a profit or the 80 sold at a loss. Similarly, if only one diamond is held on trust, it is
important to know whether that diamond was one of the four that was stolen.
3.1.3 Categorising assets
Exercise: Engage
Do you think there is any difference between the types of assets in our examples (shares and diamonds) which might justify different rules when it comes to certainty of subject matter?
You may be surprised to learn that they are treated differently for these purposes. It is possible to
declare a trust of 20 out of 100 ordinary shares in the same company without identifying the
specific shares. In contrast, it is not possible to declare a trust over one out of five diamonds
without identifying the specific diamond to which the trust relates.
In order to understand the case law in this area it is necessary to distinguish:
(a) Tangible and intangible assets
(b) Fungible and non-fungible assets
Tangible and intangible
Tangible assets are physical assets such as the diamonds in our examples. Another example of a
tangible asset is cash. In contrast, intangible assets do not exist in physical form, like the company shares in our example. Other examples of intangible assets include intellectual property rights and debts.
Tangible assets
Physical assets such as the diamonds and cash.
Intangible assets
Assets that do not exist in physical form such as company shares,
intellectual property rights and debts
Fungible and non-fungible
Assets are described as ‘fungible’ if they are identical and readily exchangeable, like the ordinary
shares in our examples. Although the price of the shares may fluctuate over time, at any given time they will all be worth the same and therefore interchangeable. The diamonds in our examples are non-fungible. Although they have similarities, they may be distinguishable in cut, colour and clarity. Crucially, they may well not have the same value and
are therefore not interchangeable.
Fungible
Identical and readily exchangeable.
