Three Certainties Flashcards
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,
The three certainties 4
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
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.
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.
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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.
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
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.
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Fungible, intangible assets
The trust over the shares in our example is valid because the shares are intangible and fungible.
There is no need to identify the specific shares which are subject to the trust. They are completely
interchangeable. (In contrast, there would be a problem with certainty of subject matter if the
settlor owned different classes of share in the same company and failed to specify which type of
share was the subject matter of the trust. The bulk must comprise of identical assets in order for
the trust to be valid.)
Non-fungible, tangible assets
The trust over the diamond in our example is void for uncertainty of subject matter because the
diamonds are tangible and non-fungible. Each diamond is unique. As discussed earlier, there may
be differences in cut, clarity and colour which impact their value.
They are not interchangeable, and it is necessary to identify the specific diamond which is the
subject matter of the trust. This may be by way of segregating, earmarking or otherwise
describing the specific diamond subject to the trust.
Fungible, tangible assets
What about tangible, fungible assets? If the assets forming the wider bulk are effectively
identical, will they be treated in the same way as the shares or as the diamonds?
Exercise: Engage
Is it possible to declare a trust over:
(a) 20 out of 100 bottles of wine (all of the same vintage)?
(b) One out of five 1 kg bars of gold?
You may be surprised to learn that the answer to both questions is ‘no’. It is not possible to declare
a trust over a specified number of tangible assets forming part of a bulk, even if they appear to be
identical, without identifying them.
This could be seen to make sense in the case of the wine. Although the bottles appear identical,
the contents may be different. Some may be corked.
The rationale is arguably less clear in the case of the gold bars. Unlike diamonds, gold is generally
considered to be fungible. However, there is clear case law indicating that the trust will not be
valid. The specific bars must be identified.
Recap of rules relating to assets in bulk
To recap the principles discussed above, it is possible to declare a trust over a specified number of
intangible, fungible assets forming part of a wider bulk without identifying the specific assets
forming the subject matter of the trust.
It is not possible to declare a trust over a specified number of tangible assets forming part of a
wider bulk, whether or not they are fungible, unless the specific assets forming the subject matter
of the trust are identified.
The beneficial entitlement requirement
The subject matter rules we have considered so far relate to the requirement for the trust property
itself to be certain. It must also be possible to ascertain the nature and extent of the beneficiary’s
interest in that trust property. To the extent that it is not possible to do so, the trust will fail. This is
the beneficial entitlement requirement. In the remainder of this section, we will consider some
examples of cases in which the beneficial entitlement requirement may prove to be a problem.
Although not free from criticism, the legal principles discussed above are generally quite clear.
There is, however, one more controversial case on beneficial entitlement which is rather harder to apply in practice.
Consider the scenario in which trustees hold a sum of money on trust, out of which they are
directed to pay a ‘reasonable income’ to a beneficiary. Based on the principles we have discussed
so far, you would be forgiven for concluding that this trust would be void for uncertainty of
subject matter.
Test for certainty of objects
The test of certainty of objects depends on the type of trust in question.
* A greater degree of certainty is required for a fixed trust than for a discretionary trust, because
the trustee is required to divide the property exactly as the settlor has instructed. The trustees
must know exactly who is to benefit (certainty of objects) and how much they are to receive
(certainty of beneficial entitlement). If there is uncertainty, the trust will fail (in whole or in
part).
* In contrast, the power afforded to the trustee in a discretionary trust allows the courts to apply
a less stringent test of certainty. This is because the trustees are not required to divide the
property between all the objects, and thus they do not need to be able to identify them all.
* Similarly, where a power of appointment exists, the donee of the power is not required to
exercise the power. They therefore do not need to be able to identify all the potential objects of
the power.
Fixed trusts
It is the nature of a fixed trust that each beneficiary has a definable interest in the trust fund. In
the simplest case, a fixed trust will have a single beneficiary who is entitled to the entire trust fund.
If there is certainty as to who the settlor intended to benefit, there will be certainty of objects. If
there is uncertainty as to the intended beneficiary, the trust will fail.
If a fixed trust is intended to have multiple beneficiaries, but there is uncertainty as to the identity
of one or more of those beneficiaries, the trust will not necessarily fail completely. If the
identifiable beneficiaries have a beneficial entitlement which is not dependent upon the
entitlement of the uncertain beneficiaries, they can still take their interest.
Equal distribution between class
Some fixed trusts will require the trustees to distribute property equally between the members of a
class of objects. In such cases, the trustees must be able to say who all the beneficiaries are at the
time when they begin distributing the trust fund.
The test for certainty of objects in such cases is therefore known as the ‘complete list test.’ It must
be possible to draw up a complete list of all the beneficiaries: IRC v Broadway Cottages Trust
[1955] Ch 20. It follows that such trusts require both conceptual and evidential certainty.
Conceptual certainty
‘Conceptual certainty’ refers to the precision of language used by the settlor to define the class of
persons whom they intend to benefit. It is sometimes described as ‘linguistic’ certainty. In other
words, if the objects of the trust are not clearly defined, it will not be possible to draw up a
conclusive list and the trust will fail.
Evidential certainty
‘Evidential certainty’ refers to the extent to which the evidence in a particular case enables the
trustees to identify the objects of the trust. For example, there may be cases where the class of
objects is conceptually clear but nonetheless no evidence exists allowing the trustees to actually
draw up a list of those objects.
Powers of appointment
As is the case with trusts, a power of appointment must satisfy the test of certainty of objects in
order to be valid. If the donee of a power is not able to determine who falls within the class of
objects, they risk exercising the power improperly (ie by choosing a person who is not an object of
the power).
Although the objects of a power have no right to require the donee of that power to exercise it in
their favour, they can constrain the improper use of the power.
For the court to be able to make a judgment on such matters, it must be able to determine
whether the individual making a claim (and any individual in whose favour the power is exercised)
is a member of the class of objects.
This does not mean it is necessary to identify every single member of the class. A power of
appointment will be valid if it satisfies a test known as the ‘is/is not test’ (sometimes also known as
the ‘any given postulant test’).
The test requires a trustee to be able to say with certainty whether ‘any given individual is or is not
a member of the class’. You may also see it described as the ‘any given postulant’ test
Discretionary trusts
Although the trustees of discretionary trusts must exercise their discretion, and therefore have an
obligation to consider the range of possible beneficiaries, this does not mean they need to identify
all of those people in order to exercise their discretion. Rather, they must carry out a survey of the
class which is appropriate to the particular trust.
The extent of this exercise will therefore depend upon the breadth of the class of objects; in the
case of a small, family trust the trustees are likely to consider every individual before exercising
the power whereas with a larger, commercial trust (for example, a discretionary trust for the
employees of a particular company) it may not be necessary to actively consider every single
object before exercising the discretion in favour of a particular individual
The is/is not test
Following McPhail v Doulton [1971] AC 424, it is clear that there is no need for the trustees of a
discretionary trust to draw up a complete list of objects. It is simply necessary to satisfy the ‘is/is
not test’.
4.4.2 Conceptual certainty
Conceptual certainty is clearly still a requirement. If the objects of the trust are not clearly
defined, the trustees will not be able to apply the is/is not test with certainty.
If the definition is unclear, there will be categories of people of whom it is not possible to say with
certainty whether they are intended to be objects or not:
* The trustees will therefore not be able to properly survey the class and therefore will not know
the scope of their powers or duties.
* Potential claimants will not be able to determine whether they have a right to compel proper
administration of the trust.
* And if there is an allegation that the trustees have made a distribution to someone outside the
class, the court will not be able to say whether the trustees have acted inside or outside their
powers.
Applying the is/is not test
The first two classes of object pose little problem, although they must be considered in the context
of the particular document to ensure that there is no ambiguity:
(a) The ‘employees’ of a company: ‘Employees’ has a legal meaning so this term is conceptually
certain. A well drafted trust deed would clearly specify whether it applied only to current
employees or also extended to past/future employees of the company.
(b) The ‘children’ of an individual: ‘Children’ also has a legal meaning so is conceptually certain.
However, a settlor should ensure that this accords with their personal intention. For example,
adopted children are legally the children of the adoptive parent (and are not legally the
children of the biological parents). Step-children are not legally the children of their stepparents. It will therefore sometimes be preferable to specify whether the class of objects
includes step-children or biological children who are not the legal children of the individual.
The remaining two classes of object are more problematic:
(c) The ‘friends’ of an individual: This is the paradigmatic example of an uncertain class. How
would you define ‘friends’? What are the hallmarks of friendship for you personally? And do
you think they are universal?
(d) The ‘relatives’ of an individual: You might wonder whether ‘relatives’ is uncertain for the same
reasons as the above. However, the Court of Appeal decided that it was conceptually certain
in Re Baden’s Deed Trusts(No 2) Ch 9. The judges did not reach a unanimous conclusion on its
meaning; two concluded that it meant ‘descendants from a common ancestor’.
Evidential certainty
(a) A discretionary trust for the settlor’s ‘children, grandchildren and great-grandchildren’
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(b) A discretionary trust for the ‘past, present and future employees’ of a company
What happens if the trustees don’t know how many children the settlor had?
What if the company did not keep records of all its past employees?
In both cases, the trustees know how to define the objects. But what do they do if they don’t know
whether a person meets that definition? Does the trust fail if a person comes forward claiming to
be an object of the trust but cannot prove it?
Re Baden (No 2)
The law on evidential certainty for discretionary trusts is controversial, with the Court of Appeal in
Re Baden (No 2) unable to reach agreement. On this particular point, each of the three judges
gave a different opinion, meaning that there is no majority decision on the need for evidential
certainty.
In practice, the judgment which is widely considered to be the most pragmatic (and thus most
likely to be followed) is that of Sachs LJ who indicated that it is for the claimant to prove to the
trustees’ satisfaction that they are within the class. If they cannot prove that they are in the class,
they are considered to be outside it.
Administrative unworkability
Finally, it is important to note that a discretionary trust could fail because the class of objects is
too wide. In McPhail, Lord Wilberforce said that a discretionary trust is void if the class of
beneficiaries ‘is so hopelessly wide as not to form “anything like a class” so that the trust is
administratively unworkable’. He gave as an example of such a class ‘all the residents of Greater
London’.
This dictum has been applied by the courts to invalidate a discretionary trust for the inhabitants
of West Yorkshire (as many as 2.5 million potential beneficiaries).
The size of the class does not invalidate a fiduciary power of appointment because the donee of a
fiduciary power has no obligation to exercise the power and thus no obligation to survey the class
before doing so. In Re Beatty [1990] 1 WLR 1503, the court upheld a fiduciary power to appoint
property to anyone (or any corporation) in the world.
Inter vivos arrangements
The analysis depends on the specific fact pattern. If the legal owner of the property has not
transferred legal title to anyone else, then there will be no change in beneficial ownership unless
and until all three certainties are satisfied.
In contrast, if legal title appears to have been transferred gratuitously, it is first necessary to
consider whether there is an intention to create a trust at all. If there is no certainty of intention,
the presumption of resulting trust applies. If that presumption can be rebutted, for example by
evidence that there was an intention to gift the property to the transferee, that transaction will
take effect. If the presumption is not rebutted, there will be a presumed resulting trust for the
original owner. Presumed resulting trusts are covered in more detail in the chapter on ‘Resulting
trusts’.
If there is a clear intention to create a trust, and the property has already been transferred to the
intended trustee, uncertainty of subject matter or objects will mean that the trust fails. The
intended trustee clearly cannot keep the property so there will then be an automatic resulting
trust for the settlor. Automatic resulting trusts are covered in more detail in the chapter on
‘Resulting trusts’.
So, broadly, in the absence of all three certainties, there is likely to be a resulting trust for the
settlor (unless it is possible to show that they intended a gift rather than a trust).
Testamentary arrangements
If, instead, you are interpreting the provisions of a will, the first question is whether there is an
intention to create a trust at all. If it is clear that a person is intended to receive property, but it is
unclear that they are intended to be a trustee, the effect is a gift. Even if there is some suggestion
that they might benefit another person, unless that intention can be interpreted as imposing a
trust, it will be interpreted as evidence of the motivation behind the gift and impose a moral
obligation only.
In contrast, if the will clearly provides that a person is intended to be a trustee, uncertainty as to
objects or subject matter will simply cause the provision to fail. The executors will not be required
to transfer legal title to the intended trustee and the property will instead form part of the residue
of the estate.
Lifetime (inter vivos) Testamentary
No transfer of legal title Legal title transferred
No change in beneficial
ownership unless all three
certainties satisfied.
If no certainty of intention,
presumption of resulting trust
applies.
If clear intention for
transferee to be trustee,
automatic resulting trust
arises if there is uncertainty
as to either subject matter or
objects.
No certainty of intention: Gift
Uncertainty as to subject
matter or objects: Trust fails
and property falls into
residue.
