Awakening from China to Peru?

McPhail v Doulton is not only a case that presents many challenges for criticism but also a case that has a significant position in English Equity law. This analysis begins with a brief introduction of case facts and the law applicable before the judgement. The main attention here is put on the case itself accompanied by the comments of various academics. This is followed by the applicability of the case in future.

Mr. Bertram Baden decided in 1941 to create a trust with the intention to support his employees – past and present ones. In the trust instrument there was a clause that caused a dispute about the case – clause 9(a). [1]

The question raised at the first stage of this case to the House of Lords was whether what Mr Baden left, constituted a discretionary trust or a power. It was argued, because of clause 9, that there was a power. [2]

Until McPhail v Doulton, was used the rule set up by Lord Eldon in Morice v Bishop of Durham (1805) [3] that there has to be a complete list of beneficiaries, otherwise there is no certainty of objects. It was justified in this case that in order for the beneficiaries to be able to complaint, court needs to know who they are. [4] The rule of Exhaustive Remuneration [5] was applied not only to fixed trusts but also in discretionary trusts. In 1955 was considered case IRC v Broadway Cottages Trust [6] which only confirms the principle laid down in 1805 and the fixed trust rule. [7] However, exactly due to fact that there was no exact list of beneficiaries the trust was void.

Clause 9(a) according to the House of Lords decision implies that the trustees are under no obligation to distribute the whole amount of the available money in each year [8] . And as it was tested in the judgment the most important element that persuaded Lords to decide in favour of discretionary trust was the usage of the word “shall”. [9]

It was Lord Wilberforce who pointed out the difference between discretionary trust and power is not broad at all. [10] Moreover, he stated that the whole trust should not depend on so fine lines between the two. In this distinction he used expressions “trust power” and “powers”, where trust power is meant as discretionary trust. Professor Pettit calls this usage of terminology “unfortunate” due to fact that trust power can be exercised in two different meanings [11] where the second meaning (ii) is barely making any difference from the definition of discretionary trust. Therefore he the expressed hope that the usage of a new expression (trust power) will be recognized correctly and used in practice only in cases of implied trust in default of appointment. [12] On the other side, few years later, he expanded this thought as the two senses of the trust power can be seen as an advantage. He justifies it by explaining that in cases where the group of beneficiaries is too broad the discretionary trust can be used, and in cases of small amount of beneficiaries the trust in default of appointment would be the good solution. [13] Jill Martin is under the impression that test applied by the House of Lords in McPhail v Doulton washed away any differences between these two concepts. [14]

Lord Wilberforce suggested that there is a necessity for the trustees to search for potential beneficiaries as they have to fulfil their fiduciary duties. On the other side his Lordship pointed out that level of necessity is not that high in the cases concerning the powers. [15] What was probably meant to be said is that there is a duty on trustees to divide the property due to fact that discretionary trust is still a trust, so trustees must identify the beneficiaries. [16] Also he expressed no doubts that the trustees would make sure that they taken into consideration all the relevant factors when distributing the property to the beneficiaries – not only the proper search but also precise amount. That needs to be exercised in each particular case, as the requirements may differ. [17] Applying this analysis Lord Wilberforce continued that in case where there is a large group of potential beneficiaries the list test is not necessary, and even confusing in pursuance of his fiduciary duties. [18]

His judgment follows that the trust can be performed also in the way of not dividing property equally, unlike the maxim “Equality is Equity”. That was mentioned in connection that the court as well as trustee must have in mind and to do what is necessary to fulfil the wishes of the settlor. He then clarifies that in order to succeed in its duty; court has a variety of methods that might be used. These include the appointment of a new trustee, allowing beneficiary to create the way of dividing the property or to rule the appropriate way of division for the trustee. [19]

The division of the property here will never be equal and therefore there is no need for the trustee of a discretionary trust to create an exhaustive list of beneficiaries.

After this analysis he was ready to conclude that that the test which was used until McPhail v Doulton is wrong and the distinction between the discretionary trust and the power is inaccurate. IRC v Broadway Cottages Trust (1955) [20] was held as not applicable anymore, and the decision reached in Re Gulbenkian Settlement (1970) [21] was used as model test for trusts and powers. In that case it was held that beneficiaries are people that prove to fall within the identified group prescribed in trust instrument. As emphasized Lord Wilberforce, the settlor must express himself clear enough, so there will not be any kind of semantic doubts about the language used, because these might lead to the situation where the trust will be cancelled. [22] As Edwards and Stockwell concluded the approach of “any given postulant test” has been completely obeyed in cases of discretionary trusts. [23]

Another scenario that can appear with this type of trust is that it will be void due to administrative workability. By the words of Lord Wilberforce if the group of beneficiaries is “hopelessly wide” then it would be impossible for the trustees to divide the property. [24] Moreover, as mentioned before, there must be made utmost effort to comply with the settlor´s wishes, which probably would not be to declare his trust unworkable.

Because of the decision changing practice over the years this case acquired a lot of criticism. Starman LJ said that the decision in this case is “most unfortunate doctrine”. He carried on with the criticism of the language tests performed by the House of Lords and dubbed them as “an absurd and embarrassing result”. [25]

Unlike Lord Wilberforce´s persuasive judgement there was also a view of Lord Hodgson. Although he was not part of the majority (3/2) he received enough criticism as well. He felt that court has to have a full power over the trust in question, and that there are no other recognizable types of trust. Despite that it is called exhaustive or non-exhaustive discretionary trust, he thinks that it still falls under the term trust, and therefore general trust rules should apply [26] . Golsworth partially agrees with him that there are some general provisions applicable to all trusts, although he admits that each case brings its own matters that can create shades among them, and therefore distinguish each other. [27] Moreover, Yuri Grbich expressed his opinion in relation to Lord Hodgson´s judgement in his article as “the old nomenclature bogey”. [28] And quite similar view took Lord Radcliff in C.S.D. v Livingston (1965) [29] in which he said “…propositions are advanced or rebutted by the employment of terms that have not in themselves a common basis of definition”. [30]

After this House of Lords judgement the disputes continue in the second stage of the case that concerned certainty of beneficiaries i.e. persons falling within the class specified by Mr Baden. This second stage went up to the Court of Appeal, where all three judges – Megaw, Sachs and Stamp LJJ – end up with a same conclusion, but through different analysis. The analysis consist of linguistic and semantic test of the words “relatives” and “dependants” and the ruling on question that if possible beneficiary fails to prove he belongs within the group of beneficiaries can the whole trust fail? Lords unanimously held that even if one possible claimant cannot prove belonging to the beneficiaries it is still valid discretionary trust. [31] Although Professor Pettit considers it as confusing. [32]

Sachs LJ held that at first there is need for conceptual certainty, once this is established there is remaining only evidential certainty that given individual belongs to the prescribed group. If that individual does not show evidence then he does not belong to the group. He continues with saying that it applies to any group – whether that is broad or narrow. The concept of failing the trust on the basis that one claimant might not be certainly processed as a beneficiary Sachs LJ referred as “wholly fallacious”. [33]

Megaw LJ concentrates mainly on justification of the use of “or is not” as Vinelott QC argued at this point. According to the Megaw LJ the attention should be put on the fact that “substantial number” of people can be conceptually and evidentially proved to be in the group. He then carry on that the key is not in saying that somebody is “outside the trust” , so does not belong into the group of beneficiaries, but “it is not proven whether they are in or out”. As to the word “substantial” he linked it with common sense approach and the question of administrative workability, as it may differ from one case to other. [34]

Stamp LJ emphasize the word “any”, as the search for the potential object must be proper. In deciding who is within the class of potential beneficiaries he implies that the word “relatives” is used to name the “next of kin”. He thinks that only in that case it is possible to find potential beneficiaries who could prove without doubts that they fulfil requirements of certainty. He denies the concept of “descent from common ancestor” as is relative defined by the Sachs LJ. Stamp LJ thinks that it is too broad concept. [35]

It can be argued from both sides, and sometimes maybe individual approach can be used in each case. Next of kin meaning is concentrated on the relatives with blood connection, it is undoubtedly narrow approach whereas descendant from the common ancestor, can be quite broad concept as it covers also non-blood relatives. It would then depend on the intention of the settlor, which approach should be used.

However it is possible to say that both Stamp and Sachs LJJ approved the idea that word relative can be used as a certain concept, and the given individual can be within this concept proved to belong there or not.

Very unsure, maybe too careful approach was taken by Megaw LJ, who does not want to lean to none of above mentioned sides. Megaw LJ was under impression that it is quite sure to decide who is relative, but he admits that there are exceptions which might support the idea of the descendants from common ancestors. [36]

Maybe exactly because of these doubts Megaw LJ did not want to define the word relatives, as it may be interchangeably used in its narrow or broad approach, and also it would depends on the wording that settlor used. It is crucial to mention again that the choice of wording in the trust is the most important.

As Professor Pettit explained the conceptual certainty is connected with linguistic point that is why settlor has to be careful when describing the class of beneficiaries. The evidential certainty on the other side requires proof or evidence that potential beneficiary can be permitted in the group, unlike ascertainability which deals with location and existence of the beneficiaries. [37]

However, with those certainties is not satisfied Stamp LJ. In his opinion it creates situation where only one beneficiary might be proved, what would be substantially enough (using concept of Megaw LJ), but there would be also a number of others whose position would be uncertain. [38] According to the Edwards and Stockwell this is the issue of the judgement. Using the concept of descendant from the common ancestor, many individuals can be involved, however because it is evidentially impossible to prove it, and because there might exist substantial number (without having precise meaning) of beneficiaries, a number of people with an unsure position would not be considered at all. But Court of Appeal did not feel confused about it. They ruled that as far as substantial number of beneficiaries proved with certainty to fall within the class exists, the trust is valid and can be executed. [39]

Jill Martin has a bit lenient approach. She is asking what conceptual certainty means. She made a comparison between the “Nobel Prize winners” and “friends”. Martin suggests that former is conceptually certain – it is possible to say who and when won the Nobel Prize. But the word friends is so broad (and can be also personal) that it is impossible to distinguish and prove the certainties. However, she mentioned that “old friends” [40] could be seen as certain as such persons can exist in one´s life, and can be proven as well. She reacts also on the word relatives – she admits it may create some problems, but here she suggests that the input of trustees and their wiseness would be essential. [41]

Therefore, applying what was held by the Court of Appeal, Professor Hudson implies that the burden of proof should fall on potential beneficiary. The trustees should make a thorough search, and then claimant proves whether he falls within the class or not. Hudson does not seem to have a problem that there might exist a numbers of individuals who are in uncertain position. On the contrary he seemed to agree with the position of Megaw LJ and the substantial number, which was taken from the judgement of Lord Denning in Re Allen (1953) [42] (Re Gulbenkian overruled that case). [43]

Principle established in McPhail v Doulton was later successfully used in number of cases such in R v District Auditor (1986) [44] . The case concerned a huge amount of beneficiaries [45] and Lloyd LJ dealt with it very cautiously. He did not reject McPhail v Doulton principle of conceptuality, but at the end he voided the trust due administrative unworkability. [46] This case particularly No.2 one helped to ascertain the judgements in number of other cases such as Re Barlow´s WT [47] where linguistic approach of conceptual certainty was put into contrast with Re Allen (1953). Case was efficient in consideration for the range of beneficiaries in the Re Hay´s Settlement (1982) [48] , where it was put into comparison with the Re Manisty´s Settlement (1974) [49] . The case helped not to void the gift only because of linguistic uncertainty.

To conclude it can be said that McPhail v Doulton was a ground- breaking case that changed and most probably saved a lot of trusts. The law before the case can be called vague, but with this new challenge has become inseparable part of many disputes and definitely a powerful weapon in the fights of accomplishing the settlor´s wishes. It is a rigid practice today in discretionary trusts disputes that the trust is not void if any person is able to prove that he falls into the group of beneficiaries or he does not. Despite the existing criticism it is still proving its significance and it can be generally said that it will remain its dominant position. Both Houses of Lords and Court of Appeal created a valuable case law applicable in various cases and situations by using tentative and cautious language as well as logical and simple examples that can be easily followed.