McPhail v Doulton

In order to allocate property according to the testator’s wishes, equity recognises both a trust and a power of appointment. The donee of such power will distribute the property by making appointments to the objects of the power; however, a donee is not under an obligation to exercise his power and he has absolute discretion to assign the property. By contrast, a trustee is under an obligation to distribute the property to the objects of the trust, who can enforce that obligation should the trustee fail to do so.

The words used in a document are important: do they create a trust or a power? And if they create a trust, are the objects of the trust sufficiently certain? If not, the trust is void. The test for certainty of objects under a power was wider than the test for certainty of objects under a trust; therefore, the certainty of objects could be valid under the former but not under the latter. In McPhail v Doulton the Court revised the test for certainty of objects under a trust, to ensure they were not invalid. It is worth noting that McPhail is also referred to as Re Baden’s Deed Trust (No. 1), and it was sent back to the High Court and subsequently to the Court of Appeal for the test of certainty of objects to be applied, as Re Baden’s Trust (No. 2), but it will be referred to as McPhail for the purpose of this essay.

In McPhail, Bertram Baden established a fund for the benefit of the staff of Matthew Hall & Co Ltd. He died in 1960 and the executors of his trust claimed that the trust was invalid for uncertainty of objects. It was, therefore a power not a trust. The issue contested was contained in clause 9(a) of the trust deed which said that, the trustees shall apply the net income of the fund in making ‘at their absolute discretion’ to or for the benefit of any of the officers and employees or ex-officers or ex-employees of the company or to any relatives or dependents of any such persons […] the trustees shall be under no obligation to see to the application of the money.

On appeal, the Court of Appeal ruled that: 1. Clause 9 (a) constituted a trust because the word ‘shall’ combined with a power of selection created a trust for the distribution of income; 2. The test for certainty of objects was similar to that applied to powers: if it can be said with certainty that any given person is or not a member of the class, the trust will not fail only because it is impossible to ascertain every member of the class. Through this decision, McPhail constitutes a turning point because it changed the certainty requirements for discretionary trusts.

After McPhail, in a discretionary trust, the trustee has the discretion to appoint within a class of potential objects and the trust will fail only if the definition of the class is conceptually uncertain.  Providing the meaning of the words in the trust are sufficiently clear, so it can be said of any given person whether they would be or not a member of the class, it does not matter if every potential member cannot be identified by evidence. The test for ascertaining if a person falls within the class is applied generically rather to a particular person. Therefore the trustee only has to make a survey of the class and then select the beneficiaries from within that class, which is the same rule that applies to fiduciary powers of appointment established in Re Gulbenkian. In other words, the trustee must find the permissible area of selection but that does not mean he has to identify every single member of that class of objects before making any allocations.

What then is conceptual certainty? Emery refers to the words used by the settlor to define the class; the words he employ can either be very precise and ‘admit of little or no argument’ or can be highly imprecise, but, he stresses, the crucial point is that conceptual certainty is different from evidential certainty; the former refers to the fact that the class defined by the settlor has a precise boundary of meaning, in the sense that it is possible to state the necessary criteria for a person to be a member of that class; on the other hand, evidential certainty exists when it is possible to gather facts that can demonstrate that a person does or does not belong to a class.

McPhail is a good example of a non-exhaustive discretionary trust where the trustees have the power to distribute the fund but also to accumulate it; in contrast, a fixed trust is one in which the shares and proportions are determined by the settlor when he created the fund; therefore, it will be void for uncertainty unless it is possible to draw up a complete list of each person who is a member of the class. Previous to McPhail, this was also the test applied to discretionary trusts, but the complete list test was unworkable for trusts such as McPhail because it would be impossible to draw up a complete list; the court were aware that this concept could limit the social function of the discretionary trust; cases pre- McPhail also placed too much weight on the distinctions between trusts and powers of appointment; instead, McPhail established that all that was required was that it could be said with certainty if  a given person is or is not a member of a class.

In conclusion, the decision of the court, that it was clear that Bertram Baden did not intend for every single employee, ex-employee, relative and dependent to benefit from the fund but simply that the trustees should choose the beneficiaries from that class only, gave a new possibility for allocation of funds to a larger class of beneficiaries. If the complete list test were to apply in such cases, the trust would not be workable because implementing the trust would have a huge administrative burden, which would in itself defeat the trust. The burden post-Mc Phail should then fall upon potential claimants to prove that they belong to that particular class.

Bibliography

Cassell E, Templeman Lord, Equity and Trusts 150 Leading Cases (1st edn, Old Bailey Press 1999)

Emery C T, The Most Hallowed Principle (1982) 98 Law Quarterly Review 555

McGhee J QC, Snell’s Equity (33rd edn, Sweet & Maxwell 2014) Chapter 22, 22-023. Available through Westlaw UK, search>Books, under S> Snell’s Equity. Accessed on 9 July 2015.

Pearce R, Stevens J, Barr W, The Law of trusts and Equitable Obligations (5th edn, OUP 2010)

Cases

Gulbenkian’s Settlement Trust [1970] AC 508

McPhail v Doulton [1971] AC 424

Footnotes

Robert Pearce, John Stevens, Warren Barr, The Law of trusts and Equitable Obligations (5th edn, OUP 2010) 81

Ibid, 83

[1971] AC 424

Pearce (n 1) 86

Elizabeth Cassell, Lord Templeman, Equity and Trusts 150 Leading Cases (1st edn, Old Bailey Press 1999) 10

Ibid 13

Pearce (n 1) 87

John McGhee QC, Snell’s Equity (33rd edn, Sweet & Maxwell 2014) Chapter 22, 22-023. Available through Westlaw UK, search>Books, under S> Snell’s Equity. Accessed on 9 July 2015.

Gulbenkian’s Settlement Trust [1970] AC 508

Pearson (n 1) 523

C T Emery, The Most Hallowed Principle (1982) 98 Law Quarterly Review 555

Ibid, 556

Pearson (n 1) 536

Snell (n 11) 22-001, 002, 003

Pearson (n 1) 537, 538

Pearson (n 1) 542