The Importance of the Law of Trusts

The law of trusts has often been referred to as one of the most important and enduring creations of the Court of Chancery, the court responsible for the administration of the body of law known as equity. Equity was original developed as a response to the harsh outcomes resulting from the rigid application of common law rules. In contrast to the strict rules of common law, equity is characterized by its concern with individual justice, morality and fairness, as evidenced by its flexible remedies which are applied on a discretionary basis. Although equity and the trust have significantly evolved since their creation, they have still maintained the defining features which separate them from the common law.

In 1873, the Parliament of the United Kingdom enacted the Supreme Court of Judicature Act which fused the courts of equity and common law. This act prompted significant debate about the consequences of such fusion, with some arguing that the two bodies of law had become one while the majority remained adamant that they had maintained their substantive differences. The law of trusts, depending upon the distinction between legal and equitable title, is ripe with cases which demonstrate that the two bodies of law have preserved their substantive differences and the fusion of the courts has only amounted to procedural differences, allowing for the pleading of both bodies of law in one court.

The flexibility of equitable remedies and the focus on individual justice is highly evident in the use of constructive trusts to reverse unjust enrichment. In Pettkus v. Becker, a case involving a property dispute between two unmarried spouses, the constrictive trust was applied to reverse the unjust enrichment of a man whose bee farm had benefited at the expense of his spouses unpaid labour. Dickson J., speaking on behalf of the majority, referred to the flexibility of equity as one of its greatest advantages, going on to state that due to this flexibility, “the judiciary is thus able to shape these malleable principles so as to accommodate the changing needs and mores of society, in order to achieve justice.” The use of the word shape in this context is interesting as it indicates a willingness to change the law in order to respond to the needs of society to ensure that outcomes are just. Dickson J. also noted that this result would not have been possible in common law as it is unwilling and unable to provide compensation for someone on the sole basis that their actions have benefited another. Indeed, the liability in this case did not depend on the intention of the parties or a binding contract between them. It depended entirely on the principle of unjust enrichment. The requirement of reasonable expectation between the parties in order to award a constructive trust in these situations, suggests that the courts were concerned with issues of fairness, it would be unfair and unethical for one party to benefit at the expense of another.

Recently, the fundamental principles and motivations of equity have been invoked in order to extend the ambit of constructive trusts beyond cases of unjust enrichment. In Soulos v. Korkontzilas, a real estate agent breached his fiduciary duty when he purchased land for himself rather than purchasing it on behalf of the purchaser. The land subsequently decreased in value so the purchaser abandoned his claim for damages and brought an unjust enrichment claim. However, as there was no corresponding deprivation the trial judge denied the claim. The case reached the Supreme Court of Canada where it was held that the constructive trust can also be imposed in order to prevent wrong doing. McLachlin J., speaking for the court, deals extensively with the concept of “good conscience”. She argues that good conscience is one of the unifying concepts underlying constructive trusts and is one part of the foundation of equity. Elaborating on the meaning of good conscience, McLachlin J. noted that it is not only concerned about fairness between the parties but also about maintaining the integrity of institutions such as fiduciary relationships. She also notes that the flexibility of equitable remedies, in accordance with natural justice, allows for the development of the law on a case-by-case basis. Although a constructive trust may not have seemed appropriate in this case, it was awarded because it would have been unfair not to provide a remedy in this situation, or as it was stated by the court, because good conscience required it. Thus, the ambit of the use of constructive trust was expanded to include

While constructive trusts allow for considerable flexibility and a broad use of judicial discretion, the rules for an express trust are followed more strictly. However, even in this more rigid area of trusts, there has been room for discretion and concern for individual justice. One of the requirements of an express trust is the certainty of subject matter, meaning that in order for an express trust to be valid it is necessary for the courts to be able to determine exactly what the property in a trust consists of. In Golay’s Will Trusts, there was uncertainty about was meant by the use of the words “reasonable income” in a testamentary trust. Due to the fact that the testator is dead, it was impossible to ascertain what he meant by the use of the word “reasonable”. Therefore, the judges exercised their discretion by substituting their subjective belief of what is meant by the word “reasonable’ for what was actually meant from the testator’s perspective, which is supposed to be the goal of the inquiry. The courts premised their justification for doing so on their belief that courts are well equipped to deal with reasonableness. However, it would appear that the true underlying motivation was a desire to provide this unfortunate girl with a remedy. Most observers would have expected the trust to fail due to uncertainty of subject matter based on a reading of past cases. The aberration in this case illustrates the desire of equity to deliver individual justice even if it comes at the expense of consistency and predictability.

Although equity is substantively different from common law, there are still areas of trust law which demonstrate that the two bodies of law can be similar in some cases. The defining characteristics of equity, such as its flexibility and the attentiveness to individual justice and conscience are not always present. One area of trust law in which the rules have been applied rigidly even though they have occasionally led to some harsh results, is the law concerning the fiduciary duties of trustees. A good example of this is found in the case of Boardman v. Phipps, which dealt with the rule against making personal gains. Here, a solicitor to the trustees and one of the beneficiaries used information gained from a shareholder’s meeting to make the decision to purchase additional shares and take control of the company. Together they acquired the consent to do so from two of the three trustees. The company went on to do very well, benefitting both the trust and themselves. Yet, because the solicitor breached his fiduciary duty by making personal gains, the court held that the defendants held a portion of the shares on constructive trust for the plaintiff and were to account for the profits earned on those shares. This may strike some as an overly strict application of the rule against gains since the defendants attempted to gain the consent from the trustees, were acting in the best interest of the trusts, and ended up making a significant amount of money for the beneficiaries. What is seen here is a firm application of rules which some may appreciate for its virtue of predictability.

It should be noted that even though the outcome in this case may be considered harsh, there was some flexibility exhibited in this case and the courts did take into account the fact that the defendants acted in good faith. As a result, the defendants were given an allowance for their work and skill which produced the profits. Wilberforce J., speaking for the High Court, stated that “it would be inequitable now for the beneficiaries to step in and take the profits without paying for the skill and labour which has produced it.” It is clear that there were still concerns about fairness and individual justice even though the rules of fiduciary duties are to be applied strictly.