The Nature of Equitable Property A Funct PDF

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The nature of ‘equitable property’: A

functional analysis
Tatiana Cutts*
This article explores a hypothesis posited by Harris in 1971 and adopted by
the High Court of Australia in 2005 in CPT Custodian Pty Ltd v
Commissioner of State Revenue, that the trust ought to be understood as
a power-liability relationship, rather than a right-duty relationship. This is
important, and deserves fuller analysis. It has the potential to clarify many of
the conceptual and practical difficulties surrounding the proper
categorisation of equitable interests across the common law world. This
article argues that the beneficiary’s interest under a trust ought to be
understood in terms of the beneficiary’s power to impose upon the trustee a
duty to transfer to the former the rights to the trust res, and the
corresponding liability of the trustee to be made subject to such a duty.
Introduction
How ought we to classify the interest of the beneficiary? The question is not
new, but recently it has once again been the subject of judicial and academic
attention across the common law world.1 However we answer that question,
the consequences are many. It affects, inter alia: claims in respect of negligent
damage to and interference with the trust res;2 the timing and durability of
proprietary restitutionary claims;3 liability for breach of trust,4 and the relative
priority of trust and security interests.5 In order to provide a satisfactory
* Keble College, Oxford. I am very grateful for comments from Professor Joshua Getzler,
Justice James Edelman, Ben McFarlane, Professor Robert Stevens, Professor Sarah
Worthington, James Lee, Professor James Penner, Frederick Wilmot-Smith, Aruna Nair,
Andrew Dyson, David Winterton and Eli Ball, and to all those who heard an original draft
of this paper at the SLS Annual Conference 2011. All errors and omissions remain my own.
1 See, eg, Colour Quest Ltd v Total Downstream UK Plc [2011] QB 86; [2010] 3 All ER 793;
[2010] 3 WLR 1192; [2010] EWCA Civ 180; Spread Trustee Company Ltd v Sarah Ann
Hutcheson [2011] All ER (D) 51 (Jul); (2011) 14 ITELR 37; [2011] UKPC 13; [2012] 1 All
ER 251; Restatement of the Law (Third), Restitution and Unjust Enrichment (ALI, 2011);
L Smith, ‘Common Law and Equity in R3RUE’ (2011) 68 Washington and Lee L Rev 1185;
W Swadling, ‘The Fiction of the Constructive Trust’ (2011) 64 CLP 1; B McFarlane and
R Stevens, ‘The Nature of Equitable Property’ (2010) 4 J Eq 1.
2 See, eg, Colour Quest Ltd v Total Downstream UK Plc [2011] QB 86; [2010] 3 All ER 793;
[2010] 3 WLR 1192; [2010] EWCA Civ 180; MCC Proceeds Inc v Lehman Brothers
International (Europe) [1998] 4 All ER 675.
3 See, eg, Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669; [1996] 2
All ER 961; [1996] 2 WLR 802, 703; Shalson v Russo [2005] Ch 281; [2003] All ER (D)
209 (Jul); [2005] 2 WLR 1213; [2003] EWHC 1637 (Ch); Stump v Gaby (1852) 2 De GM
& G 623; Gresley v Mousley (1859) 4 De G&J 78; Westminster Bank Ltd v Lee [1956] Ch
7; [1955] 2 All ER 883.
4 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 at 703; [1996] 2 All
ER 961; [1996] 2 WLR 802.
5 See, eg, Latec Investments Ltd v Hotel Terrigal Pty Ltd (1965) 113 CLR 265; [1966] ALR
775; (1965) 39 ALJR 110; BC6500350; Phillips v Phillips (1861) 4 De GF & J 208; In Re
Goldcorp Exchange Ltd (in rec) [1995] 1 AC 74; [1994] 2 All ER 806; [1994] 3 NZLR 385;
[1994] 3 WLR 199.
44
The nature of ‘equitable property’: A functional analysis 45
answer it is necessary first to identify the manner in which the creation of the
trust alters the parties’ rights, duties, powers and liabilities. The enquiry here
is thus a practical one: what can the beneficiary do that he was not able to do
prior to creation of the trust; conversely, in what way is the trustee bound to
act that he was not previously bound to? McFarlane and Stevens have argued
persuasively in a recent paper in this Journal that that question ought to be
answered by thinking of the beneficiary’s interest in terms of a ‘right against
a right’.6 It is argued here, building upon a hypothesis originally posited by
Harris and more recently adopted by the High Court of Australia in CPT
Custodian Pty Ltd v Commissioner of State Revenue, that while this is a
helpful conceptual development, the debate is not properly framed in terms of
rights. Rather, by creating a trust the settlor confers upon the beneficiary the
power to obtain a right. More precisely, the settlor confers upon the
beneficiary an unconditional power to impose upon the trustee a duty to
transfer to the former the rights to the trust res. That is not a complete account
of the trust, nor does it purport to be. The argument made here is simply that
identifying the functional similarity of, inter alia, the rule in Saunders v
Vautier, the resulting trust and the power to rescind allows us to look beyond
labels such as ‘fully vested’ or ‘mere power’ in order to begin to catalogue
interests according to rational distinctions rather than anachronistic divisions
between equity and the common law.
Property or obligation?
The debate is a familiar one. One school of thought locates the trust with the
law of property,7 the other within the law of obligations.8 The special difficulty
presented by the equitable interest under a trust is that it demonstrates
characteristics of both. On one hand, where a trustee (T) holds some-thing on
trust for a beneficiary (B), and gives that thing to a third party (X), absent
defences B can claim directly against X by virtue of his interest under the
trust.9 On the other, there are acts of interference with, or injury to, the trust
res that are not regarded as invasions of the beneficiary’s rights (as opposed
to those of the trustee).10 It is with regard to this latter characteristic of the
trust that debate has recently resurfaced.
The Buncefield11 litigation concerned a negligently overfilled fuel storage
tank that resulted in what is thought to have been the largest peacetime
explosion in Europe,12 causing extensive damage to pipelines and storage
tanks at the site and many properties outside it. Claims for compensation were
6 McFarlane and Stevens, above n 1.

7 See, eg, A W Scott, ‘The Nature of the Rights of the Cestui Que Trust’ (1917) 17 Colum L
Rev 269; R Nolan, ‘Equitable Property’ (2006) 122 LQR 232.
8 See, eg, F W Maitland, Equity, Also the Forms of Action at Common Law: Two Courses of
Lectures, Cambridge University Press, 1909.
9 Phillips v Phillips (1861) 4 De GF & J 208; Pilcher v Rawlins (1871-72) LR 7 Ch App 259.
10 MCC Proceeds Inc v Lehman Brothers International (Europe) [1998] 4 All ER 675;
Hounslow LBC v Jenkins [2004] EWHC 215 (QB).
11 Shell UK Ltd v Total UK Ltd [2009] EWHC 540 (Comm); [2009] 2 Lloyd’s Rep 1; Colour
Quest Ltd v Total Downstream UK Plc [2011] QB 86; [2010] 3 All ER 793; [2010] 3 WLR
1192; [2010] EWCA Civ 180; [2010] 3 WLR 1192 (CA).
12 [2009] 1 CLC 186 at 191.
46 (2012) 6 Journal of Equity
brought by a number of claimants against Total Downstream UK plc, Total

UK Ltd, and Hertfordshire Oil Storage Ltd (owned by Total and Chevron Ltd).
One of these claimants was Shell. The legal title to the pipelines, storage tanks
and land was held by UKOP Ltd and WLPS Ltd as trustee for Shell, BP, Total
and Chevron. The damage from the explosion meant that Shell could no
longer use the pipelines and storage tanks and suffered substantial economic
losses. Shell brought proceedings in negligence, nuisance and under the rule
in Rylands v Fletcher13 against Total. At first instance the claim in negligence
failed owing to the rule prohibiting recovery for negligent infliction of pure
economic loss, legal title to the property being held by the trustee
companies.14 Shell appealed. It was eventually conceded by Total that the
property damage was a reasonably foreseeable consequence of their
negligence. However, Total disputed liability for the consequential economic
losses. Total relied on the so-called ‘exclusionary rule’ set out by Lord
Brandon in The Aliakmon:
in order to enable a person to claim in negligence for loss caused to him by reason
of . . . damage to property, he must have had either the legal ownership of or a
possessory title to the property concerned at the time when the loss or damage
occurred.15
Under English law, a claimant without legal or possessory title to the thing that
is negligently damaged cannot recover in tort in respect of economic losses
arising out of that damage, regardless of his dependence upon the property
rights of another in relation to it;16 the defendant owes no duty to the claimant
in respect of the latter’s loss. Shell had no legal title at the time the damage
occurred, and all the judges who heard Shell’s claim held that Shell had no
possessory title either. However, although The Aliakmon was not concerned
with damage to trust property, Lord Brandon went on to say that if a claimant
were a mere ‘equitable owner’, he would have to join the legal owner as a
party to the action in order to recover.17 The Court of Appeal in Buncefield
drew from this the proposition that, so long as the beneficiary took the
procedural step of joining the trustee, it could recover for loss consequent on
property damage to the trust res;18 to hold otherwise was to allow a ‘triumph
of form over sustance’.19
Given the peculiar circumstances of the case, the result seems
unobjectionable. The instrument of a trust was used by the parties only
because s 34(2) of the Law of Property Act 1925 provides that there can be no
more than four trustees in settlements and trusts for the sale of land. Although
there were four equitable tenants in common to the WLPS pipeline by the time
of the accident, prior to 31 July 1991 there had been five. Thus the parties
13 (1865-66) LR 1 Ex 265; [1865-66] All ER 1.

14 Shell UK Ltd v Total UK Ltd [2009] EWHC 540 (Comm); [2009] 2 Lloyd’s Rep 1.
15 Leigh & Sillivan Ltd v Aliakmon Shipping Co Ltd [1986] AC 785 at 809; [1986] 2 All ER
145; [1986] 2 WLR 902; [1986] 2 Lloyd’s Rep 1.
16 Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] QB 27; [1972] 3 All ER
557; [1972] 3 WLR 502.
17 Ibid, at 812.
18 Colour Quest Ltd v Total Downstream UK Plc [2011] QB 86; [2010] 3 All ER 793; [2010]
3 WLR 1192 at 1201; [2010] EWCA Civ at [129].
19 Ibid, at [143].
could not easily have structured their co-ownership entirely at common law.20
However, the doctrinal consequences of the Court of Appeal’s conclusion
cannot be so easily dismissed. A right in rem is a right exigible against the
world at large which gives the right-holder the ability to exclude an
indeterminate number of others from its subject matter. Property rights thus
impose prima facie duties on the rest of the world ‘not to engage with that
thing, to “keep off” as it were’.21 By contrast, if T holds a res on trust for B,
and the res is stolen or carelessly damaged by X, X breaches no duty to B, but
only a duty to T. B therefore cannot proceed directly against X in respect of
any loss B suffers as a result of breach. It was always true of detinue that a
beneficiary could not make a claim against a third party,22 and it is well
established that the same is true of conversion.23 In MCC Proceeds24
Bishopsgate Investment Trust Ltd (BIT) held share certificates in their
possession on bare trust for MacMillan (M) and was liable to transfer the
shares to M upon M’s written demand. BIT then pledged those same
certificates to Lehman Brothers (LB), who was unaware of M’s interest. MCC
Proceeds (MCC), to whom M’s rights had been assigned, brought an action
against LB for conversion of five of the relevant share certificates. MCC’s
action against LB for conversion failed in the Court of Appeal on the basis that
MCC’s title to the shares was equitable only and could not ground a claim in
conversion.25
The Court of Appeal in Buncefield cited no authority in support of the duty
that it recognised, and in particular did not discuss the conversion cases. As a
result of the Court of Appeal’s analysis, negligent damage to, but not
necessarily interference with, property in relation to which a claimant holds an
equitable right, generates a cause of action for that claimant.26 This is
peculiarly unsatisfactory. It is clear from Buncefield that until we decide where
the trust fits in our law, we will continue to find it very difficult to draw with
confidence the limits of its enforceability.
Rights against rights

McFarlane and Stevens argue that the key to locating the trust in our law lies
in the recognition that the beneficiary has a ‘right against the trustee’s right’,
which is prima facie binding against anyone who acquires a right that derives
from the trustee’s right.27 Thus the beneficiary has rights, not in the trust res,
but in the rights vested in the trustee. This theory is intuitively attractive; it
explains, for example, why an unlimited range of equitable interests may be
20 K Low, ‘Equitable Title and Economic Loss’ (2010) 126 LQR 507 at 510.
21 J E Penner, ‘Ownership, Co-Ownership and the Justification of Property Rights’ in
Properties of Law: Essays in Honour of Jim Harris, OUP, 2006, Ch 9, p 167. See also
J Harris, ‘Reason or Mumbo Jumbo: the Common Law’s Approach to Property’, 2002,
Maccabean Lecture in Jurisprudence.
22 Joseph v Lyons (1884) 15 QB 280; Hallas v Robinson (1884) 15 QB 288.
23 MCC Proceeds Inc v Lehman Brothers International (Europe) [1998] 4 All ER 675;
Hounslow LBC v Jenkins [2004] EWHC 215 (QB) at [15] per Pitchford J.
24 [1998] 4 All ER 675.
25 Ibid, at 686.
26 A Rushworth and A Scott, ‘Total Chaos’ (2010) LMCLQ 536 at 542.
27 McFarlane and Stevens, above n 1.
created, which the law of property does not admit. It is also, however, highly
abstruse. The phrase ‘rights against the trustee’s right of ownership’ describes
two separate relationships: (a) the relationship between the trustee and the
trust res, and (b) the relationship between the trustee and the beneficiary. It is
the second of these with which we are here concerned. According to
McFarlane, in order to acquire what he terms a ‘persistent right’ under a trust,
B must show that T is under a duty to B — what he terms the ‘core trust duty’.
So-called ‘persistent rights’ in general are described as the correlative of the
positive duty to ‘use a specific right in a particular way for B’s benefit’28 and
the beneficiary’s right in particular attracts the correlative negative duty upon
T ‘not to use a right for his own benefit’.29 These formulations are logically
disparate and are considered separately here.
The ‘duty to use a specific right in a particular way for B’s

benefit’
The heart of the duty of loyalty has been described as the ‘duty to advance
another’s interests’.30 According to what Birks terms the ‘third degree of
altruism’, the trustee is subject to a ‘compound obligation’, that is, ‘to a
number of concurrent obligations bound around the first and greatest
obligation to preserve and promote the interests of the beneficiary’.31 Whether
or not this duty is essential to the trust was the issue raised by the Citibank
litigation.32 That case concerned an application for directions made to the
court by Citibank as trustee for the holders of debt notes issued to securitise
debt. The issuer of the notes covenanted to pay the sums due on the notes and
gave other covenants the benefit of which was held by Citibank in trust for the
note-holders. Holders of the senior notes had the additional benefit of a
guarantee given by MBIA for the repayment of the sums due on their notes.
MBIA had the right to give Citibank instructions concerning the exercise of
most of its powers and discretions as trustee. Under the terms of the deed,
neither MBIA nor Citibank were required to have regard to the interests of the
note-holders when giving and acting on instructions. Citibank applied to the
court for directions regarding an instruction by MBIA to Citibank to exercise
an option to convert part of the debt into cash. That instruction was challenged
by a subordinated note-holder who believed the option would be exercised at
an undervalue. The note-holder argued that Citibank’s duties as trustee
prevented it from exercising the option.
At first instance Mann J rejected the argument that MBIA’s rights to control
the trustee were so wide as to reduce the ‘irreducible core’ of the trustee
obligations.33 There still was both a trust and a trustee; although ‘various
powers have been surrendered to MBIA for the time being,’ that was ‘done as
28 Ibid, at 8.
29 B McFarlane, The Structure of Property Law, Hart, Oxford, 2008, p 551.
30 L Smith, ‘The Motive not the Deed’ in J Getzler (Ed), Rationalizing Property, Equity and
Trusts: Essays in Honour of Edward Burn, Butterworths, London, 2003, Ch 4, pp 53–81.
31 P Birks, ‘The Content of Fiduciary Obligation’ (2002) 16 Tru LI 34.
32 Citibank NA v MBIA Assurance SA [2007] EWCA Civ 11; [2007] 1 All ER (Comm) 475;
[2007] All ER (D) 141 (Jan).
33 [2006] EWHC 3215 (Ch); [2006] All ER (D) 196.
a matter of commerce’34 and the note-holders knowingly took their

commercial interests subject to MBIA’s powers. On appeal the judgment was
upheld.35 In the leading judgment Arden LJ held that the court should lean
against a construction of the contractual documents such that ‘the powers of
the trustee were so reduced that it ceases to be a trustee at all’. However her
Ladyship considered that that point had not been reached because the trustee
continued at all times to have an obligation of good faith.36
The decision has been criticised precisely on the basis that it allows parties
to exclude or reduce the ‘irreducible core’ of trust duties.37 This criticism
stems from a misunderstanding of the ‘irreducible core’. In Armitage v Nurse
the question was whether a trustee had excluded liability for negligence by a
clause which provided that:
No trustee shall be liable for any loss or damage which may happen to (the trust)
fund or any part thereof or the income thereof at any time or from any cause
whatsoever unless such loss or damage shall be caused by his own actual fraud.38
The claimant alleged that this clause could not exempt the trustee from gross
negligence. The Court of Appeal disagreed. Millett LJ said:
There is an irreducible core of obligations owed by the trustees to the beneficiaries
. . . The duty of the trustees to perform the trusts honestly and in good faith for the
benefit of the beneficiaries is the minimum necessary to give substance to the
trusts.39
His Lordship was not suggesting that the irreducible core consisted of three
separate obligations of honesty, good faith and a duty to act in the best
interests of the beneficiaries. Instead, his statement seems to have been
intended as a comprehensive account of the duty of ‘good faith’, which he had
considered as part of his analysis of the duty of loyalty in Bristol & West
Building Society v Mothew.40 There he explained that the duty of loyalty
comprised, amongst other elements, a duty of good faith. He did not suggest
that there was any separate duty of ‘honesty’ or ‘acting in the beneficiary’s
best interests’. In Armitage the focus was thus upon the trustee’s intentions in
carrying out the trust purposes for the benefit of the beneficiary (ie, that the
intentions must be ‘in good faith’ or ‘honest’).41 Lord Nicholls of Birkenhead
has thus written extra judicially, ‘to define the trustee’s obligation in terms of
acting in the best interests of the beneficiaries is to do no more than formulate,
in different words, a trustee’s obligation to promote the purpose for which the
trust was created’.42
34 Ibid, at [48].
35 [2007] EWCA Civ 11; [2007] 1 All ER (Comm) 475; [2007] All ER (D) 141 (Jan).
36 Ibid, at [82].
37 A Trukhtanov ‘The Irreducible Core of Trust Obligations’ (2007) 123 LQR 342 at 343.
38 [1998] Ch 241 at 253; [1997] 2 All ER 705; [1997] 3 WLR 1046.
39 Ibid.
40 [1998] Ch 1 at 18; [1998] ANZ ConvR 271; [1996] 4 All ER 698; [1997] 2 WLR 436.
41 J Edelman, ‘Four Fiduciary Puzzles’ in E Bant and M Harding (Eds), Exploring Private
Law, CUP, 2010, Ch 13.
42 D Nicholls, ‘Trustees and Their Broader Community: Where Duty, Morality and Ethics
Converge’ (1995) 9 Tru LI 71 at 75.
The duty ‘not to use a right for his own benefit’

The same objection applies to the negative formulation of the ‘core trust duty’.
In stating that ‘[the trustee] may not act for his own benefit or the benefit of
a third person without the informed consent of his principal’, Lord Millett was
not identifying any separate duty, but rather describing the nature of the
obligation properly to carry out the trust according to the agreed purposes. If
the trust was created to confer financial benefits on certain persons, a decision
not to maximise those financial benefits but to promote different moral
objectives is clearly not advancing the trust purposes. In the same way, a
decision to allocate trust money to oneself in lieu of the agreed purposes is an
infringement of the obligation to carry out the trust. In In Re Beatty Hinves v
Brooke43 the testatrix bequeathed her personal chattels to trustees, stating that
they should ‘. . .distribute the chattels . . . among such persons as they think fit
within two years of her death’. Clause 12(c) of the will allowed the trustees
to exercise any power conferred by the will, notwithstanding any direct
personal interest in the mode of its exercise. The court construed this clause
as allowing the trustees, subject to having proper regard to their overall
fiduciary duties, to make gifts or payments to themselves.44 Although that
power was subject to the same rule as to certainty of object as any other in that
the trustees had to be able to say whether any given person was or was not an
object of the power,45 the court held that, ‘in this case there is no difficulty
because there is no one who is not’.46 It therefore upheld the payment to each
of the trustees of £10,000, made in accordance with the express wish of
Mrs Beatty. In other words, the duty upon the trustee not to use the trust res
for his own benefit is really a duty not to use the trust res for his own benefit
to the extent that this conflicts with the trust purposes, or in other words, a
duty to carry out the trust.
The role of knowledge in creation of the trust

However one prefers to formulate it, the identification of some duty is integral
for any right-based conception of the beneficiary’s interest. In order for an
individual to have a right, another person must be subject to a corresponding
duty; ‘duty’ and ‘right’ are correlative.47 If X has a right against Y that he shall
stay off the former’s land, the correlative is that Y is under a duty toward X
to stay off the place.48 Though there is a great deal of disagreement about their
content and the precise mechanism by which they arise, almost all accounts
agree that fiduciary obligations depend, in some sense, on a voluntary
undertaking, either of individual obligations or of a position to which
responsibility is attached.49 A reasonable conclusion from all of this is that a
43 In Re Beatty Hinves v Brooke [1990] 3 All ER 844; [1990] 1 WLR 1503.

44 Ibid, at WLR 1506.
45 In re Gulbenkian’s Settlements [1970] AC 508; [1968] 3 All ER 785; [1968] 3 WLR 1127.
46 [1990] 3 All ER 844; [1990] 1 WLR 1503 at 1506.
47 Lake Shore & MSR Co v Kurtz 10 Ind App 60; 37 NE 303 at 304 (1894); W N Hohfeld,
Fundamental Legal Conceptions as Applied in Judicial Reasoning, Yale University Press,
1923, p 38.
48 Hohfeld, ibid, p 38.
49 Maitland, above n 8, p 55; L Smith, ‘Constructive Fiduciaries?’ in P Birks (Ed), Privacy and
trust will only arise where the trustee has sufficient awareness of the facts.50
By his own admission, certainly, McFarlane’s ‘core trust duty’ cannot arise
until the trustee knows that the trust has been created.51 A great deal rests on
this point; if trusts can only exist where the trustee has sufficient knowledge,
then issues such as the determination of what level of knowledge is required,
how to identify when the requisite level has been reached and from whom
notice must be given become fundamentally important. As will be considered
in what follows, questions of timing affect inter alia the priority of third party
interests, transfer of property interests, limitation periods and tax liability. The
question now considered is therefore whether it is in fact that the case that the
trustee must know that he is intended to be trustee before the trust can arise.
Deeds and assent
A deed need not be communicated to its beneficiary. Though a deed must be
delivered, the role of delivery is simply to evidence the sincerity of the
intention of the donor. A deed will therefore be valid if delivered, even if there
has been no communication to or assent of the recipient.52 As will be
demonstrated, that rule is the same for trust deeds; a deed is valid to vest an
interest in the beneficiary without prior communication to and assent of the
trustees, who may then demonstrate dissent and divest themselves of legal
title.
In Siggers v Evans53 a settlor executed a deed of assignment conveying all
his property to a trustee in trust for the trustee and others. The settlor wrote to
the trustee to inform him of the deed, but a writ of fieri facias was delivered
to the sheriff the next day, before the trustee acknowledged and accepted the
trust. The case turned on whether the trust arose before delivery of the writ.
The court held that the trustee’s knowledge was not necessary to vest legal
title in him. The trust came into existence as soon as the deed was validly
executed. In reaching this conclusion the court referred, inter alia, to Townson
v Tickell,54 in which the court considered the nature of the disclaimer
necessary to devest an estate. The court proceeded from the assumption that
the usual rule was that the estate would vest in the devisee ‘until he does some
act to shew his dissent’.55 The conclusion in Siggers was thus that the general
rule of law was that the estate vests, subject to later dissent.
Hobson v Thelluson56 applied Siggers v Evans on very similar facts, holding
that a conveyance by a debtor of his goods to two creditors for the benefit of
themselves and the other creditors passed the property at once, on the
Loyalty, Clarendon Press, Oxford, 1997, ppp 249, 262–7; P Millett, ‘Restitution and
Constructive Trusts’ (1998) 114 LQR 399 at 404; J Edelman, ‘When do fiduciary duties
arise?’ (2010) 126 LQR 302.
50 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669; [1996] 2 All ER
961; [1996] 2 WLR 802 per Lord Browne-Wilkinson; B McFarlane, ‘The Centrality of
Constructive and Resulting Trusts’ in Constructive and Resulting Trusts, Hart, Oxford, 2010,
pp 196–7.
51 McFarlane, ibid, pp 196–7.
52 Hall v Palmer (1844) 3 Hare 532; (1844) 67 ER 491; Macedo v Stroud [1922] 2 AC 330.
53 (1855) 5 E&B 367.
54 (1819) 3 B & Ald 31; (1819) 106 ER 575.
55 Ibid, at B & Ald 38 per Holroyd J.
56 (1866-67) LR 2 QB 642.
execution of the deed by the debtor, without any assent on the part of the
trustees, subject to later disclaimer. Importantly, however, the courts have held
that where the trustee does disclaim, this does not operate to destroy the
beneficiary’s interest. In Mallott v Wilson57 a settlor made a voluntary
settlement of property to a trustee in trust. A year later, when the trustee
learned of the trust, he disclaimed and the settlor made a different voluntary
settlement of the same property 22 years later. After the settlor’s death the
question arose whether the beneficiaries of the first or second settlement were
entitled to the property. Byrne J held that the first trust was effectively created
when the settlement was executed and that the trustee’s disclaimer revested
title in the settlor subject to that trust.58
The courts have suggested two lines of reasoning for the conclusion that
trusts can exist even in cases in which the trustee has no notice of their
existence. One is that although acceptance is necessary, there is a conclusive
presumption in favour of it. Thus in In Re Birchall Lindley LJ said, ‘a man’s
assent to a devise is presumed unless he disclaims’.59 This is a legal fiction.
It is not permissible to adduce evidence to prove that the trustee was unaware
of the trust,60 and so we are not dealing with a true presumption.61 If
acceptance were truly presumed and therefore still necessary for the existence
of the trust, disclaimer ought to destroy the interest of the beneficiary. It does
not have this effect. Any trustee who has not accepted can disclaim, causing
title to revest in the settlor, and the trustee has no liability, either as titleholder
or as trustee. This does not destroy the trust, which arises at the time of the
conveyance, and the settlor holds title subject to the trust. The alternative, and
better, line of reasoning, is that title passes regardless of acceptance or
notice.62
The role of knowledge in the creation of informal trusts:
Westdeutsche Landesbank Girozentrale v Islington LBC
Outside the realm of trusts created by deed, the role of knowledge has been the
subject of some controversy, which stems in particular from the judgment of
Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington
LBC.63 In that case a local authority had received money as part of a void swap
transaction. By the time the case reached the House of Lords it was agreed
between the parties that the bank could recover the value of its payments on
the ground of unjust enrichment, and the only issue was whether it was
entitled to compound interest on that money. The majority held that it was
not.64 Compound interest could only be awarded if the facts involved fraud or
breach of trust. There had been no fraud and the payments received by the
local authority had not been held on trust because, according to Lord
57 [1903] 2 Ch 494.
58 Ibid, at 503.
59 (1889) 40 Ch D 436.
60 Siggers v Evans (1855) 5 E&B 367.
61 W Swadling, ‘Explaining Resulting Trusts’ (2008) 124 LQR 72 at 95.
62 Scott and Ascher on Trusts, 5th ed, Aspen, 2006, p 262.
63 [1996] AC 669; [1996] 2 All ER 961; [1996] 2 WLR 802.
64 See now Sempra Metals Ltd v IRC [2008] 1 AC 561; [2007] 4 All ER 657; [2007] 3 WLR
354; [2007] UKHL 34.
Browne-Wilkinson, the local authority had dissipated the money before its
conscience had been affected by knowledge of the invalidity of the contract.
His Lordship said:
Since the equitable jurisdiction to enforce trusts depends upon the conscience of the
holder of the legal interest being affected, he cannot be a trustee of the property if
and so long as he is ignorant of the facts alleged to affect his conscience, ie, until he
is aware that he is intended to hold the property for the benefit of others in the case
of an express or implied trust, or, in the case of a constructive trust, of the factors
which are alleged to affect his conscience.65
He distinguished Chase Manhattan Bank v Israel-British Bank (London)
Ltd.66 In that case a trust was held to have arisen of money that had been paid
to the defendant by mistake. Lord Browne-Wilkinson held that this was
because the money had still been identifiable in the defendant’s hands at the
time when it became aware of the claimant’s mistake, saying, ‘there is, so far
as I am aware, no authority which decides that X was a trustee, and therefore
accountable for his deeds, at any time before he was aware of the
circumstances which gave rise to a resulting trust’.67
A number of cases were relied upon by counsel for the bank, in each of
which the resulting trust was held to arise despite the recipient’s state of
knowledge. In Re Vinogradoff68 a grandmother transferred stock into joint
names with her 4 year old granddaughter. The grandmother received the
income from the stock until her death. The court held that the income formed
part of the estate of the grandmother, so that the estate did not have to account
for it. In Re Muller69 an aunt deposited money in the names of her niece and
nephew, aged 2 and 6. The infants and their parents were unaware of the
deposits and the aunt collected the interest during her life. In Birch v
Blagrave70 a father conveyed land to his daughter in order to reduce the value
of his estate so that he would be disqualified from becoming Sherriff of
London. He intended that the daughter should hold the land on trust for him
but did not tell her of the conveyance. On discovering that this arrangement
did not have the desired effect he paid the usual fine for not accepting office.
Both father and daughter died. Though the daughter died without learning of
the transfer, the father’s devisees recovered the land from the daughter’s heirs,
the purpose of the transfer having failed. Thus the resulting trust which arose
did so at the outset, independently of the knowledge of the resulting trustee.
In Childers v Childers,71 the plaintiff, A, directed the transfer to his son of
such an interest in 400 acres of land as would qualify him for the office of
bailiff. A deed was executed and registered. The son died soon after without
ever having heard of the transaction or A’s intentions. The plaintiff brought an
action against the defendant, the only child and heiress of the son, arguing that
a trust had arisen in his favour. It was unsuccessfully argued for the defendant
ER 961; [1996] 2 WLR 802.
66 [1981] Ch 105; [1979] 3 All ER 1025; [1980] 2 WLR 202.
67 [1996] AC 669 at 705; [1996] 2 All ER 961; [1996] 2 WLR 802.
68 [1935] WN 68.
69 [1953] NZLR 879.
70 (1755) Amb 264.
71 (1857) 1 De G&J 482.
that ‘there was no understanding between the grantor and the grantee; nothing
to raise an equity against the latter’.72
His Lordship held that each of these cases was explicable on the ground
that, by the time action was brought, the original recipient or his successors
in title had become aware of the facts which gave rise to a resulting trust and
their conscience was affected as from the time of such discovery. This is true,
but although the cases do not conclusively refute the proposition that the
trustee must have notice as a precondition for the existence of the trust,
certainly they do not dictate it. Nor did Lord Browne-Wilkinson cite any
authority which positively supported that proposition. On the basis of what
rationale, therefore, did he reach that conclusion?
He began from the premise that whenever a trust arises the trustee will
always be subject to certain fiduciary obligations and consequent liability for
breach.73 He therefore concluded, overruling Sinclair v Brougham, that it
would be unfair to expose a defendant to such liability unless he knew of the
existence of the trust. In that case it had been held that money deposited with
a statutory building society under ultra vires banking contracts was held on
trust. However, Viscount Haldane LC had explicitly held that this was a
‘resulting trust, not of an active character’,74 by which it was meant that it was
a trust under which the depositors had an equitable interest, but under which
the building society owed them no duty to account for the money. This is
important. Certainly the trustee’s acceptance is relevant in ascertaining the
existence and scope of fiduciary obligations to which he is subject. The
paradigm example of the fiduciary relationship is the express trust, which
initially developed out of a relationship of confidence between the trustee and
the settlor. However, the fiduciary duties owed by the trustee are owed not to
the settlor but to the beneficiary, with whom there is no such relationship.
Thus the duties owed by the trustee to the beneficiary are based, not upon the
relationship between trustee and beneficiary, but rather upon the trustee’s
undertaking to the settlor to hold and manage the trust res on behalf of the
beneficiary. Lord Millett, writing extra judicially, puts it thus:
If the trustee is to be treated as a fiduciary, this must be because he has knowingly
subjected himself to fiduciary obligations. These are not created by the separation of
the legal and equitable titles, though they may be created by the same circumstances
which gave rise to the separation. But where the only relationship between the
parties, who may not even know of each other’s existence, is that one holds the legal
title and the other is the equitable owner, there can be no fiduciary relationship.75
To return to his Lordship’s words in Westdeutsche: ‘there is, so far as I am
aware, no authority which decides that X was a trustee, and therefore
accountable for his deeds, at any time before he was aware of the
circumstances which gave rise to a resulting trust’.76 Both parties accepted, on
the basis of President of India v la Pintada Compania Navigacion SA,77 that
72 Ibid, at 487.
73 [1914] AC 398; [1914-15] All ER Rep 622.
74 Sinclair v Brougham [1914] AC 398; [1914-15] All ER Rep 622.
75 Millett, above n 49, at 405.
76 [1996] AC 669 at 705; [1996] 2 All ER 961; [1996] 2 WLR 802 (emphasis added).
77 [1985] AC 104 at 116; [1984] 2 All ER 773; [1984] 3 WLR 10.
compound interest was payable only if the council received the money under
the void interest rate swaps agreement as fiduciary. Counsel for the bank
argued that where money was transferred subject to a void contract, there was
a separation of the legal and equitable title and a trust arose.78 Counsel for the
local authority responded: ‘even if [there was such a separation of legal and
equitable title], the council was not constituted a “fiduciary” for the purposes
of the question whether it is liable to pay compound interest’.79 In any event,
‘the unwitting use of someone else’s property does not give rise to a breach
of trust’.80 An award of compound interest has been justified not as
punishment but simply on the basis that it represents the profit that the
fiduciary has made or is presumed to have made from investment of the
principal sum in order that he does not profit personally from having had the
use of assets to which he had no right.81 The question was thus not whether
or not a trust arose immediately upon receipt of money under a void contract
but whether a person who receives money in such circumstances could owe
the duty to invest, typical of an express trustee, a time even before he knew
he was a trustee. The court’s conclusion that he could not is uncontroversial.
According to Lord Millett, whether or not we call the relationship that
arises upon the separation of legal and equitable estates a ‘trust’ is ‘essentially
a question of semantics’.82 With respect, the matter is not quite so simple.
Orthodoxy tells us that the where there is a trust the beneficiary has an interest
which, whether one calls it personal or proprietary, certainly affects the
position of third parties. If we are to conclude that the relationship shorn of
fiduciary obligations is not a trust, then we must call it something; we must not
draw the conclusion that in these circumstances the beneficiary has no such
interest at all. That conclusion attracts all sorts of practical difficulties. It is
often very important to know exactly when a proprietary interest arose.
Chambers writes:
delaying the creation of the trust until the trustees have sufficient notice to affect
their consciences may have a drastic effect on a number of important matters which
depend on the timing of the creation of the resulting trust, such as entitlement to
income, liability for taxation, risk and insurance, commencement of limitation
periods, transfer and transmission of property interests, and priority of competing
claims.83
For example, in Rawluk v Rawluk84 statute required the property rights of a
couple to be adjusted, which adjustment took place with regard to the rights
as they existed on a particular day. It was therefore essential to know what
their respective rights were on that day, which required a decision to be made
as to whether the law of trusts had already conferred an interest on the female
party before that day. Again, in Vandervell v IRC85 the question was whether
a taxpayer was taxable in respect of income arising from certain shares during
78 [1996] AC 669 at 675; [1996] 2 All ER 961; [1996] 2 WLR 802.

79 Ibid, at AC 674 (emphasis added).
80 Ibid.
81 Burdick v Garrack (1869-70) LR 5 Ch App 233 at 241.
82 Millett, above n 49, at 404.
83 R Chambers, Resulting Trusts, Oxford, 1997, p 206.
84 [1990] 1 SCR 70; 65 DLR (4th) 161.
85 [1967] 2 AC 291; [1967] 1 All ER 1; [1967] 2 WLR 87.
a certain tax period. That question turned on whether he had an equitable

interest in those shares during the relevant period, throughout which his own
belief was that he had no such interest.86
As has already been discussed, Lord Browne-Wilkinson’s starting point is
that no equitable proprietary interest is ever created unless and until the
conscience of the holder of the legal estate is affected. In express trusts this
means that the latter must know that he or she is intended to be a trustee; in
other trusts he or she must know the facts which are said to affect his
conscience. Precisely which facts are these? Is constructive knowledge of the
requisite facts enough? Aside from the task of determining the requisite type
and level of knowledge, identifying the point at which it has been reached in
an individual case is difficult, and inevitably leads to uncertainty over when a
trust arises.87 In particular, the inquiry would no longer be restricted to the
moment of transfer but could span the remaining years of the trustee’s life.88
These are not straightforward difficulties. As Birks explains:
The only way to overcome these problems would be to repeat the process which
some may think that centuries of history have already achieved, namely, artificially
to reduce ‘affected conscience’ to a list, no doubt a long and sophisticated list, of
discoverable situations deemed by law to affect conscience. Thus, for example, one
might say that, where there is a conveyance to a person in circumstances in which
the law understands that conveyance to have been a conveyance upon express trust,
the conscience of the transferee is deemed to be affected from the moment of the
conveyance, whether or not he himself thought and had reasonable grounds for
thinking that the conveyance was intended beneficially. But once conscience is
‘deemed to be affected’ in this way it becomes a fifth wheel on the coach.89
The courts, in deciding such questions, have certainly shown no interest in the
opinions of the transferee. The question whether Mr Vandervell’s trustee
company received the option to purchase the shares upon trust was not
answered by an investigation into the deemed knowledge of the trustee
company. In Ministry of Health v Simpson (In Re Diplock)90 the House of
Lords affirmed the existence of the principle whereby those to whom a
deceased’s property has been mistakenly given are personally liable to repay
the persons rightfully entitled. One of the arguments made by counsel for the
charity-recipients in the Court of Appeal was that for an equitable claim to
succeed, ‘the consciences of the respondents must in some degree be
affected’.91 The court rejected this argument, saying:
it is no doubt true that an equitable claim predicates that the consciences of the
defendant must be affected. But we have failed to observe any justification, in the
judgments cited, for the suggestion that the state of the defendant’s conscience
depends upon his knowledge or assumed knowledge that his title to the money paid
to him may or may not be defeasible in favour of other interested persons. The test
86 See further P Birks, ‘Trusts Raised to Reverse Unjust Enrichment: the Westdeutsche Case’
(1996) 4 RLR 3 at 19–20.
87 Siggers v Evans (1855) 5 E&B 367; Birks, ibid, at 20.
88 Chambers, above n 83, p 207.
89 Birks, above n 86, at 20.
90 [1951] AC 251; [1950] 2 All ER 1137.
91 [1948] Ch 465 at 476; [1948] 2 All ER 318.
as regards conscience seems rather to be whether at the time when the payment was
made the legatee received anything more than, at the time, he was properly entitled
to receive.92
This was affirmed by the House of Lords, in which Lord Simonds stated:
the Court of Chancery, it was said, acted on the conscience, and, unless D had
behaved in an unconscientious manner, would make no decree against him . . . My
Lords, I find little help in such generalities. On the propriety of a legatee refusing to
repay to the true owner the money that he has wrongly received I do not think it
necessary to express any judgment. It is a matter on which opinions may well differ.
The broad fact remains that the Court of Chancery . . . established the rule of equity
which I have described, and this rule did not excuse the wrongly paid legatee from
repayment because he had spent what he had been wrongly paid.93
Equity functions according to rules which operate independently of questions

of conscience. The courts are clear that where a trust arises it does so because
the conditions for its creation are met rather than because of any change in the
state of mind or ‘conscience’ of the trustee.
All of this is not to suggest that consent is irrelevant: far from it. After all,
it is according to the manifestation of consent that courts are able to determine
the existence and scope of the trustee’s obligations. However, the creation of
the trust does not depend upon such a voluntary undertaking. The creation of
an express trust depends upon the expression of the settlor’s intention to create
a trust of identifiable subject matter in favour of certain objects, together with
a vesting of the title to the subject matter in the trustee, ‘all of which can occur
without the trustee’s knowledge’.94 The fact that the trustee usually will know
about and concur in the creation of the trust should not lead one to the
mistaken assumption that it is a necessary condition for its creation. A trust
can arise in the absence of knowledge on the part of the trustee, though he will
not be subject to any obligations in respect of the trust res, nor liability for
breach in such cases. This has important implications for the classification of
the beneficiary’s interest under a trust; if there is not necessarily a
corresponding duty, the term ‘right’ is inaccurate to describe the beneficiary’s
interest. In these cases at least, we need a more nuanced understanding of the
trustee-beneficiary relationship.
Powers to obtain rights

The argument presented below is that the cases support a different view of the
beneficiary’s interest under a trust: it is an unconditional power to obtain a
right, the correlative of which is the trustee’s liability to be made subject to a
duty to transfer his rights to the beneficiary. Such a power arises immediately
upon creation of the trust, irrespective of any knowledge on the part of the
trustee or beneficiary.
92 Ibid, at Ch 488.
93 [1951] AC 251 at 276; [1950] 2 All ER 1137.
94 Chambers, above n 83.
Express trusts
In Saunders v Vautier95 the testator gave stock to trustees to accumulate the
income until his great–nephew, Daniel Vautier, should attain the age of 25
years, and then to transfer the stock and accumulations to him. The testator
died in 1832 and Daniel reached 21 in 1841. Daniel petitioned for a transfer
to him of the corpus. Lord Cottenham LC held that he was entitled to such
transfer immediately:
Where a legacy is directed to accumulate for a certain period, or where the payment
is postponed, the legatee, if he has an absolute indefeasible interest in the legacy, is
not bound to wait until the expiration of that period, but may require payment the
moment he is competent to give a valid discharge.96
Thus if there is only one beneficiary, or if there are several and they are all in
agreement, and are sui juris, they may (a) collapse the trust and (b) do so
without reference to the wishes of the settlor or the trustees. This is now
known as the rule in Saunders v Vautier, but the rule that it exemplifies existed
long before the case that gave it its name.97 The effect of collapsing the trust
is to impose upon the trustee an obligation to transfer to the beneficiary the
rights (specifically legal title) to the trust res by delivery or its equivalent. The
logic of the rule is this: all the duties of a trustee are owed to the beneficiary,
and can only be for his benefit. Any duties owing to the beneficiary not to hand
over trust property, say before he turns 25, are therefore obligations that he
may waive.98 The power is of course exercisable only by those who are able
to access the legal system (or, on their behalf, by the court)99 but neither the
settlor nor the trustee are able to impose binding conditions upon its exercise
by a beneficiary who is sui juris.
In CPT Custodian Pty Ltd v Commissioner of State Revenue100 the High
Court of Australia considered the nature and effect of the rule in Saunders v
Vautier, concluding that it gives the beneficiaries ‘a Hohfeldian power which
correlates to a liability on the part of the trustees, rather than a right correlative
to a duty’.101 In reaching that conclusion the court relied upon an article of
Harris’ entitled ‘Trust, Power and Duty’,102 quoting the following sentence
from that article: ‘By breaking up the trust, the beneficiaries do not compel the
trustees to carry out any part of their office as active trustees; on the contrary,
they bring that office to an end.’103 The next sentence of the article is this:
‘What the rule gives the beneficiaries is a Hohfeldian “power” correlating to
a “liability” on the part of the trustees, not a “right” correlating to a “duty”’.
This idea, though it has yet to be explored in depth, has the potential to clarify
95 (1841) 4 Beav 115; (1841) 49 ER 282.

96 Ibid, at Beav 116.
97 See, eg, Lord Pawlett’s case (1685) 2 Vent 366; Love v L’Estrange (1727) 5 Bro PC 59.
98 B McFarlane, The Structure of Property Law, Hart, Oxford, 2008, p 554. See also J Getzler,
‘Transplantation and Mutation in Anglo-American Trust Law’ (2009) 10 Theoretical
Inquiries in Law 355 at 368, where he details, and prefers, Lord Langdale’s reasoning
regarding the precatory nature of accumulations.
99 Eg, Trustee Act 1925 s 53.
100 (2005) 224 CLR 98; 221 ALR 196; [2005] HCA 53; BC200507253.
101 Ibid, at [44].
102 (1998) 87 LQR 31.
103 Ibid, at 63.
many of the conceptual and practical difficulties surrounding the proper

categorisation of equitable interests across the common law world. As
Hohfeld has explained, ‘the term “rights” tends to be used indiscriminately to
cover what in a given case may be a privilege, a power, or an immunity, rather
than a right in the strictest sense’.104 ‘Duty’ and ‘right’ are correlative. A legal
power is the correlative of a legal liability.105 A person holding a power ‘has
the legal ability by doing certain acts to alter legal relations, viz to transfer
[rights] from one person to another’.106 A beneficiary has, in this latter sense,
a power which, when exercised, will cause the transfer to the beneficiary of a
proprietary right by imposing upon the trustee, or any transferee who acquires
rights that derive from the trustee’s, a duty to transfer to the beneficiary his or
her rights to the trust res. The duty to convey does not exist from the first, but
only arises when a demand is made by an entitled beneficiary.107 Until then the
trustee is under a liability; he or she is at any time liable to have their legal
relations altered by the beneficiary’s exercise of the power.108
That there is no duty upon the trustee to transfer the trust res to the
beneficiary before exercise of the power was made clear as long ago as 1759.
Burgess v Wheate109 concerned a settlement by way of trust for one Elizabeth
Harding. The subject matter of the trust was a half share of a manor in
Gloucestershire which descended to Elizabeth as heir of her uncle, John
Chandler. Elizabeth’s father was Thomas Chandler, brother of John. The trusts
were such as Elizabeth might appoint, but in default for Elizabeth absolutely.
Elizabeth and her husband died, leaving no heir on her father’s side. Richard
Burgess was Elizabeth’s heir on her mother’s side. In 1738 the surviving
trustee Sir Francis Page came into possession of the estate, and so it was
against Page that Burgess brought the claim. The common law rule was that
descent to land was to be traced from the last purchaser with seisin.
‘Purchaser’ included a person who took a conveyance even if gratuitously, but
did not include a person who had inherited the land (as had Elizabeth).
However Burgess argued that Elizabeth had in effect taken a new legal estate
by purchase from the trustees. The argument was this: Elizabeth, as sole
beneficiary of the trust, could have called for a conveyance from the trustees.
If she had, she would have been a purchaser and, in the absence of heirs on
the father’s side, the heir on the mother’s side could take. Since ‘equity
regarded as done that which ought to be done’, equity regarded the
conveyance as having been made, and therefore Burgess as being entitled.
However, Sir Thomas Clarke MR said:
Nothing is looked on in equity as done, but what ought to have been done, not what
might have been done . . . Here Mrs Harding never prayed a conveyance, and one
cannot tell whether she ever would; and the maternal heir is not to be considered as
a privy in blood, but a mere stranger.110
104 Hohfeld, above n 47, p 36.

105 Ibid, p 50.
106 Ibid, p 7.
107 Swadling, above n 1, at 11.
108 J W Harris, ‘Trust, Power and Duty’ (1971) 87 LQR 31.
109 (1759) 1 WmBl 123; 1 Eden 177.
110 Ibid, at Eden 186–7.
There was no duty to transfer title, and Elizabeth never had a right to it. What
she had was ‘the right to ask for it’,111 or in other words the power to call for
a conveyance from the trustees, thereby imposing upon them the duty to
transfer to her title to the land. In this way the trust is constituted by the power
in the beneficiary to call for transfer to him of the rights to the trust res. Until
exercise of the power the trustee is under no duty to transfer title, and the
beneficiary, so Burgess tells us, has no right to it.
Resulting trusts
Trusts can be devoid, or ‘bare’, of obligation. The resulting trust is usually,
though not always, this kind of trust. In Vandervell v IRC112 the House of
Lords held that an option to purchase shares, granted by the Royal College of
Surgeons (RCS) to the Vandervell Trustee Company (T), was held by T on
resulting trust for Mr Vandervell (B) who had been solely entitled in equity to
the shares and had ordered that they be transferred to the Royal College. The
shares were initially held on trust for B. At B’s direction RCS granted an
option over the shares to T in return for B vesting title to them in the RCS.
Substantial dividends were declared on the shares and paid to RCS. A claim
was brought by the Revenue for surtax in respect of these. Though the transfer
was deemed to be effective, dividends were ‘income from property of which
the settlor has [not] divested himself absolutely by the settlement’.113 Vesting
of the rights in a trustee company under the option raised the inference that
was to take as trustee. This inference was not rebutted, and thus arose a
resulting trust for B. Such a trust, in the words of Megarry J, ‘merely carries
back to [B] the beneficial interest’ when the beneficiary calls for it.114 It is
resulting in effect in the sense that the equitable interest is ‘carried back’ to
B.115 It is also resulting in purpose where it exists to reverse an unjust
enrichment. The analysis presented here applies just as much to trusts which
respond to unjust enrichment as those which respond to consent; the trust in
all its forms is a power to obtain a right. Where the trust is resulting in purpose
the power that arises does so in order to enable the holder to reverse an
enrichment gained at his expense.
It has been said that where an enrichment is transferred in circumstances
which give rise to a proprietary claim in the form of a resulting trust, the
trustee has a duty to the beneficiary not to retain the enrichment.116 In Chase
Manhattan,117 one of the most frequently cited examples of proprietary
restitution of an unjust enrichment, Goulding J thus said: ‘If one party P
transfers property to another party D by reason of a mistake of fact, P has in
111 P Matthews, ‘The Great Case of Burgess v Wheate’, SLS Annual Seminar: Landmark Cases
in Equity, p 20.
112 [1967] 2 AC 291; [1967] 1 All ER 1; [1967] 2 WLR 87.
113 Income Tax Act 1952 s 415.
114 Megarry J in Vandervell (No 2) [1974] Ch 269; [1974] 3 All ER 205; [1974] 3 WLR 256.
See also Willoughby v Willoughby (1787) 1 TR 763 at 771. NB: the ‘retention’ theory of
resulting trusts was discredited by Lord Browne-Wilkinson in Westdeutsche; thus ‘back’
should be understood to mean ‘to’ A.
115 More precisely, a new equitable interest is created which, in Vandervell, reflected the old.
116 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 at 721 per Lord
Goff; [1996] 2 All ER 961; [1996] 2 WLR 802.
117 [1981] Ch 105; [1979] 3 All ER 1025; [1980] 2 WLR 202.
general a right to recover it and D a duty to restore it.’118 This is the first
common fallacy. ‘Duty’ is a misnomer. In circumstances which give rise to a
proprietary claim, B still choose to pursue a personal claim in lieu.119 It makes
little sense therefore to say that the trustee is under an immediate duty to
transfer the right. Rather, the enrichment is at most held on a trust that arises
by operation of law, by virtue of which B has the power to impose upon T a
duty to transfer to him the rights to the trust res.
The second fallacy has been to describe B as ‘retaining’ a beneficial interest
under a trust.120 In Westdeutsche121 Lord Browne-Wilkinson explained that:
A person solely entitled to the full beneficial ownership of money or property, both
at law and in equity, does not enjoy an equitable interest in that property. The legal
title carries with it all rights. Unless and until there is a separation of the legal and
equitable estates, there is no separate equitable title. Therefore to talk about the bank
‘retaining’ its equitable interest is meaningless.122
A person with best title to a thing does not also hold the equitable title to it.
Where a transfer is made which amounts to an unjust enrichment of the
recipient, the transferor’s equitable interest arises at the moment of the
transfer. It arises to enable the transferor to recover legal title and thereby to
reverse the enrichment obtained unjustly at his or her expense.
While making a decisive move away from the language of ‘retention’, Lord
Browne-Wilkinson also denied the proposition that the transferor’s equitable
interest arises immediately upon and in consequence of an impaired-consent
transfer.123 According to his Lordship two conclusions necessarily follow
from this view:
(a) the recipient will be personally liable, regardless of fault, for any subsequent
payment away of the moneys to third parties even though, at the date of such
payment, the ‘trustee’ was still ignorant of the existence of any trust . . .;
(b) as from the date of the establishment of the trust (ie, receipt or mixing of the
moneys by the ‘trustee’) the original payer will have an equitable proprietary
interest in the moneys so long as they are traceable into whomsoever’s hands
they come other than a purchaser for value of the legal interest without
notice.124
These conclusions are considered in what follows. The reasoning from which
they are derived displays certain misconceptions, which misconceptions are
fundamental, but not irremediable.
118 Ibid, at Ch 124.

119 Foskett v McKeown [2001] 1 AC 102; [2000] 3 All ER 97; [2000] 2 WLR 1299; [2000]
UKHL 29. Or indeed the beneficiary may choose reverse the enrichment at all.
120 See, eg, Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105 at
119 per Goulding J; [1979] 3 All ER 1025; [1980] 2 WLR 202; Air Jamaica [1999] 1 WLR
1399 at 1412 per Lord Millett.
121 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669; [1996] 2 All ER
961; [1996] 2 WLR 802. The case concerned an invalid interest-rate swap transaction
between a local authority and a bank.
122 Ibid, at AC 705.
124 Ibid.
Innocent recipient liability for breach of trust

According to his Lordship the first problem with the immediate interest model
of proprietary restitution was the danger of imposing on the innocent recipient
of a mistaken payment the onerous duties of trusteeship and consequent
liability for breach.125 It has been demonstrated above, however, that the trust
can and does exist quite apart from the trust obligations, where those
obligations have been excluded,126 or never existed.127 This is so where,
although there are no trust obligations, the beneficiary has a power to obtain
the rights to the trust res. The difference between the trust obligations and such
a power is that each of the duties of a trustee is assumed, explicitly or by
implication.128 The knowledge and assent of the trustee is relevant in relation
to the existence and content of the obligations of the trustee; certainly the
trustee in Mallott v Wilson and Adams v Adams, once he had disclaimed, was
not subject to any obligations in respect of the trust res. However, the
beneficiary’s interest is not dependant on such knowledge and assent for its
existence, and therefore is not destroyed by its absence. As Scott has put it:
Acceptance by the trustee is necessary in order to subject him to a duty to the
beneficiaries to perform the trust and to subject him to liabilities to third persons as
legal owner of the trust property, but it is not a condition precedent to the creation
of the trust. Disclaimer by the trustee relieves him from such duties and liabilities,
but does not terminate the interest of the beneficiaries in the trust property.129
On the view presented here, therefore, if B transfers to A a right in
circumstances that amount to an unjust enrichment of A, where a trust arises
it does so immediately. However, so long A is unaware of the circumstances
giving rise to the trust there is no basis on which to hold that A has assumed
any trust obligation towards B, and it thus remains the case that ‘the unwitting
use of someone else’s property does not give rise to a breach of trust’.130
Liability of third parties
In Westdeutsche Lord Browne-Wilkinson expressed his second concern in this
way:
The law of resulting trusts would confer on the plaintiff a right to recover property
from, or at the expense of, those who have not been unjustly enriched at his expense
at all, eg, the lender whose debt is secured by a floating charge and all other third
parties who have purchased an equitable interest only, albeit in all innocence and for
value.131
125 Ibid.
126 Citibank NA v MBIA Assurance SA [2007] EWCA Civ 1; [2007] 1 All ER (Comm) 475.
127 Hardoon v Belilios [1901] AC 118 at 123 per Lindley LJ; (1900) 70 LJPC 9; (1900) 83 LT
573; (1900) 17 TLR 126; Vandervell v IRC [1967] 2 AC 291; [1967] 1 All ER 1; [1967] 2
WLR 87.
128 Bristol & West Building Society v Mothew [1998] Ch 1 at 18; [1998] ANZ ConvR 271;
[1996] 4 All ER 698; [1997] 2 WLR 436. Except for one — the duty to act in good faith,
but this is a duty imposed on everyone. See J Edelman, ‘When do fiduciary duties arise?’
(2010) 126 LQR 302.
129 Scott and Ascher on Trusts, above n 62, p 262.
ER 961; [1996] 2 WLR 802.
Häcker has argued persuasively for what she terms a ‘generalised power
model’, taking rescission as the central case around which to model the
general proprietary restitutionary claim. According to this model, proprietary
restitution after an impaired-consent transfer is always a ‘power in rem’,
which power is more easily defeated than a ‘fully vested equitable interest’.132
She argues that transfers induced by fraud or duress generate a ‘legal power
in rem’, while transfers made by virtue of an innocent misrepresentation,
undue influence and certain unilateral mistakes generate an ‘equitable power
in rem’. The difference between the two is that in the former the power can be
directly exercised to obtain rights to the res and in the latter there is a
necessary interposition of a trust, which must separately be collapsed in order
to obtain rights to the res. Thus where A pays £100 to B in the mistaken belief
that it is owing, until A exercises his right to avoid the conveyance, B holds
title outright and A has a power to recover the rights A initially held and B now
holds.133
The claim that there are two kinds of power — legal and equitable — is
made by analogy with the law of rescission as it is usually understood.
A claimant can rescind a transaction at common law by reason of fraudulent
misrepresentation and duress. In equity, in addition to these grounds, the
claimant may rescind by reason of innocent misrepresentation, undue
influence, certain unilateral mistakes, and unconscionable bargain. Since
Parke B’s decision in Load v Green it has been recognised that title passes
under a voidable contract at law.134 The same has been true in equity since
Phillips v Phillips.135 It is also true of both law and equity that rescission of
the voidable contract will sometimes give rise to restitution of rights conferred
under it. Arguably, however, the effect of rescission differs between them. At
common law, the property right is revested upon the exercise of the power to
obtain restitution. As rescission is exercised by self-help, title at law is
regained immediately upon valid exercise of the power to rescind.136 In equity,
by contrast, it is arguable that legal title is not revested by the election to
rescind, but either by an act ordered by the court as part of the judicial order
effecting rescission or by the exercise of a power as beneficiary under a
resulting trust.137
As to the latter, English law empowers the rescinding party to assert an
equitable interest when he or she disaffirms, at least in circumstances where
the contract has been induced by fraud. In Shalson v Russo138 Rimer J held
that title to advances procured by a sophisticated fraud passed to the payee
company. He rejected the submission that the company automatically held the
funds subject to a constructive trust. After reviewing the authorities, he went
on to say:
132 Häcker, ‘Proprietary restitution after impaired consent transfers: a generalised power model’
(2009) 68 CLJ 324.
133 Ibid, at 325.
134 (1846) 153 ER 828; 15 M & W 216.
135 (1861) 4 De GF&J 208; 45 ER 1164.
136 Load v Green 153 ER 828 (1846); 15 M & W 216.
137 Clark v Malpas (1862) 4 De GF & J 401; 45 ER 1238.
138 [2005] Ch 281; [2003] All ER (D) 209 (Jul); [2005] 2 WLR 1213; [2003] EWHC 1637 (Ch).
upon rescission of a contract for fraudulent misrepresentation, the beneficial title

which passed to the representor under the contract revests in the representee. The
representee then enjoys a sufficient proprietary title to trace, follow and recover
what, by virtue of such revesting, can be regarded as having always been in equity
his own property.139
The analysis that has been preferred by the courts is thus that the party
rescinding the transaction has at the first stage a power to rescind and then,
once this power is exercised, a new power arising under a trust, which he or
she must exercise in the usual way to obtain the rights to the asset. However,
once rescission occurs, equitable title is to be treated as having been vested in
the rescinding party from the outset, when title was first transferred.140 Given
the retroactivity of the trust, some have doubted whether it should not in fact
be regarded as arising as soon as property is transferred under a voidable
transaction.141 Indeed, there are cases establishing that a person with the
entitlement to recover property through rescission has an equitable proprietary
interest in the recoverable asset and can transfer that interest to third parties.
In Stump v Gaby142 Lord St Leonards LC held that the grantor of a voidable
conveyance continued to be the equitable owner of the property conveyed and
could devise his interest in the property, even though no steps had been taken
to avoid the conveyance. This was approved in Gresley v Mousley,143 where
a testator had sold property at an undervalue to his solicitor and then devised
all his real estate to the plaintiff. Knight Bruce and Turner LJJ held that the
testator had been entitled to set aside the sale and therefore had ‘a devisable
interest in the property sold’. Indeed, it seems likely that the courts’ refusal to
recognise a proprietary interest under a trust at the first stage derives quite
simply from the historical procedural distinction between the two systems —
that in equity the rescinding party requires the assistance of the court whereas
at law rescission can be effected by self-help.144
Although the distinction between the legal and equitable ‘power in rem’ is
open to doubt, Häcker’s account has much to commend it as an answer to Lord
Browne-Wilkinson’s second concern.145 Proprietary claims to reverse unjust
enrichments, being ‘powers in rem’ or ‘mere equities’, are weaker than ‘vested
rights in rem’; they will, to take his Lordship’s example, be defeated by a
subsequently created equitable security right by way of charge. However,
conclusory labels are liable to mislead, and there is a great deal of confusion
associated with ‘mere equity’ and ‘mere power’.146
The first mistake has been the assumption that a mere equity is not a

140 Lonrho plc v Fayed (No 2) [1991] 4 All ER 961; [1992] 1 WLR 1 at 12.
141 Chambers, above n 83, pp 172–84.
142 (1852) 2 De GM&G 623.
143 (1859) 4 De G&J 78.
144 D O’Sullivan, S Elliott, R Zakrzewski, The Law of Rescission, OUP, 2008, pp 277–317.
ER 961; [1996] 2 WLR 802.
146 As Everton puts it, ‘to seek to define the mere equity, or to explain the characteristics which
help to distinguish it from an equitable interest is to tread a hazardous path’: ‘Equitable
Interests and Equities: in Search of a Pattern’ (1976) 40 Conv (NS) 209 at 210.
proprietary interest.147 This assumption stems from National Provincial Bank

v Ainsworth,148 which concerned the status of a ‘deserted wife’ as regards the
former matrimonial home. In that case the deserted wife’s interest was called
a ‘mere equity’, which was contrasted with a ‘proprietary interest’ or
‘equitable interest’ in the home.149 In fact the wife’s equity was not a mere
equity, but rather a personal right against the husband, flowing from her status
as wife, not her occupation. A mere equity is a proprietary interest, but an
interest which fails not only if its subject matter comes into the hands of a
bona fide purchaser of a legal estate without notice, but also if it comes into
the hands of a bona fide purchaser of an equitable interest without notice of
the equity. In Westminster Bank Ltd v Lee150 Upjohn J thus concluded that
successors could be bound by a mere equity, though subsequent equitable
encumbrancers could plead that they were purchasers for value without notice.
Similarly, in Stump v Gaby and Gresley v Mousley151 the grantor and testator
respectively had a proprietary interest, which could therefore be devised but
which would have been more easily defeated by a third party.
The terms ‘mere power’ and ‘power in rem’ are similarly opaque. Powers
can be personal or proprietary, and, where proprietary, may be defeated by
certain specified categories of persons without losing their character as
proprietary interests. The interest contingent on a successful tracing exercise
falls into this category. In Lipkin Gorman v Karpnale Ltd152 Cass, one of the
partners of the claimant firm of solicitors, withdrew money from the client
account and gambled it away at the defendant casino. Though the casino was
innocent, the House of Lords held that it was in principle liable to make
restitution of the value received, subject to a defence of change of position. A
thief does not usually receive good title. However, Cass had authority to draw
on the client account for certain (partnership) purposes. Though he actually
drew on it for gambling, there was authority to the effect that in those
circumstances property passed to the gambler.153 Title to the money in Cass’s
hands was his, and when he gambled with it the property in it passed from him
to the club. Thus the firm had to establish title to sue, and could not do so in
conversion, having no right to possess. At the beginning of the story, the firm
had money in their account: that is, more precisely, they had a right against the
bank to be paid a certain sum of money. Money was in fact obtained as
substitute for that right, title to which was in the hands of Cass. That
substitution gave the firm some form of proprietary interest, but given that title
had passed, what was the nature of that interest? According to Lord Goff, their
interest depended on an act manifesting an election, similar (thought not
identical) to ratification: ‘tracing involves a decision by the owner of the
original property to assert his title to the product’.154 In Birks’ words, ‘these

148 [1965] AC 1175; [1965] 2 All ER 472.
149 Ibid, at AC 1214; 1244.
150 [1956] Ch 7; [1955] 2 All ER 883.
151 See above nn 113–114.
152 [1991] 2 AC 548; [1992] 4 All ER 512; [1991] 3 WLR 10.
153 Union Bank of Australia Ltd v McClintock [1922] 1 AC 240; Commercial Banking Co of
Sydney Ltd v Mann [1961] AC 1; [1960] 3 All ER 482.
154 [1991] 2 AC 548 at 573; [1992] 4 All ER 512; [1991] 3 WLR 10.
attributes add up to only one thing: what they had was a restitutionary power
in rem, analogous to the power to rescind’.155 Such a power, however,
‘behaves like the beneficial interest in a trust, in that it is defeated by good
faith purchase and in that it can attach to intangible rights such as debts’,156
and has been called a ‘trust’.157
This confusion is unnecessary. On the view presented here, the trust is a
power. Where a res is held on resulting (rather than express) trust the
difference is that the power enables the beneficiary to reverse the enrichment
gained unjustly at the beneficiary’s expense. ‘Power in rem’, ‘mere power’
and ‘resulting trust’ are each therefore descriptive of something that at root is
identifiable by the same basic characteristic. We know, however, that the
labels ‘mere equity’, ‘mere power’ and ‘power in rem’ have been attached to
interests which are weaker than those interests which have been described as
‘immediately-vested rights’ under a trust.158 If the claim that each is a power
is to be sustainable, the disparity in the protection afforded to different powers
must be explicable on some basis other than their mere identification as such.
The power to rescind, the proprietary claim to revoke consent to a mistaken
transfer and thus revest title, and the power in Lipkin Gorman all have at least
one thing in common: each is devoid or ‘bare’ of obligation until the power is
exercised. It follows that the beneficiary in such cases has no positive rights
against the trustee that the trustee deal with his or her rights in a particular
way.159 Not all trusts are of this kind; the trustee will often have assumed a
number of duties towards the beneficiary which govern his or her behaviour
in relation to the trust res.160 Equitable chargors are also subject to certain
duties — not to deal with the charged property without the permission of the
chargee;161 where the subject matter of the charge is book debts either not to
deal with them at all or to collect and pay them into a blocked account162 —
in other words not to remove the charged assets from the ambit of the
security.163 Where the chargor is allowed to do so the charge will be
floating.164 The floating charge does not create duties in relation to particular
rights but rather allows the chargor to deal with the assets in the ordinary
course of business.165
There are therefore those relationships which may properly be described as
155 P Birks, ‘Mixing and Tracing: Property and Restitution’ (1992) 45 CLP 69 at 92.
156 L Smith, (2009) 125 LQR 338 at 341.
157 McFarlane, above n 98, p 295.
158 Phillips v Phillips (1861) 4 De GF&J 208.
159 Except the right that the trustee not act fraudulently — which right is universally applicable.
See J Edelman, ‘Four Fiduciary Puzzles’ in Bant and Harding, above n 41, Ch 13.
160 See, eg, Bristol & West Building Society v Mothew [1998] Ch 1 at 18 per Millett LJ; [1998]
ANZ ConvR 271; [1996] 4 All ER 698; [1997] 2 WLR 436; above n 38.
161 Re Brightlife [1987] Ch 200; [1986] 3 All ER 673; [1987] 2 WLR 197; [1986] BCLC 418.
162 Re Spectrum Plus [2005] 2 AC 680; [2005] 4 All ER 209; [2005] 3 WLR 58; [2005] UKHL
41.
163 Agnew v Commissioner of Inland Revenue [2001] 2 AC 710 at 723; (2002) 20 ACLC 3051;
[2001] 3 WLR 454; [2001] UKPC 28; S Worthington, Proprietary Interests in Commercial
Transactions, Clarendon Press, 1997, Ch 4.
164 Ibid.
165 The floating chargor is under a liability to come under a duty: see R Stevens, ‘Contractual
Aspects of Debt Financing’, D Prentice and A Reisberg (Eds), Corporate Finance Law in the
UK and EU, OUP, 2011, p 222.
‘bare’ (devoid of active obligation) and those relationships in accordance with

which the holder of the interest has positive rights that another person deal
with his or her rights in a particular way. Where the equitable interest is bare
such interest presents a weaker claim for protection than the claim of the
beneficiary under an active-duty trust and the fixed charge holder. In Phillips
v Phillips166 Lord Westbury thus held that:
where there are circumstances that give rise to an equity as distinguished from an
equitable estate — as for example, an equity to set aside a deed for fraud, or to
correct it for mistake — and the purchaser under the instrument maintains the plea
of purchase for valuable consideration without notice, the court will not interfere.167
The chargee or beneficiary under an active-duty trust has an interest which the
law recognises as superior to that of the beneficiary under a bare trust (such
as the power to rescind, to rectify a deed or to assert title to a product), and
which takes priority where the chargee or beneficiary is able to support a claim
of bona fide purchase.
That this is so has been borne out frequently by the cases. In Garrard v
Frankel168 the plaintiff landlord wanted to rectify the rent payable in a lease,
but the tenant had granted an equitable mortgage of the lease to a bona fide
purchaser, who took priority over the plaintiff’s right to rectification. In Latec
Investments Ltd v Hotel Terrigal Pty Ltd169 the mortgagee of a hotel
fraudulently sold that hotel to its subsidiary company, which in turn granted
a floating charge over the hotel in favour of a trustee for debenture holders.
The floating charge crystallised and the plaintiff mortgagor then sought to set
aside the sale as a fraudulent exercise of the mortgagee’s powers of sale. A
unanimous High Court of Australia agreed that the plaintiff had an equitable
interest in the hotel, but also agreed that the equitable chargee of the trustee
for the debenture holders had priority. In Re Goldcorp170 investors in bullion
allowed Goldcorp to store it for them. The ‘non-allocated’ claimants were
given a ‘certificate of ownership’ and Goldcorp promised that its stocks were
audited monthly to ‘ensure there are sufficient stocks’. No bullion was
appropriated to individual contracts. The company began to struggle
financially and the Bank of New Zealand eventually appointed receivers under
the terms of a debenture issued by the company, whereupon the bank’s
floating charge over the company’s assets crystallised. At that time bullion had
not been specifically appropriated to the individual purchase contracts, so that
title did not pass. The argument for a trust failed for the same reason. Even if
the claimants had a power to rescind as a result of the misrepresentation that
it would maintain a separate stock, that power was defeated by the crystallised
charge.171 The non-allocated claimants therefore had no proprietary interest in
bullion acquired by the company.
According to Chambers there is a contradiction in classifying the power to
166 (1861) 4 De GF&J 208.

167 Ibid, at 218.
168 (1862) 30 Beav 445.
169 (1965) 113 CLR 265; [1966] ALR 775; (1965) 39 ALJR 110; BC6500350.
170 In Re Goldcorp Exchange Ltd (in rec) [1995] 1 AC 74; [1994] 2 All ER 806; [1994] 3 NZLR
385; [1994] 3 WLR 199.
171 Ibid, at AC 86.
rescind as an equitable interest, while subjecting that right to subsequent

equitable interests.172 The contradiction is semantic only. Substantively, the
power to rescind or to revest title on the one hand and the fixed charge and
active-duty trust on the other are ‘different qualities of equitable
interest’173which present normatively distinct claims for protection. A trust is
always at root a power-liability relationship. Trusts can therefore be ‘bare’ of
obligation but such a trust attracts weaker protection in law than a trust or
charge that carries active duties and rights.
Difficult cases
Trusts for purposes
Thus far the interest of the beneficiary has been described in terms of a power
in the beneficiary to obtain rights to the trust res. There are of course trusts
cases in which there is no beneficiary entitled to call for transfer of title to the
trust res to him or her. The most obvious example is the charitable trust. These
are trusts for purposes that benefit the public and which are recognised by the
law as charitable. In these cases the courts draw a clear distinction between
charitable trusts, in which the relevant power is vested in the Attorney-General
(so that the trustee is under an enforceable liability in respect of the trust res)
and invalid purpose trusts, in which there is no such power (so that the trustee
is under no enforceable liability).
In Morice v Bishop of Durham174 the testatrix bequeathed her personal
estate to her executor on trust to pay debts and legacies and to dispose of the
residue to such objects of benevolence and liberality as the executor in his
own discretion should most approve of. Two issues arose: whether the trust
was charitable; and, if not, whether it was in any case valid. In holding that the
trust was not valid, Sir William Grant MR said, ‘there can be no trust over the
exercise of which this court will not assume a control, for an uncontrollable
power of disposition would be ownership and not trust’.175 The Master of the
Rolls clearly saw the distinction between charitable trusts and invalid purpose
trusts as turning on the question of enforceability: there must be someone in
whom the power to impose upon the trustee a duty is vested. If there is not,
the trustee cannot be said to be under a liability, and the relationship is not one
of trust.
Re Denley’s Trust Deed176 is famously difficult to reconcile with either
authority or principle. A plot of land was conveyed to trustees to hold, for a
period determined by lives:
for the purpose of a recreation or sports ground primarily for the benefit of the
employees of the company and secondarily for the benefit of such other person or
persons (if any) as the trustees may allow.
Goff J held that a trust which, though expressed as a purpose, is directly or
indirectly for the benefit of an individual or individuals, is valid, provided the

173 ‘Equitable Interests and Equities: in Search of a Pattern’ (1976) 40 Conv (NS) 209 at 218.
174 (1804) 9 Ves Jun 399; 32 ER 65 (MR); (1805) 10 Ves Jun 522; 32 ER 947 (LC).
175 [1803-13] All ER Rep 451 at 453.
176 [1969] 1 Ch 373; [1968] 3 All ER 65; [1968] 3 WLR 457.
individuals are ascertainable at any one time.177 The provision was construed
as a trust for employees with a power to allocate to ‘other persons’.
‘Employees of the company’ was interpreted to mean ‘employees of the
company for the time being’.178 The trust was therefore ‘outside the mischief
of the beneficiary principle’ because the court could execute it ‘by ordering the
trustees to allow the employees and such other persons (if any) as they may
admit to use the land for the purpose of a recreation or sports ground’.179 Re
Denley was applied in Re Lipinski’s Will Trusts180 to uphold a trust for the Hull
Judeans (Maccabi) Association ‘to be used solely in the work of constructing
new buildings for the association and/or improvements to said buildings’.
According to Oliver J, where the gift is intended for the benefit of ascertained
or ascertainable beneficiaries a gift with a superadded direction is valid.
Lawrence Collins J criticised Re Denley in Re Horley on the basis that
‘Goff J appears to have equated the beneficiary principle with the question of
enforceability and not with the issue of equitable ownership’.181 It has been
argued here that the issue of enforceability is the correct focal point; the
question is whether the trustees are under an enforceable liability (to come
under a duty to transfer the trust res, whether to persons or purposes). Re
Denley remains a difficult case, however, because, as Lawrence Collins J
pointed out, ‘the question of whether the employees of the company, together
with others who might be permitted to use the sports ground, could terminate
the trust was not regarded as material’.182 In other words, it is not clear that
there was in fact any person or persons in whom the power to impose upon the
trustee a duty to transfer the trust res was vested. To the extent that Re Denley
indicates that a trust will be held to be valid despite there being no method of
ensuring its enforceability (because there is no person or persons in whom the
power to enforce the trustee’s liability is vested), it is indeed questionable.
There can be no liability unless there is a correlative power in someone else
to enforce it.
Conditional powers
The rule in Saunders v Vautier is accepted all over the common law world.183
America is an exception; there the ‘material purpose’ doctrine prevails. Under
this doctrine a trust cannot be terminated or modified prior to the time fixed
for termination by petition of all the beneficiaries if termination or
177 Ibid, at Ch 383–4.

180 [1976] Ch 235.
181 [2006] EWHC 2386 (Ch); [2006] WTLR 1817 at [99].
182 Ibid. See also G Thomas and A Hudson, The Law of Trusts, OUP, 2004, paras 6.15 et seq.
183 See, eg, L J M Cooray, Reception in Ceylon of the English Trust, Colombo, 1971, pp 176–7;
G Kodilinye, Introduction to Equity in Nigeria, Sweet & Maxwell, 1975, p 133; D W M
Waters, Law of Trusts in Canada, 2nd ed, Carswell, 1984, Ch 23; T Honoré, Law of Trusts
in South Africa, 3rd ed, Juta Legal and Academic Publishers, 1985, paras 90–95; H A J Ford
and W A Lee, Principles of the Law of Trusts, 2nd ed, The Lawbook Co, 1990,
paras 1608–1612 (Australia); P Matthews and T Sowden, Jersey Law of Trusts, 3rd ed, Key
Haven Publications Plc, 1994, para 15.12; H Delany, Equity and the Law of Trusts in
Ireland, Round Hall Ltd, 1996, p 366; G Kodilinye and T Carmichael, Commonwealth
Caribbean Trust Law, 2nd ed, Routledge-Cavendish, 2002, p 265.
modification would be contrary to a material purpose of the settlor. The logic

of the material purpose rule is protective. The American courts enforce
settlor-imposed restraints in circumstances in which the purpose of the
restraint is to benefit the beneficiary.184 It has therefore been argued that the
power of the beneficiary to collapse the trust cannot be relevant in categorising
the equitable interest under a trust.185 It is shown here that this is a
misunderstanding of the rule in Saunders v Vautier. That case stands for two
propositions: that the beneficiary has the power to collapse the trust, and that
that power is unconditional. American law recognises the former but not the
latter. It is the fact that the power is unconditional which distinguishes the trust
from other institutions in English law.
Before the late 1800s the United States followed the English approach. In
Elder v Elder,186 decided in 1861, the deceased’s will directed that his wife act
as executrix and trustee and that the trustee use the income from his estate to
support and furnish a home for his minor children so that they could live as
well as his older children did. The trustee was to divide the remainder among
all of the children at the end of the time period specified in the will. However,
the annual income for the minor children proved inadequate for the expressed
purposes and the trustee applied for equitable relief. The court allowed the
trustee to sell a part of the estate to add to the income in fulfilment of what the
court saw as the intention of the testator. In Culbertson’s Appeal,187 decided in
1874, the stated purpose of the trust was to give the deceased’s widow income
for life and the remainder to his children. The court allowed termination of the
trust by giving the widow the principal in accord with ‘a well-settled rule of
equity that . . . although all (of the trust’s) purposes may not have been
accomplished’ the consent of the beneficiaries gave the court the required
discretion. Similarly, 18 years later in New Jersey the court dealt with a trust
that ran for 10 years for the benefit of the decedent’s widow and children.188
The beneficiaries petitioned the court so that they might receive the principal
of the trust before the 10 year period expired. Again, the court allowed the
petition despite the expressed wishes of the deceased settlor.
Claflin v Claflin189 represented a marked change in judicial approach. The
facts were very similar to those of Saunders v Vautier. The testator’s son was
the sole beneficiary of the trust set up by the will, but the trustee was directed
to pay over the income in instalments at the age of 21, 25 and 30 years. After
reaching 21, the son brought an action to collapse the trust. The court refused
to follow Saunders v Vautier. The testator’s material purpose was to provide
the capital as the son became older, and giving the money to him immediately
would defeat that purpose. The court noted that it was ‘plainly (the testator’s)
will that neither the income nor any part of the principal should now be paid
to the plaintiff’ and refused termination.
184 J H Langbein, ‘Burn the Rembrandt? Trust Law’s Limits on the Settlor’s Power to Direct
Investments’ 90 BUL Rev 375 (2010).
185 Swadling, above n 1, at 11.
186 50 Me 535 (1861).
187 76 Pa 145 (1874).
188 Huber v Donaghue 23 A 495; NJ Ch (1892).
189 20 NE 454 (Mass, 1889).
It was the Supreme Court in Shelton v King190 which finally entrenched the
material purpose doctrine. In that case it was held, transcending the reasoning
in Claflin, that conditions restraining alienation could be seen as installing a
power of active management of the trust, and could be supported on that
ground alone.191
Despite the apparently clear words of the Uniform Trust Code, in which the
material purpose doctrine is now enshrined,192 that doctrine has evolved.
Statutes in several states have relaxed the conditions under which a trust may
be modified by request of the beneficiaries. Some of these statutes weaken the
material purpose limitation itself. Others authorise modification or termination
by consent of only some of the beneficiaries. Missouri is the clearest example
of departure from the doctrine in its post-Claflin form. In 1983, Missouri
enacted a statutory provision, Missouri Revised Statute § 456.590.2, that
authorises termination by beneficiaries. Unlike the majority position
expressed in the Claflin doctrine, the Missouri statute is devoid of deference
to the settlor’s intent. In Hamerstrom v Commerce Bank of Kansas City, NA193
the settlor established a testamentary trust for the benefit of Elizabeth
Hamerstrom. Elizabeth was to receive $150 per month until the corpus was
exhausted or until her death. Upon her death the trust was to be terminated,
and the corpus was to be distributed to her husband, should he survive, or to
their two sons in equal shares should their father predecease Elizabeth.
Despite the settlor’s clear intent, the court allowed Elizabeth to call for the
corpus before her death.
Whatever the current state of the material purpose doctrine in practice, it is
at least theoretically possible for a settlor to impose conditions on the exercise
of the beneficiary’s power to collapse the trust. The question, therefore, is
whether or not this is compatible with the view that the beneficiary’s interest
is best understood as constituted by the power to impose upon the trustee the
duty to transfer to the beneficiary rights to the trust res.
Saunders v Vautier stands for two conceptually distinct principles: first, the
case recognises the existence of the power to obtain rights to the trust res;
second, it holds that that power is unconditional. As discussed above,194 the
reason that it is unconditional is that all the duties of a trustee are owed to the
beneficiary, and can only be for his or her benefit. Thus the beneficiary can
waive any duty not to hand over trust assets before a certain time. The first
principle is recognised in both English and American law; on the facts of
Claflin v Claflin as soon as the beneficiary reached the prescribed age, he
would have been able to exercise his power to obtain the corpus. The
distinction between the approaches in the two countries is that in American,
but not English, law, it is possible for the settlor to impose conditions (such
as an age limit) on the exercise of that power. The beneficiaries are therefore
not the only persons to whom it is conceptually possible to owe duties. This
190 229 US 90; 33 S Ct 686 (1913).

191 Getzler, above n 98, p 382.
192 The Uniform Trust Code (2000) § 411(b) reads, ‘a non-charitable irrevocable trust may be
terminated upon consent of all the beneficiaries if the court concludes that continuance of the
trust is not necessary to achieve any material purpose of the trust.’
193 808 SW 2d 434 (Mo Ct App, 1991).
194 See text accompanying n 98.
question of whom the trust duties are owed to is thus of essential importance.
In CPT Custodian the High Court of Australia was asked to consider whether
any or all of the units of a unit trust conferred an estate of freehold in
possession in any land held for the unit trusts. It was precisely because ‘the
unit holders were not the persons in whose favour alone the trust property
might be applied by the trustee of the Deed’195 that they could not collapse the
trust, and therefore were not entitled to an estate of freehold in possession
within the meaning of the Land Tax Act 1958 (Vic). Thus no unit holder was
assessable as the ‘owner’ of such land within the s 3(1) definition of that Act.
That the power is unconditional is what distinguishes the trust from other
institutions in English law. There are many examples of powers to obtain
rights that, being conditional, are not trusts. In Modelboard Ltd v Outer Box
Ltd196 the question facing the court was whether the terms upon which the
plaintiff (P) supplied sheets to the defendant (D) created a trust or a charge
over the proceeds of sale (£1200) of those boards. The conditions of sale
provided, inter alia, that property in the goods remained with P until payment
of the price, that until payment D’s possession of the goods was as bailee for
P, that D was licensed to process the goods in his possession provided that the
product of the process ‘shall become and/or shall be deemed to be the sole and
exclusive property’ of P, and that D had power to sell products made from the
boards on condition that the proceeds of sale were ‘held in trust’ for P. Michael
Hart QC held that those terms had to be read in the context of D’s concomitant
contractual obligation to pay the purchase price within 30 days of the end of
the month in which delivery is made. Suppose, he said, that P delivers on day
one at a contract price of £1000 and D processes and subsells for cash for
£1200 on day five:
If the whole beneficial interest in the £1200 is vested in the plaintiff immediately on
its receipt by the defendant, the plaintiff can presumably immediately call for its
transfer. In the meantime, what has happened to the defendant’s obligation to pay the
purchase price? Some relationship between that obligation and the plaintiff’s interest
in the proceeds of sale has to be implied.197
Clearly the nature of the agreement was that the plaintiff could only call for
transfer of the proceeds if, and to the extent that, P failed to account to D for
the balance. Accordingly, he concluded, P’s interest in the proceeds was by
way of charge only (which, not being registered, was therefore void). Being
obviously conditional, the power could not be a trust.
Conclusion
It has been argued that the interest of the beneficiary is properly considered
not as a right, but rather as the unconditional power to impose upon the trustee
a duty to transfer to the former the rights to the trust res. Of course that is not
all we need to know to fully understand the trust. The argument made here is
simply that identifying the functional similarity of, inter alia, the rule in
Saunders v Vautier, the resulting trust and the power to rescind allows us to
195 (2005) 224 CLR 98; 221 ALR 196; [2005] HCA 53; BC200507253 at [49].
196 [1992] BCC 945; [1993] BCLC 623.
197 Ibid, at BCC 949.
focus clearly upon certain important questions: are all such powers treated the
same way in our law? If not, on what grounds are we to distinguish between
them? It has been argued that the appropriate distinction is not between
express trusts (those which respond to consent) and resulting trusts (those
which respond to unjust enrichment), nor between legal and equitable powers,
but between interests with active duties and those without. According to the
account of the beneficiary’s interest presented here the following things can
now be said with confidence: the interest of a beneficiary under a trust does
not per se entitle the beneficiary to sue and recover from a third party damages
for loss consequent upon negligent damage to the trust res; proprietary
restitutionary claims arise immediately but do not attract liability for breach of
trust, and the relative strength of the beneficiary or chargee’s claim depends on
the existence or otherwise of active duties and correlative rights.

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JOBNAME: No Job Name PAGE: 46 SESS: 1 OUTPUT: Thu May 17 11:37:23 2012

The nature of ‘equitable property’: A

The nature of ‘equitable property’: A functional analysis 45

6 McFarlane and Stevens, above n 1.

46 (2012) 6 Journal of Equity

brought by a number of claimants against Total Downstream UK plc, Total

13 (1865-66) LR 1 Ex 265; [1865-66] All ER 1.

The nature of ‘equitable property’: A functional analysis 47

Rights against rights

48 (2012) 6 Journal of Equity

The ‘duty to use a specific right in a particular way for B’s

The nature of ‘equitable property’: A functional analysis 49

a matter of commerce’34 and the note-holders knowingly took their

50 (2012) 6 Journal of Equity

The duty ‘not to use a right for his own benefit’

The role of knowledge in creation of the trust

43 In Re Beatty Hinves v Brooke [1990] 3 All ER 844; [1990] 1 WLR 1503.

The nature of ‘equitable property’: A functional analysis 51

52 (2012) 6 Journal of Equity

The nature of ‘equitable property’: A functional analysis 53

54 (2012) 6 Journal of Equity

The nature of ‘equitable property’: A functional analysis 55

78 [1996] AC 669 at 675; [1996] 2 All ER 961; [1996] 2 WLR 802.

56 (2012) 6 Journal of Equity

a certain tax period. That question turned on whether he had an equitable

The nature of ‘equitable property’: A functional analysis 57

Equity functions according to rules which operate independently of questions

Powers to obtain rights

58 (2012) 6 Journal of Equity

95 (1841) 4 Beav 115; (1841) 49 ER 282.

The nature of ‘equitable property’: A functional analysis 59

many of the conceptual and practical difficulties surrounding the proper

104 Hohfeld, above n 47, p 36.

60 (2012) 6 Journal of Equity

The nature of ‘equitable property’: A functional analysis 61

118 Ibid, at Ch 124.

62 (2012) 6 Journal of Equity

Innocent recipient liability for breach of trust

The nature of ‘equitable property’: A functional analysis 63

64 (2012) 6 Journal of Equity

upon rescission of a contract for fraudulent misrepresentation, the beneficial title

139 Ibid, at Ch 321.

The nature of ‘equitable property’: A functional analysis 65

proprietary interest.147 This assumption stems from National Provincial Bank

147 Chambers, above n 83, p 172.

66 (2012) 6 Journal of Equity

The nature of ‘equitable property’: A functional analysis 67

‘bare’ (devoid of active obligation) and those relationships in accordance with

166 (1861) 4 De GF&J 208.

68 (2012) 6 Journal of Equity

rescind as an equitable interest, while subjecting that right to subsequent

172 Chambers, above n 83, p 178.

The nature of ‘equitable property’: A functional analysis 69

177 Ibid, at Ch 383–4.

70 (2012) 6 Journal of Equity

modification would be contrary to a material purpose of the settlor. The logic

The nature of ‘equitable property’: A functional analysis 71

190 229 US 90; 33 S Ct 686 (1913).

72 (2012) 6 Journal of Equity

The nature of ‘equitable property’: A functional analysis 73

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