Question:

“When a donor attempts but fails to complete a gift, there is no reason for a trust to arise
unless it would be unconscionable to refuse to complete this gift.”

Discuss.
Answer:
On the face of it, the first part of statement in question, “[w]hen a donor attempts but fails
to complete a gift, there is no reason for a trust to arise…”, seems to me to be certainly true
according to the rule in Milroy v Lord [1] and the maxim of equity: “Equity will not perfect
an imperfect gift”.

The “general” rule: equity will not perfect an imperfect gift

The “law of gift”: the constitution of trusts

Have you ever imagine how difficult it can be to give someone a gift? It could be a
complicated task in the eyes of equity.

Turner LJ in Milroy v Lord reaffirmed three methods of making a gift recognized by equity:
(1) the donor arranges an outright transfer of legal title to the property (or the outright
assignment of an already existing equitable interest);
(2) the donor transfer the legal title of the property to the trustee to hold on trust; or
(3) the donor declares himself a trustee of the property. [2] , [3]

Trust in the last scenario will be perfectly constituted once the declaration is made because
the property will already be vested in the settlor. Thus, the possibility of an imperfect gift
only arises in the first two scenarios, when the formalities governing transfer of property are
not satisfied, and the property eventually does not vest in the trustee/ donee. [4]

Turner LJ’s rule in ‘Milroy v Lord’: Equity will not assist a volunteer to perfect an imperfect
gift

In the leading case Milroy v Lord, Thomas Medley assigned 50 shares by voluntary deed to
Samuel Lord upon trust for Milroy’s benefit. Nevertheless, no transfer of the shares was
registered in the company’s books following formalities for transferring shares. Because of
such failure to observe the formalities required, the trust is incompletely constituted.
Similarly in Richards v Delbridge [5] a donor signed and endorsed on a lease that it had been
given to a member of his family. Applying Milroy v Lord, the gift was imperfect and
unenforceable as the leasehold property was not passed by deed.

To ensure a voluntary settlement valid & effectual, according to Turner LJ, “the settlor must
have done everything which, according to the nature of the property comprised in the
settlement, was necessary in order to transfer the property and render the settlement
binding upon him… there is no equity in this court to perfect an imperfect gift.” [6] As
demonstrated in Milroy v Lord and Richards v Delbridge, unless the beneficiary/ donee has
furnished consideration, it is not possible for him to enforce the trust against the trustee/
donor in equity where no vesting has occurred. [7] , [8]
Deviations from the “general” rule
Occasionally, courts might depart from the rule in Milroy v Lord in some situations to
ameliorate its strictness, as Lord Browne-Wilkinson once expressed that “although equity
will not aid a volunteer, it will not strive officiously to defeat a gift.” [9]

The “every effort rule”: ‘Re Rose’, ‘Re Fry’ & ‘Mascall’

Morris observed that Turner LJ’s test in Milroy v Lord was not just reaffirmed but
“amplified” in Re Rose. [10] The case Re Rose [11] , again, was about an ineffective transfer
of legal title to shares but this time equitable title held to pass because the settlor had
“done everything in his power by executing the transfers to transfer his legal and beneficial
interest in the shares to the [donee].” [12] Equitable interest in shares then vested in the
donee by means of constructive trust lasting until perfection of legal title. [13] , [14] , [15]
On the other hand, Romer J in Re Fry [16] refused to perfect an imperfect gift of shares
because the testator had not “done everything that was required to be done by him at the
time of his death” [17] : Treasury consent was necessary before registration but had not
been obtained.

Re Rose is still good law, its ratio was subsequently approved by the House of Lord in
Vandervell v IRC [18] , and applied in Mascall v Mascall [19] .

Major departures from the “general” rule —

Introduction of “unconscionability” as a justification for perfecting imperfect gift
Role of “unconscionability”: ‘Choithram’ & ‘Pennington’

While reconsidering the extent of rule in Re Rose, a further relaxation of the Milroy v Lord
principle took place later in Pennington v Waine [20] . Here, Ada Crampton, the donor,
intended to transfer 400 shares of a company to her nephew, Harold Crampton, and
intended him to take up the directorship of that company. The Court of Appeal held that the
execution and delivery of share transfer forms to an intermediary was sufficient to transfer
the equitable interest. Arden LJ, citing Lord Browne-Wilkinson in T Choithram International v
Pagarani [21] in support, [22] held that unconscionability was a trigger causing an interim
constructive trust to arise while pending perfection of legal title. [23]

Arden LJ explained that equitable assignment of shares had happened “at some stage
before the shares are registered.” [24] She then admitted that, for the interest of legal
certainty, it is essential to ascertain when the equitable assignment of shares took place, i.e.
when the gift is completed. However, this time she chose to move away from the “every
effort rule” by not emphasizing when the settlor has done everything that he personally
needs to take. Instead, Arden LJ concluded that equitable assignment occurred when it
becomes “unconscionable” for the donor to go back on his promise. [25]

Criticism of the role of “unconscionability”

The most controversial or determinative question in Pennington is: what makes it

“unconscionable” for the donor to renege on the gift? Arden LJ denied that there is a
“comprehensive list of factors” [26] for the court to consider, “it must depend on the court’s
evaluation of all the relevant considerations.” [27] As Garton once said, this give the public
an impression that judges has “an unfettered discretion to perfect imperfect transaction in
an arbitrary and unpredictable fashion.” [28]

Secondly, the court in Pennington somehow wrongly relied on Choithram as authority

regarding “unconscionability”. [29] , [30] Choithram was based on an uncommon fact that
the donor also nominated himself as one of the several trustee in favour of a charitable
organization. Mr Pagarani manifested an “irrevocable intention” to create a trust, even if he
fail to transfer the property to other trustees, his retention of property would be
constructed as one of the trustee thereby constituting the trust. [31] Hence, the maxim
“equity regards as done that which ought to be done” would be applicable. Lord Browne-
Wilkinson also stressed that in Choithram, there was no breach of the Milroy v Lord
principle as Mr Pagarani had also declared himself as a trustee. [32]

Thirdly, detrimental reliance is required so that “[donor’s] conscience is affected and it

would be unconscionable and contrary to the principles of equity to allow such a donor to
resile from his gift.” [33] (Banner Homes Group plc v Luff Development Ltd (No. 2) [34] )
Arguably in Pennington, the donee had not incurred any actual “detriment” and also the
donor had not gain any “benefit” to justify a finding of unconscionability. [35] Furthermore,
the donor in Pennington was never trying to resile from her gift, thus, the test for
unconscionability was come from a total hypothetical basis. That is why some scholars
considered unconscionability in Pennington as “a vehicle for arriving at a desired result.”
[36]

Moreover, Ada Crampton in Pennington, unlike the donor in Re Rose, had never give the
executed share transfer form to her nephew or to the company. Instead she delivered it to
the intermediary, Mr Pennington, who was her agent. [37] , [38] Hunter suggested that the
court should not perfect the imperfect gift, following the authority in Re Fry, as the donor
had not “done everything that was required to be done by [her]” [39] . [40]

Conclusion
With some “tolerable” exceptions like the “every effort rule” in Re Rose, beneficiaries, who
may be a volunteer, will have no claim on trust property under an incompletely constituted
or imperfect trust in general according to Milroy v Lord. Would the outcome be different if
the situation is that “…it would be unconscionable to refuse to complete this gift”? I think
the short answer to this question would be: yes, as long as Pennington remains good law.

Was the decision in ‘Pennington’ too generous to a fault?

Let’s imagine that cases like Milroy and Re Fry were brought up to today’s court, there
might be a good chance that courts would raise a trust in favour of those disappointed
donee if the judges apply Pennington — it might be equally unconscionable for donors in
Milroy and Re Fry to resile from their gifts.
In view of the above-mentioned criticism, I concur that the decision in Pennington is
probably questionable, blurring the clarity of the “law of gift”. However, I disagree that the
decision in Pennington was so evidently wrong.

Arguably, the decision in Pennington, in its particular facts, could be a rational and
pragmatic one: the court tried hard to adhere to what she perceived to be the actual
donor’s intention. I understand the goodwill of English Court in cases like Choithram and
Pennington — they prefer to choose giving effect to the deceased settlor’s intentions over
allowing those residuary legatees to earn a windfall. However, it might be unwise for the
court to achieve such “right” result by further complicating this area of law.

Until the moment that Pennington is limited in scope in subsequent rulings, or considered as
merely a case decided on its particular context, or even overruled by the House of Lord,
Pennington is still good law for the court to rescue an imperfect gift by artificial means. All in
all, it is within the realm of equity — the realm of so-call “palm tree justice”. [41]

In accordance with the Milroy v Lord [1862] principle, if the transferor has done everything
required of him and the only things remaining to be done are to be performed by a third
party, the transfer will be effective in equity. This is known as the ‘last act’ principle. The
donor has completed the last act that may be achieved by him. This will be sufficient to
transfer the equitable interest in the property to the donee. In these circumstances the
donor who retains the legal title to the property holds it as a trustee for the donee. The type
of trust is constructive and is thus created by operation of law. The effect is that dividends
declared at any time after the transferor has completed his duties in respect of the transfer,
and before the new owner is registered, will be held on trust for the new transferee.
Likewise, votes attaching to the shares are required to be cast as trustee for the new owner.
Whether the transferor has done everything required of him to transfer the shares is
essentially a question of fact.

In addition to the transfer of the relevant property to the trustees, the settlor is required to
declare the terms of a trust. In other words, the requirement here is that in order to
constitute the trust the settlor must transfer the property to the trustees and, either before
or after the transfer, declare the terms of the trust. A transfer of the property to the
trustees unaccompanied by a declaration of trust by definition will not create an express
trust. Such a transfer may create a resulting trust for the settlor. For example S, an intended
settlor, purports to create an express trust of 10,000 BT plc shares by transferring the legal
title to the shares to T1 and T2 as trustees, but failed to declare the terms of the trust. The
intended beneficiary of the shares was his son, B, absolutely, but S failed to indicate the
terms of the trust. Since T1 and T2 acquire the shares as trustees without a declaration of
the terms of the trust, the intended express trust fails and a resulting trust for S will arise.
Likewise, a declaration of trust of 10,000 BT plc shares in favour of B absolutely with the
intention that T1 and T2 will acquire and hold the shares as trustees for B will fail if T1 and
T2 did not acquire the relevant shares.

A declaration of trust involves a present, irrevocable intention to create a trust. This involves
the ‘three certainties’ test: certainty of intention to create a trust, certainty of subject-
matter and certainty of objects
Arden LJ introduced unconscionability as the trigger causing a constructive trust to arise. It had been
assumed for the purposes of the decision that there had been no delivery to the company of the
signed share transfer form, and, for this part of Arden L.J’s decision, that the form remained with the
donor. Arden LJ explained that equitable assignment of shares had happened “at some stage before
the shares are registered.” She then admitted that, for the interest of legal certainty, it is essential to
ascertain when the equitable assignment of shares took place, when the gift is completed. However,
this time she chose to move away from the “every effort rule” by not emphasizing when the settlor
has done everything that he personally needs to take. Instead, Arden LJ concluded that equitable
assignment occurred when it becomes “unconscionable” for the donor to go back on his promise.

The donor in Pennington, unlike the donor in Re Rose, had not put the done in a position to
complete the legal transfer himself and hence, a new test had to be formulated.  In general terms,
the donor can be said to have done everything necessary when it becomes ‘unconscionable’ for the
donor to resile from his intention to make the gift. The challenge came from third parties seeking to
upset what the donor still intended, or had intended until death, to be a valid gift. Furthermore, the
donor in Pennington was never trying to resile from her gift, thus, the test for unconscionability
came from a total hypothetical basis. That is why some scholars considered unconscionability in
Pennington as “a vehicle for arriving at a desired result.”