Trusts

1. Compare and contrast the trust with the following

a) Agency

b) Debt

c) Power of appointment

d) Bailment

e) Contracts

Trusteeship involves onerous obligations, where a donor retains no responsibility for the property once
the gift has been made. Difficulty has been found in providing a comprehensive definition of a trust but
various authors have made attempts to define the term trust.

A trust is a relationship recognised by equity and arises where authority is vested in persons known as
trustees under a duty to hold property for the benefit of others known as beneficiaries.

A trust is a relationship recognised in equity which subsists when a person called the trustee is compelled
by a court of Equity to hold property, whether real or personal, and whether by legal or equitable title for
the benefit of some persons, of whom the trustee himself may be one and who are called cestui que trust
or beneficiaries, or for some object permitted by law; in such a way that the real benefit of the property
accrues not to the trustee, as such, but to the beneficiaries or other objects of the trust.
Definition in Hague Convention on Law of Trusts:
This has been incorporated into English Law by the UK Recognition of Trusts Act 1987 and under
Article 2 of that convention, a trust is defined as follows:-
For the purpose of this convention, the word ‘trust’ refers to the legal relationships created – inter vivos
or on death – by a person, the settlor, when assets have been placed under the control of a trustee
for the benefit of a beneficiary or for a specified purpose.
A trust has the following characteristics—
(a) the assets constitute a separate fund and are not part of the trustee’s own estate;
(b) title to the trust assets stands in the name of the trustee or in the name of another
person on behalf of the trustee;
(c) The trustee has the power and duty, in respect of which he is accountable, to manage,
employ or dispose off the assets in accordance with the terms of the trust and the special duties imposed
upon him by law.
(d) Interests are always described in the instrument creating the trust.
(e) Subject matter must be in form of property that is to say chattels, land,
money ,equitable interests and chose in action.
(f) Beneficiaries interest is always proprietary that is to say it can be it can be sold given
away, disposed off by the will however it ceases to exist when the property is sold to a bonafide purchaser
of value
.
A trust can be distinguished from other legal concepts such as bailment, agency, contract, debts,
conditions and charges, powers. among others.

TRUST & AGENCY

Agency is a contractual arrangement express or implied, written or verbal whereby one person may act on
behalf of another and bind the other as if he or she acted personally. An agency arises where a person
called the agent has expressed or implied authority to act on behalf of another called the principal and he
consents to do so. The agent is normally treated as an accounting fiduciary party and he binds the
principal vis-à-vis third parties. Royal Brunei Airlines v Tan [1995] 2 AC 378 where a travel agent was
appointed to sell tickets for the plaintiff airline on condition that all monies received by the agent were to
be held for the airline on trust.
There are some similarities between trustees and agents;
-The relationship of trustee and beneficiary is fiduciary in nature while that of principle and agent is
normally fiduciary but not inevitably so.
Both agents are accountable to their principles just as trustees for any profit made out of property.
-Both trustees and agents must act personally and should not delegate their duties
-Neither of them may make un-authorised profits from their office
There are differences however
1. The trustee in exercise of his office will contract as principal and cannot bind the
beneficiaries unless they have constituted him both trustee and agent but an agent binds his
principal so long as he acts on the principal’s authority or on the apparent or ostensible authority that he
is deemed to have.
2. Although the trustee has a right of re-coup an indemnity against the beneficiaries for any
properly incurred expenses and creditors may subrogate those rights in certain circumstances there is
therefore no direct contractual link between the beneficiary and 3 rd parties comparable to the link
between the principal and 3rd parties

3. Agency is normally terminated on death of either party and also by the principal acting
unilaterally if there is no contract to the contrary or the contract permits him to do so. On the other
hand a trust cannot be revoked unless the trust instrument reserves the power of revocation . As
held in Mallot v. Wilson [1930] 2 Ch. 494.

However the beneficiaries if sui juris unanimous and together entitled may demand that the trust
property be distributed and consequently that the trust be brought to an end.

4. Normally the principal in agency gives binding directions to his agent whereas
beneficiaries cannot control the exercise of the trustee’s discretion.as held in Re Brockbank
[1948]Ch. 206;

5. The central distinction between agency and trust is in relation to property. An agent does not
per se hold any property for his principal. Many agents do not obtain items of property at all and those
who do so acquire only possession but not title. On the other hand there can be no trust unless title to
the trust property vests in the trustee or in another party on behalf of the trustee.

6. Between a principal and an agent , their always exist a contractual relation ship while it is
not the case under the trustee and beneficiary.

7 Trust is proprietary where an agent owes money to a principal it may be recovered

personally however if the agent is insolvent the rules of insolvency apply.and if the agent
has no assets the principle loses (Bankrupcy Act Cap 67 Section 35-6)while In trust the
property of the trustee is not available to meet his real debts conversely if a trustee owes
money ,that money cannot be recovered from the trust property.
Trust and agency overlap
 Note that trust and agency may overlap. A trust may be created under which the trustee undertakes a
contractual obligation to act on behalf of the beneficiary e.g. the vesting of company shares in a
nominee for a fee. Conversely an agent may become a trustee if for instance he acquires title to
property to be held for the benefit of his principal.

It has been said that an agent becomes a trustee for his principal if he obtains title to the property
for the principal’s benefit and on the face of if this is a clear proposition. However this is not easy
to gauge in practice especially if what is involved is a mere chattel or money whose title may be
transferred by mere delivery of possession with an intention to transfer it. The question was tested in
Cohen v. Cohen [1929]1 CLR in which a wife had sued her estranged husband for several sums of
money and the husband in defence pleaded the statute of limitations her claims were time barred
under the statutes of the Limitations Act. The defence would succeed unless the claims arose under a
trust or had been acknowledged within the limitation period applicable to personal claims. The
claims were as follows: 9000 DM being money and the sale price of chattels sold on her behalf by an
agent in Germany. In order to overcome difficulties which attended transfer of funds from Germany
to England where she lived, the wife had arranged for her husband to collect her 9000 marks and use
it for purchase of goods in Germany for his own business, it being agreed that he would pay her out
of his own funds in England.

The second claim was for £123 pounds sterling being the sale price of surplus furniture of the wife
sold after the marriage, the husband having retained this amount.

The third claim was as to £80 pounds sterling being settlement of an insurance claim arising from the
loss of the wife’s jewellery again the husband having retained this amount.

The court held that she succeeded in all the claims, the court finding that the husband stood in a
fiduciary relationship with regard to the wife’s property in the circumstances and was therefore a trustee
for her benefit. In arriving at this decision the court followed the decision in Burdick v. Garrick 9000 DM
(1870) L.R. 5 C.L 233 where Lord Justice Giffard stated as follows:

“in respect of attorneys who had been authorised and buy property and had attempted to set up
the statute of limitations as a defence “there was a very special power of attorney under which the
agents were authorised to receive and invest to buy real estate otherwise to deal with the property
but under no circumstances could the money be called theirs.” Under no circumstances had they
the right to apply the money to their own use or to keep it otherwise than to a distinct and separate
account throughout the whole of the time that this agency lasted, the money was the money of the
principal and not in any sense theirs. Under these circumstances, I have no hesitation in saying that
there was in the plainest possible terms a direct trust created. I do not hesitate to say that where the
duty of persons is to receive property and to hold it for another and to keep it until it is called for, they
cannot discharge themselves from that trust by pleading lapse of time.”

A TRUST AND A DEBT

The distinction between trust and debt is more difficult. The traditional view is that the relationship
between trustee and beneficiary is not one of debtor and creditor. In other words, the trustee does not owe
the value of the rights he holds to the beneficiaries. Take a simple example. If I lend you £100, your
obligation to repay me £100 will not be taken away if a bolt of lightning immediately destroys the very
banknotes I gave you. But if you hold £100 on trust for me, then destruction of the subject-matter of the
trust by lightning (so long as it was without fault on your part) will mean that your obligations to me are
at an end; it is not possible for me to bring an action against you, claiming that you owe me £100 (see
Morley v Morley (1678) 2 Cas Ch 2). Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567
created confusion in this area, holding that a borrower of money can be both a debtor and trustee in
respect of the same sum. That decision is, however, extremely controversial, and has been recently
reviewed in Twinsectra v Yardley [2002] UKHL 12 But though, under the traditional view enunciated
above, a trustee will not owe the value of the right held on trust, this is not to say that a debt cannot form
the subject-matter of a trust. When we talk of a trust of a bank account, we mean nothing more than that
the creditor’s right to sue is held on trust.

A debt may or may not be contractual and the duty of the debtor is to repay money to the creditor. In
contrast, the trust does not need to be contractual and the duty of a trustee is to hold trust property for the
beneficiary.

The obligation of a debtor is personal but a trust is proprietary.

A trustee should where possible use trust property in income bearing investment and account to the
beneficiary for income. In the case of a debtor, such an obligation is unnecessary except in so far as
provided for in agreements express or implied.as held in Potters v loppert (1973) CH. 399

Furthermore if money borrowed is stolen from the borrower, he is still under obligation to repay it.
However within trusts, a trustee is not liable for the loss which is not attributed to his negligence.as held
in Morley v Morley 22 ER 817 (1678) 2 CH.D.2

Further the words of an instrument may be employed in such a manner as to create both personal and trust
obligation thereby creating a situation where a debt and trust exist.

In Barclays Bank ltd v quitsclose investment ltd 1970 AC 567

In the above case Rolls Royce Razor ltd was highly indebted to Barclays bank and was in need of
209,000 pounds to pay dividends which had been declared on its shares. The sum was borrowed from
Quitsclose under an arrangement whereby the loan was to be used for that purpose. The money paid into a
separate account at Barclays Bank which had notice of the nature of the arrangement. Before dividends
were paid, Rolls Razor went into liquidation. The issue was whether the money on the account was
owned by the beneficiary Rolls Razor, in which case Barclays Bank claimed to set it off against the
overdraft or whether Rolls Razor had received the money as trustee and still held it in trust for Quitsclose.
The House of Lords unanimously held that the money had been received in trust to be applied for
payment of dividends that purpose having failed, the money was held in trust for Quitclose.it was also
held that the loan to be held by the borrower on a trust is repayable .if the purpose for which the money
was lent is carried out and may be held on trust for the lender if performance is impossible.

The fact that the transaction was a loan, recoverable by an action at law did not exclude the implication of
a trust. The legal and equitable rights of remedy could coexist; the bank having notice of the trust could
not retain the money against Quitclose.

A TRUST AND BAILMENT

Bailment refers to a relationship which arises where an owner of property gives permission to another
person to possess it. A bailment is a delivery of personal chattels to a bailee subject to a condition that
they be returned to the Bailor or be dealt with as the Bailor directs when the purpose of the bailment has
been carried out. There is an element of delivery in bailment. It arises when a chattel owned by x is with
xs permission in the possession of y . and the rights may be governed or not by the contract terms.
Read part 9 of the contract Act No 7 of 2010.
Suppose that you are going abroad for a year. You may have a painting which you do not want to leave in
the house. You therefore hand it to a friend to look after during your absence. This will probably amount
to a bailment, though it could be a trust. Everything will depend on the location of your title, your right to
exclusive possession, of the painting.

If you vested it in a friend, then they will be a trustee of that right for you. If however, you kept your right
in yourself, handing over only the possession of the painting, the transactions will be one of bailment, not
trust. The difference between the two is crucial for a number of reasons. One is this. If, in breach of
instructions, your friend sold his title to the painting to an innocent purchaser, it will matter a great deal
whether you created a bailment or a trust. If your friend was a bailee, then the purchaser will not acquire a
title good against you and you will be able to recover the painting’s value from the purchaser in an action
in the tort of conversion, no matter how innocent the purchaser may have been.

The basic rule is nemo dat quonon habet (no one gives what he does not have), and since your friend did
not have your title to the painting, he could not transfer it to the purchaser.

But if your friend was a trustee, the position of the purchaser would be different; for now your friend does
have the right in question and so is capable of passing it on to third parties. You, of course, have rights
under the trust, but such rights are destroyed when the subject-matter of the trust comes into the hands of
an innocent purchaser of value.
It suffices to note that bailment is governed by common law. The position of a bailee is similar to that of
a trustee in the sense that both are ‘entrusted’ with another’s property. The Trustee’s duty to take care
of trust property is roughly comparable with the duty of a gratuitous bailee although generally the
trustee’s duties are more onerous. There are however differences
Bailment differs from a trust in the following ways:

(a) A bailee obtains only possession and what is referred to as special property in the
goods property while a trustee takes title to the trust property. As a consequence a bailee cannot
except in a sale in market overt by virtue of estoppel or under special legislations such as the Factors Acts
pass a title to the Chattels valid against the bailor whereas a bona fide purchaser who purchases the legal
estate from a Trustee for value without notice of the trust acquires a good title;

(b) Bailment is a common law notion worked out in proceedings for common law relief
such as actions for conversion, detinue or breach of contract whereas the trust relationship is purely
equitable. In conversion, initial possession is lawful but later converts the goods contrary to what the
owner intended. Detinue is where the defendant is unlawfully withholding the plaintiff’s goods with no
good reason.

(c) Bailment applies only to personal chattels that are capable of delivery whereas a
trust may arise in respect of real or personal property and whether tangible or intangible.

(d) A bailment is enforced by the bailor who is a party to the arrangement while
generally the trust is enforced by the beneficiary who is not a party to the trust instrument.

-In bailment, there is no transfer of property from the bailer to the bailee, i.e from A to B

-Bailment duties are dependent on rules of common law and not equity.

-The duties of trustees under a trust are minimal in character compared to the duties that exist in bailment.
-Bailment is restricted to chattels but a trust may exist for all types of property.

-Under bailment, the bailer can lose his legal ownership of the bailed property through any of the ways by
which legal owners lose rights; for example, Estoppel, however under a trust, the beneficiary’s
interest/title can only be defeated by transfer of legal title to a bonafide purchaser for value without notice
of the trust. As held in Pilcher V Rawlins (1872) LR.7 Ch.APP. 259

CONTRACTS AND ATRUST

There is no clean division between contract and trust, though some judges have attempted to draw one
(e.g. as in re Cook [1965] Ch. 902). Indeed, there can be no hard and fast line between contract and trust
because contract is a source of rights while trust is a way of holding rights. Indeed, many of the rights
held in trust are born of contract. A simple example will illustrate. Suppose I open a bank account and pay
in £1,000. I have a right born of contract that the bank repays me £1,000 on demand. If I then declare that
I hold that right on trust for my children, it is impossible to say that this is now a case of trust and not
contract; in truth, it is both.

A contract is a common law personal obligation resulting from an agreement between parties. According
to the contracts act section 10 (1) A contract is an agreement made with the free consent of parties with
the capacity too contract for a law full consideration ,with a law full object with an intention to be legally
binding . On the other hand, a trust is an equitable relation which can rise independently of an
agreement. However, there are situations when a distinction between the two is hard to draw, for
example;
Settlement and covenants to settle
Where the property has not yet been transferred to the trustees but it is simply subject to a consent to
settle, the beneficiaries will only be able to enforce the consent if they have given consideration. This is
based on the principle that “equity will not assist a volunteer”

Second is the controversy as to whether the problem or the inability by the third party to sue on a
contract contracted as a trustee for him .It has been suggested that the issue here is not one of distinction
between the trust and contract rather it is one of whether there is a trust of the promise under the
contract .This is resolved by looking at the rules relating to the creation of express trusts and determining
whether there is an intention to create a trust of the promise. as held in Fletcher V fletcher.

POWER OF APPOINTMENT

 Appointment. In trust law, "appointment" often has its everyday meaning. It is common to talk
of "the appointment of a trustee", for example. However, "appointment" also has a technical trust law
meaning, either:
o the act of appointing (i.e. giving) an asset from the trust to a beneficiary (usually where
there is some choice in the matter—such as in a discretionary trust); or
o the name of the document which gives effect to the appointment.

The trustee's right to do this, where it exists, is called a power of appointment. Sometimes, a
power of appointment is given to someone other than the trustee, such as the settlor, the protector,
or a beneficiary.
This refers to a power that is conferred upon a done to dispose of the donor’s property by nominating and
selecting one or more third-parties to receive it. The property may consist of tangible items like cars,
boats, house hold items, or it may consist of an intangible interest in property such as the right to receive
dividend income from stocks. Power is defined as an authority to dispose off ones interest or some
interest in the land but confers no right to enjoyment of the land . power is also defined as the right to
dispose off an interest in property rather than ownership of the estate or interest.

The distinction between trusts and powers of appointment is fundamental. A trustee must do as the
settler directs that is to say the powers are imperative. whereas powers of appointment are discretionary.

Further, the beneficiaries under a trust are owners in equity of the trust property. However, the objects of
powers of appointments are nothing unless and until the donor of the power makes an appointment in
favour of the donee. As held in Vesty v IRC (1980) AC 1148

The objects of a power need not necessary be capable of exact ascertainment . with trust, the objects
the trust void for uncertainty except where the class has been described with sufficient precision to enable
the trusties to compile a list of its all members through out the duration of the trust. In contrast a power
would be valid even where no such list of members can be made. The only requirement of certainity is
that a sufficient criteria of class membership should provided to enable the court to that is to say any
person whether he is an object of the power or not.Ther may be instances where the power exists in the
nature of the trust eg where an instrument pupports to give power when in fact atrust is really intended
thus in Burroughs Vs Philcox (1840) 5 MY &CR 72 & Browm Vs Higgs (1799) 4 VES 708,31 ER
366 .atestator gave property to trustees on trust for his two children for their lives , remainder to their
issue and in default of issue , the survivor of them was was to dispose off the property by one of them or
to as many of them as my surviving child shall think proper . The testators children died without issue and
with out any appointment having been made by the survivor . It was held that atrust in favour of the
testator s nephews and nieces and their children had been created subject to a power of selection and
distribution

It is significant that where there is a power with a gift over the other persons in default of
appointment ,this negatives the presumption that there is atrust in favour of the persons who are the
objects of the power .In such acase the test is whether the testator has shown an intention to benefit in any
class of any event.

In RE Pevoline (1951) CH 785 A testatrix gave her property to her husband for life knowing that he will
make arrangements for the disposal of my estate ,according to my wishes for the benefit of the
family ,There was no gift over in default of appointment .The husband died with out having validly
exersiced the power to appointment . It was held that their was no intention to create the trustfrom the
power.

OFFICE OF PERSONAL REPRESENTATIVE.AND A TRUST

The relationship between the excecutor /administrator to beneficiaries is not necessary the same as that of
a trustee and a trust .Adeniji V Probate Registrar 1968) NMLR 125 .The Trustees Act cap 164 section 12
-25 apply to both the personal representative and trustee Nevertheless there are similarities between the
two .Additionally most of the powers of the trustees can be exercised by personal representatives .By
section 1 of the Trustees Act ,Atrust is defined to include the duties incident to the office of personal
representatives. THE following are the differences .

Whereas the basic duty of a personal representative is to distribute the estate , that of the trustee is to hold
trust property.
Secondary the authority of the trustees is invariably joint .That of personal representatives is joint in
respect to land .but joint and several in respect of pure personality .This means that one of several
personal representatives may dispose off pure personality .This is not possible with a single trustee
appointed with other trustees. As held in Attenboruogh Vs Solmon [1913] AC 76.

The provisions of the trustees Act relating to the appointment and retirement of trustees do not apply to
personal representatives

The period of limitation with regard to the actions against trustees and personal representatives is
generally the same 6 years however limitation in regard to personal representatives and relating to actions
for claims to the personal estate of the deceased person in twelve years (Limittation Act Cap 80 Section
20.Nevertheless where the trustee or personal representative is fraudulent there is no limitation period .It
is notable that aperson may be appointed both a trustee and personal representative.

CONDITIONS AND CHARGES WITH A TRUST.

Difficulties may arise in determining whether a gift of property is subject to the trust or whether it is
conditional upon or charged with a duty to make certain payments .Re frame[1939] 2 ALL E.R 865
Foreistance A bequest to A to pay shs 500 to B This may give rise to a number of interpretations

The first is that this amounts to gift to A upon trust to pay back to B This means that B is immediately
entitled to the shs 500 subject to the value of the property.

Second is that the gift to A is conditional upon his performing an obligation .In such a case B obtains no
interest in the shs 500 consequently A has a choice of keeping the property and paying the shs 500 or
declining both.

Thirdly the bequest may be construed as imposing acharge on the property . In such a situation A will
only be under duty to B in RE Cowley (1885) 53 LT 494 A testator gave all his interest in certain lease
hold premises to his son ,subject to all the payment of his debts ,Funeral and testamentary expenses .A
is however is entitled to retain the surplus after meeting the payment to B .

In Re Oliver (1890)62 LT 533 the testator gave his real estate at north and south collingham and his
residuary estate to his offer .he later referred to the legacies would by them selves have been opt to
create a trust but as the testator referred to the legacies as charged on the collingham estate a charge
only and not a trust was created .The nephew was not however liable to account 4 the back rents and
profits.

It is significant to note that B in the example a bove similar to the position under atrust acquires an
equitable interest a rising from the charge Parker V J udkin [1931]1 CH 475 which can only be displaced
by abonafide purchaser for value of the legal estate without notice .It is suggested Hanbury $ maudsley
page 90 though that this interest is different from one of the beneficiary under the trust.

Finally the bequest may be interrupted to impose personal duty on A if he accepts the gift . this means
that A is in the position of a debtor.
UGANDA CHRISTIAN UNIVERSITY MUKONO
NAME: MUHUMUZA DUNCAN

REG NO: J12B11/438

COURSE: LLB 2 II

COURSE UNIT: EQUITY AND TRUSTS

:LECTURER Mrs. EMMA SSALI

TUTOR: Mrs .PATIENCE TUSINGWIRE

QN RELATE A TRUST TO OTHER LEGAL CONCEPTS.