McPhail v Doulton
Encyclopedia
Re Baden's Deed Trusts or McPhail v Doulton [1971] AC 424 was a landmark decision
of the House of Lords
in English trusts law
.
The validity of the trust was challenged, averring that the objects were insufficiently certain.
, after noting the fact that the settlor
had left his property on trust, with instructions to distribute according to the trustees choices (and, therefore, not equally among the potential beneficiaries
), stated the following:
His Lordship then went on to discuss the authority for this principle, which is compelling. As to the value of the facts, the comment above was a powerful reason for departing from the Broadway Cottages case ([1955] Ch 20), which was the basis for the strict test for certainty of object of discretionary trust
s, as overruled in McPhail (for which see below).
For a trust to be valid, "It is clear law that a trust (other than a charitable trust
) must be for ascertainable beneficiaries"
Prior to McPhail, the law was that for a discretionary trust one also had to be able to draw up a complete list of beneficiaries. However, in McPhail the House of Lords restated the law, abandoning the "complete list" test in favour of an "in or out" test. Lord Wilberforce
phrased the new test of certainty thus:
This was the same test which the courts had previously applied to powers.
On the facts, it was held that it was perfectly possible to say, looking at an individual whether they were either an officer or employee, or an ex-officer or ex-employee, or a relative or dependent of one, and the validity of the trust was upheld.
Criticisms
The two key criticisms of an "in or out", (or "given postulant"), test for discretionary beneficiaries were as follows:
Lord Wilberforce, in relaxing the generally accepted strictures of trust law prior to the decision, met these two objections as follows.
It was only necessary, he held, to consider every possible claimant, if one was fully distributing the fund, i.e. essentially winding it up. In such cases he would necessarily make a wider and more systematic survey in deciding to make grants. But there was no requirement to draw up a complete list of names, as indeed the law did not require for the exercise of a discretionary power.
Further he felt that the court being called upon to execute the trust if the trustee would not do so was a theoretical rather than a practical difficulty. He pointed out that in cases that had reached the courts, there were no examples of a trustee refusing to act in that manner. But in any event, the court had powers to remove and replace trustees, who could then act properly. Further, it was not the case, in his view, that distribution was impossible unless there as an equal division, and he cited several older cases, prior to 1801, in which the court exercised discretion in relation to the making of distributions.
Life after McPhail
Although McPhail is rarely mentioned in the same breath as other revolutionary decisions, such as Donoghue v Stevenson or Dunlop Pneumatic Tyre v Selfridge and Co. Ltd., it nonetheless fundamentally restated the law of trusts, and created the discretionary trust as a far more viable and accessible option in terms of estate planning, and significantly reduced the strictures associated with such trusts. The ratio was reformed in Sieff v Fox
Landmark decision
Landmark court decisions establish new precedents that establish a significant new legal principle or concept, or otherwise substantially change the interpretation of existing law...
of the House of Lords
Judicial functions of the House of Lords
The House of Lords, in addition to having a legislative function, historically also had a judicial function. It functioned as a court of first instance for the trials of peers, for impeachment cases, and as a court of last resort within the United Kingdom. In the latter case the House's...
in English trusts law
English trusts law
English trusts law is the original and foundational law of trusts in the world, and a unique contribution of English law to the legal system. Trusts are part of the law of property, and arise where one person gives assets English trusts law is the original and foundational law of trusts in the...
.
Facts
Mr Betram Baden executed a deed settling a non-charitable trust for the benefit of the staff of Matthew Hall & Co Ltd and their relatives and dependants. The objects clause provided that:- "The trusteeTrusteeTrustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...
s shall apply the net income of the fund in making at their absolute discretion grants to or for the benefit of any of the officers and employees or ex-officers or ex-employees of the company or to any relatives or dependants of any such persons in such amounts at such times and on such conditions (if any) as they think fit."
The validity of the trust was challenged, averring that the objects were insufficiently certain.
Judgment
Lord WilberforceRichard Wilberforce, Baron Wilberforce
Richard Orme Wilberforce, Baron Wilberforce, PC was a Lord of Appeal in Ordinary in the House of Lords from 1964 to 1982....
, after noting the fact that the settlor
Settlor
In law a settlor is a person who settles property on trust law for the benefit of beneficiaries. In some legal systems, a settlor is also referred to as a trustor, or occasionally, a grantor or donor. Where the trust is a testamentary trust, the settlor is usually referred to as the testator...
had left his property on trust, with instructions to distribute according to the trustees choices (and, therefore, not equally among the potential beneficiaries
Beneficiary (trust)
In trust law, a beneficiary or cestui que use, a.k.a. cestui que trust, is the person or persons who are entitled to the benefit of any trust arrangement. A beneficiary will normally be a natural person, but it is perfectly possible to have a company as the beneficiary of a trust, and this often...
), stated the following:
His Lordship then went on to discuss the authority for this principle, which is compelling. As to the value of the facts, the comment above was a powerful reason for departing from the Broadway Cottages case ([1955] Ch 20), which was the basis for the strict test for certainty of object of discretionary trust
Discretionary trusts and powers in English law
Discretionary trusts and powers in English law are elements of the English law of trusts, specifically of express trusts. Express trusts are trusts expressly declared by the settlor; normally this is intended, although there are situations where the settlor's intentions create a trust accidentally...
s, as overruled in McPhail (for which see below).
Significance
The case fundamentally restated the law in relation to certainty of objects for discretionary trusts, one of the three certainties required to form a trust.For a trust to be valid, "It is clear law that a trust (other than a charitable trust
Charitable trust
A charitable trust is an irrevocable trust established for charitable purposes, and is a more specific term than "charitable organization".-United States:...
) must be for ascertainable beneficiaries"
Prior to McPhail, the law was that for a discretionary trust one also had to be able to draw up a complete list of beneficiaries. However, in McPhail the House of Lords restated the law, abandoning the "complete list" test in favour of an "in or out" test. Lord Wilberforce
Richard Wilberforce, Baron Wilberforce
Richard Orme Wilberforce, Baron Wilberforce, PC was a Lord of Appeal in Ordinary in the House of Lords from 1964 to 1982....
phrased the new test of certainty thus:
- "Can it be said with certainty that any given individual is or is not a member of the class"
This was the same test which the courts had previously applied to powers.
On the facts, it was held that it was perfectly possible to say, looking at an individual whether they were either an officer or employee, or an ex-officer or ex-employee, or a relative or dependent of one, and the validity of the trust was upheld.
Criticisms
The two key criticisms of an "in or out", (or "given postulant"), test for discretionary beneficiaries were as follows:
- a trustee's duty to distribute could only be properly performed if he considered every possible claimant; and
- the court could only execute the trust, if the trustee failed to do so, by percentage division of the trust fund.
Lord Wilberforce, in relaxing the generally accepted strictures of trust law prior to the decision, met these two objections as follows.
It was only necessary, he held, to consider every possible claimant, if one was fully distributing the fund, i.e. essentially winding it up. In such cases he would necessarily make a wider and more systematic survey in deciding to make grants. But there was no requirement to draw up a complete list of names, as indeed the law did not require for the exercise of a discretionary power.
Further he felt that the court being called upon to execute the trust if the trustee would not do so was a theoretical rather than a practical difficulty. He pointed out that in cases that had reached the courts, there were no examples of a trustee refusing to act in that manner. But in any event, the court had powers to remove and replace trustees, who could then act properly. Further, it was not the case, in his view, that distribution was impossible unless there as an equal division, and he cited several older cases, prior to 1801, in which the court exercised discretion in relation to the making of distributions.
Life after McPhail
Although McPhail is rarely mentioned in the same breath as other revolutionary decisions, such as Donoghue v Stevenson or Dunlop Pneumatic Tyre v Selfridge and Co. Ltd., it nonetheless fundamentally restated the law of trusts, and created the discretionary trust as a far more viable and accessible option in terms of estate planning, and significantly reduced the strictures associated with such trusts. The ratio was reformed in Sieff v Fox