Equity and Trusts First-Class Coursework Essay (Awarded an 80, JD Level)

Submitted by: Stefania Garlicka


Question: Critically discuss the principles on which fully secret and half-secret trusts are enforced, with reference to the above statement.


"Secret and half-secret trusts are outmoded and should be abolished."


1. Introduction

The formality requirements for putting together a valid document in the form of a ‘will’ are outlined in the Wills Act 1837 (the “Act”). Failure to comply with these formalities results in an invalid will. There may be situations, however, where the testator consciously makes the decision not to comply with the requirements and will intentionally leave out the name of the beneficiaries in the will. In these situations, it is Equity that intervenes and finds solutions that are fair to all parties involved.

Specifically, it is secret trusts (“ST”) that are controversial and that are not in harmony with section 9 of the Act. Because of this, scholars have been debating whether ST’s should even exist due to their noncompliance with the Act, despite there being a clear intention from the testator and strong case law to support them. Secret trust’s come in two forms: (i) an identified individual in the will holds property on trust for an unknown individual, who is then communicated to the trustee separately. This is known as a half-secret trust (“HST”);[1] and (ii) in the will, it seems as though the testator leaves property to an identified individual beneficially, however, this individual is asked to hold the property for a separate, unidentified beneficiary. This is known as a fully secret trust (“FST”). These trusts are preferred if the testator does not wish to name certain individuals in his/her will. While such trusts have been criticised for their lack of adherence to the Act, courts have nevertheless continued to accept them in order to ‘carry the property forward’[2] and to carry forward the testator’s intentions.

This essay will first give a description of ST requirements, followed by a critical discussion of the principles on which these trusts are enforced, explaining why they are not outmoded and should not be abolished.


2. Requirements for Secret Trusts

Secret trusts must fulfill three requirements in order to be valid. The requirements of intention, communication, and acceptance were set out in the case of Ottaway v Norman.[3] In both FST’s and HST’s, the testator must have expressed a clear intention to create a trust. If there is any uncertainty as to the intention, the trust will fail. For example, in McCormick v Grogan,[4] it was held that a letter indicating that the trustee was to do the same as the testator if he were alive, was not considered a satisfactory intention to create a ST. Similarly, in Re Snowden,[5] no valid ST was formed, because the testator left property to her brother under a moral obligation by saying ‘he would know what to do’.[6]

The timing of the communication (oral or written) differs between FST’s and HST’s. For FST’s, the testator must communicate the terms to the trustee before his/her death.[7] In Re Boyes,[8] the testator told the trustee about the ST; however, the beneficiary was disclosed only after the testator’s death via a letter that the trustee did not know existed. The trust was held void and was thus held on a resulting trust. As with HST’s, the communication must occur before or during completion of the will.[9] A sealed letter given to the trustee, which is read after the testator’s death, is also an accepted form of communication because the identity of the beneficiary is available to the trustee.[10]

Finally, the terms of the ST must be accepted before the testator’s death. Acceptance may occur either expressly or through silence,[11] or by any other means as long as the testator is left with the belief that the trustee will carry out his/her request.[12] If these conditions are not met, the ST will be held void.

While the requirements explain what must be present in order to have a valid ST, additional principles under which these trusts are enforced must be considered in order to conclude why they should not be abolished.


3. Principles and Theories

There are a few principles on which ST’s are enforced that academics either favor or completely reject. The two main principles, also known as the ‘starting points for analysing secret trusts’,[13] are the ‘fraud theory’ and the ‘dehors­-the-will theory’. Others include the doctrine of estoppel and the proposal of a ‘conscience-estoppel’ theory.


a. The Fraud Theory

The fraud theory[14] has received massive criticism by academics, however, it has been nonetheless favored over the dehors theory. It is important to consider this theory from a ‘case law’ perspective, rather than a ‘strict rule’ point of view, for the reason that ST’s originated under the Court of Chancery.

The prevention of fraud is based on the understanding that, ‘the Court of Equity, from a very early period, decided that even an Act of Parliament shall not be used as an instrument of fraud; […] the Court of Equity, it is true, does not set aside the Act of Parliament, but it fastens on the individual who gets a title under that Act, and imposes upon him a personal obligation, because he applies the Act as an instrument for accomplishing a fraud’.[15]

The fraud theory has been the root of ST enforcement by courts for hundreds of years, despite it being in noncompliance with the Act. This theory has been rejected by many scholars due to the view that acceptance of the fraud principle is ‘unconstitutional’,[16] in the sense that parliamentary supremacy is violated.[17] This argument seems logical and its worries are legitimate, however, since the medieval times, Equity has been regarded as the area of law dealing with Common Law decisions deemed as being ‘too harsh’, or if there was no remedy available.[18] This has been the role of Equity for hundreds of years. Sir Edward Coke has also stated that Equity intervened in those times ‘to avoid consequences that Parliament could not have intended’.[19] Therefore, it is evident that ‘parliamentary supremacy is not founded on absolute power that demands strict compliance’.[20] In order for ‘absurd’ results to be avoided (i.e. fraud), judges, instead of relying on statutes, rely on equitable principles to reach an orderly result that is fair to those involved in the trust. Without doing so, the purpose of Equity would be meaningless. Not only this, but since the first time ST’s made their appearance in Thynn v Thynn,[21] Parliament has not chosen to make any changes in order to clarify the role of ST’s.[22] These propositions put forth the argument of violation of parliamentary supremacy as groundless.

The unnecessary action of legal reform has been further confirmed by legal practitioners in a survey conducted by Rowena Meager in 2003.[23] Results of this survey showed that not only did individuals still ask for secret bequests, but 85% of the legal professionals who took part believed that ST’s were in no need of legislation in order to regulate them,[24] in addition to 54% considering ST’s as not being outmoded.[25] Secret trusts, therefore, should not be abolished based on the claim that fraud should be set aside due to parliamentary supremacy being broken.

Secret trusts also should not be abolished based on the fact that someone, who the testator trusted, attempted to make a personal gain from the trust. This was recognised by Lord Westbury in McCormick.[26] Due to Lord Westbury’s statement, the fraud theory has tended not to be accepted for validating HST on the basis that the trustee’s identity is stated in the will, making it more difficult to prove any attempted personal gain. However, it has been recognised that by taking a more ‘objective’ approach, it is not only personal gain, but also deception towards the testator (in not fulfilling his/her wishes) and the beneficiary’s loss that constitute fraud,[27] helping justify that the fraud theory also applied to HST’s. For example, in Blackwell, a HST was enforced for the prevention of fraud. Further, in Re Keen,[28] although no ST was enforced, Lord Wright MR recognised and accepted the findings of the Court in Blackwell, stating that ‘it would be a fraud or breach of faith not to fulfill the undertaking […] for which the request to him was made’.[29] As for the argument that ‘fraud is not always the concern’,[30] this can be rebutted on the basis that almost all ST cases have involved fraud prevention, and that Megarry VC’s rejection of the fraud theory should be considered anomalous.[31] This is why the fraud theory is effective and will continue to be so.

Additionally, it is a fact that individuals continue to ask legal professionals for the creation of ST’s.[32] Moreover, cases as recent as 2014[33] involving illegitimate children have also made appearances in English courts. Reasons given for the abolishment of ST’s based on the claim that cases involving illegitimate children are no longer as frequent should not be accepted, since the 2014 case involved such a dispute. These reasons, however, are not the only justifications for which individuals are interested in creating ST’s. One of Meager’s findings was that testators did not wish for any strangers to benefit from their legacy, as a result of the beneficiary’s contemplation of divorce.[34] In addition, because family relations vary widely, ST’s are a solution to avoid any disappointment or distress of family members due to existing family conflicts.[35] Finally, ST’s have been a solution for testator’s wanting to leave property for controversial causes.[36] Evidently, it is not only illegitimate children that are now used as reasons for the creation of ST’s, but rather, other modern day circumstances such as divorce, that can replace those that are now less frequent (e.g. mistresses).

A question that must be asked when considering whether ST’s should be abolished or not, is whether the fraud principle outweighs noncompliance with the Act.[37] It can be argued that in certain situations, the fraud theory can trump the Act, especially if statute is attempted to be used as an instrument for fraud.


b. Estoppel Theory

Arguments have been made that ‘agreements and promises are not legally enforceable; there is no universal legal obligation to follow an argument’.[38] While this may be true, the role of Equity is to intervene if there is real evidence of reliance on a promise or an agreement.

A second and perhaps more convincing theory in recognising HST’s is based on the equitable doctrine of estoppel.[39] The three requirements for estoppel, communication (from the testator to the trustee), acceptance (from the trustee), and reliance (the testator relies on the trustee to fulfil his/her promise), are achieved with ST’s.[40] Failure for the trustee to carry out this promise would be unconscionable,[41] something that Equity attempts to prevent, as stated by Gibson LJ in Kasperbauer v Griffith.[42] It is no coincidence then, that communication and acceptance are two of the requirements for the recognition of ST’s.[43]

A very similar theoretical proposition made by Benny Chung from the University of Hong Kong is the ‘conscience-estoppel’ theory.[44] It can be said that the fraud theory illustrates the overwhelming role that conscience plays in ST’s,[45] and Equity intervenes in order to ‘generate conscionable results’[46] when the trustee’s integrity fails the testator. Promissory estoppel is then combined to form the theory. It is, therefore, logical for Equity to accomplish what would otherwise result in an ‘irreparable harm to a dead person’.[47] Abolishing ST’s would result in this harm on the testator who can no longer act or speak for himself/herself.


c. Dehors-the-will Theory

Based on the justification that ST’s are not testamentary dispositions and therefore must not comply with section 9 of the Act,[48] this theory was first raised in Blackwell, where Viscount Sumner declared that ST’s do not apply to the ‘provisions of the Wills Act’,[49] but instead, ‘brings [secret trusts] within the law of trusts’.[50] This has further been confirmed through other case law.[51] Whether this is in fact true, however, has remained a moot point for many years. Academics have been debating over whether these ST’s fall within the definition of a ‘testamentary disposition’ under section 1 of the Act.[52] Most academics, however, have generally agreed that ST’s are testamentary dispositions, falling within the Act and should therefore conform with the Act, making the dehors theory irrelevant. This has been disputed. To be a testamentary disposition, ST’s would have to comply with section 9 of the Act, however, based on their characteristics, they do not.[53] What would justify ST’s in the present day and therefore defend this argument, would be to recognise an equitable interest as being ‘created rather than transferred to the beneficiary’[54] upon acceptance of the trustee, putting ST’s in line with modern day equitable principles and therefore justifying their continued existence.

By treating the ST and the equitable interests as being created instead of transferred, it will then not fall within the meaning of ‘testamentary disposition’[55] under section 1 of the Act. This explanation was given in the cases of Re Gardner (No 2)[56] and Re Young.[57] In the former, Romer J stated that ‘the rights of the parties appear to me to be exactly the same as though the husband […] had executed a declaration of trust’.[58] The beneficiary’s equitable interest was therefore considered to be created not under the will, but through the trust that was created between the testatrix and the trustee.[59] Following the decision in Re Gardner, Danckwerts J in Re Young, held that ‘a beneficiary under a secret trust does not take under the will’,[60] therefore, putting the beneficiary outside section 15 of the Act. Although this case has been criticized for its reasoning, the best explanation for Romer J upholding the ST was to respect and continue the testatrix’s intention, a situation in which Equity intervenes in the first place.

The debate over the dehors theory does not seem to have an end in sight. Due to the different justifications (i.e. ST’s being express inter vivos trusts, constructive trusts, or neither), what may be considered is whether the dehors theory is even necessary as a theory in the first place. If the fraud theory and the promissory estoppel doctrine can prove and be accepted as sufficient enough principles to set aside the Act, then controversy surrounding the dehors theory may begin to subside.[61]


4. Conclusion

It is difficult to prove the true reasoning for judges’ enforcements of ST’s; however, it seems to be that whether it is a FST or a HST, the intentions of testators are being fulfilled through equitable principles. Reasons for the existence of ST’s remains disputed to this day and they can be strongly justified through the fraud and estoppel theories. Whether the dehors theory is to be accepted remains a moot point. It is unreasonable, however, to simply reject the doctrine of ST’s without considering the Equity jurisdiction and its role as ‘the court of conscience’.[62] The wider picture of these doctrines that have existed for hundreds of years and that have been established in law must be considered. The likely fact that ST’s will not be abolished any time soon should be accepted.

Bibliography


Primary Sources Cases

Blackwell v Blackwell [1929] AC 318

Bonham v College of Physicians (1610) 8 Co Rep 107

Gillett v Holt [2001] Ch 210

Healey v Brown [2002] WTLR 849

Johnson v Ball (1851) 5 De G & Sm 85

Kasperbauer v Griffith [2000] 1 WTLRR 333

McCormick v Grogan (1869) LR 4 HL 82

Moss v Cooper (1861) 1 J & H 352

Ottaway v Norman [1972] Ch 698

Paine v Hall (1812) 18 Ves. Jr. 475 Ct of Chancery

Rawstron v Freud [2014] EWHC 2577

Reech v Kennegal (1748) 27 ER 932

Re Boyes (1884) 24 Ch D 531

Re D’Amico [1974] 2 WWR 559

Re Gardner (No 2) [1923] 2 Ch 230

Re Keen [1937] Ch 236

Re Snowden [1979] Ch 528

Re Young [1951] Ch 344

Thynn v Thynn (1684) 1 Vern 296

Wallgrave v Tebbs (1855) 2 K & J 313


Legislation

Wills Act 1937


Secondary Sources

Allan, GW ‘The Secret is Out There: Searching for the Legal Justification for the Doctrine of Secret Trusts through Analysis of the Case Law’ 2011 40(4) Common Law World Review

Challinor E, ‘Debunking the myth of secret trusts?’ 2005 Conveyancer and Property Lawyer

Chung B, ‘Fraud Prevention? Dehors? Or What?: why secret trusts are enforced?’ 2018 24(2) Trusts and Trustees

Critchley P, ‘Instruments of Fraud, Testamentary Dispositions, and the Doctrine of Secret

Trusts’ 1999 115 Law Quarterly Review 11

Griffin J, ‘The need for the abolition of secret trusts’ 2017 23(4) Trusts and Trustees

Leung SYC, ‘Equity as a nest: the principle-based secret trust’ 2019 25(8) Trusts and Trustees

Meager R, ‘Secret trusts - do they have a future?’ 2003 Conveyancer and Property Lawyer

Pettit PH, Equity and the Law of Trusts (12th edn, OUP 2012)

Siu H, ‘Keeping Secrets: a critical analysis of justifications for the doctrines of secret trusts’,

2015 3(1) North East Law Review

Virgo G, The Principles of Equity and Trusts, (3rd edn, OUP 2018)

[1] Graham Virgo, The Principles of Equity and Trusts (3rd edn, OUP 2018) 110. [2] ibid 111. [3] [1972] Ch 698. [4] (1869) LR 4 HL 82. [5] [1979] Ch 528. [6] ibid 533H (Sir Robert Megarry V-C). [7] Wallgrave v Tebbs (1855) 2 K & J 313; see also Moss v Cooper (1861) 1 J & H 352, 789, where the court stated that whether the testator’s promise of complying either before or after execution of the will is ‘immaterial’. [8] (1884) 24 Ch D 531. [9] Johnson v Ball (1851) 5 De G & Sm 85 [90-91]; Blackwell v Blackwell [1929] AC 318. [10] Re Keen [1937] Ch 236. [11] Paine v Hall (1812) 18 Ves. Jr. 475 Ct of Chancery; this was also confirmed in Blackwell (n 9) and Wallgrave (n 7). [12] McCormick (n 4). [13] Samuel Yee Ching Leung, ‘Equity as a nest: the principle-based secret trust’ 2019 25(8) Trusts and Trustees 1. [14] Recognised in McCormick (n 4) and Blackwell (n 9). [15] McCormick (n 4) 97 (Lord Westbury); see also Reech v Kennegal (1748) 27 ER 932, 933 (Lord Hardwicke) and Healey v Brown [2002] WTLR 849. [16] Patricia Critchley, ‘Instruments of Fraud, Testamentary Dispositions, and the Doctrine of Secret Trusts’ 1999 115 Law Quarterly Review 11; Emma Challinor, ‘Debunking the myth of secret trusts?’ 2005 Conveyancer and Property Lawyer 3. [17] Leung (n 13) 3. [18] Virgo (n 1) 1.2. [19] Bonham v College of Physicians (1610) 8 Co Rep 107. [20] Leung (n 13) 4. [21] (1684) 1 Vern 296. [22] Joshua Griffin, ‘The need for the abolition of secret trusts’ 2017 23(4) Trusts and Trustees 6. [23] Rowena Meager, ‘Secret trusts - do they have a future?’ 2003 Conveyancer and Property Lawyer. [24] ibid 4. [25] ibid. [26] McCormick (n 4) 97-98. [27] Blackwell (n 9). [28] n 10. [29] ibid 244. [30] Benny Chung, ‘Fraud Prevention? Dehors? Or What?: why secret trusts are enforced?’ 2018 24(2) Trusts and Trustees 3; Re Snowden (n 5). [31] G.W. Allan, ‘The Secret is Out There: Searching for the Legal Justification for the Doctrine of Secret Trusts through Analysis of the Case Law’ 2011 40(4) Common Law World Review 3. [32] Meager (n 23) 2. [33] Rawstron v Freud [2014] EWHC 2577. [34] Meager (n 23) 3. [35] ibid 2. [36] Re D’Amico [1974] 2 WWR 559, where the testator left property to the ‘Provincial Committee of the Communist Party of Canada’. [37] Leung (n 13) 3. [38] Griffin (n 22) 4. [39] Virgo (n 1) 5.2. [40] ibid. [41] Re Keen (n 10). [42] [2000] 1 WTLRR 333, [27]. [43] Virgo (n 1) 5.2. [44] Chung (n 30). [45] ibid 5. [46] ibid. [47] ibid; see also Gillett v Holt [2001] Ch 210, where Robert Walker LJ says that it would be unconscionable for the trustee ‘to resile from his agreement’, at 228. [48] Ho Siu, ‘Keeping Secrets: a critical analysis of justifications for the doctrines of secret trusts’, 2015 3(1) North East Law Review 85. [49] Blackwell (n 9) 339. [50] ibid. [51] Re Young [1951] Ch 344; Re Snowden (n 5). [52] Critchley (n 16). [53] Allan (n 31) 12. [54] ibid. [55] ibid 3. [56] [1923] 2 Ch 230. [57] Re Young (n 51). [58] ibid 233. [59] Philip H. Pettit, Equity and the Law of Trusts (12th edn, OUP 2012) 132. [60] Re Young (n 51) 351. [61] Leung (n 13) 5. [62] Challinor (n 16) 2.