Extracts from the speeches of Lord Hodson (dissenting) and Lord Wilberforce in McPhail v Doulton [1971] AC 424

Extracts from the speeches of Lord Hodson (dissenting) and Lord Wilberforce in McPhail v Doulton [1971] AC 424
(Brief facts: The case concerned the interpretation and validity of the following provisions in a trust instrument:
"9. (a) The trustees 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 and any such grant may at their discretion be made by payment to the beneficiary or to any institution or person to be applied for his or her benefit and in the latter case the trustees shall be under no obligation to see to the application of the money. (b) The trustees shall not be bound to exhaust the income of any year or other period in making such grants as aforesaid …
"10. All benefits being at the absolute discretion of the trustees, no person shall have any right title or interest in the fund otherwise than pursuant to the exercise of such discretion, and nothing herein contained shall prejudice the right of the company to determine the employment of any officer or employee."
The first issue the court addressed was whether the provision created a trust, i.e. imposed a duty on the trustee to distribute this property to the class specified, or merely a power to do so. Their Lordships unanimously decided a trust was intended; the question then was whether the trust was certain. Lord Hodson (dissenting) held that a trust would be invalid unless each object was ascertainable, i.e. identifiable. In other words, unless one had or could come up with a complete list of the objects, the trust would fail. Lord Wilberforce, for the majority, held that a trust would be valid if for any individual it could be said whether he was or was not within the class of objects indicated framed by the settlor's words. Prior to this decision, the 'is or is not' test was regarded as the correct test for the validity of powers of appointment, but not for discretionary trusts, for which the 'complete list' test was the test for certainty of objects)
LORD HODSON (dissenting)
There remains the vexed question, much canvassed before your Lordships not only in this case but in In re Gulbenkian's Settlements (Whishaw v. Stephens) [1970] A.C. 508, as to the distinction, if any, between trusts and bare powers in favour of a class of persons when the court has to consider whether a disposition fails by reason of uncertainty.
Of late years a number of dispositions have been considered by the courts in which donors have sought to make elaborate provisions in favour of beneficiaries including such persons as the employees of limited companies and their wives and widows. Such a case was Inland Revenue Commissioners v. Broadway Cottages Trust decided in the Court of Appeal and reported in [1955] Ch. 20. It was there recognised that the accepted test of the validity of a trust was that it must be such as the court can control. The authority for this proposition is to be found in Morice v. Bishop of Durham (1805) 10 Ves.Jr. 522 as stated by Lord Eldon, where he said, at pp. 539, 540:
"As it is a maxim, that the execution of a trust shall be under the control of the court, it must be of such a nature, that it can be under that control; so that the administration of it can be reviewed by the court; or, if the trustee dies, the court itself can execute the trust: a trust therefore, which, in case of maladministration could be reformed; and a due administration directed; and then, unless the subject and the objects can be ascertained, upon principles, familiar in other cases, it must be decided, that the court can neither reform maladministration, nor direct a due administration."
In a sentence there is no trust over which the court cannot assume control. If the inability arises from inability to ascertain the objects of the alleged trust, it is said to be void for uncertainty.
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The distinction between a trust and a mere power can be stated shortly although the short statement will require some explanation. It is that where there is a trust there is a duty imposed upon the trustees who can be controlled if necessary in the exercise of their duty. Whether the trust is discretionary or not the court must be in a position to control its execution in the interests of the objects of the trust. Where there is a mere power entirely different considerations arise. The objects have no right to complain. Where by the instrument creating the power the discretion is made absolute and uncontrollable the court cannot interfere (Gisborne v. Gisborne (1877) 2 App.Cas. 300). The trust in default controls and he to whom the trust results in default of exercise of the power is in practice the only one competent to object to a wrongful exercise of the power by the donee. Counsel did not profess to know of any successful application to the court by a person claiming to be an apparent object of a bare power. I exclude from consideration cases in which bad faith may be alleged.
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In the Gulbenkian case [1970] A.C. 508 the majority of your Lordships held the view that where there is a valid gift over in default of appointment a mere or bare power of appointment among classes is valid if it can be said with certainty whether any given individual is or is not a member of a class and that the power did not fail simply because of the impossibility of determining every member of the class.
In my opinion a mere power is a different animal from a trust and the test of certainty in the case of trusts which stems from Morice v. Bishop of Durham, 10 Ves.Jr. 522 is valid and should not readily yield to the test which is sufficient in the case of mere powers.
The unhappy results which may follow from incompetent drafting may be, in the case of an instrument held to impose a trust, that it is so much waste-paper, whereas in the case of an instrument differing perhaps on the face of it very little from the invalid trust instrument a good gift of a power to benefit objects may emerge. Thus it is said that in order to avoid fine distinctions the test should be the same for both.
One persuasive argument used is that, in applying the principle that where there is a trust the court must be in a position to exercise it, the court cannot exercise the trustees' discretion in the event of their failing to do so. The discretion being conferred on and exercisable by the trustees alone, the court cannot do other than authorise a distribution in equal shares. This, in cases comparable with the present, must lead to a result tending towards absurdity and makes the strict test of certainty open to serious criticism. This disability of the courts to exercise the discretion reposed in trustees was referred to in the recitation of the argument for the Crown in the
judgment of the court in the Broadway Cottages Trust case [1955] Ch. 20, 30. It was not referred to specifically in the conclusion reached by the court although it would be fair to say that the arguments of the Crown set out in the judgment were implicitly accepted. For myself I do not deny that there is force in the argument based on the absurdity of an equal division especially as it has not always been accepted.
In what are called the relations cases, Mosely v. Moseley (1673) Fin. 53, Clarke v. Turner (1694) Free.Ch. 198 and Warburton v. Warburton (1702) 4 Bro.P.C. 1, the court did exercise its own discretionary judgment against equal division. Similarly, in a different context the same principle was applied in the case of Richardson v. Chapman (1760) 7 Bro.P.C. 318, where it appears from the reported argument that the court decreed the proper act to be done not by referring the matter to the trustee's discretion but by directing him to perform as a mere instrument the thing decreed (pp. 326-327). These cases may be explained as cases where there were indications which acted as pointers or guides to the trustees and enabled the court to substitute its own discretion for that of the trustees.
This practice, however, has fallen into desuetude and the modern, less flexible, practice has, it appears, been followed since 1801, when Sir Richard Arden M.R. in Kemp v. Kemp (1801) 5 Ves.Jr. 849 stated that the court now disclaims the right to execute a power and gives the fund equally. The basis of this change of policy appears to be that the court has not the same freedom of action as a trustee and must act judicially according to some principle or rule and not make a selection giving no reason as the trustees can. The court, it is said, is driven in the end to the principle that equity is equality unless, as in the relations cases, the court finds something to aid it. Where there is no guide given the court, it is said, has no right to substitute its own discretion for that of the designated trustees. …
I have had the advantage of reading the speech which has been prepared by my noble and learned friend Lord Wilberforce, whose opinion particularly on this topic is of very strong persuasive power. I cannot, however, bridge the gulf which still, I think, yawns between us. If one bases oneself, as I do, on the passage from Lord Eldon's judgment in Morice v. Bishop of Durham, 10 Ves.Jr. 522, 540 as defining the features of a trust, it is, in my opinion, impermissible to sanction, in the case of an uncertain disposition in the sense of the passage quoted, the authorisation by the court of a scheme of distribution such as he suggests. I cannot accept that this is justified by stating that a wider range of inquiry is called for in the case of trust powers than in the case of powers (meaning "mere" as opposed to "trust powers"). To adopt this solution is, I think, to do the very thing which the court cannot do. As was pointed out by my noble and learned friend Lord Upjohn in the Gulbenkian case [1970] A.C. 508, 524:
"The trustees have a duty to select the donees of the donor's bounty from among the class designated by the donor; he has not entrusted them with any power to select the donees merely from among claimants who are within the class, for that is constituting a narrower class and the donor has given them no power to do this."
I have read and re-read the speech of my noble and learned friend Lord Wilberforce with, I hope, a readiness to change my mind and to temper logic with convenience, but having given the best consideration I can to the problem, I still adhere to the view I have previously expressed
in the Broadway Cottages case [1955] Ch. 20 and in the Gulbenkian case [1970] A.C. 508 as to the requirements for certainty in the case of the objects of a trust.
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LORD WILBERFORCE
My Lords this appeal is concerned with the validity of a trust deed dated July 17, 1941, by which Mr. Bertram Baden established a fund for the benefit, broadly, of the staff of the respondent company, Matthew Hall Co. Ltd. Mr. Baden died in 1960 and the appellants are the executors of his will. They claim that the trust deed is invalid and that the assets transferred to the trustees by their testator revert to his estate. The trusts established by the deed are of a general type which has recently become common, the beneficiaries including a wide class of persons among whom the trustees are given discretionary powers or duties of distribution. It is the width of the class which in this and in other cases before the courts has given rise to difficulty and to the contention that the trusts are too indefinite to be upheld.
The trust deed begins with a recital that the settlor desired to establish a fund for providing benefits for the staff of the company and their relatives or dependants. …
In this House, the appellants contend, and this is the first question for consideration, that the provisions of clause 9 (a) constitute a trust and not a power. If that is held to be the correct result, both sides agree that the case must return to the Chancery Division for consideration, on this footing, whether this trust is valid. But here comes a complication. In the present state of authority, the decision as to validity would turn on the question whether a complete list (or on another view a list complete for practical purposes) can be drawn up of all possible beneficiaries. This follows from the Court of Appeal's decision in Inland Revenue Commissioners v. Broadway Cottages Trust [1955] Ch. 20 as applied in later cases by which, unless this House decides otherwise, the Court of Chancery would be bound. The respondents invite your Lordships to review this decision and challenge its correctness. So the second issue which arises, if clause 9 (a) amounts to a trust, is whether the existing test for its validity is right in law and, if not, what the test ought to be.
Before dealing with these two questions some general observations, or reflections, may be permissible. It is striking how narrow and in a sense artificial is the distinction, in cases such as the present, between trusts or as the particular type of trust is called, trust powers, and powers. It is only necessary to read the learned judgments in the Court of Appeal to see that what to one mind may appear as a power of distribution coupled with a trust to dispose of the undistributed surplus, by accumulation or otherwise, may to another appear as a trust for distribution coupled with a power to withhold a portion and accumulate or otherwise dispose of it. A layman and, I suspect, also a logician would find it hard to understand what difference there is.
It does not seem satisfactory that the entire validity of a disposition should depend on such delicate shading. And if one considers how in practice reasonable and competent trustees would act, and ought to act, in the two cases, surely a matter very relevant to the question of validity, the distinction appears even less significant. To say that there is no obligation to exercise a mere power and that no court will
intervene to compel it, whereas a trust is mandatory and its execution may be compelled, may be legally correct enough but the proposition does not contain an exhaustive comparison of the duties of persons who are trustees in the two cases. A trustee of an employees' benefit fund, whether given a power or a trust power, is still a trustee and he would surely consider in either case that he has a fiduciary duty: he is most likely to have been selected as a suitable person to administer it from his knowledge and experience, and would consider he has a responsibility to do so according to its purpose. It would be a complete misdescription of his position to say that, if what he has is a power unaccompanied by an imperative trust to distribute, he cannot be controlled by the court unless he exercised it capriciously, or outside the field permitted by the trust (cf. Farwell on Powers, 3rd ed., p. 524). Any trustee would surely make it his duty to know what is the permissible area of selection and then consider responsibly, in individual cases, whether a contemplated beneficiary was within the power and whether, in relation to other possible claimants, a particular grant was appropriate.
Correspondingly a trustee with a duty to distribute, particularly among a potentially very large class, would surely never require the preparation of a complete list of names, which anyhow would tell him little that he needs to know. He would examine the field, by class and category; might indeed make diligent and careful inquiries, depending on how much money he had to give away and the means at his disposal, as to the composition and needs of particular categories and of individuals within them; decide upon certain priorities or proportions, and then select individuals according to their needs or qualifications. If he acts in this manner, can it really be said that he is not carrying out the trust?
Differences there certainly are between trusts (trust powers) and powers, but as regards validity, should they be so great as that in one case complete, or practically complete, ascertainment is needed, but not in the other? Such distinction as there is would seem to lie in the extent of the survey which the trustee is required to carry out: if he has to distribute the whole of a fund's income, he must necessarily make a wider and more systematic survey than if his duty is expressed in terms of a power to make grants. But just as, in the case of a power, it is possible to underestimate the fiduciary obligation of the trustee to whom it is given, so, in the case of a trust (trust power), the danger lies in overstating what the trustee requires to know or to inquire into before he can properly execute his trust. The difference may be one of degree rather than of principle: in the well-known words of Sir George Farwell, Farwell on Powers, 3rd ed. (1916), p. 10, trusts and powers are often blended, and the mixture may vary in its ingredients.
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The basis for the Broadway Cottages principle is stated to be that a trust cannot be valid unless, if need be, it can be executed by the court, and (though it is not quite clear from the judgment where argument ends and decision begins) that the court can only execute it by ordering an equal distribution in which every beneficiary shares. So it is necessary to examine the authority and reason for this supposed rule as to the execution of trusts by the court.
Assuming, as I am prepared to do for present purposes, that the test of validity is whether the trust can be executed by the court, it does not follow that execution is impossible unless there can be equal division.
As a matter of reason, to hold that a principle of equal division applies to trusts such as the present is certainly paradoxical. Equal division is surely the last thing the settlor ever intended: equal division among all may, probably would, produce a result beneficial to none. Why suppose that the court would lend itself to a whimsical execution? And as regards authority, I do not find that the nature of the trust, and of the court's powers over trusts, calls for any such rigid rule. Equal division may be sensible and has been decreed, in cases of family trusts, for a limited class, here there is life in the maxim "equality is equity," but the cases provide numerous examples where this has not been so, and a different type of execution has been ordered, appropriate to the circumstances.
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The conclusion which I would reach, implicit in the previous discussion, is that the wide distinction between the validity test for powers and that for trust powers is unfortunate and wrong, that the rule recently fastened upon the courts by Inland Revenue Commissioners v. Broadway Cottages Trust ought to be discarded, and that the test for the validity of trust powers ought to be similar to that accepted by this House in In re Gulbenkian's Settlements [1970] A.C. 508 for powers, namely, that the trust is valid if it can be said with certainty that any given individual is or is not a member of the class.
I am interested, and encouraged, to find that the conclusion I had reached by the end of the argument is supported by distinguished American authority. Professor Scott in his well-known book on trusts (Scott on Trusts (1939)) discusses the suggested distinction as regards validity between trusts and powers and expresses the opinion that this would be "highly technical" (s. 122, p. 613). Later in the second Restatement of Trusts (1959), s. 122 (which Restatement aims at stating the better modern view and which annotates the Broadway Cottages case), a common test of invalidity is taken, whether trustees are "authorised" or "directed": this is that the class must not be so indefinite that it cannot be ascertained whether any person falls within it. The reporter is Professor Austin Scott. In his abridgment, published in 1960 (Scott's Abridgment of The Law of Trusts, s. 122, p. 239), Professor Scott maintains the same position:
"It would seem that if a power of appointment among the members of an indefinite class is valid, the mere fact that the testator intended not merely to confer a power but to impose a duty to make such an appointment should not preclude the making of such an appointment. It would seem to be the height of technicality that if a testator authorises a legatee to divide the property among such of the testator's friends as he might select, he can properly do so, but that if he directs him to make such a selection, he will not be permitted to do so."
Assimilation of the validity test does not involve the complete assimilation of trust powers with powers. As to powers, I agree with my noble and learned friend Lord Upjohn in In re Gulbenkian's Settlements that although the trustees may, and normally will, be under a fiduciary duty to consider whether or in what way they should exercise their power, the court will not normally compel its exercise. It will intervene if the trustees exceed their powers, and possibly if they are proved to have exercised it capriciously. But in the case of a trust power, if the trustees do not exercise it, the court will: I respectfully adopt as to this the statement in Lord Upjohn's opinion
(p. 525). I would venture to amplify this by saying that the court, if called upon to execute the trust power, will do so in the manner best calculated to give effect to the settlor's or testator's intentions. It may do so by appointing new trustees, or by authorising or directing representative persons of the classes of beneficiaries to prepare a scheme of distribution, or even, should the proper basis for distribution appear by itself directing the trustees so to distribute. The books give many instances where this has been done, and I see no reason in principle why they should not do so in the modern field of discretionary trusts (see Brunsden v. Woolredge (1765) 1 Amb. 507, Supple v. Lowson (1773) 2 Amb. 729, Liley v. Hey (1842) 1 Hare 580 and Lewin on Trusts, 16th ed. (1964), p. 630). Then, as to the trustees' duty of inquiry or ascertainment, in each case the trustees ought to make such a survey of the range of objects or possible beneficiaries as will enable them to carry out their fiduciary duty (cf. Liley v. Hey). A wider and more comprehensive range of inquiry is called for in the case of trust powers than in the case of powers.
Two final points: first, as to the question of certainty. I desire to emphasise the distinction clearly made and explained by Lord Upjohn ([1970] A.C. 508, 524) between linguistic or semantic uncertainty which, if unresolved by the court, renders the gift void, and the difficulty of ascertaining the existence or whereabouts of members of the class, a matter with which the court can appropriately deal on an application for directions. There may be a third case where the meaning of the words used is clear but the definition of beneficiaries is so hopelessly wide as not to form "anything like a class" so that the trust is administratively unworkable or in Lord Eldon's words one that cannot be executed (Morice v. Bishop of Durham, 10 Ves.Jr. 522, 527). I hesitate to give examples for they may prejudice future cases, but perhaps "all the residents of Greater London" will serve. I do not think that a discretionary trust for "relatives" even of a living person falls within this category.