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The concept of choses in action, focusing on debts and contractual rights. It explains how debts can be considered a chose in action, the types of choses in action, and the process of assigning them. The document also covers the concept of novation and the creation of trusts, providing examples and case law.
Typology: Study notes
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Choses in Action:
What is a chose in action? A chose in action is a type of personal possession that is an intangible right. o “A known legal expression used to describe all personal rights of property which can only be claimed or enforced by action, and not by taking physical possession” – Torkington v Magee [1902] o It can also be thought of as the right to receive something. For example, a personal bank account is the right to receive a certain amount of money that is equivalent to the credit standing in your account. o “The phrase ‘chose in action’ is used in different senses, but its primary sense is that of a right enforceable by an action. It may also be used to describe the right of action itself, when considered as part of the property of the person entitled to sue‘. A right to sue for a sum of money is a chose in action, and it is a proprietary right.” – Loxton v Moir (1914)
Examples: o Legal: Debts, shares in a company, contractual rights, intellectual property rights, right of action in tort. Bank accounts (bank account does not hold money for you, but promises to give money). o Equitable: Interest under a trust, interest under an unadministered estate, equity of redemption, partnership agreement.
Debt as an example of a legal chose in action o A “debt” indicates an obligation on the debtor to make payment of a sum of money and a corresponding right on the part of the creditor to get paid/ to sue for payment o E.g. contractual debt: D (debtor) owes C (creditor) Personal as between D and C C sues D for recovery C is an unsecured creditor if D becomes insolvent i.e. C has no right over D‘s assets However, D’s right to payment is ‘property‘ in the hands of C – a chose in action. Chose in action assignable by C to X, so that D owes X
Types of CIA: o Individual rights can be referred to as choses, or the right to enforce a bundle of rights can be a chose in itself. o Your bundle of rights can amount to property, and/or can give you an interest in property. o Need to recognise a distinction between (a) a bundle of contractual rights (the bundle is a chose, i.e. the right to enforce them is property itself, and can be transferred, subject to certain exceptions) AND (b) a chose which is an interest in property (it, itself, amounts to an interest in property.) E.g. the equitable interest under the trust. The equitable interest is the chose, but that chose gives you an interest in the asset which is being held on trust. Also note as similar: Livingston Rights. The chose in action is the right to due administration of the estate (not a property right in the estate itself), but then once estate has been administered, right turns into a right in the actual property in the estate.
Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales Pty Ltd (1974) Facts: Volume Sales provided money to a concert promoter (Fourth Media). Fourth Media had contracts with various artists. Box office receipts came in from the public. There was a ‘joint venture’ between VS and FM regarding the box office receipts. FM then granted an equitable charge over the box office receipts to secure an obligation they owed to Canny Gabriel. Issue: Who had the better right to the box office receipts? Held: This question turned on whether (a) each partner was entitled to share in the surplus assets of the partnership on its dissolution (legal chose in action) OR (b) each partner had a chose in action in every partnership asset such that VS had an earlier equitable interest. There was a partnership, even though it did not describe the parties as partners and did not provide expressly for the sharing of losses, although this was implied. Indicia of partnership included the sharing of profits, the policy of the joint venture being a matter for joint agreement, an attempted assignment of half interests in contracts with singers, and mutual concern
Note that this case is NOT authority for fact that you can assign bare rights to litigate. However, the finding that litigation funding was not against public policy leaves the prohibition on assigning bare rights on unstable ground. It is more likely that rights to litigate would be ‘assignable’, but uncertainty remains because of the “public policy” provision in s6 (below). Therefore – though the principle has been broken down in a number of ways, it is unclear if the prohibition still remains.
Civil Liability Act 2002 (NSW) sch 2, para 2(2) Sch2, Para2(2)
[The changes] do not affect any rule of law as to the cases in which a contract is to be treated as contrary to public policy or as otherwise illegal, whether the contract was made before or after the commencement of the Maintenance, Champerty and Barratry Abolition Act 1993.
Campbells Cash and Carry v Fostif (2006) Facts: Tobacco retailers sought compensation in respect of tobacco licensing fees that they had paid and that had since been invalidated as unconstitutional excises. A company called Firmstones encouraged tobacco retailers to claim a refund of the tobacco licence fees from wholesalers. Firmstones wrote to the retailers, and sought authority to act on their behalf in recovering the amounts, taking a 33% “success fee” of any money recovered. Firmstones did not actually receive an assignment of the retailers’ cause of action, but retained lawyers to act on behalf of the retailers. Thus, although Firmstones did not receive an assignment of the retailers’ of action, it was in fact conducting the litigation on behalf of the retailers and with a view to receiving a cut of the proceeds. Issue: did these litigation arrangements constitute an abuse of process?
Held: It was not an abuse of process. On assignability of bare rights to litigate : Given the underlying statutory wrong of maintenance and champerty has been repealed , query the public policy justification against assigning bare rights to litigate o CLA sch 2 para 2(2) (above) merely states that it cannot be assumed from the removal of the tort in statute that the bare rights to litigate can be assigned.
Not conclusive on this point, given that facts involved FUNDING litigation, rather than assigning the right to litigate. On Litigation Funding Confirmed that there is not necessarily an abuse of process in a litigation funder, with no pre-exisiting genuine commercial interest, seeking to cause Ps to sue with a view to making a profit. The HCA turned on the specific question of whether this amounted to an abuse of process (the ratio does not directly concern the assignability of bare rights to litigate) Many people seek profit from assisting litigation – it is not surprising that a person who hazards funds in litigation wishes to control the litigation. Public policy arguments were raised regarding: 1) fears about adverse effect on the process of litigation, and 2) fears about fairness of the bargain. However, held that neither of these warrants formulation of an overarching rule of public policy that would in effect bar prosecution of an action where any agreement has been made to provide money to a party to institute or prosecute a litigation in return for a share of the proceeds in the litigation. This would be “too broad an axe to the problems.”
NB: where the assignee is not a person interested in having rights vindicated (e.g. a shareholder, creditor) but is a person whose interest is solely in making a profit from funding the litigation, then the court may demand security for costs: Green v CGU Insurance.
While this case did not find that bare rights to litigate can be assigned, it cannot be assumed from the CLA that the rights cannot be assigned because of public policy – the finding here that litigation funding is not against public policy leaves the prohibition on unstable ground Thus, it remains unclear whether assigning the bare rights to litigate is prohibited
(1.2) Circumventing the prohibition
If the prohibition DOES still exist, you can nonetheless circumvent it:
a) Can assign the FRUITS of litigation
Glegg v Bromley [1912] Facts: Woman suing for slander. At the same time, she owed money to her husband, so she purported to assign her winnings to her husband. “Florence Elizabeth Glegg doth hereby assign unto the said Edward Maxwell Glegg all the interest, sum of money, or
premises to which she is or may become entitled by virtue of the said action of Glegg v Bromley, or under by virtue of any verdict, compromise, or agreement which she may obtain or which she may become party in or consequence upon the said action or otherwise howsoever under of by reason of the same.” Issue: Whether the assignment was legal, given that there is no rule against assigning the fruits of litigation. Held: Parker J: assigning the fruits of the right to litigate is not a current chose in action, but future property identified by reference to an existing chose in action. In such situations, no question of maintenance shall arise. The mortgagee (husband) has no right or is under no duty to interfere. “Such an assignment does not give the assignee any right to interfere in the proceedings in the action. The assignee has no right to insist on the action being carried on; in fact, the result of a compromise is actually included as a subject of the assignment. There is in my opinion nothing resembling maintenance or champerty in the deed of assignment.” NB: important that she assigned money which she might recover, rather than he right to recover damages.
b) Can assign the right to litigate if the assignee is an “interested party”, i.e. has a legitimate, pre-existing commercial interest in the litigation
An assignee who is a creditor of the assignor has sufficient commercial interest: Re Timothy’s Pty Ltd. Where the assignee has also been sued under the same commercial transaction in respect of the dame damage, this is a sufficient commercial interest: Browntown v Edward Moore Inducon. See also the comments of Debelle J in South Australian Management Corp : actions of unliquidated damages in tort should also be assignable where there is a genuine commercial interest, provided they are not personal (e.g. personal injury, defamation false imprisonment).
Trendtex Trading Corp v Credit Suisse [1982] Facts: Trendtex in litigation with the Central Bank of Nigeria. One of T’s creditors, Credit Suisse, paid $800,000 and agreed to pay T’s costs in exchange for being assigned T’s rights to litigate. T already owed a large amount of money to CS. CS then assigned the suit to a third party, who forced the bank to settle for $8 million. Issue: T argued that its own assignment to CS was invalid, as it realised that it had been a strategically poor decision (IDIOTS) Held: The assignment was valid. Two strains of argument put forward for the validity of the assignment.
The original chose of action is assignable: Since the original chose in action was assignable (i.e. the Nigerian Bank owed T a debt), T should be allowed to assign its right to sue (a subsequent chose in action) for this debt. It was not considered a bare right to litigate. Where a cause of action (chose in action) arises out of a right which itself was assignable, that cause of action is assignable – “it is not a ‘bare right to litigate’ but itself a right of property.” This might be thought of as an incidental right to litigate (Oliver LJ).
CS has a legal interest in the property of dispute Assignment of right to litigate is authorised where the assignee has a genuine pre-existing financial interest in maintaining the solvency of a plaintiff. I.e. did the assignee have a genuine commercial interest in taking the assignment and enforcing it? Here, CS did: there were a large creditor of T, so it was certainly in their interest for T to stay afloat by taking over the litigation costs.
NB: this principle is NOT authority for notion that you can gain a commercial interest in the litigation by being assigned a right to litigate – this right must be pre-existing.
National Mutual Property Services (Australia) v Citibank Savings : Said that Trendtex does not embrace an interest arising from an arrangement voluntarily entered into by the assignee of which the impugned assignment is an essential part. Genuine commercial interest = a commercial interest which exists already or by reason of other matters, and which receives ancillary support from the assignment.
NB : on appeal, the HOL found that the agreement was contrary to public policy and void because of CS’s assignment to the third party. The third party had no interest in the litigation – it is not an interest in litigation that you are going to make money out of it, as the interest must be independent of that acquired by the assignment itself. However, as the agreement was governed by Swiss law, it was not necessary to determine whether the champertous element invalidated the whole agreement. Thus, T’s action for relief in England on the basis that the agreement was invalid failed.
(c) Can assign property that comes with the right to litigate :
ss78- 81 PPSA takes this view – a contractual prohibition on the assignment of a security will not make a purported assignment invalid.
Owners of Strata Plan 5290 v CGS & Co Pty Ltd [2011] Facts:
A building contract expressly stated neither party could assign benefit. The building company went in liquidation. The liquidator then held all the company’s rights and purported to assign the benefit of the right to be paid to another company. The Liquidator argued that s477(2)(c) of the Corporations Act permitted this (provision allowing liquidators to sell off assets), as it allows sale of all assets/property including choses in action. ie, statute allows sale of the right to be paid under the building contract.
Held:
Rights were not assignable. This was a matter of statutory construction. The provision of the Act was not broad enough to authorise liquidators to transfer rights arising under contracts with “non-assignability” clauses. Legislation did not mean that an unsellable thing was now sellable. Parliament could override contractual prohibitions if this was made an express intention in the statute. Still note: the fact that the contract says you cannot assign those rights does not mean you cannot declare a trust over those rights.
Bluebottle UK Ltd v Deputy Commissioner of Taxation (2007) Facts: A company’s (Virgin Blue’s) constitution did not prohibit assignment of the right to receive dividends on shares – BUT, instead, it stated that dividends only had to be paid to shareholders. Nonetheless, a shareholder assigned their right to receive dividends to Bluebottle, though he did not assign the shares themselves. (note that a corporation’s constitution is treated as a contract) Issue: Who did the company have to pay? – was the constitutional clause a prohibition on assignment? Held: HCA – a matter of construction of the contract (the constitution) Virgin Blue only had to pay dividends to the registered shareholders/members. “It is important to recognise that the debt which is now in question arises out of and is governed by the contract constituted by Virgin Blue‘s constitution. By fixing a record date of 28 November 2005, the directors determined the class of those who would be entitled to receive the dividend as those entitled to be registered as members on that day and by fixing a record date the directors determined that it was those and only those members with whom Virgin Blue was to deal with respect to the dividend.” However – Since valuable consideration had been paid to the assignee, when the company paid the dividends to the shareholder, the shareholder was obliged to pass on those dividends to the assignee.
(3) Personal Service Contracts
(a) General prohibition Neither the benefit nor the burden is freely assignable where the identity of the person in the contract is material to the performance by the person who owes performance.
Burden of a PS contract – cannot be assigned at all (e.g. if Picasso agrees to paint a painting, he cannot assign the burden of the contract – the work of the painting – to Y) Benefit of a PS contract – if A enters a contract to render a PS to X, the benefit cannot be transferred by X to Y without A’s consent: Nokes (e.g. mine cannot assign labour of one of it’s miners to a new mine). o E.g. Usyd cannot assign Usyd cannot assign Jamie’s obligation to lecture, to UNSW, with the effect of transferring his employer. o UNLESS there is a statutory prohibition to the contrary (which may mean you cannot assign the benefit at all).
Following this, a master cannot assign an employee’s employment to a company that is the successor of the old company. o Differentiate this from where ownership of shares and directors change, but the company is the same legal person
This applies to personal confidence contracts – e.g. publisher cannot assign the benefit of author’s contract to write a book if the author relied on the skill or qualities of the publisher: Stevens v Benning.
Nokes v Doncaster Amalgamated Collieries Ltd [1940] Facts: Mr Noke was employed to work as a coal miner. Hickleton transferred the company Nokes worked for to Doncaster. What Doncaster bought was the business, not just the shares, so that Doncaster was now running the mine. Nokes didn’t show up for work and he was fined for unlawfully absenting himself from work? Issue: Could Nokes be fined? Depended on whether the ‘benefits’ generated by his employment contract were assignable from Hickleton to Doncaster. Held: The fine was not legitimate, as Hickleton could not assign the employment contract it had with Nokes to Doncaster unless Nokes consented. Viscount Simon LC: “It is indisputable that (apart from statutory provision to the contrary) the benefit of a contract entered into by A to render personal service to X cannot be transferred by X to Y without A’s consent.” This rule is strictly enforced, so that the old contract between A and X would have to be terminated (by notice or with mutual consent) and a new contract of service entered into by agreement between A and Y (novation). This situation is distinct from where one company merely buys out the other and the company does not change. Here, a new company was created. Section 154 of the Companies Act did not provide a statutory exception to this principle (requiring the companies to amalgamate) – because on its proper construction, it did not allow the transfer of the appellant’s contract of service. Lord Atkin: The Courts should not be authorized to transfer employment to another employer. 1. It is the servant’s decision to choose their master. 2. Employees attach importance to the identity of the particular company with which they deal. Particularly the difference between large and small corporations. HOWEVER – “A big company can buy the majority of the shares in the old company, replace the directors and managers, change the policy and produce the same result. Be it so: but the result is not the same: the identity of the company is preserved.” Critique: When I am seeking a loan, I might choose the lender because of things I hear personal to the lender (e.g. doesn’t mind accepting late payments). But the benefit of a debt can be assigned without hassle. Why can a lender assign the debt (benefit of the contract) to another, but an employer cannot assign personal services owed to them (benefit of the contract) to another?
(b) Exceptions i) If the contract expressly or impliedly contemplates assignment
Tolhurst v Associated Portland Cement Manufacturers (1900) Ltd [1903] Facts: Mr Tolhurst owned a chalk quarry and entered into a contract with Imperial Cement. Pursuant to that contract, the agreement was that Tolhurst would supply chalk to Imperial. The contracted lasted 50 years. Imperial then tried to assign the contract to Associated Portland. Tolhurst argued that he did not have to supply chalk to Associated because they did not have the benefit of the contract. Issue: Had the benefit of the contract (the supply of the cement) been validly assigned? Held: The benefit of the contract HAD been effectively assigned, and so Associated Portland could insist that Tolhurst continue to supply them. Since it was a long contract, it clearly did not really matter to Tolhurst who he was providing the chalk to. What he was really buying was a steady supply of money over a long period. The personal identity of Imperial was not material to the contract (the contract impliedly contemplated assignment during the long term) and as such, the benefit was assignable.
ii) If obligations assigned are negative In general, personal service contracts cannot be assigned. However, you can probably assign negative obligations for a personal services contract because the public policy reasons for not forcing an employee to work for a new master do not apply absent any positive obligations.
Mid-City Skin Cancer & Laser Centre P/L v Zahedi-Anarak (2006) Facts: Dr Zahedi worked in a medical practice, Mid-City, which was sold to the plaintiff. Part of the terms of employment included an obligation to keep clients’ details confidential.
Facts: Sara Lee held a number of trademarks and entered into an agreement with Underworks, granting exclusive rights to Underworks to use the trademarks. The next year, Sara Lee sold its business to Pacific Dunlop. As part of that sale, Sara Lee assigned the benefit of the Underworks agreement. Pacific Dunlop then further onsold its rights to Pacific Brands. Underworks refused requests to novate the agreement. Pacific Brands later alleged that Underworks were in breach of the Tradeworks agreement and sought to terminate the agreement. Issue: Could Pacific Brands thus allege Underworks were in breach of their licence – i.e. had the right (the benefit of the trademarks agreement) been validly transferred? Held: The benefit did not pass, there was no effective assignment and therefore, Pacific Brands did not have the ability to terminate the agreement. If the identity of the parties is important, this will normally show that there has been no implicit agreement to consent to novation. Here: The identity of the parties was important to the original agreement. It was not a personal service contract in the sense of employment, but it WAS important to Sara Lee and to Underworks at the outset that they were dealing with each other – the court found this as a question of fact. NB: If U had just carried on with it, can probably argue was an implicit agreement to novate. Because U knew was dealing with PB, PB did the right thing. If they hadn’t done that and allowed things to carry on, over time as U continued to deal with PB could have argued an implicit novation.
(4) Public Pay
General prohibition: A holder of public office cannot assign his/her right to be paid whilst they are in office ( Mulvenna v Admiralty ). o Stems from a public policy concern about maintaining the dignity of public office holders and to ensure they actually perform their duties. However, they CAN assign: o 1. The money after they have been paid. o 2. The right to be paid if the reason does not relate to public policy concerns. Therefore if the right relates to discharging duties, cannot be assigned. E.g. can assign a pension payable in respect of past services under a statute that does not prohibit its alienation: Mulvenna.
Arbuthnot v Norton (1846) Facts : when judge died, right to 6 months pay if died in office. Found : the right could be assigned to family.
Exploring Equitable Choses in Action Interest under a trust: General approach Questions to ask: o Is the arrangement a trust or some other relationship? E.g. charge, bailment, agency, contract. o Has there been an intention to create a trust? (assuming that other ‘certainties’ are satisfied) o What is the nature of the interest? Personal against the trustee, or proprietary? TERMINOLOGY o Legal (absolute) owner o Settlor o Trustee o Beneficiary (cestui que tust) Topic 4 looks further at assigning equitable choses in action.
3.1 Equitable Choses in Action: Equitable interests aren’t completely personal against the trustee, but nor are they proprietary against the whole world. Examples: o Beneficiary’s rights under a trust; o Partnerships: i.e. Partner’s interest in a partnership (see case above: Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd ); o Money in bank; This is no property in particular notes/coins, but a debt (CIA) When you withdraw money, debt owed to you by the bank is diminished In an overdraft, you own the notes you withdraw, but have a debt to the bank. o Livingstone rights: Interest of a beneficiary of an unadministered estate. In equity, the rules of assignment vary depending on whether the assignment was gratuitous (a gift) or for valuable consideration.
3.2 What is a trust?
Trust: a division of legal and equitable interests in property. One person (the trustee) hold property for the benefit of another (the beneficiary). “A trust is an institution developed by equity and cognisable by a court of equity. A trust is not a juristic person with a legal personality distinct from that of the trustee and beneficiary, nor is it merely descriptive of an equitable right or obligation. Instead, it is a RELATION between trustee and beneficiary in respect of certain property.”
Example: “I (J) am transferring $10,000 to X, on trust for Y”. o Full legal owner : person with legal title not subject to trust (J before the transfer). Someone who owns both the legal and equitable interest in the property (in which case there is no division between the two). Only the full legal owner has beneficial interest (rights of use and enjoyment). o Settlor: person who creates the trust (also J). o Trustee : the legal owner subject to trust (X after transfer). o Beneficiary : person with an equitable interest (Y). Y can force X to use X’s legal title in a particular way, but does not have legal title themselves.
The Trustee and beneficiary cannot be the same person. If it is the same person, it just merges into a full legal title. J, X and Y are three different roles , but not necessarily different people. E.g. could make a contribution to superannuation fund on trust for myself.
3.3 Creation of Trusts Method: o Declaration of trust – actions or words create a trust. May arise: o Expressly: actual intention to create a trust. o Resulting: Presumed intention to create a trust. o Constructive: Regardless of intention to create a trust: Lysaght v Edwards.
Substantive requirements: Three certainties must be in place to create an EXPRESS trust: o (1) Intention to create the trust; o (2) Subject matter of the trust (must be able to identify the property that will be the subject matter of the trust); o (3) Object of the trust (who the trust is for).
(1) Certainty of Intention
A trust only arises if the settlor intends to create a trust. That intention is ascertained objectively – they do not have to use the word “trust,” nor to they need to realise that they are creating a trust. Not enough to request – words have to be certain enough to put the recipient under a legally (not morally) binding obligation. o Sufficient: must, will, shall, hold for. o Insufficient: wish, hope, expect, desire. o E.g. ‘in full confidence that she would do what was right as to the disposal thereof between my children’: was a request/moral obligation: Re Adams o ‘on trust for what she thinks right for my children’ would be valid. Do not need to use the word trust. Use of the word “trustee” is not conclusive – neither is the lack of its use. Intention may be inferred from words or conduct: e.g. bank account is “as much yours as it is mine” was a trust: Paul v Constance. However, if word “trust” is used, this is generally sufficient (magical): o Relevant intention is objective not subjective: Byrnes v Kendle.
am bound to say that she has not designated the subject as to which she expresses her confidence; and I am therefore of opinion that there is no trust created .”
E.g. “I leave each of my properties to my trustees on trust for my children” Certainty of intention and objects. But, no certainty of subject matter as don’t know what house will go to what beneficiary. If testator is dead, trust fails. If testator is living, advise him to fix the trust: give trustee choice of which property is held for whom, give eldest choice, consolidate into one trust. Would be expedient to mention the interest accrued, but this will not mean failure.
(3) Certainty of Objects (Beneficiaries) It must be clear for whom the trustee is holding the trust property. What happens if the settlor refers to a class of people? A trust can either be fixed or discretionary: o If it is FIXED, you need to know precisely who the beneficiaries are (since their share will vary depending on the number of beneficiaries) ( IRC v Broadway Cottages ) E.g. “For Darren,” or a list, “for Darren, Chris, Steve…” o If it is DISCRETIONARY, you do not need to know precisely all of the beneficiaries provided the criterion for membership of the class is clear. You must be able to determine whether ‘any given postulant’ could be a beneficiary of the trust ( McPhail v Doulton ). E.g. Criterion = “my children”. Where more vague – e.g. “my friends” – certainty is not established.
3.4 Constitution of a Trust
Trust property must be vested in trustees. Where the trustee and settlor are the same person – i.e. in a self-declaration of trust, this is already satisfied. Where the trustee and the settlor are not the same person. o It is not enough for the three certainties to be satisfied – a trust is not created until the property becomes vested in the trustee. i.e. legal title must be transferred by the settlor to the trustee. o If the settlor has entered into a binding contract to transfer their house to hold on trust, the trustee has an equitable interest in the house from the time the contract is binding, and this is enough to constitute the trust ( Oughtred v Inland Revenue Commissioners ).
Formal requirements: A trust over land must be proved in writing by the creator of the trust: o RECALL: s23C(1)(b), Conveyancing Act. A trust over other forms of property does NOT need to be in writing.
3.5 Once a trust is created, what interest exists?
Proprietary or personal right? Does a beneficiary have a proprietary right that can be exercised against the world, or merely a personal right that can be exercised against the trustee? Roxborough v Rothmans per Gummow J: no simple answer, but “considerable skepticism respecting any all-embracing theory.” Current position: o The beneficiary’s rights under a trust comprise a chose in action, but the interest in the trust is comprised of a number of rights. o Some rights are personal, others are proprietary. Personal rights: Personal right to compel due administration of the trust. Property rights: Equitable rights in respect of the trust property: Baker v Archer Shee. This binds the trustee, and people who take legal title from the trustee. o However, note that if the legal title is transferred to someone who is not the beneficiary, and the bona fide transferee receives the trust assets for value (consideration) without notice of the trust, they are not encumbered by the beneficiary’s interest. o If this does not apply (e.g. fraud, no consideration, transferee has notice), then the property is encumbered by the beneficiary’s interest. Equitable rights to dividends of the trust. o Trustees have charge on trust for costs, charges and expenses.
(a) Equitable right to the property
This is the case generally cited for the proposition that the beneficiary under a trust has an interest in the trust property:
Baker v Archer-Shee [1927] Facts: Testmentary trust created for Lady Archer-Shee. The trust (trustee and trust assets) were located in the US. Direction in an American man’s will to trustees to hold income and profits of the testator’s estate to “the use of my said daughter” for her life (daughter had moved to England to marry some guy). She was entitled to income from the trust assets. The trustee collected income and paid it into a US bank account. Tax in the UK was assessed using income including amount of money in the US account.
Issue: Did Lady Archer-Shee have an immediate property right to the interest, or simply a personal right to be paid the equivalent of that income? Held: Per Lord Wrenbury – simply needed to construe the will. Had to work out what Lady A’s interest was: Either: (1) The trustee has a personal right to claim expenses, and the beneficiary (Lady A) has a personal right to claim all that is left (compel the trustees to give it to her) (2) The beneficiary (Lady A) has a property right to the assets themselves, i.e. to all the income, subject to the trustee’s personal right to claim expenses.
Only if she had a proprietary interest would it be taxable under the relevant legislation. Majority had the view that it was a proprietary interest, and therefore the daughter had to pay income tax. “Her right is not to a balance sum, but to the dividends subject to deductions.” This reading depends heavily on the TERMS of the trust – e.g. if it were a discretionary trust, there would be no property rights by the potential beneficiaries to the trust assets, only a personal right to be considered. This is our starting point for saying that an interest under a trust is an interest in property – constitutes a chose in action. “Once a trust is established… the beneficiary has, in equity, a proprietary interest in the trust property, which proprietary interest will be enforceable in equity against any subsequent holder of the property… other than a purchaser for value of the legal interest without notice ( Westdeutsche Landesbank Girozentrale case)
(b) Personal Rights to Due Administration
A beneficiary has a right in equity to due administration of the trust, and the trustee has corresponding fiduciary obligations, e.g. to carry out the terms of the trust, to take care in the management of trust affairs, to administer trust affairs impartially, etc. In situations where the trustee can choose beneficiaries from a class (i.e. discretionary trusts), the beneficiaries only have an expectancy that they will be chosen to be a beneficiary. This is a very weak form of equitable interest. Recall the question in Baker: Beneficiary has a right to the income of the trust, but the trustees also have a right to reclaim their administration expenses. Either: o (i) The trustee has a personal right to reclaim expenses, and the beneficiary has a personal right to whatever is left of the income. Or, o (ii) The beneficiary has a property right to all of the income, albeit that the trustee has a personal right to reclaim expenses.
Byrnes v Kendle [2011] Facts: K and B were married. IN 1984, K purchased realty and was its sole registered proprietor. He declared a trust in favour of Byrnes over one undivided half interest in the property. Later, K and B moved out of the property and then separated. K leased the property for several years to his son, who paid only 2 weeks rent. No efforts made by K to collect the arrears. B later assigned her interest in the property to her son by a different marriage for $40k. B and her son sued K for breach of trust for failing to collect the rent. Issue: Did B have a personal right against K? Held: The wife’s equitable interest under the trust was sufficiently proprietary to be able to sell to her son. The equitable interest that she sold comprised a number of rights including a personal right against the trust (K) to compel due administration. K breached his fiduciary duty as trustee to obtain income by failing to collect rent – thus, K had to pay compensation to B in breach of his personal obligation.
3.6 Distinctions between Trusts & other relationships/dealings
( a) Distinction between Trust and Debt
account. Vitally important to the judge’s conclusion was that there was no segregation of the deposited monies from Farepak’s general account (as in Re Kayford). If Farepak could mix the customers’ money with its own money, then it could use it in running its business, this was inconsistent with the existence of a trust.
Daly v Sydney Stock Exchange (1986) Facts: Dr Daly had money he wanted to invest and sought the advice of some stockbrokers. The stockbrokers told him it was not a good time to invest, and instead advised him to give the money to them on deposit, with the stockbrokers paying interest in the meantime. The stockbrokers were in financial difficulty at the time, and did not reveal this to Dr Daly. Dr Daly gave the money to the stockbrokers on deposit, awaiting their advice when the market improved. The stockbrokers folded. Dr Daly sought to recover his money from a fidelity fund created under a statute. The statute required that Dr Daly could only recover funds if his money had been held on TRUST for him, and there had been a misapplication of those funds. Issue: Was the money held on trust, or was it just a personal debt? Held: There was no trust. There was a fiduciary relationship between the stockbrokers and Dr Daly, which the stockbrokers had breached by failing to reveal their financial situation. This breach would have allowed Dr Daly to get his money back by rescinding his contract, however, a trust would not be generated until such rescission. Dr Daly had not rescinded the contract – until he did so, there was a mere debt. “Dr Daly lent the money to Patrick Partners. As borrowers, Patrick Partners received the money on their own account, not on behalf of Dr Daly nor as trustees. They were Dr Daly's debtors. When the debt was assigned, Patrick Partners became Mrs Daly's debtors. A contract for the lending of money repayable on demand does not itself create a relationship of trustee and [beneficiary]”.
Just because someone owes money to you, doesn’t mean they hold your money on trust for you. However, the institutions of debt and trust CAN sometimes co-exist in the one transaction – this is known as a Quistclose trust: o “Where money is advanced by A to B, with the mutual intention that it should not become part of the assets of B, but should be used exclusively for a specific purpose, there will be implied (at least in the absence of an indication of contrary intention) a stipulation that, if the purpose fails, the money will be repaid, and the arrangement will give rise to a relationship of a fiduciary character, or trust.” o In such situations, it can be thought that the equitable interest remains with the lender, because the funds would be returned to the lender should the purpose of the loan not be satisfied. o See Quince v Varga below for an example of this exception.
Quince v Varga [2009] Facts: Q transferred M $500k to invest for her. M in fact spent the money on his family and friends (he was an undischarged bankrupt, with several convictions for armed robbery). Issue: Was the money held on trust by M, so that Q could recover the money? Or was it a debt? Held: There WAS a trust in this case. The loan was made on a specific condition (to invest in short term high interest loans). The trust was either an express trust, or a resulting trust that arose after the failure of the purpose of a loan (i.e. when it was not invested according to this condition). Where the lender makes it clear that their money is not to be at the free disposal of the borrower but should been used to make certain investments on the borrower’s behalf, a trust may arise The facts differ from Daly v Sydney Stock Exchange Ltd. While Mrs Quince, like Dr. Daly, had given her money to invest, she had only given it on the condition that it be invested in a specific way i.e. in secured loans. In Daly the stockbrokers had free reign – they owned the money and could invest it as they pleased, make money off it, and pay it back. Douglas J: “[T]he agreement that [the funds] be lent on security, attracting a particular rate of interest from which commission would be deducted by Mr McLaughlan, suggests that it was intended that the money remain in Ms Quince’s beneficial ownership giving her an equitable interest in that property. [...] The situation is different from the facts in Daly v Sydney Stock Exchange Ltd [...] This case is more akin to the facts in Twinsectra Ltd v Yardley where the money was held on a solicitor’s undertaking that made it clear that the lender’s money was not to be at the free disposal of the borrower but should have been used to acquire property on the borrower’s behalf.”
(b) Distinction/Relationship Between a Trust and a Contract
Six key ways that a trust differs from a contract:
Potential Overlap between trusts & contracts
Trusts and contracts are not mutually exclusive – they are different mechanisms, but can be put together in complex ways. o Recall Topic 1: Trust relationship may arise from a contract for sale of land, if there’s writing or part performance (e.g. Lysaght v Edwards ) – parties to contract become trustee and beneficiary.
o A trust may ALSO arise from a contract for the benefit of a third party – one party to the contract is the settlor, the other becomes the trustee, third party is a beneficiary.
Contracts for the benefit of third parties
Essence of contract = a mutual agreement between two parties, supported by consideration, creating personal rights between contracting parties and generally not for the benefit of a third party. However, contractual rights are a chose in action and therefore a form of property. The benefit of a contractual promise (as a CIA) may be able to be held on trust for someone else ( Trident, per Deane J) o (1) this is one way to get around non-assignability of CIAs. i.e. Even if the benefit of a contract is not assignable at law, the right can still be held on trust for someone else. o (2) can also get around the doctrine of privity – if a trust can be established, then the third party (beneficiary) can enforce the trust.
To establish that there is a trust: Consider the INTENTION of the promisor & promise (parties to the contract): o A trust may exist if the parties’ intention was that the “third party should himself be entitled to insist upon performance of the promise and receipt of the benefit, and if the trust is, in the circumstances, the appropriate legal mechanism for giving effecting to that intention.” o Whether there is such an intention is a question of construction of the contract. Must be construed in context E.g. Insurance policy – terms “manifest an unmistakable intention”
(i) Contracts for the Benefit of Third Parties, For Value
(Potential to get around the doctrine of privity, and enable third parties to enforce the contract, by arguing that there is a trust) A may have a contract with B that B will provide a benefit to C, but the contract remains between A and B. In that case, A is the only person who can enforce the contract against B. If A sues B for breach, A may only get nominal damages, since B has not personally suffered any loss. B can potentially get around this if specific performance is available. Does C have any recourse? o If a trust is constituted – then yes. C can then compel the trustee to bring an action for specific performance, or can bring an action themselves.
[Recall from Contracts Course] Coulls v Bagot’s Executor & Trustee Co Ltd (1967) Facts: Mr Coulls entered a contract to allow O’Neil Constructions to quarry part of his land. In exchange, O’Neil was to pay royalties to Mr Coulls and his wife as joint tenants. Following Mr Coulls’ death, his executor (Bagots) sought to determine whether O’Neil was required to pay the royalties to the estate or to Mrs Coulls. Issue: Could Mr Coulls’ executor force O’Neil to pay Mrs Coulls? Held: Where A promises B for a consideration supplied by B to pay C then B may obtain specific performance of A’s promise, at least where the nature of the consideration given would have allowed the debtor to have obtained specific performance. That C provided no consideration is irrelevant. Differing opinions in the court about how to construe the agreement: Barwick CJ: This was not a promise by A with B for consideration supplied by B to pay C. Rather, it was a promise by A made to B AND C for consideration to pay B and C. McTiernan, Taylor and Owen JJ: Agreement was between Mr Coulls and the company only, whereby Coulls authorized the company to pay his wife. This mandate ended when Coulls died.
