A Critique of Lord Millett's Account of the Quistclose Trust: Challenging the Orthodoxy, Study Guides, Projects, Research of Law

Download A Critique of Lord Millett's Account of the Quistclose Trust: Challenging the Orthodoxy and more Study Guides, Projects, Research Law in PDF only on Docsity! OXFORD UNIVERSITY! UNDERGRADUATE LAW JOURNAL ! ! ! 56! 'Once More Unto the Breach': The Quistclose Trus t Revis ited Nathalie Koh Jia En* I . In troduction he Quistclose trust is a legal quagmire, described as both ‘the single most important application of equitable principles in commercial life’ and ‘an aberrant creation of common law’1. Despite recent efforts,2 the area remains besieged with conceptual uncertainty. It sits unsatisfactorily amongst orthodox equitable principles—not (yet) declared sui generis, and repeatedly recast into different theoretical moulds. This article seeks to add to the current discourse by examining Lord Millett’s prevailing account of the Quistclose trust in Twinsectra v Yardley.3 Two flaws will be pointed out: first, that it has unwarrantedly lowered the threshold for finding an intention to retain the beneficial interest; and secondly, that it also fails to coherently or accurately locate the beneficial interest in the resulting trust. Additionally, the model suggested by Robert Chambers will be supported as a more tenable alternative to the flawed orthodoxy of Twinsectra. II . Lord M il l e tt's Account Lord Millett’s account, which claims to have ‘eliminated the impossible [analyses]’ and uncovered the ‘truth’4, represents the theory of Quistclose trusts currently applied by the courts.5 It classifies the Quistclose trust as a single resulting trust in the lender’s favour—the lender transfers only the legal title to the borrower, while retaining the entirety of the beneficial interest. Specifically, a resulting trust arises as the beneficial interest ‘remains throughout in the lender, subject only to the borrower’s power or duty to apply the money in accordance with the lender’s instructions’.6 This is contrasted to Lord Wilberforce’s theory of the Quistclose trust in the eponymous case, where he identifies a primary express trust for the creditors (the third party to which the purpose is to be applied) and a secondary resulting trust for the lender.7 !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! * The Queen’s College, University of Oxford. 1 Lord Millett, ‘Foreword’ in William Swadling (ed), The Quistclose Trust: Critical Essays (Bloomsbury Publishing 2004) vii. 2 cf William Swadling, The Quistlcose Trust: Critical Essays (Bloomsbury Publishing 2004); Thomas and Hudson, The Law of Trusts (1st edn, OUP 2004). 3 Twinsectra v Yardley [2002] UKHL 12, [2002] 2 AC 164. 4 ibid 192. 5 Applied in, inter alia, Templeton Insurance Ltd v Pennington Solicitors [2006] EWHC 865; Cooper v PRG Powerhouse [2008] EWHC 498; Eleftheriou v Costi [2013] EWHC 2168. 6 Twinsectra (n 4) 193. 7 Quistclose Investments v Barclays Bank plc [1970] AC 567 (HL). T OXFORD UNIVERSITY! UNDERGRADUATE LAW JOURNAL ! ! ! 57! On this basis, Lord Millett suggests that the Quistclose trust is ‘an entirely orthodox example of the kind of default trust known as resulting trust’.8 He likens it to a ‘retention of title’ (or Rompala) clause in a contract, which ‘enables the borrower to have recourse to the lender’s money without entrenching on the lender’s property rights more than necessary to enable the purpose to be achieved’.9 III . Que stions l e ft una nswe re d a nd d i fficul tie s p ose d Lord Millett’s account is flawed in two areas: first, it unwisely and unwarrantedly lowers the threshold for inferring an intention to retain the beneficial interest; and secondly, it fails to comprehensibly identify the location of the beneficial interest. ( A) In fe r r ing in te ntion from p urp ose : Lowe r ing the s ta nd a rd A primary criticism of Lord Millett’s theory is that it results in courts artificially imputing to the lenders an intention to retain the beneficial interest. According to Lord Millett’s theory, the Quistclose trust responds to a negative intention (i.e. the absence of an intention to pass the entire beneficial interest to the borrower) as opposed to a positive intention to retain the beneficial interest.10 In Twinsectra, Lord Millett states that ‘a resulting trust arises whenever there is a transfer of property in circumstances in which the transferor did not intend to benefit the recipient. In other words, it responds to the absence of an intention on the part of the transferor to pass the entire beneficial interest, not to a positive intention to retain it’ [emphasis added].11 This dictum is eventually narrowed down to the following test: ‘the question in every case is whether the parties intended that the money be at the free disposal of the recipient’, based on the construction of the relevant documents and the whole circumstances of the transaction.12 If the money is not at the free disposal of the recipient, then the lender did not intend to benefit him, and a resulting trust in the lender’s favour is established. By equating lack of ‘free disposal’ with the intention to create a trust, Lord Millett’s Quistclose trust applies an excessively lenient approach to the finding of an intention to retain a beneficial interest—it does so in the absence of words or actions that indicate a positive intention to do so; a simple stated purpose for the money is sufficient. Penner argues that by equating the money not being at B’s free disposal to the lack of beneficial ownership vested in B, courts are able to infer a Quistclose trust whenever a condition is attached to a loan or a purpose is stated, despite parties having no positive intention to retain the beneficial interest. 13 This is quite accurate. There is a meaningful difference between the lender’s act of transferring to the borrower the legal title to the money (for a purpose) and the lender having an intention to retain the beneficial interest. Swadling gives the example of ordering a new computer and making it a term !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 8 Twinsectra (n 4) 192. 9 ibid 187. 10 The lender could only be said to have the positive intention that the beneficial interest should pass to the third party recipient, only if it was dealt with in accordance with its stated purpose. 11 Twinsectra (n 4) 190. 12 ibid 185. 13 Penner, ‘Lord Millett’s Analysis’ in Swadling (n 3) 61. OXFORD UNIVERSITY! UNDERGRADUATE LAW JOURNAL ! ! ! 60! This is tenuous because the ‘lack of a free disposal’ element is liable to be interpreted in other, competing ways: it is indeterminate. For example, Chambers’ account can be equally inferable from a lack of ‘free disposal’. His account, briefly stated, highlights that the borrower has full beneficial ownership of the money (in addition to the legal title), and the lender only has an equitable right to prevent the use of the fund for any other purpose. This could be an equally valid inference from the borrower’s lack of ‘free disposal’—especially in cases where a large part of the beneficial interest (e.g. the right to revoke, the power to apply it to the purpose) passes onto the borrower, leaving the lender with, practically speaking, only the right to demand the return of the monies on failure of purpose. In conclusion, the act in Paul is equivalent to a declaration of trust; it directly refers to the location of the beneficial interest and could thus amount to a conveyance of said proprietary interest. It is untenable to argue that statements concerning purpose, such as ‘the loan is made for the acquisition of property’22 or ‘the loan is provided to ensure the continuance of advertising campaigns’23 amount to a similar declaration of trust. ( i i ) E xa min ing R e Ka y ford : a fur the r lowe r ing of the thr e shold ? Secondly, Kayford (admittedly) presents an initial challenge to the argument made by Penner above. It affirmed that ‘a sender may create a trust by using appropriate words when he sends the money… or the company may do it by taking suitable steps on or before receiving the money’.24 There, the payment into a separate bank account was considered a circumstance that created a trust;25 this is more similar to the factual matrix of the Quistclose trust than Paul. In both Kayford and Quistclose trust cases, the only available evidence courts had to infer intention from were certain indicative circumstances, such as the payment of monies into a segregated bank account, rather than positive statements. It is argued that even when the courts infer intention from indicative circumstances, the threshold for success has been significantly lowered. This occurs with the gradual (and excessive) expansion of the range of indicative circumstances that courts can infer an intention to retain beneficial interest from. While the segregation of funds might be a reasonable circumstance to draw such an inference from, this has been relaxed in recent cases, such that any loan (into segregated bank accounts, or not) that stipulates a purpose can give rise to a Quistclose trust. Unlike the segregation of funds, this is not a reasonable basis for inferring an intention to retain the beneficial interest. In both older and more recent cases, the requirement of a segregation of funds has been gradually weakened, and currently occupies a nugatory position. Two cases demonstrate this: first, in Quistclose itself, Quistclose Investments did not impose any duty of segregation over the !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 22 As in Twinsectra (n 4). 23 As in Carreras Rothman Ltd v Freeman Mathews Treasure Ltd, [1985] Ch 207. 24 Re Kayford (n 18) 282. 25 It is noted that the segregation of funds is an important, but not necessary, proof of intention. This was acknowledged in Re Kayford (n 18) 282.: ‘Payment into a separate bank account is a useful (though by no means conclusive) indication of an intention to create a trust, but of course there is nothing to prevent the company from binding itself by a trust even if there are no effective banking arrangements.’ OXFORD UNIVERSITY! UNDERGRADUATE LAW JOURNAL ! ! ! 61! money. The bank was advised to keep the funds in a separate account but this stipulation did not come from Quistclose Investments (and hence could not be indicative of their intention to create a trust). Interestingly, Lord Millett in Twinsectra never retrospectively addressed the issue of why the requirement to segregate funds reveals the intention of Quistclose Investments rather than that of the bank, given that the stipulation came from the latter. This position was even more relaxed in the second case of Cooper v Powerhouse PRG.26 In Cooper, the fact that the money when paid would be ‘mingled with the company’s funds’27 did not detract from the finding of a Quistclose trust; Evans-Lombe J explicitly states that Lord Millett rejected the requirement of the monies being kept in a segregated fund.28 Importantly, the intention to create a trust in Cooper was based on a stipulation of purpose alone. Evan-Lombes J states that ‘the money paid was only to be used for the purposes of paying off his loan’ and on that basis inferred an intention. Cooper may be symptomatic of a wider judicial trend in Quistclose trust cases of discarding requirements previously thought to be strictly held and instead relying solely on the stipulation of a purpose to infer an intention. This is startling when one notes very recent Quistclose cases such as Mundy v Brown,29 where Cooper’s disposal of the segregation of monies requirement is affirmed and applied, and cases such as Bellis v Challinor 30 and Bieber v Teathers31 in which again, the court bases the inference of intention solely on whether a purpose has been attached to the loan, and not whether there has been a segregation of monies. This demonstrates the broadness of the test for intention to retain a beneficial interest in Twinsectra and the problems associated with it—as observed, courts face no semantic or analytic difficulty with varying and lowering the threshold upon which an inference of intention to retain a beneficial interest is found. They give no reason for this finding other than the fact that the attachment of a purpose prevented the monies from being at the ‘free disposal’ of the borrower.32 Furthermore, the broadening of the test is normatively undesirable, as it disposes of a more concrete, orthodox test of certainty of intention to retain the beneficial interest and create a trust. While it is true that Kayford does not strictly enforce the segregation of bank funds as a requirement that courts can infer an intention to retain a benefit from, the converse situation— inferring it solely on the basis of an attached purpose—is too weak a requirement. It would increase the likelihood of courts inferring a resulting trust in favour of the lender in situations where it is far from likely that the true bargain was that the lender could demand the monies be returned to him where the purpose, in the widest sense of the word, fails (eg if it were applied to paying employees their salary instead of advertising). In such a case, this would amount to what Penner has described as ‘a grossly unwarranted rearrangement by the court of the true bargain’.33 !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 26 Cooper v Powerhouse PRG [2008] EWHC 498. Note, however, that the trust in Cooper might also be classified as a purpose trust, depending on how one views it. 27 ibid 598. 28 ibid 596. 29 Mundy v Brown [2011] EWHC 377. 30 Bellis v Challinor [2015] EWCA Civ 59. 31 Bieber v Teathers [2012] EWCA Civ 1466. 32 Twinsectra (n 4) 185. 33 Penner (n 14). OXFORD UNIVERSITY! UNDERGRADUATE LAW JOURNAL ! ! ! 62! ( C) T he myste r ious loca tion of the be ne ficia l in te r e s t Perhaps the most interesting conceptual conundrum posed by the Quistclose trust lies in the inability of courts to accurately pinpoint the location of the beneficial interest. Lord Millett, as explained, states that the beneficial interest is located throughout in the lender. This is untenable—in some cases, imputing a beneficial interest to the lender would be akin to legal fiction. Two arguments will be made to this effect: that Lord Millett’s account effectively ‘hollows out’ the content of the lender’s beneficial interest; and that it fails to accommodate instances in which the borrower obtains factual benefit from the fund. ( i ) ‘Hol lowing out’ the conte nt of the l e nde r ’s be ne ficia l in te r e s t In insisting that the beneficial interest in the trust remains with the lender throughout, Lord Millett’s account potentially empties the term ‘beneficial interest’ of meaningful content. The lender is artificially affixed with the label of ‘beneficial owner’, while not being able to exercise majority of the concomitant rights. This occurs on both a wide and narrow interpretation of the content of beneficial interest. First, the lender cannot be said to have the beneficial interest if we employ a wide interpretation of the term as referring to the full range of rights associated with beneficial ownership. Examples of such are expressed in cases such as Re Bowes34 (beneficiaries allowed to call for the funds reserved for the purpose of maintaining trees, to alleviate their financial problems), Re Nelson35 (the beneficial interest ‘cannot be fettered by prescribing a mode of enjoyment’),36 and Baker v Archer-Shee37 (beneficiary could direct the trustees how to deal with the trust property). Payne summarises the argument quite succinctly: ‘If the lender takes full beneficial ownership of the property from the start then Quistclose ought to be able to wield all the rights normally attached to full beneficial ownership… such as the right to compel Rolls Razor to use the money for the payment of the dividend, or revoke the loan and requirement immediate repayment of the money, to prevent the payment of the dividend by Rolls Razor to the shareholders while the purpose remains capable of fulfillment or to require the borrower to use the money for some other purpose’38 However, it can be validly argued that the full range of rights constituting a beneficial interest, as outlined above, are only enjoyed by beneficiaries in an express trust. Instead, a more narrow interpretation of beneficial interest must be considered in a resulting trust. This makes sense in the context of a Quistclose trust, where the lender does not possess an indefeasible !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 34 Re Bowes [1896] 1 Ch 507. 35 Re Nelson [1928] Ch 920. 36 ibid 921. 37 Baker v Archer-Shee [1927] AC 844 (HL). 38 Payne, ‘Quistclose and Resulting Trusts’ in P Birks and F Rose (eds.), Restitution and Equity: Resulting Trusts and Equitable Compensation (London, 2000), 162. OXFORD UNIVERSITY! UNDERGRADUATE LAW JOURNAL ! ! ! 65! borrower’s misuse of the fund) ‘continues in full force, becoming merged into the greater equitable ownership under the resulting trust’.51 The validity of this approach will now be considered: first, it is agreed that this account provides a less contrived explanation of the location of the beneficial interest than Lord Millett’s account. Chambers supports the argument in Part C(i) and (ii) that the problem with orthodox accounts of the Quistclose trust is that they have been overly insistent on a ‘search for the location of the equitable interest as a key to understanding the Quistclose trust’.52 His account neatly evades the criticism levied against Lord Millett’s account; the beneficial interest is passed onto the borrower subject to the equitable right of the lender, and is not wholly retained by lender. Secondly, it is noted that Chambers’ account, by virtue of the lender not retaining a beneficial interest, does not implore the same questions regarding the lowering of the threshold for inferring an intention to retain a beneficial interest as discussed in Part B. Instead, it (correctly) fails to impute any intention to the lender to retain beneficial interest; it imputes only an intention to the lender to have an equitable right to enforce the application of the monies to the purpose. Therefore, and to some extent, Chambers’ account solves some of the problems encountered by Lord Millett’s account. It is, however, far from perfect. It is noted that the exact nature of the lender’s right is unclear—it is described as both contractual and equitable. This might lead to several competing interpretations of Chambers’ account and add to the conceptual disarray posed by the Quistclose trust. In addition, and more significantly, Chambers’ 1997 account has received both judicial53 and academic criticism.54 Such criticism is extensive and varied and, due to exigencies of space, will not be fully outlined here. One such critique, for example, dismisses Chambers’ theory as ‘it provides no solution to cases of non-contractual payment’.55 This is fully explained by Ho and Smart (cited by Lord Millett in Twinsectra as having successfully countered Chambers’ thesis).56 Other significant counter-arguments given by Lord Millett in Twinsectra include the fact that Chambers’ account, being partly based on contract, cannot be reconciled with the availability of remedies against third parties.57 Lastly, although it generally acts as a better compass for the true location of the beneficial interest, Chambers’ account still leaves us with several conceptual gaps. It does not explain situations in which third parties are capable of enforcing the trust (e.g. Carreras and Re Northern Developments Holdings Ltd, as discussed above). In such a case, Chambers’ account fails in equal measure to Lord Millett’s—it fails to account for the beneficial interest viz. the right to enforce the trust is present in the third party instead of the borrower. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 51 ibid 85. 52 ibid 76. 53 Twinsectra (n 4) 190. 54 Ho and Smart, ‘Re-interpreting the Quistclose Trust: A Critique of Chambers’ Analysis’ (2001) 21(2) OJLS 267. 55 Twinsectra (n 4) 191. 56 Ho and Smart (n 55). 57 Twinsectra (n 4) 191. OXFORD UNIVERSITY! UNDERGRADUATE LAW JOURNAL ! ! ! 66! In conclusion, although Chambers’ account as given in 1997 fails, it can be said to have ‘failed better’58 than Lord Millett’s – though not completely accurate, it still provides a better compass for locating the beneficial interest, and inferring an intention to retain the beneficial interest. ( i i ) Cha mbe r s ’ a ccount in 2004: wor th r e cons ide r ing? Chambers’ account, as given in 2004, will now be considered: essentially, Chambers posits that the Quistclose trust is ‘not a particular relationship, but a range of possible relationships’.59 There are two possible versions of resulting trust that can arise, depending on the nature of the restriction that produces it; both mirror (more accurately than on Lord Millett’s account) the location of the beneficial interest. Both arise because the lender’s restriction on the borrower’s use of money prevents the borrower from obtaining the full beneficial interest. In the first type of resulting trust, the restriction wholly eliminates the benefit of having the money, and B will hold it entirely on resulting trust for the lender. In the second type of resulting trust, the restriction merely reduces that benefit, and the beneficial ownership is shared by both the lender and the borrower. Chambers envisages various ‘sharing arrangements’, such as ‘if the permitted uses of the money are for B’s benefit and B has the right to use it for these purposes, B must have at least some beneficial interest in the money’ and ‘if the restriction on B’s use is minor, then B should be regarded as its sole beneficial ownership, subject only to A’s right to restrain its misuse’60 (i.e. his account of the trust in 1997). First, the account clearly benefits from flexibility and comprehensiveness in accommodating varying locations of the beneficial interest under the structural ‘umbrella’ of a Quistclose trust. This solves a majority of the problems discussed above: the type of resulting trust (and if relevant, the particular ‘sharing arrangement’) that the transaction is classified as is entirely commensurate with the restrictions imposed on each of them. This belies the theory’s sensitivity to ‘what parties want… the relationship they have chosen’, and its intention ‘to give effect to their intentions if they are known’.61 Ultimately, it acknowledges the problem with Lord Millett’s thesis in attempting to constrict what is in fact a range of relationships within a single theory. Secondly, that this effect is achieved through introducing the idea of ‘sharing arrangements’ for beneficial interest is both justified and normatively valuable – the beneficial interest can, and should, be described as shared. Chambers argues this succinctly: ‘If the arrangement is primarily for B’s benefit or for the mutual benefit of A and B and the permitted use of the money will benefit B, then B probably has a beneficial interest in the money. If A’s right to restrain B’s misuse of the money is regarded as a beneficial interest, then beneficial ownership is !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 58 Samuel Beckett, Worstward Ho (Grove Pr 1984). Here, I kindly draw on the description used by Dr Ciara Kennefick in a university tutorial (Oxford, 30 February 2016). 59 Chambers (n 46) 118. 60 ibid 120. 61 ibid 119. OXFORD UNIVERSITY! UNDERGRADUATE LAW JOURNAL ! ! ! 67! shared’.62 Usefully, he cites Isaacs J’s dicta in Hoystead v Federal Commission of Taxation as support for the proposition that beneficial ownership can be shared or split: a beneficiary’s ‘interest in the trust estate at any given moment is measured by the relief which equity is then prepared to give him, that is, by the rights which the due execution of the trusts as framed by the creator of the trusts will at that moment give him’.63 Academic support for the notion that beneficial interest can be shared can be derived elsewhere, and it is widely accepted that it represents the normatively desirable way to conceptualise equitable interest.64 However, there may be some room to criticize his account as failing (though, as this article argues, ‘failing better’ than Lord Millett’s account) as it is methodologically flawed. Designating the Quistclose trust as a range of relationships rather than a specific one risks emptying the trust of any specific definition or conceptual boundaries, making it difficult to tell where the concept ends and begins and hindering legal certainty. This is apparent as the effect of Chambers’ account is to create two types of resulting trusts with three possible locations of beneficial interest (i.e. in the lender, shared, or in the borrower). Chambers’ account may need some fine-tuning in terms of providing us with essential features of the trust, instead of simply accommodating most features under its varying schema of ‘resulting trust’ type relationships. V . Conclus ion This article highlights the sluggishness of Lord Millett’s theory in responding to changing factual matrixes. Specifically, the near-disposal of any serious requirements for inferring an intention to retain the beneficial interest, and the inability to cope with pinpointing varying locations of beneficial interest make his thesis untenable. Instead, it would be useful to consider, as Chambers does, the Quistclose trust as a range of relationships. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 62 ibid 99. 63 Hoystead v Federal Commission of Taxation (1920) 27 CLR 400, 425. 64 cf Robert Nolan, ‘Equitable Property’ (2006) LQR 232, 233: ‘…very different quanta of benefit from trust assets can be allocated by a settlor to different beneficiaries, very largely as he pleases, while allowing each such beneficiary the security of a proprietary claim on the trust assets, a claim which survives a trustee's insolvency’; Patrick Parkinson, ‘Reconceptualising the Express Trust’ 2002 CLJ 657, 663: ‘Consequently, it is incorrect to think of trusts always in terms of legal and equitable ownership. Rather, the core idea of the private express trust lies in the notion of equitable obligations in relation to property, which in most cases will also give to beneficiaries commensurate property rights in equity.’