'Re-imagining the Express Trust': The 2024 Cambridge Freshfields Lecture (audio)

I. Introduction
1. Thank you, Sinéad, for the kind introduction. I am also very grateful to Lionel,
the CPLC, colleagues and students in Cambridge for the warm welcome. I’d
also like to thank Freshfields for their generous sponsorship. It’s an honour to
speak with all of you this evening.
2. Cambridge’s legacy in the study of trusts is impressive. As we all know, Prof.
Maitland’s remark that trust law is equity’s ‘most important invention’ has been
widely quoted. More than a century on, Cambridge scholars continue to be
influential, although they now paint a less rosy picture of express trusts. For
example, Lionel has famously coined the derogatory term ‘massively
discretionary trusts’. Sarah has written about agents behaving badly. Graham,
and of late Sinéad as well, have analysed the problems of illusory trusts. So,
how then, has the express trust, once the poster child of English law, fallen
from grace?
3. In this lecture, I hope to restore the good name of the express trust by reimagining
this legal institution. I will present a theory of express trusts that
identifies their greatest value to society. The theory is collaboratively
developed with Matthew Harding, who deserves much of the credit.
4. My lecture will be divided into four main parts. After outlining a theory of
express trusts as distinctly enabling stewardship commitment, I will consider
how trust law doctrines might be re-envisioned through the lens of stewardship
commitment. As you might expect, the third part will demonstrate how the
theory establishes justificatory limits on the use of the trust, addressing issues
with sham, illusory, and massively discretionary trusts. Finally, the last part will
discuss how trusts can surpass other private law forms, including companies, in
supporting impact investing by enterprises with a social mission.
5. Let me start with the theory. Unless we are clear about the foundation of
express trusts, we lack the tools necessary to tackle the pertinent doctrinal
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issues in practice. Currently, there are two prevailing views about the value of
express trusts in society. Hanoch Dagan and Irit Samet claim that trusts
increase the options essential for an autonomous life by allowing private
individuals to create bespoke property arrangements. Whilst that claim is
undoubtedly true, it does not capture the unique contribution of trusts. After all,
contract law also permits bespoke contractual arrangements.
6. In contrast, James Penner thinks that express trusts, far from forming a part of
autonomy-enhancing life choices, serve as a mere ‘normative technology’ for
structuring gifts of property. However, when compared to other legal devices
such as contracts, trusts often offer additional benefits. The Quistclose trust,
for example, affords creditors enhanced protection beyond contract law should
the debtor become insolvent. Hence, it is worthwhile to assess the values that
trust technology promotes, and not merely to acknowledge the fact that it is a
kind of legal technology.
7. I hope I have convinced you that the role of express trusts goes beyond the
technical or the mere amplification of choices. Instead, I argue that the value of
express trusts lies in enabling/ and supporting a distinctive modality of
collaborative relationship, one in which individuals make an enduring
commitment to pursue values and projects that they care about. I call this
stewardship commitment.
8. In this modality of commitment, the property manager selflessly pursues the
objectives of stewardship (think of Alfred Pennyworth the loyal butler in
Batman!) Crucially, no single party involved in a trust stewardship has full
control over the property; all parties must adhere to stewardship objectives.
This arrangement renders stewardship objectives particularly resistant to
erosion. Insofar as express trusts support such an arrangement, thereby
bolstering commitment to cherished goals and projects, their value to society
should be beyond dispute.
9. So, what then does stewardship commitment entail? Its essence can be
captured by three attributes: altruistic, dynamic, and unwavering dedication.
10. Consider altruistic dedication first. The dominant ethos in the trustee’s
undertaking is altruism, as trustees manage rights transferred to them for the
benefit of others. This promise of altruism and self-denial aims to achieve
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much higher ideals than may be realised through self-interested, contractual
promises.
11. Trust stewardship is also inherently dynamic. Trustees are typically granted
discretionary powers to exercise their personal judgment. Such powers allow
them to address evolving circumstances concerning trust administration.
12. You might say that fiduciary relationships are also altruistic and dynamic. That
is true, which brings me to the third and last attribute, unwavering dedication,
by which I mean a pledge that is resistant to erosion by the parties involved.
13. Trust stewardship not only binds the trustee. Settlors relinquish their rights
over property and commit them to the trust. Once the trust is established, they
cannot continue to control the property. Beneficiaries’ enjoyment of those
rights is subject to the terms of the trust; they, too, lack control over the
property. As a result, no party – trustee, beneficiary, or settlor – enjoys
unfettered power over the trust property, and all parties must abide by the trust
objectives. In contrast, fiduciary relationships are terminable at the will of the
principal.
14. Again, you might say that companies also involve stewardship, and that neither
trust nor corporate objectives are unwavering, as both may be terminated
prematurely. For instance, shareholders of a sufficient majority can vote as
they please to change a private company’s objects, to participate in a take-over
bid, or to wind up the company. Private express trusts can be terminated
against the settlor’s intention under the rule in Saunders v Vautier. Bare trusts
are terminable at the will of the single absolute beneficiary.
15. I agree that many trusts and companies do not exhibit unwavering dedication.
In such instances, the choice between a trust and a company rests on such
practical considerations as flexibility, tax, costs, and regulatory requirements.
16. However, trust law still goes further than company law in preventing premature
termination, and therefore offers a vital conceptual advantage for protecting the
continuity of objectives. For instance, company law does allow a founder to
entrench certain articles by imposing additional conditions beyond those
required for a special resolution. However, the entrenchment itself may be
amended by the unanimous agreement of all members of the company. By
contrast, whilst a trust may be terminated by unanimous consent under the rule
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in Saunders v Vautier, the rule can be – and often is – easily averted by diligent
drafting.
17. Put simply, although trusts and companies both serve to separate management
from ownership, only trusts have the additional capacity to separate ownership
from control.
18. Moreover, it should be stressed that I am not suggesting that many or all trusts
involve unwavering dedication. Rather, my argument is that express trusts
possess a unique ability to support stewardship commitments that are altruistic,
dynamic, and unwavering.
II. Re-imagining the trust
19. We now have a picture of stewardship commitment. We can then re-imagine
trust doctrines from this perspective, which changes the way we understand,
teach, and develop trust law. Although such an endeavour encompasses many
facets of trust principles, I will be able to discuss only four aspects this evening.
II(1) Duties & remedies
20. I will start with the most obvious. To fortify the trust’s altruistic undertaking,
which not only relieves beneficiaries of the burden of property management but
also exposes them to potential abuse of power by the trustee, numerous trust
duties and remedies go beyond those available in contract law. Using the term
‘duty’ loosely, a trustee is subject to irreducible core duties to provide trust
information, to account, to act honestly, loyally, and in good faith, and to ensure
due administration.
21. Personal remedies against trustees uniquely adopt a claimant-take-all
approach that effectively turns them into a guarantor of the trust fund. For
example, claimants are permitted to treat unauthorised disbursements resulting
in a loss/ as having never been made, and those generating profits as having
been made on behalf of the trust.
22. Importantly, as remedies against trustees would be toothless in the face of third
parties, equity builds a protective wall against third parties. It allows proprietary
claims upon tracing, and personal claims of knowing receipt and dishonest
assistance against third parties. These duties and liabilities are typically
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explained by commentators as rules for addressing the agency problems of
conflict of interest and information asymmetry in trusts.
II(2) Equity’s supervisory jurisdiction
23. However, the agency problem perspective does not adequately address the
second crucial aspect of trust law: equity’s supervisory jurisdiction. It is
inevitable in ongoing stewardship persisting over time that trust terms fail to
anticipate unforeseen circumstances. Accordingly, trustees can seek
directions or ‘blessing’ for specific actions from the court. They can even
surrender their discretion to the court, which may in turn exercise discretion. In
extreme cases, the court can approve a proposed variation for the benefit of
beneficiaries who are unable to give consent themselves. None of these
situations necessarily involves agency problems.
24. Focusing on trust law as a means to address agency issues might lead
scholars to overlook the supervisory jurisdiction. For example, it receives no
mention in Professor Robert Sitkoff’s influential article on the agency cost
theory of trusts. Many trust teachers, myself included, often move swiftly on to
breaches and remedies after outlining the duties of trustees. This oversight is
unfortunate, but can be made good once we appreciate trusts as a governance
regime that supports dynamic stewardship commitments.
II(3) Standing
25. The stewardship theory also illuminates a third aspect of trust law, namely
standing for enforcing trusts, which has provoked considerable scholarly
discourse. Such discourse stems from ambiguity in the beneficiary principle
laid down in Morice v Bishop of Durham, in which Sir William Grant observed:
Every [non-charitable] trust must have a definite object. There must be
somebody, in whose favour the Court can decree performance.
Unfortunately, his Lordship did not specify who counted as ‘somebody’, thus
permitting two interpretations.
26. The narrower interpretation suggests that because trust duties relate to the
benefits of the trust property, only those beneficiaries with the correlative
entitlements to trust benefits can enforce those duties.
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27. On the broader interpretation, because the essence of the beneficiary principle
is to facilitate judicial oversight of trusts, standing should extend to discretionary
objects with potential entitlements, as they can assist the court’s oversight.
28. The widely used language, that beneficiaries have an ‘equitable interest’ in the
trust property, seems to support the narrower interpretation. Despite the
strong critique of Professors Ben McFarlane and Robert Stevens, this language
persists. In the recent Supreme Court decision in Byers v Saudi National Bank,
Lord Burrows saw ‘no real difficulties with continuing to use the orthodox
language’ of a ‘continuing equitable interest’.
29. Well, in my view, the language risks perpetuating the assumption about the
necessity of an equitable proprietary interest for the enforcement of trusts.
There are many authorities contradicting that assumption, and I have benefitted
considerably from discussions with Prof. Charles Mitchell in this respect.
30. First, it is well established that trustees, including co-trustees and successor
trustees, have standing to sue for a breach of trust, even if it was one
committed by themselves. However, trustees clearly neither have the right nor
the hope to receive beneficial entitlement.
31. Second, legal authorities, mainly in Australia but also in England and Wales,
recognise the standing of the residuary legatees of unadministered estates,
discretionary beneficiaries and objects of fiduciary powers before an
appointment in their favour. It does not matter that these parties have no
entitlement to trust property until discretion has been exercised in their favour.
32. The impetus for English judges to extend standing to discretionary objects
comes from the Privy Council decision of Schmidt v Rosewood Trust Ltd in
relation to disclosure of trust information. In this decision, Lord Walker rejected
any ‘bright dividing line’ based on the nature of the claimant’s right to beneficial
entitlement.
33. In Lewis v Tamplin, Master Matthews, in obiter, endorsed Schmidt and
recognised discretionary objects’ standing to invoke equitable tracing. He said
[39]:
No one can doubt that even a discretionary object of the trust … would
have standing to sue the third party for the return of the asset to the trust
fund.
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He added [41]:
The whole direction of travel is in equating the position of the
discretionary object to that of the fixed interest beneficiary, and not the
other way round.
34. This position was recently affirmed in Serious Fraud Office v Litigation Capital
Ltd, where Mr Justice Foxton, who is present with us tonight, has outlined the
claims for which discretionary objects have standing. These include claims:
- to require the trustee to administer the assets in accordance with
the terms of the trust,
- to seek reconstitution of the trust fund from the trustee, and
- to recover misapplied assets from third-party recipients.
35. Third, actions concerning charitable trusts may be instituted not only by the
Attorney General but also, pursuant to s115 of the Charities Act, by ‘any person
interested in the charity’.
36. How then do we reconcile these contrary authorities with the narrower
interpretation? One approach, which still hangs on to the requirement of a
proprietary right, has been to argue that discretionary objects have rights of a
sufficiently proprietary nature to warrant standing. However, this view simply
stretches the concept of property and begs the question of what proprietary
right suffices for standing.
37. An alternative approach, proposed by Mohammud Hafeez-Baig and Jordan
English, concedes that discretionary objects merely have personal rights. Yet
they are allowed to initiate derivative proceedings against third parties under
the special circumstance of the trustee being obliged to take legal action but
failing to do so.
38. However, there is no need to stretch the notion of property or appeal to this
exceptional basis if, through the lens of protecting stewardship commitment, we
appreciate that the court's inherent jurisdiction over trusts is not confined to the
paradigm of enforcing bipartite rights and duties.
39. Let us revisit Morice v Bishop of Durham, but this time consider a memorable
statement made by Lord Eldon. His Lordship said:
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As it is a maxim, that the execution of a trust shall be under the controul
[sic] of the court …; so that the administration of it can be reviewed by
the court.
40. Although Lord Eldon’s words are most often associated with the beneficiary
principle, their fundamental importance is in acknowledging that the court will
control the trust and ensure its due administration.
41. What this means is that the court will control the trustee in the use of their rights
over trust assets by granting equitable relief. Such relief need not be limited to
objects with beneficial entitlement. Those with a hope to benefit under the
terms of the trust also have a legitimate interest in protecting the trust fund from
which they may benefit. They, too, should have standing.
42. We need not be concerned about opening floodgates, as equity’s administrative
jurisdiction operates differently from common law. First, as Viscount Radcliffe
observed in Commissioner of Stamp Duty v Livingston, any claim by a
residuary legatee ‘can only result in the lost property being restored to the
estate for use in the due course of administration’. The same point was made
in relation to discretionary objects in Maguire v Makaronis, where the High
Court of Australia said that there will not be any payment of a specific sum to
the claimants for their sole use and benefit.
43. Second, as in Schmidt, in determining the relief, the court always has the last
word. It has discretion to consider the strength of the objects’ claim, the
competing interests of other objects, and the general interest of the trust.
44. Bearing these considerations in mind, the key question in determining standing
is what liability is being enforced, and whether the claimant has the power (or
right) to enforce the liability in question.
45. For example, fixed-interest beneficiaries, who have entitlements to specific trust
property or a share of the trust property, have not only the power to require the
trustee to account for the administration of the trust estate, but also the right to
call for the transfer of property.
46. Although discretionary objects cannot call for any trust property transfer, they
should still have the power to enforce the limits placed on the trustee’s power to
deal with the property, and thus recover the wrongfully depleted trust fund. Let
me explain.
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47. Imagine the trustee as akin to Santa Claus bearing a large present in his sack
and standing at the crossroads of a principal thoroughfare that diverges into
lesser roads with residences abutting them. Although he is supposed to look
after the present, it falls to him to decide which of these residences, if any, to
deliver it to. Thus, the children in each residence have only a hope of receiving
the present. If Santa destroys the present, then the children are wrongly
stripped of even that glimmer of hope, as there is no gift to be dispensed.
48. Even though the children cannot ask Santa to give them the present, should
they not be allowed to ask him to make good on what is in the sack? I think
they should. Discretionary objects are in the same position as the children in
this example. The point is that, despite lacking any entitlement to trust
property, they should still have the power to invoke the court’s jurisdiction to
protect the property to which they might become entitled.
49. By contrast, we should exclude standing for those who may benefit from the
execution of a trust but who are not designed by the settlor to benefit in
accordance to the trust’s terms. As Lord Cottenham observed in Shaw v
Lawless, a gift intended for a son’s education at a specific school does not
grant standing to the headmaster, who derives an advantage from the gift. The
gift was ‘made for the benefit not of the master but of the scholar’.
50. Similarly, in Haslemere Estates Ltd v Bake, Sir Robert Megarry interpreted the
statutory test of ‘persons interested in a charity’ to refer specifically to those
who brought actions to ensure the due administration of the charity.1 He
excluded standing for the lessees-of land owned by a charity, as they would
merely be pursuing their own commercial interest. Another explanation is that
the lessees are not designed to benefit from the charity.
51. Whilst discretionary objects have standing because they are intended by the
settlor to benefit, trustees have standing because they are intended to bear the
responsibility to protect the trust property. Just as they have a duty to ‘get in’
trust property, they also have a duty to get back misapplied property.
52. Notably, the trustee’s standing demonstrates that trust enforcement is not
solely about identifying the party benefitting under the terms of the trust. What
1 Haslemere Estates Ltd v Baker (1982) 1 WLR 1109
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matters is whether the claimant has the power in relation to the liability in
question.
53. Thus far, I have explained standing based on the settlor’s design or intention.
The Attorney General represents the only exception wherein standing is rooted
elsewhere, namely the role of the Attorney General in safeguarding the public
interest served by charitable trusts.
III. Trust abuses
54. The third part of this lecture focuses on the next aspect of trust law illuminated
by the stewardship perspective, specifically abuses of the trust concept. Few
would argue that the value of a legal form is independent of its application,
similar to a crowbar remaining valuable as a tool even when used to cause
harm.
55. In tackling abuses of trusts, it is therefore crucial to distinguish between the
justificatory limits of express trusts, which are based on a minimum
engagement with the trust concept, and their external limits, which uphold
public policies that are extrinsic to the trust concept. The distinction helps us to
accurately diagnose the problems arising from the abuse of trusts, as well as to
prescribe the appropriate remedies.
56. For example, sham trusts are void because despite the parties’ ostensible
declaration of an intention to create a trust, they actually intend a different legal
arrangement. They do not genuinely engage a stewardship commitment.
57. In illusory trusts, such as those seen in Clayton v Clayton, Pugachev, and
Webb v Webb, the settlors purported to create a trust, which required them to
relinquish control to the trustee, but they also reserved such extensive powers
that they retained effective control over the trust property. In short, they wanted
to have their cake and eat it. This contradiction of intention nullified any
engagement of stewardship. As Sinéad said, the purported trusts failed owing
to a lack of certainty of intention.
58. Massively discretionary trusts present challenges in both justificatory and policy
terms. Their vices have been neatly demonstrated by Lionel. Such trusts grant
trustees extensive discretion to appoint or remove beneficiaries without having
to dispose of the whole trust estate, which means that there are only objects of
powers and a residuary beneficiary. Such arrangements help to conceal the
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true beneficiaries from themselves and trust creditors/ while allowing settlors to
maintain control over the property.
59. Dagan and Samet recently argued that the secrecy in these trusts allow settlors
to circumvent their tax responsibilities, which are important for redistributing
wealth and providing people with necessary conditions for autonomy.
Accordingly, such trusts undermine autonomy and contradict the rationale of
trusts. The authors urged the courts to invoke their supervisory jurisdiction over
trusts, directing trustees to appoint and ‘transform these ghost beneficiaries into
real ones’.
60. I have doubts about such a proposal. It is antithetical to equity’s supervisory
jurisdiction, which is designed to safeguard the interests of beneficiaries, to
mandate actions that would undermine those very interests. In any event, there
are more appropriate techniques in trust law to address the issues brought
about by these trusts.
61. In terms of justificatory limits, if the concealment of the beneficiary and
insufficient oversight of the trustee indicate a lack of intention to create a trust,
then the trust fails to engage the trust form and can be declared illusory.
62. Judges have of late exhibited greater willingness to declare trusts illusory, to lift
the trust veil, to interpret protectors’ power widely to enhance trustee
monitoring, and, as discussed a few minutes ago, to affirm the standing of
discretionary objects.
63. In terms of external policy limits relating to money-laundering or tax evasion,
there are plenty of legal rules at the international and domestic levels.
International standards set by the OECD and the Financial Action Task Force,
along with their blacklist systems, have pressured jurisdictions to enact relevant
laws. In the UK, for example, express trusts must make relevant disclosures
under the Trust Registration Service established in 2017 and the Register of
Overseas Entities regime established in 2022. These rules are more
appropriate than repurposing the supervisory jurisdiction to expose the identity
of beneficiaries.
IV. Non-charitable purpose trusts
64. I shall now turn to an assessment of non-charitable purpose trusts from the
perspective of stewardship commitment.
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65. These trusts may represent the next stage in the evolution of massively
discretionary trusts, as they do not even have a beneficiary to cause trouble.
They pose two challenges in justificatory and policy terms:
a. First, enforceability – would the lack of beneficiaries with personal stakes
in the trust violate the beneficiary principle?
b. Second, as a matter of policy, why should organs of the state be used to
enforce non-charitable, possibly idiosyncratic purposes?
66. In my view, these obstacles are formidable, but not insuperable. Taking the
policy concern first, not all non-charitable purposes are idiosyncratic, and some
may even be worth state support. In the realm of company law, the purposes
of community interest companies (or CICs) are a good case on point. CICs
combine a profit-making objective with a social mission, which need not be
charitable but must focus on benefiting the local community. Oversight of CICs
is provided by a dedicated regulatory body, signifying the government’s
willingness to use state resources to support these purposes. Stakeholders
may lodge complaints with the regulator, which may conduct investigation and
take regulatory action. In contrast, it is unclear whether trusts established for
the same purposes are valid.
67. I now turn to the concern of enforceability, which lies at the core of a
stewardship commitment. In theory, despite having no personal stake in the
trust fund, enforcers may be driven by professionalism or a desire to avoid
personal liability to do their job properly. However, in practice, such enforcers
are few and far between.
68. Moreover, the enforcement mechanisms in most non-charitable purpose trust
legislation are deficient. Consider the recent Trusts and Succession (Scotland)
Act, which grants standing to any ‘person with an interest’ in the trust’s purpose
without giving them any right to information, and makes it optional to appoint a
supervisor with information and enforcement rights.
69. Against this background, I believe the Stewardship Purpose Trust legislation
introduced in the US state of Oregon in 2019 represents a much better model
of non-charitable purpose trust legislation.
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70. It bears noting that the legislation was not designed as a tax haven product. It
represents a bona fide attempt by lawyers and academics to create a legal form
to assist social enterprises in safeguarding their founding social mission.
71. The legislation ensures accountability by providing three-way checks and
balances and separating control from economic interest. For example, a
stewardship purpose trust must appoint a stewardship committee of at least
three members to direct the trustee and at least one enforcer who has all the
powers of a beneficiary to enforce the trust, including to sue the trustee and the
stewardship committee.
72. All trust parties must adhere to their fiduciary duties and the terms of the trust,
and the trustee and stewardship committee must provide information about
trust administration to all other parties. None of the parties can receive any
distribution from the trust fund.
73. The stewardship purpose trust has now been adopted by numerous businesses
across the United States, with Patagonia, a prominent US-based clothing
brand, being its most notable example.
74. In 2022, Patagonia’s iconoclastic owner Yvon Chouinard transferred all of the
company’s voting stock into the trust, thereby placing control of the company
under the trust. Trust administration is guided by the stewardship committee
subject to the scrutiny of enforcers. The nonvoting stock was transferred to a
charitable organisation, which receives and uses all of the company’s profits to
support environmental causes. This arrangement protects the company’s
mission of fighting climate change from future shareholders who might not
share the same mission. As the owner has proudly stated, ‘Earth is now our
only shareholder.’
75. Undoubtedly, this legislation is still not fool proof, and it is possible that some
ingenious lawyers will attempt to exploit it. However, that possibility does not
detract from the point that carefully designed non-charitable purpose trust
legislation is indeed feasible. If such legislation also provides for regulatory
oversight such as that for CICs, it may well help to restore the good name of
the trust.
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V. Conclusion
76. Thus far, I have discussed the distinct role of the express trust in supporting
stewardship commitment and considered the doctrinal implications of that
perspective. One question remains, however, and I thank my colleague Peter
Chau for discussion on this point.
77. Even if express trusts are valuable, is it necessary? In other words, must an
adequate range of options for autonomous living necessarily include the
express trust?
78. I agree that an adequate range of options doesn’t require specific legal forms
such as the express trust. Civil law jurisdictions without trusts are doing fine.
However, focusing solely on specific private law forms overlooks the need for
private law to support an adequate range of social interactions in society.
79. This adequate range comprises core pillars to support various collaborative
relationships, even if the specific legal forms within those pillars are pathdependent
and influenced by the society’s history and culture.
80. For example, in a developed market economy, there should at least be:
- one core pillar for mutual, self-reliant agreements – think of
contracts,
- another for associative collaboration – think of partnerships and
companies, and
- a third for selfless stewardship commitments to apply property to
pursue goals over time.
81. In summary, stewardship law is necessary in a developed society, although it
does not necessarily have to take the form of trust law. It could be the Stiftung
in German Law or the fiducie in Italian Law.
82. What, then, is the unique value of the law of express trust? I believe it is to
provide an additional legal instrument for people to commit to values and
projects they care about, many of which extend beyond immediate self-interest.
For example, care and concern for family and friends, benevolence for society,
and environmental protection, to name but a few. Without legal fortification,
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these values and projects are vulnerable to changes of mind and conflicting
interests.
83. Contract law, agency law, and company law can support commitments to such
goals to some extent. However, trust law offers the most extensive fortification
seen in private law and has the ability to support the most enduring of
commitments. Think of the aspects of the trust governance regime discussed
this evening, such as its duties and remedies, the supervisory jurisdiction, and
the rules on standing to control the trustee in the use of their rights over trust
assets.
84. In short, express trusts’ greatest value to society is their ability to bolster
people’s enduring commitment to values and projects they care about.
Lusina Ho
23 April 2024