Can equity perfect an imperfect gift?

  Halliwell is in agreement that the case of Re Rose is a valid exception to the rules laid down in Milroy. She agrees that where the donor has done all that is necessary to transfer their title to the donee, the trust is valid. Hunter, however states that the decision in Re Rose is ‘questionable’ and that the decision should be ‘overruled’, he quotes Todd who suggests that the transfer in Re Rose was not a foregone conclusion, in that the donor had not done everything in his power to effect the share transfer-because the directors of the company had possessed a power to refuse to register the name of the transferee, which they could have done. It would seem that the decision in Re Rose is inconsistent with that of Re Fry where if the above analysis was used the cases would be analogous. An important point that must be noted is that on the facts of Re Rose, there was no evidence to suggest that Rose intended to make himself a trustee of the shares. In Richard v Delbridge it was stated that there must be express intention, which was clearly lacking here.  Sir George Jessel M.R. said in Richards v Delbridge that '...for a man to make himself a trustee there must be an expression of intention to become a trustee...' There was certainly no clear intention in Re Rose.  It appears that at best, the area must be described as 'muddled'!

  Ho Tham however states with regards to Jenkin LJ judgement in Re Rose that the decision gave a ‘relatively clear understanding’ to this area of law. Todd and Lowrie welcome the development of ‘increased flexibility’ which has occurred due to the decision in Re Rose. Garton appreciates the dilemma above but states that the rule in Re Rose should only operate to allow a transfer to take effect in equity before registration where ‘registration is a rubberstamping exercise’ in public limited companies. He goes on to say that that only in ‘exceptional circumstances’ directors may refuse to register a change in shareholder. He elaborates on this by stating that the rule in Re Rose should be limited in the case of share transfer to ‘those few companies where the directors have no discretion to refuse registration whatsoever’.  Garton seems to be trying to distinguish Re Rose from Re Fry to justify the reasoning of the decision. However this is not how the law stands at the moment and it remains active in its original form as demonstrated in Mascall v Mascall.  Even Garton's best attempts still led him to describe the issue as a 'significant problem' and argued that limits should be on place and this ability should only apply to '...those few companies where the directors have no discretion to refuse registration whatsoever.'

  It will come as a surprise to few that given the condemnation of the law by the Courts, the opportunity for modernisation was too good to refuse.  The case of Pennington v Waine appears to have developed a new maxim: “Although equity will not aid a volunteer, it will not strive officiously to defeat a gift”. This will be discussed in greater detail later, but the decision has attracted both support and criticism in equal measure.  Halliwell has described the current position as allowing the courts ‘unfettered discretion’ following a ‘dramatic change of heart’, a view which seems to be supported by Morris who describes the decision as ‘an alteration in the underlying principles’ where practitioners ‘may find it unrecognisable’. 

  This however, has been rebuffed by Garton who has reacted positively, labelling the decision a ‘step forward to resolving the disparity between the existing operation of the rule and the orthodox trust law theory’, arguing that it also allows the courts ‘...take the surrounding circumstances...into account’. This view is supported by Lowrie and Todd who when commenting on the decision in Re Fry, stated that the test should be similar to that in Richard v Delbridge where intention is found where the settlor deals with his property so ‘as to deprive himself of its beneficial ownership, and declare that he will hold it from that time forward on trust for the other person.’  However, although it must be said that in order for our legal system to be at its brilliant best, a creative element should never be discounted, an even more important basis of the law is its certainty, and it can be argued that Pennington eats away at this certainty. 

  The next major case in this area was T Choithram International SA v Pagarani. This case promoted the idea of good conscience and this new doctrine of unconscionability. In other words the court would hold a trust as constituted where it would be unfair not to. The Privy Council in this case held that the settlor had constituted the trust, and that the language and articulation of ‘gift’ by the donor in the context of the charitable foundation could only be interpreted as intending to create a trust. It would have been unconscionable for Mr Pagarani to recall the gift of the shares to the foundation.  

  In coming to a decision Lord Browne-Wilkinson identified a number of key facts which could only lead to the conclusion above. Firstly the foundation has no legal existence apart from the trust declared by the foundation trust deed, so any such property belonging to the foundation can only be held for it by the trustees of the foundation. Secondly, Lord Browne-Wilkinson explained there is no difference between the situation where a settlor declares himself sole trustee and where he declares himself trustee being one of a number of trustees. It did not matter that there was no formal transfer of the shares as long as they were vested in one of the trustees. He stated “although equity will not assist a volunteer, it will not strive officiously to defeat a gift”.  A point to note here would be that this is a surprising conclusion as the case of Bridge v Bridge established that a trust was not constituted where the trust property was transferred to on trustee, the donor, out of many. There is insufficient evidence that TCP intended himself to be a trustee.

  Halliwell is clearly not happy with decision in Choithram stating that the decision was ‘wrong’ and that we are left ‘in the realm of unfettered judicial discretion’. Rickett also criticises on a number of basis, first he states the case is really not novel. This is due to the fact a different conclusion is reached ‘on effective constitution of the trust because their Lordships construe the case as one of a successful declaration by TCP of himself as trustee, rather than as one of transfer to trustee’. He further states that there is something of a parallel here between ‘the doctrinal consequences of the lenient interpretation offered in this decision and of the lenient reasoning on transfer of property rights in equity employed by Re Rose’. Garton takes the view that the case should be viewed as a declaration of express trust, where there must be ‘certainty of intention on part of the settlor’. He also suggests that s.61 of the Trustee Act should be used ‘to relieve the transferor of any liabilities which arise by incidence of his trusteeship’. This is to avoid problems such as the transferor being liable of trusteeship if the transfer of shares if given effect via express trust. Hopkins states that the decision is correct on its facts and should be welcomed. He believes that the maxim should be adjusted to “equity will not assist a volunteer if, in doing so, it would repair the consequences of a would-be donor’s folly”. All these academics seem to correct in their own context, and careful attention must be given to all their views before disregarding them.

  Finally the case of Pennington v Waine, this called into question the maxim that equity will not perfect an imperfect gift and altered the common law set out in Re Rose. Here Mrs Crampton wished to transfer 400 shares to her nephew and also make him the director of the company. She consulted with a partner of the relevant company’s auditors and signed a transfer form. The form was kept on the company’s file and was never delivered to the company or her nephew. The partner told the nephew that nothing further was required from him. Subsequently Mrs Crampton executed a will, which did not include the 400 shares. The Court of Appeal held that it would have been unconscionable for Mrs Crampton to have recalled what was clearly intended as a gift. This decision has caused a widespread of academic debate.

  Halliwell believes that the decision has left the law in ‘disarray’; she believes that Lord Browne-Wilkinson dictum in Choithram was taken and applied out of context. She also states that the decision represents ‘unfettered judicial discretion’ and that this notion of unconscionability must be based on principled reasoning. Also she observes that the decision is ‘completely irreconcilable with previous authorities’. Doggett questions the justification of employing such a concept at all; she states that the factors that justified the finding of unconscionability did not cause any detriment to the done. Hunter is of the opinion Mrs Crampton had not done everything in her power to affect the transfer, therefore its ‘theoretical foundations are hardly strong’ and that the decision should have been the same as in Re Fry. In support of this he states why did Arden LJ not follow Professor Worthington view? After referring to it in his judgement. Morris is of the view that the decision adds a further limb to the original test laid down in Milroy. She believes now the question should be is the donor’s conscience affected? If not, does the gift meet either of the old Milroy tests? She states that under this test external events would make it unconscionable for the donor to resile the gift. They are all trying to state that the broad application of a test of unconscionability is far too dangerous a discretion to given to the courts and one which introduces much uncertainty into the area of law which strives to achieve certainty. 

  Garton takes the view that this notion of unconscionability has ‘the potential to develop into a flexible way of mitigating the harshness of the legal formalities’. He is in essence stating that decision was a fair one and that under normal circumstances the gift would have failed and that would have been unfair. He also suggests that Pennington should not be seen as introducing a new exception ‘...but rather it is an opportunity to recast Re Rose in a theoretically sound fashion by shifting the focus away from formalities and onto the conscience of the transferor.’ This view is not shared by Delany and Ryanwho finds it difficult to accept that this use of unconscionability is indeed ‘theoretically sound’. Ho Tham takes a different view when reviewing the decision of Pennington. He believes equity alone would be inadequate and contract law would help bridge the gap nicely. Harold’s equitable interest in the shares only arose upon his acceptance of the unilateral offer made by Pennington on Mrs Crampton’s behalf.  Therefore it can be viewed that Pennington’s communications to Harold may be viewed as a unilateral offer to complete the transfer of shares. He is also in support of Garton’s view in that giving a share might not be as difficult as it once was and this cannot be a bad thing.

  In conclusion we can see the decision in Pennington has left this area open to extensive debate. It is now clear that Turner's statement that the settlor must do 'everything' required must surely be classed as redundant. A widespread of literature has been analysed in this essay and I believe that Halliwell’s views are more preferred. She believes that the decisions in Choithramand Pennington are worrying and may prove problematic.  Ricketts has asked the question himself of 'when is a gift completed?' In some cases it is impossible to say exactly when the settlor intended the transfer to become effective.  It is also worth asking what relevance legal rules have at all in trust constitution.  The role of judicial discretion has also been questioned: '...the decisions of the Privy Council in Choithram and the Court of Appeal in Pennington illustrate just how generous the courts can be when there is a judicial desire that the transfer should succeed.’

  It is difficult to assess whether Pennington is here to stay.  Morris believes it will 'come to be regarded as an alteration in the underlying principle.' It certainly seems likely that the courts will continue to take account of unconscionability. Although the courts may, in the eyes of many, have come to a fair decision, the question must be asked whether there is a role in the law for unconscionability.  The problem here is that the law must evolve through established principles.  This was considered in Milroy when Knight LJ stated: '...I find myself, almost or altogether with regret, unable to agree with the decree as to the banks shares...' Instead of following legal principles, an established rule has been destroyed over a short period of time due to the courts lack of consistency.  

Bibliography

Cases

• Milroy v Lord (1862) 4 De GF & J. 264
• Re Fry [1946] 1 Ch. 312
• Rose v Inland Revenue Commissioner [1952] Ch. 499
• Richards v Delbridge (1874) LR 18 Eq 11
• Mascall v Mascall (1985) 50 P & CR 119
• Pennington v Waine [2002] 1 WLR 2075
• T Choithram International SA v Pagarani [2001] 1 WLR 1
• Bridge v Bridge (1852) 16 Beav. 315

Books

• M Haley and L McMurtry, Equity & Trusts (2nd edn, Sweet and Maxwell, London 2009)
• S Panesar, Exploring Equity and Trusts (Pearson Education Limited, Harlow 2010)
• P Todd and S Wilson, Textbook on Trusts (9th edn, OUP, Oxford 2009)
• G Watt, ‘Trusts and Equity’ (4th edn, OUP, Oxford 2010)
• P Todd and G Watt, ‘Cases and Materials on equity and trusts’ (6 edn, OUP, Oxford 2007)

Articles

• C Rickett, ‘Completely constituting an inter vivos trust: property rules? Conv. 2001, Nov/Dec, 515
• C Ho Tham, ‘Careless share giving’ Conv. 2006, Sept/Oct, 411
• J Morris, ‘Questions:when is an invalid gift a valid gift? When is an incompletely constituted trust a completely constituted trust? Answer: after the decisions in Choithram and Pennington P.C.B 2003,6, 393
• M Halliwell, ‘Perfecting imperfect gifts and trusts: have we reached the end of the Chancellor’s foot? Conv. 2003, May/Jun, 192
• J Hopkins, ‘Constitution of trusts- a novel’ C.L.J. 2001, 60(3), 483
• I Hunter, ‘Equity and trusts: the constitution of a trust’ Cov. L.J. 2002, 7(1), 43
• P Todd and S Lowrie, ‘Re Rose revisited’ CLJ 1998, 57(1), 46
• J Garton, ‘The role of the trust mechanism in the rule in Re Rose’ Conv. 2003, Sep/Oct, 364
• A Doggett, ‘Explaining Re Rose: the search goes on?’ CLJ 2003, 62(2),263
• H Delany and D Ryan, ‘Unconscionability: a unifying theme in equity’ Conv. 2008, 5, 401

Legislations

• Trustee Act 1925

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