This essay will analyse the three tests established in Re Baden's Deed Trust (No. 2) (Re Baden) and give an opinion on which one of the tests represents the best way forward for trustees when deciding the proper approach to take in a discretionary trust.
McPhail v Daulton marked a new approach towards establishing certainty of objects in a discretionary trust. Previously, the courts had applied the test in IRC v Broadway Cottages Trust, which required that the trustees were able to draw a complete list of beneficiaries. Instead, in McPhail, the court applied the test of individual ascertainability in Re Gulbenkian. This is a test of practical certainty, which makes it possible to say with sufficient certainty of any given person whether he belongs to the class stated in the trust or not, in order to validate the trust.
This has become established as the test to uphold a discretionary trust in cases where the class of beneficiaries is large, as was the case in McPhail, where the trust stated that the beneficiaries were 'officers and employees or ex-officers and ex-employers of the company and any relatives or dependents of such persons'. Therefore, what is needed is not complete conceptual certainty, merely enough certainty in the language in order to effect the distribution of the trust funds to identifiable beneficiaries. This, in turn, made it unnecessary to be able to draw a complete list of the beneficiaries in the class, and it also made it unnecessary to establish the whereabouts and continued existence of the members of the class.
However, despite the fact that the court made the interpretation of the trust objects less strict by removing the Broadway Cottages test, the Gulbenkian test was not without problems. It is an 'is or is not' within the class test, which can make the trust fail even if a large majority of postulants were certain, and considered to be within the class, but one percent of those postulants were not in the class. The effect was that a perfectly good trust could become void. The Court sought to remedy this difficulty in Re Baden. Further, the Court set to deal with the linguistic problems in McPhail in respect of the words 'relatives' and dependants'. They created issues of conceptual certainty when trying to determine the objects of the trust. The Court was asked whether, in particular, a gift to relatives passed the new individual ascertainability test for certainty.
There were three different judgments in Re Baden, each one demonstrating a different approach towards the use of the certainty of object test. However, Klink has argued that it is difficult to determine what the distinctions in each judgment are. Furthermore, Matthews has argued that there was nothing revolutionary in the approach taken by the court in McPhail but simply that the decision in Broadway Cottages was incorrect. He regards the distinction between class ascertainability and individual ascertainability as ill-conceived in respect of the validity of a trust because they are concepts that tend to converge. He argues that it is unnecessary to draw up a full list of beneficiaries in a fixed trust, let alone in a discretionary trust, therefore that was never an issue. This has prompted McKay to state that the only test is the McPhail test, although it was reformulated in Re Baden.
Arguably, an analysis of the three tests shows important diffences, in particular because there is a different degree of strictness in the application of the tests. The approach taken by Sachs LJ and based on evidential certainty, places the burden of proof of the postulants rather than on the trustees, to demonstrate the validity of the trust. He stated that when the class of postulants is conceptually certain, it becomes a question of fact whether a postulant can prove to be within the class, and this happens on enquiry from the postulant. If the postulant is unable to prove that he falls within the class, then he does not. However, Hudson argues that this test preserves, rather than resolves the literal meaning of the 'is or is not' test in Gulbenkian. A further problem with Sachs LJ's approach is that he considered that the word 'relatives' was conceptually certain if interpreted as 'descendants form a common ancestor', following the argument postulated by Brightman J in McPhail. Despite admitting that the definition was wide and it could become administratively unworkable, Sachs LJ stated that in practice, family trees do not go too far back.
On the other hand, Stamp LJ gave clear guidelines in respect of the meaning of the words 'relatives', which was problematic in McPhail. He stated that 'relatives' referred to the 'statutory next of kin', rather than 'descendants of a common ancestor', which he considered to be too wide as a concept. He also reaffirmed that the principles in Broadway Cottages should not be used, because doing so would avoid the trust.
As such, he argued, it was not necessary to create a full list of beneficiaries, but instead, the trustees should make a survey that showed the range of objects or postulants, and this would allow the trustees to carry out their fiduciary duties, regardless of whether the survey was complete or whether it would not be possible to draw a complete list from it. Thus, he rejected the complete ascertainment test in Broadway Cottages in favour of a discretionary trust that could be valid if distributed amongst postulants who were next of kin. This would define the class of beneficiaries and remove the difficulty of determining if a particular postulant was 'in or out' of the class. His approach, therefore, removed the problem in the Gulbenkian test by concentrating on the facts in a specific manner.
Stamp LJ considered that, in respect of individual ascertainability, the approach in McPhail was tantamount to holding that the trust is valid if there are individuals, even if it is only one, of whom it can be said with certainty that he is a member of the class. He was concerned that this was the test rejected in Gubenkian for mere powers.
There has been criticism in respect of Lord Wilberforce's decision in McPhail to extend the rule applying to mere powers because this decision has failed to preserve the distinction between trusts and powers. He achieved this fusion by changing the original test and replacing it with a test looking into whether it could be said that a particular individual was or was not within the specified class, therefore, it was not necessary to ascertain all the beneficiaries in a class from the beginning. However, the difficulty is that by assimilating two separate tests, the obligation of the trustee to exercise the power under the trust has been affected. This has the effect that an imperative trust can be satisfied in the same way as a non-imperative power.
Although this fusion widens the scope of discretionary trust that can be validated, it creates confusion because the object of a mere power does not have proprietary rights of his own, those rights are only activated when the trustee exercises his discretion under the trust by deciding to make a payment to the object. On the other hand, an object under a discretionary trust has proprietary rights, which allow him to compel the trustee to exercise the power. Arguably, this is an issue that was left unresolved by all of the three judgments in Re Baden.
By comparison with Stamp LJ's approach, Sachs LJ's approach is less contradicting of the test in McPhail, and he preserved its literal force. However, the analysis made by Sachs LJ continues to ensure that it is possible to validate more discretionary trusts by reversing the burden of proof from the trustees to the postulants. Nevertheless, Hudson argues that this approach would not have application in cases where the trust provisions are vague, and where it is difficult to ascertain what they mean. Importantly though, Sachs LJ clarified the meaning of the word 'dependant' as being one of historical meaning, which had been mentioned in trust deeds and statutes over the years. He further stated that determining whether a person is a dependant is purely evidential, and it is based on fact rather tan law. Therefore, there is no conceptual uncertainty in respect of the word, and based on evidence, the trustees would be able to establish who is and who is not a dependant.
Megaw LJ agreed with Sachs LJ in respect of the word 'dependants', further stating that if a trust were to be considered void because it contained such word, few trusts would survive. His approach on evidential certainty, however, differed from Sachs LJ's. He stated that it was not necessary to ascertain every member of the class for a discretionary trust to be valid. As such, it was unnecessary to show that a particular postulant was a member of the class or not a member of the class. Instead, he suggested that it was necessary to show that 'a substantial number' of postulants were members of the class and this would validate the trust despite not being able to prove or disprove whether other postulants belonged to the class. The problem with this analysis is that the term 'a substantial number' is vague, and Megaw LJ stated that establishing it was a matter of common sense and a matter of degree in respect of a particular trust. However, he stated, it would not be sufficient to show that one person was in the class. Arguably, this approach could lead to legal uncertainty.
Megaw LJ's analysis appears to be a return to the dicta in Re Allen, in which a trust can be validated if there is certainty about a substantial number of objects. This approach only requires that there is a distinct core of beneficiaries of whom it can be said with certainty that they satisfied the terms of the power, despite the uncertainty regarding other beneficiaries. Arguably, this is a good approach because it removes the problems associated with the 'is or is not' test in Gulbenkian, and it focuses on the existence of an appreciable number of people falling within the class in order to validate the trust by satisfying the class of objects.
It could be argued that the approach taken by Stamp LJ is more strict and therefore its application would achieve more consistency. By comparison, the approach of Sachs LJ, which is based on conceptual certainty, in fact, creates conceptual uncertainty because it is attempting to formulate a class in order to validate the trust. This leaves the problem that there are not sufficient legal parameters to define the class or to make an identification of specific examples of uncertainty. As such, it appears to be based on a moral obligation.
The approach taken by Megaw LJ also creates legal uncertainty because although he argues that it is not sufficient to show that one person is within the trust in order to validate it, instead he states that what is necessary is to show that a 'sufficient number' of beneficiaries are members of the class and therefore fall within the trust. However, the parameters for ascertaining what constitutes a 'sufficient number' is left to the common sense of the trustees. This is too vague, and it creates legal uncertainty.
Arguably, although some of the linguistic issues were resolved, for instance in respect of the word 'dependants', there was dissent between the approach taken by Megaw LJ and Sachs LJ in respect of the word 'relatives'. They took the approach stated in McPhail that it should be interpreted as descendants from a common ancestor', which is too wide. This issue appeared better approached by Stamp LJ as 'next of kin', which narrows the scope of the interpretation, and makes it easier to validate the trust. Re Baden resolved the problems of the Gulbenkian test, by making it less strict, and this has made it possible for the courts to validate more discretionary trusts, not just in England but also in Australia, as demonstrated by cases such as West v Weston, and Horan v James, where the New South Wales Court of Appeal emphasised that a complete list of beneficiaries as stated in Broadway Cottages is no longer necessary.
The powers in the McPhail trust were fiduciary powers. Under clause (9) it was stated that 'the trustees shall apply the net income of the fund at their absolute discretion'. By implication, the use of the word 'shall' indicates a mandatory duty, and according to the decision in the case, it would be complied with by examining the field according to class and category by way of a survey, but without the requirement to compile a full list, which is the approach also taken by Stamp LJ in Re Baden. Arguably, this test appears to give more certainty than the test of conceptual certainty argued by Sachs LJ, or the 'substantial number' test advocated bt Megaw LJ.
It remains important to uphold the principle stated in Re Hay ST, to prevent a holder of a fiduciary power under a discretionary trust to act in an unaccountable manner, by requiring that the survey conducted is assiduous in terms of the range of objects. That way, it is not possible for a holder of a fiduciary power to act as if his power is merely personal. This view has been emphasised by Hayton and also by Emery and Hudson. Accordingly, it can be argued that the stricter judgment by Stamp LJ in Re Baden should be followed, because it represents a more legally certain approach. It is important to exert control of the holder of fiduciary power, because they are subject to what Hudson calls 'negative justiciability'. That is to say, that if a holder of a fiduciary power in a discretionary trust acts in an improper manner, his power would be deemed by the court to be null and void, otherwise trustees with fiduciary powers under a trust which is granting those powers would be allowed to act in a way which would resemble personal powers, which are not justiciable.
In conclusion, although all three judgments in Re Baden were important, arguably, the test that represents the best way forward for trustees when deciding the proper approach to take in a discretionary trust is the test established by Stamp LJ. Not only does this test correct the problems of the test in Gulbenkian, but it also creates a way to achieve legal certainty by the use of a survey of the class of beneficiaries, without the need for the more strict and unsuitable test in Broadway Cottages. The demand of an assiduous survey as a means to establish a class can also control the way in which the trustees are using their fiduciary powers. Further, Stamp LJ's test clarified the meaning of 'relatives' and made it more legally certain by defining them as 'next of kin', narrowing the definition of 'descendants from a common ancestor' contained both in McPhail and approved by both, Sachs LJ and Megaw LJ.