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‘Estoppels between trustees, their beneficiaries and others’ – Article by Justin Holmes

Marcus Flavin, Josh Lewison and I recently appeared in English v Keats [2018] EWHC 673 (Ch), a case which raised interesting questions about the extent to which an estoppel which arose between the trustees of the trust and some of the beneficiaries could affect the rights of other beneficiaries or of third parties. It also raised – from what had appeared to be its final resting place – the doctrine that equity will intervene to correct defective execution of a power.

What had happened was this. Alan and June Thunder had each created three discretionary settlements. The discretionary beneficiaries under each settlement were the same, and included their three children and remoter issue. There was a power in the trustees to appoint the trust fund to any of the discretionary beneficiaries. In default of any exercise of that power, the trustees were at the end of the trust period to hold the trust fund absolutely for one of the three children – a different child was to become entitled under each of the three trusts created by each settlor. In practice, Mr and Mrs Thunder considered that each settlement was primarily for the child named as the default beneficiary, and from the start all of the income from each trust fund was paid to the default beneficiary under that trust. In 1999 Mr and Mrs Thunder were advised that changes to the taxation of discretionary trusts would mean that it would be desirable to create interests in possession in favour of the default beneficiaries in each trust, and deeds of appointment were drawn up under which life interests in favour of the default beneficiaries in each trust were to be created. Unfortunately, although the settlors were also trustees, they were omitted from the deeds of appointment, and consequently the deeds of appointment were only executed by three out of the required four trustees. In respect of Mr Thunder’s settlements the mistake was picked up and corrected by a supplemental deed, but Mrs Thunder died before the mistake in respect of her settlements was noticed. Since 1999 the trustees and the three default beneficiaries had all acted on the basis that they had life interests in the trusts, and had declared the trust income as their own and had paid tax on it to HMRC.

The three default beneficiaries issued proceedings asking for the Court’s assistance. Initially, the case was put as a claim to rectification of the ineffective deeds of appointment. The difficulty standing in the way of this claim was that rectification is available to ensure that a document says what the parties to it intended it to say, and it would be a considerable extension of the law of rectification to extend it to cover circumstances where the document being rectified had not in fact been executed by a necessary party. Marley v Rawlings [2015] AC 129 is not authority that this can be done: in that case each of two testators had signed wills, but they had signed each other’s. The House of Lords was able to rectify each will by taking the contents from one and adding it to the signature of the other. In the event, rectification was not relied on at the trial.

The second, and eventually successful, argument put forward by Marcus Flavin for the default beneficiaries was that this is a case under which the Court can, in accordance with the doctrine that equity may intervene to correct defective execution of a power, simply treat a power as having been properly executed when there is some defect in the manner in which the power has been exercised. The doctrine dates back at least as far as Tollet v Tollet (1728) 2 Peere Williams 489. So far as any of the counsel in the case could discover, it had never previously been used to correct a purported exercise of a power which had not involved the trustee signing something. Previous cases had involved the correction of defects such as exercising a power by will when it was supposed to be exercised by deed, or by signed writing rather than by deed. In Breadner v Granville Grossman [2001] Ch 523 Park J had resisted attempts to persuade him to extend the doctrine to allow a deed to take effect even though it had been exercised a day after the power had expired, saying that the doctrine “was falling into disuse”, was invented when family settlements were drafted very differently, and should not be extended. HHJ Hacon, sitting as a deputy judge of the High Court, did not however feel that this prevented use of the doctrine in this case. He considered that there had been a sufficient attempt by Mrs Thunder to exercise the power – she had, as trustee of Mr Thunder’s trusts, signed the counterparts of the deeds of appointment in respect of his three settlements – and that the other prerequisites for use of the doctrine were satisfied. These were as set out in the Jersey case of Bas Trust Corporation v MF, Re Shinorvic [2012] JRC 081, and they were that: (a) the trustees intended to exercise the power; (b) the trustees attempted to exercise the power; (c) the defect was merely formal; (d) the attempted exercise of the power would have been proper; and (e) that the trustees had intended by the exercise of the power to benefit a person who was a qualifying beneficiary (in this case, the three default beneficiaries were, as children of the settlors, persons to whom Mr and Mrs Thunder had a natural or moral obligation to provide).

Possibly the most interesting part of the case, however, related to the argument put forward by the default beneficiaries that they had the benefit of a proprietary estoppel which should be satisfied by recognising that they had all along been the life tenants of the trusts. They asserted that the trustees had represented to them that they were the life tenants, or alternatively that they and the trustees had all proceeded on a common assumption that they were the life tenants. They said that they had relied on this representation and/or common assumption in paying tax on their receipts from the trust fund, and therefore had acted to their detriment.

Acting for the fourth defendant – representing all of the other beneficiaries of the trust funds – I questioned both whether there had in fact been any detrimental reliance, and also whether – even if an estoppel did exist between the trustees and the default beneficiaries – such an estoppel could affect the other beneficiaries of the trust, or other third parties, who had played no part in the representation or the common assumption.

The question of whether or not the default beneficiaries had in fact relied to their detriment was one of fact, and the difficulty for them was that they had received more in net income from the settlements since 1999 than they would have done if everyone had proceeded on the basis that the trusts were still fully discretionary. On the evidence filed, the beneficiaries were not able to show that they had in fact acted to their detriment overall.

The second question, whether an estoppel between one or some of the beneficiaries and the trustees should bind the rest of the beneficiaries, or other third parties, is a particularly thorny one. It has previously been the subject of judicial consideration in various cases, and particularly often in pension cases. Some of the cases seem to say that other beneficiaries in these circumstances can’t be bound by an estoppel arising between the trustee and one or some of the beneficiaries; some of them seem to say that they can. The principal authority saying that they can’t is Redrow plc v Pedley [2002] PLR 339 per Sir Andrew Morrit V-C at paras. 59-64; that authority has been followed or approved in numerous cases since, and most recently in Briggs v Gleeds [2014] EWHC 1178 (Ch) per Newey J.

On the other hand, in Catchpole v Trustees of the Alitalia Pension Scheme [2010] EWHC 1089 (Ch) a member of the scheme had asked the trustees whether her partner, to whom she was not married, would receive a widower’s pension on her death. The trustees assured her, incorrectly, that he would. After her death he brought proceedings on the basis of estoppel claiming a widower’s pension, and his claim was upheld. In Fielden v Christie-Miller [2015] EWHC 87 a beneficiary under a trust claimed that the trustees had purported to grant him an interest in a property which formed part of the trust fund and that he had relied upon their representation. The trustees objected that they could not, by way of estoppel, fetter their discretion. Sir William Blackburne disagreed, at least in respect of Fielden, pointing out that the law in respect of proprietary estoppel ought to be the same regardless of whether the true owners of the property in question are trustees.

HHJ Hacon distinguished Catchpole and Fielden on the basis that in both of those cases the question was whether the trustees had purported to act to bind not only themselves but the trust and all subsequent trustees and all of the beneficiaries. In neither case had the effect on third parties – such as HMRC – been a factor. He added that the problems identified by Morritt V-C in Redrow had not been addressed in either Catchpole or Fielden.

HHJ Hacon thus seemed to accept that trustees may, by making representations or joining in shared assumptions, estop themselves on behalf of the trust generally, and that such estoppels might confer proprietary rights on claimants to the detriment of other beneficiaries of the trust even though those beneficiaries had had no part in the making of the representation or the sharing of the common assumption. Whether or not the Court would, however, in fact confer proprietary rights in satisfaction of such an estoppel would be a matter for its discretion in the light of the extent of the detriment and the effect on the innocent beneficiaries (and of the potential effect on strangers to the trust such as the Revenue).

Article by Justin Holmes.