McPhail v Doulton (Re Baden (No. 1)) [1971] AC 424

Key Point

  • This case laid down the ‘is or is not’ test for the conceptual certainty of objects in discretionary trusts
  • This distinguished between the different forms of uncertainty in relation to objects, which include conceptual uncertainty, ascertainability and administrative unworkability

Facts

  • Settlor set up a fund for the benefit of employees of his company, their relatives and dependants
  • The trustees ‘shall apply the net income of the fund…in such amounts, at such times, and subject to such conditions as they think fit’

Held (House of Lords)

  • The deed created a discretionary trust and not a power
  • The test for certainty of objects for discretionary trusts is the ‘is or is not’ test and it is met in the current case

Lord Wilberforce

IRC v Broadway Cottages overruled

  • In IRC v Broadway Cottages the principle is stated to be that a trust cannot be valid unless it can be executed by the court and that the court can only execute it by ordering an equal distribution in which every beneficiary shares
  • The test of validity is whether the trust can be executed by the court, it does not follow that execution is impossible unless there can be equal division
  • Equal division is the last thing the settlor ever intended, the maxim ‘equality is equity’ may only apply where there is a limited class
  • The test for validity of discretionary trusts ought to be similar to the test for powers adopted in re Gulbenkian: whether it can be determined if any individual is inside or outside of a class)

Powers vs discretionary trust

  • The application of the same test does not mean assimilation of powers with discretionary trust
  • Powers
    • Trustees may be under a fiduciary duty to consider whether or in what way they should exercise their power
    • But the court will not normally compel its exercise unless the trustees exceed their powers or exercised it capriciously
  • Discretionary trust
    • If the trustees do not exercise it, the court will act in a manner best calculated to give effect to the settlor’s intentions
    • It may do so by appointing new trustees, directing representatives of the beneficiaries to prepare a distribution scheme or directing the trustees

Types of uncertainty

  1. Conceptual certainty
    • Linguistic and semantic uncertainty if unresolved renders the gift void
  2. Ascertainability
    • Uncertainty of existence or whereabouts of the members of the class can be resolved by the court
  3. Administrative workability
    • The definition of beneficiaries must not be so wide as not to form anything like a class so that the trust is administratively unworkable or cannot be executed
    • A trust for all the residents of Greater London is void
    • However, ‘relatives’ of a living person would not be too wide

Current case

  • The deed was a trust and not a power due to the mandatory ‘shall’
  • The test for certainty of objects is met: the trust was conceptually certainty, and not administratively unworkable

Commentary

  • The ‘is or is not’ test is a test of conceptual certainty
  • There is considerable debate on what Lord Wilberforce meant by administrative unworkability, but there are two main interpretations
  • Emery thinks that it simply means the same thing as capricious, i.e. there is no discernible criteria according to which the task of selection can be approached and thus the duty is too nebulous to be enforceable and impossible for the court to control
  • In West Yorkshire it was held to mean that the class of objects is too wide (number too large), but it is difficult to see why the width of the class should be an issue if the trustees had a criteria to give effect to the settlor’s intention since trustees of a discretionary trust are not required to survey the entire range of objects