Fraud Prevention? Dehors? Or What?: why secret trusts are enforced?

Fraud Prevention? Dehors? Or What?: why secret trusts are enforced? Abstract Two theories—the fraud theory and the dehors the will theory—are often cited to justify the enforcement of secret trusts. While these theories are undeniably popular, they nonetheless suffer from some critical problems. This article seeks to discuss the flaws of these two theories, and justify the enforcement of secret trusts with the conscience-estoppel theory, a theory that is built upon two established equity principles. Introduction Section 9 of the Wills Act 1837 (WA 1837) requires a valid will to be in writing, and signed by the testator him/herself and the two or more witnesses in presence. Therefore, prima facie, secret trusts, which fail to respect the formalities, should be void. However, since secret trusts have been enforced by judges from time to time, there must be reasons in doing so. In order to tackle this issue, numerous academics have tried to justify the enforcement of secret trusts with either of both the two theories—the fraud theory and the dehors the will theory (‘the dehors theory’). While these theories are undoubtedly popular, I argue that these two theories are incomprehensive and flawed. In this article, I will first discuss the fraud theory, and its several problems. Then, I will consider another popular theory—the dehors theory, and explain why this theory is logically flawed. Finally, I will explain why my theory—the conscience-estoppel theory—might serve as a better explanation. Meanwhile, I will also discuss the potential criticisms, and why those arguments do not stand. The two types of secret trusts Before delving into the core discussion, I shall first briefly illustrate the two types of secret trusts—fully secret trusts (FSTs) and half-secret trusts (HSTs). Under an FST, the testator, looks like he is making a gift,1 leaves property to a legatee in his will that complies with the rules of WA 1837, but the legatee understands that he is merely holding the property on trust for the beneficiary.2 Whereas for HST, the trust arises when there exists on a valid will that the trustee is to hold the testator’s property on trust, but the terms of the secret trust are kept confidential.3 Meanwhile, HST cannot be valid unless the trust obligations are communicated to the secret trustee before or at the time of execution of the will.4 The fraud theory and its problems The fraud theory is founded on the principle that equity would not allow statutes to be used to perpetrate fraud,5 and the theory can be further divided into two streams,6 which I call them conventional and enriched versions. Under the conventional version, the meaning of fraud is confined to unjust personal gains, and this position was endorsed in McCormick v Grogan, where Lord Westbury explicitly stated that the jurisdiction of the court was founded on personal fraud, and the alleged trustee must be proved to have acted malo animo.7 However, this argument suffers from at least one critical problem—the failure to explain the existence of HSTs. As mentioned, secret trustees of HSTs are clearly named on the will, which is a public document. In other words, everyone would know that these trustees are merely holding the property for the deceased as fiduciaries rather than as beneficiaries, and that basically rules out the possibility of engaging in personal fraud. However, this problem could be mitigated if the enriched version of the theory is considered. Under the enriched version, fraud also embraces ‘any failure by the secret trustee to perform the secret trust’ because such failures ‘[constitute] a fraud on the testator and the secret beneficiaries’.8 For example, in Norris v Frazer,9 the secret trust was enforced not because the secret trustee was seeking to enrich herself, but because the court held that: a more … personal fraud could not be committed than for…to refuse to perform that promise which she made to the testator.10 Meanwhile, in Blackwell v Blackwell, an HST case, Lord Buckmaster held that non-performance or ‘[destroying] the whole object of [the trust’s] creation’ meant that the beneficiaries were equally defrauded.11 In other words, the enriched version also considers betrayals to the testators’ faith and the beneficiaries’ expectations as fraud. With this enriched definition, not only could the theory cover more scenarios (since all three parties—testator, trustee, and beneficiary—are considered), it could also explain the enforcement of HSTs. Such broad coverage makes the fraud theory very attractive on its face. However, there are hurdles that the theory cannot possibly overcome. Apparently, testators’ intention enjoys a premier status in this theory.12 If intention is that crucial and should be dealt with utmost respect, then many cases must have been adjudicated mistakenly because the court has struck down numerous trusts/gifts even though the settlors/donors had exhibited crystal-clear intentions. For example, in Milroy v Lord,13 the settlor clearly intended to create a trust for his niece, but Turner LJ refused to recognize the trust because the settlor failed to observe all the formalities. Similarly, in Re Fry,14 the court refused to perfect the imperfect gift even though the transferor had demonstrated clear intention for similar reasons. The same line of argument is also applicable to the element of beneficiaries’ interest, which is another major concern of the theory. As pointed by Patricia Critchley, the beneficiaries’ interest is hampered in ‘every case of failure for informality’, and this factor alone cannot really be persuasive enough to justify the informality.15 Moreover, secret trusts should probably be totally abolished if fraud prevention is the prime objective. The policy goal of placing formality requirements in WA 1837 is to prevent fraud because, if whatever is stated on the will would be exhaustive and final, then the possibility of fraud, uncertainty, and doubt can indeed be minimized.16 Although this abolishment argument might sound radical at first sight, it is indeed persuasive in some sense. Finally, fraud (even if the enriched version is adopted) is not always the concern. This argument was once raised in Re Snowden where Megarry VC decided that secret trusts could be established even there existed no possibility of fraud.17 Meanwhile, in Muckleston v Brown,18 the secret trustee was merely relying on the formalities to save the trust from failing under the Statute of Mortmain 1736, so the testator’s wish could be achieved,19 and there clearly exists no fraud. Also, the secret trustee in Re Boyes20 had no fraudulent intention at all, and was merely going to the court to inquire the existence of the trust. Therefore, with these critical problems, I shall consider if another popular theory—the dehors theory—does a better job, and could serve as the underlying doctrinal justification for secret trusts. The dehors theory and its flaws The dehors theory argues that secret trusts are inter vivos (thus, non-testamentary) express trusts declared by the testator.21 The trust itself is declared when the trust is communicated to the trustee by the testator, and is fully constituted at the point when the testator passes away and the identified property is transferred.22 In other words, the trust operates outside of and independently from the will, and such a characteristic allows the trust to ignore the statutory formalities. The dehors theory has also been endorsed by the court. For example, the judgment of Cullen v A-G of Ireland23 has been interpreted to mean that secrets trusts are not testamentary dispositions.24 A more recent example would be Re Snowden, where Megarry VC held that: secret trusts … operate outside the will, changing nothing that is written in it, and allowing it to operate according to its tenor, but then fastening a trust on to the property in the hands of the recipient.25 Although this theory looks clear and concise, it nonetheless suffers from critical flaws. Indeed, the crux of the theory is the Achille’s heel because secret trusts cannot really be inter vivos. According to Philip Pettit, an inter vivos trust is not really declared and effective unless there exists an effective transfer of the trust property to the trustee,26 and this argument could find support in Milroy v Lord, where Tuner LJ stated that: to render a voluntary settlement valid and effectual, the settlor must have done everything which, according to the nature of the property comprised in the settlement, was necessary to be done in order to transfer the property and render the settlement binding upon him.27 However, in secret trust cases, the titles of the property are not passed to the trustees until the testators are dead, and it could hardly be construed to say that the testator has done everything in the legal sense. Moreover, secret trusts are also not express trusts, and there are several arguments to support this. First, in Ottaway v Norman,28 a secret trust involving land was upheld even though the only evidence produced was parol evidence, but the Law of Property Act 1925 requires disposition of land in express trusts to be done by deed. Secondly, it was held in Re Gardner (No 2)29 that secret trusts do not need to be fully constituted, but express trusts must be completely constituted to be valid.30 Thirdly, the court would save an express trust by following ‘equity will not permit a trust to fail for want of a trustee’, but it was held in Re Maddock31 that the secret trust would die with the death of the secret trustee if the trustee is outlived by the testator.32 Fourthly, after an express trust is validly declared, it is usually irrevocable,33 but the ambulatory and revocability34 of secret trusts allow testators to change their mind during their lifetime. Fifthly, it is also argued that secret trusts are constructive trusts because the trustee knows in good conscience that he is obliged to hold the property for the beneficiary.35 Finally, the theory is flawed because the concepts of ‘outside the will’ and ‘outside the Wills Act’ are confused.36 According to Critchley, the dehors theory should demonstrate why secret trusts are enforced because they are outside of WA 1837, but not just why the trust is outside the will,37 and this argument is persuasive. As demonstrated above, the theory emphasizes on how the secret trust is outside the will by categorizing the trust as being inter vivos. However, if it cannot be concurrently demonstrated that secret trusts are also outside of WA 1837, it could not possibly justify why formalities imposed by WA 1837 cannot bind secret trusts. Therefore, given the above problems, the dehors theory can also not serve as a persuasive theory to explain the enforcement of secret trusts. The conscience-estoppel theory As demonstrated above, the two popular theories suffer from several critical flaws, and could not possibly serve as satisfactorily justifications. Therefore, I decide to go slightly out of the box, and attempt to explain the enforcement of secret trusts with my own theory—the conscience-estoppel theory. As indicated by the name, this theory is comprised of two major portions, and I will explain their importance in order. To understand the conscience element, I shall first briefly explain the usage of secret trusts. Secret trusts have arisen for different reasons, and common examples identified include (i) protecting the interests of mistresses and illegitimate children and (ii) allowing indecisive testators to let the trustees decide how to arrange their estate.38 It should be remembered that equity runs on the idea of conscience.39 Looking at scenario (i), although it is arguable that the gentlemen and mistresses are blameworthy for committing adultery, it would be unequitable to strip the illegitimate children, who could not control their birth, from means of living because of their status. Meanwhile, the need for secrecy in such cases is recognized by the court.40 For scenario (ii), testators could be indecisive because their lives are short, or they died unexpectedly.41 If the existence of uncontrollable factors—lifespan and death—means that their estate should be arranged or distributed against their wishes, the result would surely be unequitable. Finally, examples in the ‘fraud theory’ section have also demonstrated how conscience plays a significant role in secret trusts. In short, there exist good reasons (in addition to fraud) in prompting the court to consider ignoring the formalities for the sake of conscience. In a rough comparison, secret trust cases, in some degree, correspond to the exceptional constitution cases, and an example is Re Rose,42 where the court held that the trust was constituted even though the formalities were not fully observed because the settlor had clear intentions, had done what could be done within power, and the final process was dependent on third parties. Similarly, testators in secret trust cases could also be said to have done everything in his power (taking factors such as secrecy into consideration). First, he intended to set up the trust. Then, he identified a trustee, informed the trustee his intentions and trust obligations, and sought agreement. After that, if it is an FST, the testator would seemingly give the identified property to the secret trustee as gift, or in an HST case, the testator would name the secret trustee on his will. The final step, which concerns the execution, is fully dependent on the integrity of the secret trustee or the court’s discretion because the testator is dead, and could not make fresh arrangements. Therefore, the court simply steps in, and helps effectuate the wishes of the deceased (if that generates conscionable results). However, it might be argued that conscience, or intention, or beneficiaries’ interest cannot justify secret trusts alone.43 Therefore, I decide to include estoppel because hallmarks of promissory estoppel could be observed in secret trusts, and this additional factor would also strengthen the foundation of my theory. Promissory estoppel arises where the following requirements are all satisfied: (i) the parties are in a relationship involving enforceable or exercisable rights, duties or powers; (ii) the promisor by words or conduct coveys a clear and unequivocal promise to the promisee that the promisor will not enforce or exercise some of those rights, duties or powers; and (iii) the promisee reasonably relies upon that promise and is induced to later his position on the faith of it, so that it would be unconscionable for the promisor to act inconsistently.44 This can arguably be applied to a secret trust scenario. The first requirement can be satisfied if one party is under obligations or possesses duties to the other party,45 and there is clearly one between the testator and the trustee because the trustee has agreed to take the property on trust, and not to act inconsistently even though he has the legal title. Secondly, it could generally be assumed that the trustee has made clear and unequivocal promises to the testator, or else there is no reason for the testator to create a legacy for the trustee. Meanwhile, the trustee has impliedly promised not to renege, and agreed to effectuate the testator’s wishes after his death. Thirdly, reliance could potentially be established by the fact that the testator chooses that specific trustee, and gives up other opportunities to achieve his plan. Finally, unconscionability could be satisfied by the ‘lost opportunity’ caused by the testator’s death.46 If the trustee goes back on his words, the wishes of the deceased testator will probably not be effectuated because the deceased cannot resurrect to resort to alternative methods. Therefore, the trustee should act as promised. Another potential criticism to this could be based on Combe v Combe,47 which held that promissory estoppel cannot act as a cause of action, and consideration is also required to succeed in such claims (but it does not seem that secret trustees receive consideration from testators). However, subsequent judicial development suggests the contrary,48 and examples include the Hong Kong case of Luo Xing Juan v Estate of Hui Shui See49 and the Australian case of Waltons Stores (Interstate) v Maher.50 In these cases, not only was promissory estoppel used as a cause of action, the lack of consideration was also not a problem.51 It shall be noted that the cases were adjudicated by the most supreme courts in Hong Kong and Australia, respectively—the Hong Kong Court of Final Appeal and the High Court of Australia. By combining conscionability and estoppel, this theory justifies the existence of secret trusts with two established equity concepts. First, the conscience element prompts the court to consider exercising discretion to effectuate the trust as planned. Then, the clear promises made by the trustees to testators, and the potential unconscionable results make it further persuasive for the court to allow the formalities to be outweighed for the sake of conscience and justice. Conclusion In conclusion, the above examples and analyses have demonstrated that both the fraud theory and the dehors theory do not appear to be satisfactory doctrinal justifications of the enforcements of secret trusts. While the fraud theory limits its applicability to fraudulent situations, the dehors theory fails on its core arguments. However, the conscience-estoppel theory avoids these problems. First, the theory applies to fraud and non-fraud cases. Secondly, by relying on the established concepts of conscience and estoppel, the possibility that the theory fails for logical reasons is minimized. With that said, the conscience-estoppel theory probably serves as a more comprehensive and stable solution. Benny Chung, Juris Doctor Candidate, Faculty of Law, Chinese University of Hong Kong. Footnotes 1. S Gallagher, Equity and Trusts in Hong Kong: Doctrines, Remedies and Institutions (1st edn, Sweet & Maxwell 2017) 586. 2. JE Penner, The Law of Trusts (10th edn, OUP 2016) 176. 3. ibid. 4. Blackwell v Blackwell [1929] AC 318, 339. 5. McCormick v Grogan (1869) LR 4 HL 82, 97. 6. G Allen, ‘The Secret Is Out There: Searching for the Legal Justification for the Doctrine of Secret Trusts through Analysis of the Case Law’ [2011] Common Law World Review 311, 312–13. 7. McCormick (n 5). 8. Allen (n 6) 313. 9. (1873) LR 15 Eq 318. 10. ibid 331. 11. Blackwell (n 4) 328–29. 12. E Challinor, ‘Debunking the Myth of Secret Trusts?’ [2005] Conveyancer and Property Lawyer 492, 497. 13. [1862] EWHC J78. 14. [1946] Ch 312. 15. P Critchley, ‘Instruments of Fraud, Testamentary Dispositions, and the Doctrine of Secret Trusts’ [1999] Law Quarterly Review 631, 648. 16. M Kandasamy, ‘Secret Trust: The Underlying Theories Explained’ [2012] Brickfields Law Review 16; J Glister and J Lee (eds), Hanbury & Martin: Modern Trusts (20th edn, Sweet & Maxwell 2015) 162. 17. [1979] Ch 528, 535. 18. (1801) 6 Ves Jr 52. 19. Kandasamy (n 16) 651. 20. (1883) 26 Ch D 531. 21. Allen (n 6) 313; Critchley (n 15) 633. 22. Critchley, ibid. 23. (1866) LR 1 HL 190. 24. Allen (n 6) 336. 25. Re Snowden (n 17) 535. 26. P Petit, Equity and the Law of Trusts (12th edn, OUP 2012) 102–03. 27. Milroy (n 13) 1189. 28. [1971] Ch 698. 29. [1923] 2 Ch 230. 30. N Richardson, ‘Secret Trusts in New Zealand’ [1995] Canterbury Law Review 108, 112. 31. [1902] 2 Ch 220. 32. ibid. 33. Gallagher (n 1) 268. 34. Critchley (n 15) 636–37. 35. A Hudson, Equity and Trusts (9th edn, Taylor & Francis 2016) 284. 36. Critchley (n 15) 640. 37. ibid. 38. A Oosterhoff, ‘Secret and Half-Secret Trusts’ [2007] Estates, Trusts & Pensions Journal 173, 175; Gallagher (n 1) 582–83; Allen (n 6) 340–41. 39. Gallagher (n 1) 32–33. 40. Blackwell (n 4) 339. 41. Gallagher (n 1) 583–84. 42. [1952] Ch 499, HC. 43. Critchley (n 15) 648. 44. Luo Xing Juan v Estate of Hui Shui See (2009) 12 HKCFAR 1, [55]. 45. S Hall, Law of Contract in Hong Kong (5th edn, LexisNexis 2017) 391. 46. S Gardner, ‘Reliance Based Constructive Trusts,’ in C Mitchell (ed), Constructive and Resulting Trusts (1st edn, Hart Publishing 2010) 64. 47. [1951] 2 KB 215. 48. ibid (n 46). 49. ibid (n 44). 50. (1988) 164 CLR 387. 51. Hall (n 45) 413. © The Author(s) (2017). Published by Oxford University Press. All rights reserved. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Trusts & Trustees Oxford University Press

Fraud Prevention? Dehors? Or What?: why secret trusts are enforced?

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Abstract

Abstract Two theories—the fraud theory and the dehors the will theory—are often cited to justify the enforcement of secret trusts. While these theories are undeniably popular, they nonetheless suffer from some critical problems. This article seeks to discuss the flaws of these two theories, and justify the enforcement of secret trusts with the conscience-estoppel theory, a theory that is built upon two established equity principles. Introduction Section 9 of the Wills Act 1837 (WA 1837) requires a valid will to be in writing, and signed by the testator him/herself and the two or more witnesses in presence. Therefore, prima facie, secret trusts, which fail to respect the formalities, should be void. However, since secret trusts have been enforced by judges from time to time, there must be reasons in doing so. In order to tackle this issue, numerous academics have tried to justify the enforcement of secret trusts with either of both the two theories—the fraud theory and the dehors the will theory (‘the dehors theory’). While these theories are undoubtedly popular, I argue that these two theories are incomprehensive and flawed. In this article, I will first discuss the fraud theory, and its several problems. Then, I will consider another popular theory—the dehors theory, and explain why this theory is logically flawed. Finally, I will explain why my theory—the conscience-estoppel theory—might serve as a better explanation. Meanwhile, I will also discuss the potential criticisms, and why those arguments do not stand. The two types of secret trusts Before delving into the core discussion, I shall first briefly illustrate the two types of secret trusts—fully secret trusts (FSTs) and half-secret trusts (HSTs). Under an FST, the testator, looks like he is making a gift,1 leaves property to a legatee in his will that complies with the rules of WA 1837, but the legatee understands that he is merely holding the property on trust for the beneficiary.2 Whereas for HST, the trust arises when there exists on a valid will that the trustee is to hold the testator’s property on trust, but the terms of the secret trust are kept confidential.3 Meanwhile, HST cannot be valid unless the trust obligations are communicated to the secret trustee before or at the time of execution of the will.4 The fraud theory and its problems The fraud theory is founded on the principle that equity would not allow statutes to be used to perpetrate fraud,5 and the theory can be further divided into two streams,6 which I call them conventional and enriched versions. Under the conventional version, the meaning of fraud is confined to unjust personal gains, and this position was endorsed in McCormick v Grogan, where Lord Westbury explicitly stated that the jurisdiction of the court was founded on personal fraud, and the alleged trustee must be proved to have acted malo animo.7 However, this argument suffers from at least one critical problem—the failure to explain the existence of HSTs. As mentioned, secret trustees of HSTs are clearly named on the will, which is a public document. In other words, everyone would know that these trustees are merely holding the property for the deceased as fiduciaries rather than as beneficiaries, and that basically rules out the possibility of engaging in personal fraud. However, this problem could be mitigated if the enriched version of the theory is considered. Under the enriched version, fraud also embraces ‘any failure by the secret trustee to perform the secret trust’ because such failures ‘[constitute] a fraud on the testator and the secret beneficiaries’.8 For example, in Norris v Frazer,9 the secret trust was enforced not because the secret trustee was seeking to enrich herself, but because the court held that: a more … personal fraud could not be committed than for…to refuse to perform that promise which she made to the testator.10 Meanwhile, in Blackwell v Blackwell, an HST case, Lord Buckmaster held that non-performance or ‘[destroying] the whole object of [the trust’s] creation’ meant that the beneficiaries were equally defrauded.11 In other words, the enriched version also considers betrayals to the testators’ faith and the beneficiaries’ expectations as fraud. With this enriched definition, not only could the theory cover more scenarios (since all three parties—testator, trustee, and beneficiary—are considered), it could also explain the enforcement of HSTs. Such broad coverage makes the fraud theory very attractive on its face. However, there are hurdles that the theory cannot possibly overcome. Apparently, testators’ intention enjoys a premier status in this theory.12 If intention is that crucial and should be dealt with utmost respect, then many cases must have been adjudicated mistakenly because the court has struck down numerous trusts/gifts even though the settlors/donors had exhibited crystal-clear intentions. For example, in Milroy v Lord,13 the settlor clearly intended to create a trust for his niece, but Turner LJ refused to recognize the trust because the settlor failed to observe all the formalities. Similarly, in Re Fry,14 the court refused to perfect the imperfect gift even though the transferor had demonstrated clear intention for similar reasons. The same line of argument is also applicable to the element of beneficiaries’ interest, which is another major concern of the theory. As pointed by Patricia Critchley, the beneficiaries’ interest is hampered in ‘every case of failure for informality’, and this factor alone cannot really be persuasive enough to justify the informality.15 Moreover, secret trusts should probably be totally abolished if fraud prevention is the prime objective. The policy goal of placing formality requirements in WA 1837 is to prevent fraud because, if whatever is stated on the will would be exhaustive and final, then the possibility of fraud, uncertainty, and doubt can indeed be minimized.16 Although this abolishment argument might sound radical at first sight, it is indeed persuasive in some sense. Finally, fraud (even if the enriched version is adopted) is not always the concern. This argument was once raised in Re Snowden where Megarry VC decided that secret trusts could be established even there existed no possibility of fraud.17 Meanwhile, in Muckleston v Brown,18 the secret trustee was merely relying on the formalities to save the trust from failing under the Statute of Mortmain 1736, so the testator’s wish could be achieved,19 and there clearly exists no fraud. Also, the secret trustee in Re Boyes20 had no fraudulent intention at all, and was merely going to the court to inquire the existence of the trust. Therefore, with these critical problems, I shall consider if another popular theory—the dehors theory—does a better job, and could serve as the underlying doctrinal justification for secret trusts. The dehors theory and its flaws The dehors theory argues that secret trusts are inter vivos (thus, non-testamentary) express trusts declared by the testator.21 The trust itself is declared when the trust is communicated to the trustee by the testator, and is fully constituted at the point when the testator passes away and the identified property is transferred.22 In other words, the trust operates outside of and independently from the will, and such a characteristic allows the trust to ignore the statutory formalities. The dehors theory has also been endorsed by the court. For example, the judgment of Cullen v A-G of Ireland23 has been interpreted to mean that secrets trusts are not testamentary dispositions.24 A more recent example would be Re Snowden, where Megarry VC held that: secret trusts … operate outside the will, changing nothing that is written in it, and allowing it to operate according to its tenor, but then fastening a trust on to the property in the hands of the recipient.25 Although this theory looks clear and concise, it nonetheless suffers from critical flaws. Indeed, the crux of the theory is the Achille’s heel because secret trusts cannot really be inter vivos. According to Philip Pettit, an inter vivos trust is not really declared and effective unless there exists an effective transfer of the trust property to the trustee,26 and this argument could find support in Milroy v Lord, where Tuner LJ stated that: to render a voluntary settlement valid and effectual, the settlor must have done everything which, according to the nature of the property comprised in the settlement, was necessary to be done in order to transfer the property and render the settlement binding upon him.27 However, in secret trust cases, the titles of the property are not passed to the trustees until the testators are dead, and it could hardly be construed to say that the testator has done everything in the legal sense. Moreover, secret trusts are also not express trusts, and there are several arguments to support this. First, in Ottaway v Norman,28 a secret trust involving land was upheld even though the only evidence produced was parol evidence, but the Law of Property Act 1925 requires disposition of land in express trusts to be done by deed. Secondly, it was held in Re Gardner (No 2)29 that secret trusts do not need to be fully constituted, but express trusts must be completely constituted to be valid.30 Thirdly, the court would save an express trust by following ‘equity will not permit a trust to fail for want of a trustee’, but it was held in Re Maddock31 that the secret trust would die with the death of the secret trustee if the trustee is outlived by the testator.32 Fourthly, after an express trust is validly declared, it is usually irrevocable,33 but the ambulatory and revocability34 of secret trusts allow testators to change their mind during their lifetime. Fifthly, it is also argued that secret trusts are constructive trusts because the trustee knows in good conscience that he is obliged to hold the property for the beneficiary.35 Finally, the theory is flawed because the concepts of ‘outside the will’ and ‘outside the Wills Act’ are confused.36 According to Critchley, the dehors theory should demonstrate why secret trusts are enforced because they are outside of WA 1837, but not just why the trust is outside the will,37 and this argument is persuasive. As demonstrated above, the theory emphasizes on how the secret trust is outside the will by categorizing the trust as being inter vivos. However, if it cannot be concurrently demonstrated that secret trusts are also outside of WA 1837, it could not possibly justify why formalities imposed by WA 1837 cannot bind secret trusts. Therefore, given the above problems, the dehors theory can also not serve as a persuasive theory to explain the enforcement of secret trusts. The conscience-estoppel theory As demonstrated above, the two popular theories suffer from several critical flaws, and could not possibly serve as satisfactorily justifications. Therefore, I decide to go slightly out of the box, and attempt to explain the enforcement of secret trusts with my own theory—the conscience-estoppel theory. As indicated by the name, this theory is comprised of two major portions, and I will explain their importance in order. To understand the conscience element, I shall first briefly explain the usage of secret trusts. Secret trusts have arisen for different reasons, and common examples identified include (i) protecting the interests of mistresses and illegitimate children and (ii) allowing indecisive testators to let the trustees decide how to arrange their estate.38 It should be remembered that equity runs on the idea of conscience.39 Looking at scenario (i), although it is arguable that the gentlemen and mistresses are blameworthy for committing adultery, it would be unequitable to strip the illegitimate children, who could not control their birth, from means of living because of their status. Meanwhile, the need for secrecy in such cases is recognized by the court.40 For scenario (ii), testators could be indecisive because their lives are short, or they died unexpectedly.41 If the existence of uncontrollable factors—lifespan and death—means that their estate should be arranged or distributed against their wishes, the result would surely be unequitable. Finally, examples in the ‘fraud theory’ section have also demonstrated how conscience plays a significant role in secret trusts. In short, there exist good reasons (in addition to fraud) in prompting the court to consider ignoring the formalities for the sake of conscience. In a rough comparison, secret trust cases, in some degree, correspond to the exceptional constitution cases, and an example is Re Rose,42 where the court held that the trust was constituted even though the formalities were not fully observed because the settlor had clear intentions, had done what could be done within power, and the final process was dependent on third parties. Similarly, testators in secret trust cases could also be said to have done everything in his power (taking factors such as secrecy into consideration). First, he intended to set up the trust. Then, he identified a trustee, informed the trustee his intentions and trust obligations, and sought agreement. After that, if it is an FST, the testator would seemingly give the identified property to the secret trustee as gift, or in an HST case, the testator would name the secret trustee on his will. The final step, which concerns the execution, is fully dependent on the integrity of the secret trustee or the court’s discretion because the testator is dead, and could not make fresh arrangements. Therefore, the court simply steps in, and helps effectuate the wishes of the deceased (if that generates conscionable results). However, it might be argued that conscience, or intention, or beneficiaries’ interest cannot justify secret trusts alone.43 Therefore, I decide to include estoppel because hallmarks of promissory estoppel could be observed in secret trusts, and this additional factor would also strengthen the foundation of my theory. Promissory estoppel arises where the following requirements are all satisfied: (i) the parties are in a relationship involving enforceable or exercisable rights, duties or powers; (ii) the promisor by words or conduct coveys a clear and unequivocal promise to the promisee that the promisor will not enforce or exercise some of those rights, duties or powers; and (iii) the promisee reasonably relies upon that promise and is induced to later his position on the faith of it, so that it would be unconscionable for the promisor to act inconsistently.44 This can arguably be applied to a secret trust scenario. The first requirement can be satisfied if one party is under obligations or possesses duties to the other party,45 and there is clearly one between the testator and the trustee because the trustee has agreed to take the property on trust, and not to act inconsistently even though he has the legal title. Secondly, it could generally be assumed that the trustee has made clear and unequivocal promises to the testator, or else there is no reason for the testator to create a legacy for the trustee. Meanwhile, the trustee has impliedly promised not to renege, and agreed to effectuate the testator’s wishes after his death. Thirdly, reliance could potentially be established by the fact that the testator chooses that specific trustee, and gives up other opportunities to achieve his plan. Finally, unconscionability could be satisfied by the ‘lost opportunity’ caused by the testator’s death.46 If the trustee goes back on his words, the wishes of the deceased testator will probably not be effectuated because the deceased cannot resurrect to resort to alternative methods. Therefore, the trustee should act as promised. Another potential criticism to this could be based on Combe v Combe,47 which held that promissory estoppel cannot act as a cause of action, and consideration is also required to succeed in such claims (but it does not seem that secret trustees receive consideration from testators). However, subsequent judicial development suggests the contrary,48 and examples include the Hong Kong case of Luo Xing Juan v Estate of Hui Shui See49 and the Australian case of Waltons Stores (Interstate) v Maher.50 In these cases, not only was promissory estoppel used as a cause of action, the lack of consideration was also not a problem.51 It shall be noted that the cases were adjudicated by the most supreme courts in Hong Kong and Australia, respectively—the Hong Kong Court of Final Appeal and the High Court of Australia. By combining conscionability and estoppel, this theory justifies the existence of secret trusts with two established equity concepts. First, the conscience element prompts the court to consider exercising discretion to effectuate the trust as planned. Then, the clear promises made by the trustees to testators, and the potential unconscionable results make it further persuasive for the court to allow the formalities to be outweighed for the sake of conscience and justice. Conclusion In conclusion, the above examples and analyses have demonstrated that both the fraud theory and the dehors theory do not appear to be satisfactory doctrinal justifications of the enforcements of secret trusts. While the fraud theory limits its applicability to fraudulent situations, the dehors theory fails on its core arguments. However, the conscience-estoppel theory avoids these problems. First, the theory applies to fraud and non-fraud cases. Secondly, by relying on the established concepts of conscience and estoppel, the possibility that the theory fails for logical reasons is minimized. With that said, the conscience-estoppel theory probably serves as a more comprehensive and stable solution. Benny Chung, Juris Doctor Candidate, Faculty of Law, Chinese University of Hong Kong. Footnotes 1. S Gallagher, Equity and Trusts in Hong Kong: Doctrines, Remedies and Institutions (1st edn, Sweet & Maxwell 2017) 586. 2. JE Penner, The Law of Trusts (10th edn, OUP 2016) 176. 3. ibid. 4. Blackwell v Blackwell [1929] AC 318, 339. 5. McCormick v Grogan (1869) LR 4 HL 82, 97. 6. G Allen, ‘The Secret Is Out There: Searching for the Legal Justification for the Doctrine of Secret Trusts through Analysis of the Case Law’ [2011] Common Law World Review 311, 312–13. 7. McCormick (n 5). 8. Allen (n 6) 313. 9. (1873) LR 15 Eq 318. 10. ibid 331. 11. Blackwell (n 4) 328–29. 12. E Challinor, ‘Debunking the Myth of Secret Trusts?’ [2005] Conveyancer and Property Lawyer 492, 497. 13. [1862] EWHC J78. 14. [1946] Ch 312. 15. P Critchley, ‘Instruments of Fraud, Testamentary Dispositions, and the Doctrine of Secret Trusts’ [1999] Law Quarterly Review 631, 648. 16. M Kandasamy, ‘Secret Trust: The Underlying Theories Explained’ [2012] Brickfields Law Review 16; J Glister and J Lee (eds), Hanbury & Martin: Modern Trusts (20th edn, Sweet & Maxwell 2015) 162. 17. [1979] Ch 528, 535. 18. (1801) 6 Ves Jr 52. 19. Kandasamy (n 16) 651. 20. (1883) 26 Ch D 531. 21. Allen (n 6) 313; Critchley (n 15) 633. 22. Critchley, ibid. 23. (1866) LR 1 HL 190. 24. Allen (n 6) 336. 25. Re Snowden (n 17) 535. 26. P Petit, Equity and the Law of Trusts (12th edn, OUP 2012) 102–03. 27. Milroy (n 13) 1189. 28. [1971] Ch 698. 29. [1923] 2 Ch 230. 30. N Richardson, ‘Secret Trusts in New Zealand’ [1995] Canterbury Law Review 108, 112. 31. [1902] 2 Ch 220. 32. ibid. 33. Gallagher (n 1) 268. 34. Critchley (n 15) 636–37. 35. A Hudson, Equity and Trusts (9th edn, Taylor & Francis 2016) 284. 36. Critchley (n 15) 640. 37. ibid. 38. A Oosterhoff, ‘Secret and Half-Secret Trusts’ [2007] Estates, Trusts & Pensions Journal 173, 175; Gallagher (n 1) 582–83; Allen (n 6) 340–41. 39. Gallagher (n 1) 32–33. 40. Blackwell (n 4) 339. 41. Gallagher (n 1) 583–84. 42. [1952] Ch 499, HC. 43. Critchley (n 15) 648. 44. Luo Xing Juan v Estate of Hui Shui See (2009) 12 HKCFAR 1, [55]. 45. S Hall, Law of Contract in Hong Kong (5th edn, LexisNexis 2017) 391. 46. S Gardner, ‘Reliance Based Constructive Trusts,’ in C Mitchell (ed), Constructive and Resulting Trusts (1st edn, Hart Publishing 2010) 64. 47. [1951] 2 KB 215. 48. ibid (n 46). 49. ibid (n 44). 50. (1988) 164 CLR 387. 51. Hall (n 45) 413. © The Author(s) (2017). Published by Oxford University Press. All rights reserved.

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Trusts & TrusteesOxford University Press

Published: Mar 1, 2018

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