In re Baden’s Deed Trusts (McPhail v Doulton, Baden v Smith)

A discretionary trust does not fail merely because every member of the class of potential beneficiaries cannot be identified. The trust is valid if it can be said with certainty of any given person whether that person is or is not within the class.

The trustees must survey the range of possible beneficiaries sufficiently to perform their fiduciary duty. They need not compile a complete list. Conceptual uncertainty remains fatal, but evidential difficulties concerning particular beneficiaries may be resolved through directions. A definition may also fail where its breadth makes the trust administratively unworkable.

A settlor established a fund whose trustees were directed to apply its income, at their absolute discretion, for officers, employees and former employees of a company, and their relatives or dependants. The settlor’s executors contended that the deed was void and that the fund reverted to his estate.

Goff J held that clause 9(a) conferred a power rather than a trust and that the power was valid. A majority of the Court of Appeal upheld the construction as a power but remitted the question of validity for reconsideration under the test subsequently stated in In re Gulbenkian’s Settlement, [1968] 3 WLR 1127.

The issues before the House were whether clause 9(a) created a trust and, if so, whether a discretionary trust required the complete ascertainment of all possible beneficiaries.

1. The appeal was allowed unanimously. Clause 9(a) created a trust, not a mere power. Lord Wilberforce delivered the leading speech. Lord Reid and Viscount Dilhorne agreed with him; Lord Hodson and Lord Guest reached the same conclusion on construction. The mandatory word “shall”, read with the deed as a whole, imposed a duty to distribute the income. The power to retain income did not convert that duty into a mere power.

2. By a majority, the complete-list test was rejected. Per Lord Wilberforce, with Lord Reid and Viscount Dilhorne agreeing, the rule in I.R.C. v Broadway Cottages Trust, [1955] Ch 20, was wrong and should be discarded. A discretionary trust is valid if it can be said with certainty whether any given individual is or is not a member of the designated class. The same criterion previously adopted for powers in In re Gulbenkian’s Settlement, [1968] 3 WLR 1127, therefore governs the conceptual certainty of objects of a trust power.

3. Assimilation of the validity tests does not eliminate the distinction between a trust power and a mere power. Trustees subject to a trust power must exercise it and, upon their default, the court will execute the trust. The court may appoint new trustees, authorise representative beneficiaries to prepare a scheme, or direct an appropriate distribution. An equal division among every beneficiary is not the court’s only possible method of execution.

4. The trustees must make a sufficiently wide and systematic survey of the possible beneficiaries to perform their fiduciary duty. A trust power ordinarily requires a more comprehensive inquiry than a mere power, but neither requires a complete list of every object.

5. Lord Wilberforce distinguished conceptual uncertainty from evidential difficulty. Unresolved uncertainty in the meaning of the class description invalidates the disposition. Difficulty in proving whether particular persons exist or where they are may be dealt with through directions. A conceptually clear class may nevertheless be so hopelessly wide that the trust is administratively unworkable.

6. Lord Hodson and Lord Guest dissented on the applicable certainty test. They would have retained the complete-ascertainment rule for trusts because the court must be able to control and execute the trust. The House remitted the case to the Chancery Division to decide whether clause 9 was valid or void for uncertainty, subject to section 164 of the Law of Property Act 1925.

1. House of Lords: Allowed the appeal, declared that clause 9(a) constituted a trust and remitted the question whether the trust was valid or void for uncertainty.
2. Court of Appeal: By a majority, affirmed the construction of clause 9(a) as a power. It discharged the first-instance determination of validity and remitted that issue for reconsideration under In re Gulbenkian’s Settlement, [1968] 3 WLR 1127.
3. Chancery Division: Goff J held that clause 9(a) conferred a power rather than a trust and that the power was valid.