Re Vandervell's Trust [No.2] revisited: was Denning really wrong?
The notoriously controversial case of Re Vandervell's Trust [No. 2] 1 is perhaps the most popular and unforgettable case for students of equity and trusts. It is a decision based on various justifications, but its most contentious element relates to the operation of the formal requirements of s.53(1)(c) Law of Property Act (LPA) 1925. The decision of the Court of Appeal in this case, especially that of Lord Denning, has remained an issue of intense scholarly debate as to its correctness and this short article shall be a contribution to the same, albeit a defence of the legal validity of the decision.
Synopsis of fact and decision.
This was the third appeal with regards to the dispositions of Mr. Vandervell (V). V had set up a trust for his children in 1949 which was managed by Vandervell Trust Company (VTC). In 1958 V transferred 100,000 shares in his company to the Royal College of Surgeons (RCS) and obtained from them an option to purchase the shares back for £5,000. The option to purchase was held and managed on a resulting trust for V by VTC.2 In 1961 the option was exercised and the shares transferred to VTC by the RCS, and V expressed an intention that it (the shares) be held on trust for his children's settlement, However he executed a deed of transfer in 1965 stating that since 1961 the shares and the dividend thereof have been held on trust for his children. V died in 1967 leaving nothing in his will to his children because of his belief that they were provided for by the settlement However, the Inland Revenue Commission (IRC) claimed that between 1961 and 1965 he had not disposed of his interest in the shares/dividends and thus his estate was liable for surtax. The executors of V's estate thus sued VTC to receive all the dividends paid in that period, claiming that since V did not comply with the formal requirements of s.53(1)(c) LPA 1925 until 1965, the dividends earned on the shares within the said period belonged to his estate.
In his usual poetic manner, Lord Denning allowed the appeal of VTC against the first instance judgment of Megarry J, upholding VTC's plea that V had divested himself of all interest in the shares since 1961. Lord Denning's justifications for his decision are interwoven, but can be divided into three major points: the difference in subject matter argument; the declaration of trust argument; and the resulting trust argument.3 These shall be discussed in turn.
The difference in subject matter argument
Lord Denning was of the opinion that once the option to purchase was exercised by VTC, they acquired a different property altogether, a chose in action of a different kind - the actual shares.4 This argument is regarded as contentious because of the seeming contradiction with the binding decision in Vandervell v IRC. 5 In Vandervell, the House of Lords held that since the option to purchase was held on resulting trust for V, he had “not divested himself absolutely of the shares which it (the option) controlled.”6 Despite the intimation by Lord Wilberforce that the option controlled the shares, Lord Denning will be wrong in law only if the ‘shares’ and the ‘option’ were equivalent to each other, in other words, if they were so connected that they were one and the same property.
It is submitted that they were not the same property. However before explaining the reasoning behind this position, it must first be stated that the RCS never held the shares on trust for V, as his intention in directing the trustees to transfer the legal estate was that RCS should likewise be the beneficial owner.7 Stating that V had a beneficial interest in the shares while they were in the possession of the RCS is fallacious, because there would then have been no need for V to secure an option. This is because all he could have done was to end the trust arrangement under the rule in Saunders v Vautier, 8 and by so doing gain the shares back. Rather, RCS held those share absolutely for the period between 1958 and 1961. To corroborate this, it is stated that if for some reason (lack of capacity to grant an option) the option was held to be void, the RCS would have been under no legal obligation to transfer the shares back to V. Only the Chancery Courts, using the remedy of proprietary estoppel would have been able to compel them to act otherwise.9
Having established that there was no equitable interest for V, the question then is, was the option so connected to the shares that they were one and the same? It has been a fundamental doctrine of English law that ownership of property can be split in two, with “ownership both at law and in equity”10 conferring both legal title and beneficial interest respectively on whomever is entitled. Thus, once this legal title and beneficial interest is fragmented a trust relationship comes into existence, but the possession of the two confers absolute ownership. Thus in establishing whether the option and the shares were the same or two distinct properties, the question is whether ownership in both was capable of being fragmented into a legal title and an equitable interest? Yet in this respect Vandervell v IRC 11 provides conclusive evidence.
In Vandervell, the House of Lords unanimously decided that RCS had taken with the transfer of the legal title, the beneficial interest in the shares, and hence held it absolutely. Likewise, they stated that the relationship between VTC and V with regards to the option was one of trustee and beneficiary in a resulting trust. Hence it can be deduced that they both (the option and shares) are distinct properties albeit choses in action, as ownership in both was capable of being fragmented, and thus could not form the subject matter of the very same trust. Therefore, when the option was exercised on the instruction of V, it was tantamount to a termination of the trust whose subject matter was the option. It is thus submitted that, although connected to and existing contemporaneously with each other, the existence of a legal title and equitable interest in both the option and the shares is conclusive evidence of two distinct properties/subject matters.
The declaration of trust argument
Having established there were indeed two distinct properties in contention, the question then is when the option was exercised and the shares transferred back to VTC by the RCS: was a new trust established in favour of the children's settlement? It has been stated above that the exercise of the option was tantamount to a termination of the resulting trust of the option, and thus the trust argument as Lord Denning postulates, is that this action created “a valid trust…at the time of transfer.”12
Some scholars have argued that V did not show sufficient intention to create a trust,13 which would have created a beneficial vacuum creating the need to input a resulting trust in his favour by operation of law. This was also the basis of the argument put forward by the executors of V's estate. This argument is unsound as it presupposes a set procedure for displaying intention. Intention to create a trust is “ultimately the matter of construing the words used by the settler or by his conduct.”14 Thus, if conduct can be used to ascertain intention as in Re Kayford, 15 then the payment of the dividends on the shares into the children's settlement is clear evidence of conduct demonstrating an intention to create a trust. More so, VTC acting as agents of V (in other words, with his consent), had written to the IRC to inform them of the existence of the trust: further evidence, this time written, of an intention to create a trust.
Lord Denning also stated that VTC's use of £5,000 from the children's settlement to acquire the shares would have been a breach of their fiduciary duty, except that it was intended to form part of the settlement. The argument against this position is that the £5,000 represented a mere fraction of the shares' true worth, and thus was merely a lien in favour of the children's settlement. As Megarry J stated “the plaintiff's (V's executors) right to shares is subject to a lien in favour of the children's settlement.”16 This proposition is unsound as it negates the fundamental law of contract in relation to consideration. Lord Upjohn in Vandervell v IRC 17 defined an option as “a contractual right to acquire property on payment of a consideration.”18 Hence the exercise of the option ought to be governed by contract law since it is a ‘contractual right’. It has always been a general rule of contract law that consideration need only be sufficient (of some economic value); it need not be adequate. This position was affirmed in Mountford v Scott, 19 where it was decided that £1 was sufficient to secure a valid and enforceable option to purchase a house with a market value of at least £10,000. Thus, even though £5,000 might not have represented the true value of the shares, the doctrine of laissez faire would create a binding contract, in other words, the day the option was signed it brought into existence a specifically performable contract as a result of the exchange of executory consideration.20 Hence the £5,000 was the contractual value for the shares and thus evidenced an intention to create a trust, absent of which there would have been a breach of trust.
It is also important to state that if an express trust was not created - since the £5,000 from the children's settlement was used at the direction of V (or at least with his knowledge)21 - it would be unconscionable to allow him recover the shares which the children's money had purchased at his bequest, and thus a constructive trust would have been imposed on the shares in favour of the children to prevent the unconscionable conduct. Therefore, either way it is submitted that a trust was established in favour of the children upon transfer of the shares.
The resulting trust argument
Of all the justifications given by Lord Denning this seems to be the most controversial as it directly affects the statutory requirements of s.53(1)(c) LPA 1925 which states “disposition of an equitable interest…must be in writing signed by the person disposing of the same…”. The popular ratio “a resulting trust…is born and dies without any writing at all” is probably etched into the minds of every student of trust law. Lord Denning's decision here clarified the law so that the disposition of equitable interests in a resulting trust does not now have to comply with the requirements of s.53(1)(c). The criticism of this approach is that its interpretation of s.53(2) LPA 1925 - which states “this section (s.53 LPA 1925) does not affect the creation or operation of resulting, implied or constructive trusts” - is too broad and far reaching so that it covers all situations in which a resulting trust could arise.22
In interpreting statutes one looks to the rules of statutory interpretation which usually operate in hierarchy starting with the literal rule. The literal rule of interpretation states that “the intention of Parliament must be found in the plain, ordinary, natural meaning of the words used within the actual statute, even if this leads to an absurdity.”23 This was affirmed by Lord Esher in R v Judge of the City of London Court, 24where he stated “if the words of an Act are clear then you must follow them.”25 Thus, in deciding the ambit of s.53(2), the issue of critical importance is the ‘plain, ordinary and natural meaning’ of the word operation. The Oxford Dictionary defines operation as the “action of functioning or the fact of being active or in effect.”26 Hence reading s.53(2) in its plain meaning would lead to the conclusion that the creation and functioning of/activities involving resulting trusts are exempt from the requirements of s.53(1)(c). It is submitted that the disposition of equitable interests would firmly fall within the description of functioning or activities involving resulting trust and thus Lord Denning was correct in exempting it from the requirements of s.53(1)(c). More so, in Fisher v Bell, 27 where the literal rule was used contrary to Parliament's intention, Parliament quickly corrected the mis-interpretation via the Registration of Offensive Weapons Act 1961. The lapse of time accompanied with the absence of any such legislation in respect of such a notorious decision is further evidence of its correctness.
Finally it is argued that since resulting trusts are implied by law, it need not comply with any formal requirements with respect to its creation. However, once it has been created it becomes a trust like any other trust and thus subject to any and all formal requirements. This argument is untenable, it would likely fall in the face of the counterargument that a trust does not lose it nomenclature/classification simply because it has been created. For example, a discretionary trust would not lose its nature simply because it has been constituted, because its ‘discretionary’ nature would be relevant if such a trust is evidentially uncertain,28 and the nature of a fixed trust would equally be important in such a situation.29 Likewise, the absence of a fiduciary duty to invest is present in a bare trust, although it is the direct opposite with an action trust because of its nature. A fortiori, a resulting trust would not cease to be ‘resulting’ simply because it has been created, it retains its nomenclature if for nothing else to be clear that it is a trust imposed by the operation of law as against an express trust, a distinction that would be important in deciding whether a testator has the power to give away property, or a donor's power in gifting property that he unknowingly held on trust.
From the arguments proposed above it is submitted that Lord Denning's decision in Re Vandervell's Trust [No. 2 ]30 has a firm and correct legal basis, and was fair on the facts. The consolidation of equitable principles geared towards eradicating the chancellor's foot, and thereby attaining certainty in the law is welcomed. However the origin of equity was the conscience, looking at what was fair, right and just between the parties. However, it has become so riddled with formalities that it is more technical and rigid than the common law which it purported to mitigate.
Foremost amongst the maxims of equity is that equity looks to intention and not formalities, and as evidenced by the decision in this case, equity ought to still be guided by this maxim. As Lord Denning puts it “every unjust decision is a reproach to the law (and when an established equitable principle is) in danger of doing injustice (the court should not apply it but rather) equity should be called upon to remedy it(self)”31
1.  Ch. 269
2. See Vandervell v Inland Revenue Commissioners  2 AC 291.
3. See Panesar, S Explaining Equity and Trusts (Pearson, 2nd Edition, 2012) at pages 149-150.
4. Re Vandervell's Trust [No. 2]  Ch. 269 at 319.
5.  2 A.C. 291.
6. Per Lord Wilberforce Vandervell v IRC  2 A.C. 291 at 327. This connection between the shares and the option to purchase was in existence simply because of the provisions of ss. 411 and 415 of the Income Tax Act 1952. By its definition of ‘settlement’ in s. 411 statutorily, Mr. Vandervell was held not to have absolutely divested himself of the shares.
7. Per Lord Upjohn Vandervell v IRC  2 A.C. 291, at 311.
8. (1841) EWHC Ch J82
9. See Inwards v Baker  2 QB 29. However consider the decision in Yeoman's Row Management Ltd. v Cobbe  UKHL 55.
10. Gray K and Gray, S Elements of Land Law (Oxford University Press, 5th Edition, 2009), at page 69.
11. Supra, note 5.
12. Re Vandervell's Trust [No. 2] Ch. 269 at 319.
13. See Richards v Delbridge (1874 ) LR 18 Eq 11
14. Panesar, S Explaining Equity and Trusts (Pearson, 2nd Edition, 2012) at page 103. See also Shah v Shah  EWCA Civ 1408.
15.  1 WLR 279
16. Re Vandervell's Trust [No. 2]  3 WLR 744 at 772
17.  2 A.C. 291.
18. Vandervell v IRC  2 A.C. 291, at 315.
19.  1 All E.R. 198 (C.A.)
20. See Re Ellenborough  1 Ch 697.
21. See Ramsden v Dyson (1865) LR 1 HL 129
22. As to when a resulting trust will arise, see Lord Browne-Wilkinson's decision in Westdeutsche Landesbank Girozentrale v Islington  AC 669
23. Vollans, T and Asquith, G English Legal System (Oxford University Press, 2nd Edition, 2011), at page 27.
24.  1 QB 273.
25.R v Judge of the City of London Court  1 QB 273 at 290.
26. Oxford University Press, Oxford Dictionaries (Copyright, 2013) [Online]
27.  2 All ER 731
28. See Doulton v McPhail  UKHL 1
29.See IRC v Broadway Cottages Trust  Ch. 20 (CA)
30.  Ch. 269
31. Re Vandervell's Trust [No. 2]  Ch. 269 at 322.
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