McPhail v Doulton

Facts

In 1941, Bertram Baden executed a deed setting up a fund for the benefit of the staff of Matthew Hall & Co Ltd. Clause 9(a) said the trustees "shall apply" the net income of the fund, at their absolute discretion, in making grants to or for the benefit of any of the officers and employees or ex-officers or ex-employees of the company, or any of their relatives or dependants, in the amounts, at the times and on the conditions they thought fit.

After Mr Baden's death, his executors argued that the clause was void for uncertainty. At the time, the law was that a discretionary trust was valid only if a complete list of all its beneficiaries could be drawn up (IRC v Broadway Cottages Trust [1955] Ch 20). Listing every employee, ex-employee, relative and dependant was impossible.

Issues

• Did clause 9(a) create a power or a trust?
• If it created a trust, what was the test for certainty of objects?

Decision

The House of Lords held, by a majority of three to two, that clause 9(a) created a discretionary trust, and that the test for certainty of objects for discretionary trusts was the same as for powers. Lord Wilberforce gave the leading speech. The case was sent back to the High Court to apply that test.

Reasoning

Trust, not power. The words "shall apply" were mandatory. The trustees had a duty to distribute the income, although they had discretion as to who received it and how much. That made it a discretionary trust.

A new test. The old "complete list" test made sense for fixed trusts, where each beneficiary has a fixed share, so the trustees must know exactly who they all are. But it made little sense for discretionary trusts, where no beneficiary is entitled to anything until the trustees decide. In Re Gulbenkian's Settlements [1970] AC 508, the House of Lords had held that a power of appointment is valid if it can be said with certainty whether any given individual is or is not a member of the class. Lord Wilberforce applied the same test to discretionary trusts.

Trustees' duties. Trustees of a discretionary trust need to survey the field and consider the range of possible beneficiaries, but they don't need to compile a complete list.

Administrative unworkability. Lord Wilberforce added that even if the class met the test, a trust could fail if its definition was so wide as not to form anything like a class, making it administratively unworkable.

Why it matters

McPhail v Doulton made it much easier to create valid discretionary trusts, which are widely used for employees, families and tax planning.

When the case was sent back, the Court of Appeal in Re Baden's Deed Trusts (No 2) [1973] Ch 9 held that "relatives" and "dependants" were conceptually certain, though the three judges took different approaches to proving that someone is outside the class. The distinction between conceptual uncertainty (the words are too vague) and evidential uncertainty (it's hard to prove the facts) became important. Only conceptual uncertainty is fatal.

Administrative unworkability was applied in R v District Auditor, ex p West Yorkshire Metropolitan County Council (1986) 26 RVR 24, where a trust for the inhabitants of West Yorkshire failed.

How it comes up in exams

For certainty of objects:

1. Classify the disposition: fixed trust, discretionary trust, or power of appointment? Look for mandatory words like "shall".
2. Apply the right test: complete list for fixed trusts; is or is not for discretionary trusts and powers.
3. Check for conceptual uncertainty in the class description, such as "friends" or "people who have helped me".
4. Consider administrative unworkability for very wide classes.

Frequently asked questions