Twinsectra versus Elizebethan Theatre: Comments on the Nature of the Quistclose Trust

Circumstances in which a Quistclose trust may arise

The classic circumstances that give rise to a Quistclose trust are a loan given under an agreement that the beneficiary will be a third party who is a stranger to the consideration. Lord Wilburforce described the essential equitable principles as ‘a secondary trust for the benefit of the lender, to arise if the primary trust, to pay the [agreed third party(s)]..., could not be carried out.’[4] Evans described the Quistclose trust as an alternative to the debtor and creditor relationship in commercial situations.[5] Having primary and secondary trusts, or at least a trust operating in the background of a transaction with the settlor as beneficiary, is a remedial measure. This is so because it permits one to handle misapplication or non-application of the funds and recognises that a lender of money has the same right as a trust settlor.

 

Such trusts have been observed in purpose-loans, but Elizabethan which concerned charitable donations, does not rule out that a Quistclose trust could arise in very different circumstances. Although there was no trust found in Elizabethan, this was not because of the pattern of the transfer, but because of precatory wording.

 

Elizabethan was taken by Millett LJ in Twinsectra (a monetary loan case) as support for the notion that at all relevant times a beneficial interest in the money remained with the lender[6] a feature given rise to by the specification of a beneficiary to whom the money must go. In Australasian, Gibbs ACJ said that Quistclose:

 

...is authority for the proposition that where money is advanced by A to B, with the mutual intention that it should not become part of the assets of B, but should be used exclusively for a specific purpose, there will be implied (at least in the absence of an indication of a contrary intention) a stipulation that if the purpose fails the money will be repaid, and the arrangement will give rise to a relationship of a fiduciary character, or trust.[7]

 

The issue of mutual intention is of some interest. Evans contrasted the Quistclose trust with trusts in general on this basis, referring to Kayford,[8] where a normal form of trust was found to have been created unilaterally by the trustee without any knowledge on the part of the settlors.[9] Mutuality of intention suggests, though does not mandate, the existence of a contract. Perhaps a more definitive statement could be made by stating that a Quistclose trust, as opposed to any normal trust, may subsist where there is an agreement enforceable at equity that benefit be conferred upon another, or failing that, that the benefit be returned to its original source. Where equity does not avail itself to enforce an agreement, or forces its vitiation, there is likely no Quistclose trust in existence.

 

But this may not be the final word. It is notable firstly that Gibbs ACJ’s reference to mutuality of intention was only a brief mention. Furthermore his statement of the law is presented not as the culmination of a process of reasoning, but as nothing more than a statement. The importance of that one word, ‘mutual’ may then be taken more lightly than the general point that Quistclose is good law in Australia. We may then say that the essence of a Quistclose trust is where the circumstances of a transfer of money implies a trust, and that due to specification of a beneficiary, the lender retains a beneficial interest in the application of the money. The circumstances in which this may occur potentially are quite broad, such that the mutuality of intention need not have been expressed between the parties. It appears then that the more important factor is that its existence is apparent in evidence at the time of settlement.

 

On grounds of the latter reasoning there may be cause to suggest that a Quistclose trust could exist where settlor and trustee have no relationship whatsoever. Suppose that A lends money to B at interest, with the intention that C should have the benefit by some means or another. B decides that the benefit is best conferred by contracting D to perform a service to C, and transfers the full amount to D up-front. But before the service is performed or completed D becomes insolvent and is liquidated so that the purpose of the trust fails. B may rely on the authority of cases such as Kayford to claim the money back and resume the process. But let us further suppose that B has ceased to exist in the meantime and any heirs of B’s rights and obligations have no interest in C’s affairs. A is thus left to reclaim its money alone. While A could sue the heirs of B, can A argue that the likeness between its intention as to C, and D’s intention as to C, is sufficient to imply a trust over any traceable funds? An answer appears to come from the basic rules of fiduciary relationships. If a trust can appear without any relationship existing between settlor and trustee then it would contradict the commonly accepted principle that the fiduciary relationship is born out of the adoption of duties with respect to the interests of others rather than mere contracting.

 

While such adoption of duties may be implied by a court as an equitable principle and not taken on with full knowledge of what precise obligations will arise, the recognised categories of fiduciary relationships all involve a direct one-to-one relationship. Furthermore, if an alleged fiduciary does not know what their principal’s interests or intentions are, then they are incapable of adopting a duty to uphold them. Then also, it is recognised that a principle is vulnerable to the fiduciary’s professional integrity. So, while A is dependent on D, the relationship in the scenario proposed does not actually reflect this. This then provides a cause to say that indirect relationships where knowledge of the parameters of dependency, and of who is dependent upon whom, has not necessarily been communicated, cannot be encumbered with a fiduciary duty.

 

As a policy argument, if fiduciary duties could fall upon contractors as if by surprise then no commerce would be safe without legal advice. It is also unethical that D and its unsecured creditors o be ambushed with a fiduciary duty. Even if a direct relationship is somehow unnecessary to create one, in accordance with Millet LJ’s comments[10] (discussed in greater depth below), unless D was informed that the money paid came from A’s loan to B, informed of the purpose of the loan, and maybe of the identity of A, then a fiduciary relationship is unlikely to exist. The obligations adopted by D towards C then are a contract with B only, and not with B’s other business counter-parties.

 

Resulting trust and express trust formulations

 

Wilburforce LJ said in Quistclose:

 

That arrangements of this character for the payment of a person's creditors by a third person, give rise to a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors, and secondarily, if the primary trust fails, of the third person, has been recognised in a series of cases over some 150 years.[11]

 

This was echoed by Gummow J in Elizabethan saying that established equitable rules are sufficient to cover the circumstances giving rise to a Quistclose trust. As such, he stated that it is unnecessary to declare any new type of trust, and the Quistclose trust is simply ‘...the peculiar operation of principle upon the facts...’[12] And so Evans wrote, ‘Quistclose trusts have not revolutionised the law of trusts. The proposition on which they are founded... is not a radical departure from established authority.’[13]

 

We will look first at Gummow J’s express trust position. The lender/donor clearly intends that money should end up with someone other than the direct recipient. If the lender/donor is a profit making business, they would subjectively, and objectively, intend to get the whole capital back, plus interest. This would be the most satisfactory outcome. But by an objective standard one sees that there is implied a secondary express trust operating such that the money will be returned upon failure of the object of the first trust. These two purposes are mutually exclusive and may threaten the certainty of intention and of who the beneficiary is. This problem is overcome however, if the latter intention for return of funds is taken as a contingency plan only, a direction to be acted upon only if and when a stated condition is fulfilled. That way the two intentions are split apart from the start and do not conflict. The Quistclose trust then cannot be a singular, homogenous entity.

 

In some instances there may be a question as to whether it is reasonable to infer an intention as to what type of trust the secondary trust is. But in Paul[14] we see that the conduct of the parties plays a vital role in determining their intention. The requisite intention will be inferred from conduct in the absence of explicitly worded declarations. Millett LJ said in Twinsectra that a settlor’s subjective intentions are irrelevant, and if the arrangements ‘have the effect of creating a trust, it is not necessary that he should appreciate that they do so; it is sufficient that he intends to enter them’.[15] From this we can see that Gummow J’s finding of an express trust with two limbs is plausible in spite of any lack of express declaration as to the return of monies, and even where any need for a return of monies is too unlikely for a reasonable person to foresee.

 

Lord Millett considered the possibility of a loan with an abstract purpose. This would fail to constitute an express trust for lack of certainty of beneficiaries.[16] (This point is countered below). He reasoned therefore that an automatic resulting trust is the only viable outcome of facts similar to Quistclose, and considered where the beneficial interest of the trust would then lie, and eliminating other possible beneficiaries, those being the ultimate loan recipient, the trustee, and that the interest was in suspense, he concluded that the lender has the beneficial interest. He also looked at the facts of Quistclose in doing so, where the borrower and lender had particular private interests that would accrue indirectly from the loan being given without any equitable rights. Therefore both settlor and trustee benefitted from what was really an investment, and Millett LJ disapproved the finding of any trust in Quistclose. To be semantically correct, then, there is no such thing as a Quistclose trust, but it is still possible that a borrower’s intention can align with that of a genuine trustee. His Lordship referred to Westdeutsche in which Lord Browne-Wilkinson explained that a resulting trust arises ‘Where A transfers property to B on express trusts, but the trusts declared do not exhaust the whole beneficial interest.’[17] By specifying a purpose, the transferor maintains a beneficial interest.[18] Millett LJ referred also to Gummow J, seeing in the latter’s reasoning the point that the Quistclose trust operates merely as a security device equivalent to a common retention of title clause. His Lordship did not raise opposition directly to the position that the secondary is an express trust, but rather made reference to the ‘universal acceptance’ of a pattern of equitable ownership resembling a resulting trust.[19] His Lordship’s reasoning then may possibly have been influenced by a commitment to finding a singular formulation to be applied to a the widest possible range of cases.

 

It may be in error to look for any rigid pattern to the Quistclose trust where the trust(s) comprising it must be of the same type in each instance. Gummow J said that ‘...the facts in such cases are susceptible of infinite variation and the trust is a supple instrument.’[20] He then referred to other alternative interpretations of a loan given for a third party’s benefit. So if the facts of individual cases within the general Quistclose paradigm are capable of considerable differentiation, then the justice of any situation may best be served by flexible rules.

 

Millett LJ stated that because a loan for an abstract purpose cannot found an express trust, the Quistclose trust cannot be an express trust. However, as long as the purpose is specific and clearly defined, then an express trust is plausible. It would be only a small number of cases in which an express trust cannot be found. Significantly, Douglas J who led the Queensland Supreme Court in Quince[21] compared the facts before him to Twinsectra, Elizabethan and to Daly,[22] and found the case facts sufficiently matched those of Elizabethan to find an express trust. It is possible then for cases bearing some resemblance to Quistclose to be judged on their own individual merit and different configurations of equitable rules applied for best effect. It is perhaps a good thing that trustees of resulting trusts are therefore not encumbered with all the duties of express trustees. It is impossible that a single trust could be both express and resulting at the same time as the expression of the intention responsible to creating an express trust will inherently eliminate the circumstance that gives rise to a resulting trust. Therefore if the facts of a case tend to evince one arrangement, it is incorrect then to say the trust is of the other sort, which means that there is danger in a hard rule that the general factual paradigm seen in Quistclose can give rise only to one type of trust and not another.

 

It is therefore possible for different types of Quistclose trust to coexist in the law, with formulations being chosen according to what is most able to produce justice. Therefore Quince should be taken to stand for judicial freedom of choice rather than a preference for one formulation. Or alternatively, whenever a duality of trusts is perceived, the different parts should be dealt with under classical trust law separately and the entire notion of a Quistclose trust be discarded. But if the latter option is taken, then there is a problem as to when and how the secondary trust for the return of money comes into existence. The cases examined herein then would stand only for how a loan or other payment can become a trust where mutual intention is evident.

 

The problem presented by strict formulations in areas of human activity that are capable of substantial variation is that injustice can be dealt where circumstances vary from the known precedents. It is conceivable that a lender – perhaps an inexperienced, non-commercial lender – might be careless and lacking in specificity in how they stipulate the beneficiary of a loan, notwithstanding their subjective intentions. If there was a strict rule that the only sort of trust that can arise from a loan to benefit a third party is an express trust, then the money lent would become the putative trustee’s own property and both beneficiary and lender would have no obvious recourse to fulfil the purpose. Let us further suppose there is a case that is similar to Elizabethan, except that the donations do not have any appearance of being unconditional gifts, but the intended beneficiaries of each donation still are not identified adequately. Let us suppose the donors take action when an intended recipient ceased to exist. Should those funds become the property of the putative trustee itself? Equity would require the return of the funds to the donors. It would be in the character of equity to find whatever form of trust will be conducive to justice. In such a case a resulting trust would be put in place. With the resulting trust paradigm in action, once it is plainly clear that there is a purpose, and that the purpose is no longer achievable, the return of moneys is compulsory, even if the identification of a beneficiary became precatory.

 

Lastly, if the Quistclose trust is comprised of classical trusts, then it may be that there is nothing but academic interest in it. But according to Wilburforce LJ, in the earliest roots of the Quistclose trust it was recognised that certain facts gave rise to a pair of trusts, not just one.[23] What the early cases show us is that two trusts are capable of operating in tandem without conflict, albeit having reverse effect on the same property. This is an important doctrine in support of lenders’ intentions.

 

The arguments for express and resulting trusts are both very good. But it is unfortunate that Millett LJ, the latter to give his judgment, did not see the potential for applying the alternative view on equal footing with his own, on the merit of individual cases.

 

The beneficiary principle

When a loan is secured with a mortgage over property that has been purchased with the loan, and the said property goes (as agreed) to a third party beneficiary, then the third party takes an encumbered title. The beneficiary may lose the property if the trustee defaults in repayment. That applies regardless of whether there was a trust in the recipient’s favour. In Twinsectra there was no mortgage, but as Lord Hoffmann pointed out, Twinsectra’s ‘...security was clause 3 of the Sims [the agents for the alleged trustees] undertaking’[24] which was a promise to make loan repayments. This in turn means the beneficiary cannot take the whole of the property rights and their rights would be compromised until repayment is made in full. The loan contract then would be intrinsically connected to the secondary trust and not just a thing existing in parallel to it. But Millett LJ ruled out that proposition saying that Twinsectra’s reliance exclusively on clause three went only to the lender’s subjective intention,[25] which is a valid point. He made reference to the lender retaining title, but only ‘unless and until it is applied in accordance with his directions, and insofar as it is not so applied it must be returned to him.’[26] McDermott commented: ‘That was not a security in the classical sense, but what was clear is that the financier would have direct recourse against…’[27] the solicitors who acted as trustees. The beneficiary then is able to take a complete, unencumbered title, meaning that the ruling in Twinsectra is consistent with the beneficiary principle.

 

As for Gummow J’s formulation, he stated that:

 

Quistclose had a beneficial interest (although not at all relevant times an exclusive beneficial interest) in the money in question. Thus, it was not merely in the position of a lender with the benefit of a promise to repay. Nor was Quistclose a settlor who had fully settled a fund upon other parties and did so not retain for itself a beneficial interest sufficient for it to ensure performance of the trust.[28]

 

Importantly then, until the money is applied, the beneficial interest is split two ways. As discussed above, the contradiction of opposed beneficiaries is eliminated by the splitting of the trust into two limbs. This means that the interest of the primary beneficiary is not compromised by the settlor’s interest.

 

Therefore under both a resulting trust construction and an express trust construction, there is no conflict with the beneficiary principle unless a mortgage exists. A secondary trust exists with the lender as beneficiary only to ensure that the primary trust is paid out to the primary beneficiary. This is effected equally well by express and resulting trusts.

 

The relevance of intention

Certainty of intention must be established objectively on the facts to found any express trust, regardless whether the parties actually knew what they were doing at the time of settlement. The test for an automatic resulting trust is also objective, but the trust arises not directly from a transfer, but from circumstances in which transferred property rights would otherwise end up with a party having no just claim to them, or else be annihilated. Thus the test is a matter of fundamental equitable principle and recognises that all property rights must have owners. Given the competing views of Millett LJ and Gummow J on the nature of a Quistclose trust, there are then competing views on the relevance of intention.

 

If a Quistclose trust is a form of express trust, then the requisite intention must appear solidly in conduct or statements that cannot on reasonable analysis evince any other form of arrangement. A loan contract specifying appropriate rights and obligations and contingency measures may suffice for this (but see Millett LJ’s comments on clause three of the trustee’s undertaking, above). However, if a Quistclose trust is a resulting trust, then there need not be any evidence that a reasonable person in the settlor’s position would have had an intention to place the said rights on trust. The “intention” that the money should “result” back to the settlor is implied by a principle that a property right should not be destroyed or fall into the hands of an undeserving party.

 

In the purpose-loan cases discussed above, the intention to settle a trust occurs bilaterally between settlor and trustee. Thus there is mutual intention. This may be compared with classic trust theory, in which a trust can come into being under the unilateral intention of the settlor. Gibbs ACJ in Australasian, cited above, specified that the intention is mutual.[29]

 

There appears to be a special interplay between certainty of intention and certainty of beneficiary in Quistclose trusts in some circumstances. In the Quistclose case a loan was given with third parties only named as a preferred beneficiaries. Unless there is further evidence in any such case to set the parameters of a trust then the absence of clarity as to who benefits, when, how and to what extent, would tend to show uncertainty of intention. It is by no means necessary that if one of those certainties fails the other does at once. However in so much as Quistclose trusts can be implied by the conduct of parties rather than explicitly declared as such, those two certainties should tend to fail together.

 

Therefore, the relevance of intention depends on whether a Quistclose trust involves resulting or express trusts. The intention to create a trust would often be mutual, but it need not be. Also, the intention to create a trust can be inferred from the mere specification of a beneficiary.

 

Conclusion: Inconsistency of the Twinsectra and Elizabethan approaches

In foregoing discussions it has been seen that a disagreement exists between English and Australian positions on what type of trust exists at the heart of the Quistclose trust. The champions of those interpretations, Gummow J and Millett LJ, advocate express and resulting trusts respectively, and do not appear to be reconcilable.

 

As noted above, a lineage of cases preceded Quistclose. Thereby a principal has been established firmly in the common law world that a loan for a third party can give rise to a trust. Quistclose followed this and was approved expressly by Gibbs ACJ in Australasian. However, since Gummow J and Millett LJ gave detail to the concept following their particular views, Australian and English courts may well favour different approaches. Both approaches have been applied in subsequent Australian State cases such as Quince. They have not been applied federally in Australia, nor at the High Court. Although the reasoning of Gummow J should carry significant weight in this country, as a result of its treatment thus far his position remains only a persuasive precedent only. As noted, the court in Quince considered Twinsectra on an equal footing with Elizabethan. Furthermore Gummow J’s reasoning was an obiter dictum, whereas Millett LJ’s reasoning was in his ratio decinendi. Therefore we are left with no clear distinction between Australian and English law on the matter. It remains open to the Australian judiciary to choose which approach is best, as the court in Quince did. As argued above this is a better state of affairs so that facts ‘susceptible of infinite variation,’[30] as Gummow J put it, can be dealt with on their own merits.

 

 

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*The author of this article is presently a JD student at Monash University with an interest in banking and commerce law. He holds a Bachelor of Arts with Honours in Sociology from Deakin University. Acknowledgement is due to Victoria Lambropoulos of Deakin University for her input during earlier stages of the research.

 

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1. Barclays Bank Ltd v Quistclose investments Ltd [1970] AC 567.

2. Twinsectra Ltd v Yardley and others [2002] 2 AC 164.

3. Re Australian Elizabethan Theatre Trust (1991) 102 ALR 681.

4. Quistclose, n1, 582.

5. Evans, M, Equity & Trusts, (LexisNexis Butterworths, Australia, 2003), p 320.

6. Twinsectra, n2, [99]. See also Turner, PG, A Two-Stage Approach to Interpretation (2004) 22 C&SLJ 427,p 430.

7. Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (In Liq) (1978) 141 CLR 335, 353.

8. Re Kayford Ltd [1975] 1 All ER 604. The rule in Kayford of a trust created unilaterally and appearing automatically upon payment by customers was applied in V R Dye & Co (a firm) v Peninsula Hotels Pty Ltd (in liq) & Rathner (1998) 28 ACSR 167.

9. Evans, n5, 321.

10. Twinsectra, n2, 185.

11. Quistclose, n1, 580. The case reviewed by his lordship on this point was Toovey v Milne (1819) 2 B&A 683.

12. Elizabethan, n3, 694.

13. Evans, n5, pp 322-3.

14. Paul v Constance [1977] 1 All ER 195.

15. Twinsectra, n2, 185.

16. Twinsectra, n2, [77].

17. Westdeutsche Landesbank Girpcentrale v Islington Borough Council [1996] AC 669, 708C. Quistclose was among the examples cited by Lord Browne-Wilkinson. This reference appeared in Millett LJ’s discussion against the proposition that beneficial interests are in suspense.

18. This point was taken by his lordship from Chambers, Robert, Resulting Trusts. See also explanation by Turner, n6, 430.

19. Twinsectra, n2, [99].

20. Elizabethan, n3, 693.

21. Quince v Varga [2008] QCA 376.

22. Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371. A stockbroker held a customer’s money allegedly on trust, but the money was found to be a loan.

23. Quistclose, n1, 580. The case reviewed by his lordship on this point was Toovey, n13.

24. Twinsectra, n2, 169.

25. Twinsectra, n2, [72].

26. Twinsectra, n2, [81].

27. McDermott, Peter, The Twinsectra Case (2003) 77 ALJ 290.

28. Elizabethan, n2, 691. It is assumed the words ‘and did so not retain’ are a typographical error and should read ‘and so did retain’.

29. Australasian, n5.

30. Elizabethan, n3, 693.

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