Many other cases are briefly summarized and referred to in the text of the various pages of Duhaime.org's trust law collection. This page has a selection of cases which will help give the reader a basic understanding of the many complex legal issues raised in the law of trusts.

Introduction

Trust law is based on equity, a old English branch of the law which still, today, has major bearings on Canadian trust law and, indeed, on the trust law of the United Kingdom, USA, Australia, New Zealand and other countries which have developed their legal systems based on the English model.

Judges' decisions, also known as "case law", have established many of the rules of trust law. In spite of major statutory overhaul in the form of "trustee acts", most of these cases continue to shape trust law as it applies today.

The following is a summary of those cases which are considered to be important in trust law. Many other cases have also been summarized in the various articles related to trust law at duhaime.org, where references appear in parentheses or in italics. Readers should be cautioned that the effect of some of the cases have been specifically precluded from some provinces. For example, the governments of Alberta and Manitoba have amended the common law to preclude the rule in Saunders v. Vautier.

The Cases

► SAUNDERS V. VAUTIER

A father died in 1832 leaving stock in trust for the benefit of his nephew. The will also set out that the trust property would devolve to the nephew when he reached 25 years old.

At the time, in England, the age of majority was 21 and when the nephew reached that age, because he was the sole beneficiary of the trust, he asked the court to terminate the trust and have all the property transferred over to him.

The court agreed and this has become known as the "rule in Saunders v. Vautier."

Now PlayingRestated today, beneficiaries of a trust may end the trust and call in the property from the trustee if (1) all beneficiaries are sui juris (ie. under no legal incapacity such as being under-age or with a mental incapacity); (2) if the beneficiaries are unanimous and constitute the only persons entitled to the trust property.

So widespread is the practise now that court authority is not even needed; trustees are willing to hand over the property if the conditions of the rule apply without any petition to the court.

This is also sometimes referred to as the doctrine of acceleration.

► IN RE BROCKBANK

In this English case, one of two trustees wanted to retire. In consultation with the beneficiaries, the retiring trustee agreed to have Lloyd's Bank replace him as trustee. But the other trustee objected. The retiring trustee and the beneficiaries applied to the court to order the remaining trustee out, relying on arguments that if the beneficiaries all agreed, for whatever reason, they could oust a trustee and appoint another one.

The court said no. The beneficiaries must choose between either invoking the rule in Saunders v. Vautier or they must leave the administration of the trust alone. Even the courts cannot change a trustee without grounds.

► RE DIPLOCK

Caleb Diplock died in 1936 and his will created a trust leaving the residue of his estate to "benevolent" organizations in England. Most of the money was distributed when, in 1939, having exhausted any remedy they might have had against the trustee, Diplock's next-of-kin challenged the validity of the trust arguing that "benevolent" was different from "charitable" and that trusts for non-charitable purposes are invalid.

The next-of-kin wanted to retrieve (i.e. to trace) the money given to the benevolent organizations.

The problem was that some of the benevolent organizations, on good faith, used Diplock's money to build on land they owned, thus mixing the trust money with property of their own.

The court refused to allow the tracing to attack this endeavour, stating that the trust assets were no longer identifiable.

In his excellent book Equity and the Law of Trusts (1993), author Philip Pettit wrote:

"The general principle laid down in Re Diplock Estate is that whenever there is an initial fiduciary relationship, the beneficial owner of an equitable proprietary interest in property can trace it into the hands of anyone holding the property except a bona-fide purchaser for value without notice."

► RE SMITH

Peter Smith set up a trust in which he transferred over $1-million worth of Imperial Oil shares, the income of which was to go to his mother, and he or she would take the remainder (capital) upon the death of the other. The trust agreement said that the trustee had "sole discretion" to retain or convert the shares.

The shares only produced 2½% interest annually so the life tenant, the mother of the settlor, asked the trustee to sell the shares. At the time, bonds were producing 8% and 9%. The trust company contacted the beneficiary-settlor for advice and was told to keep the shares.

The mother sued the trustee and the settlor produced an affidavit in defence of the trustee saying that it was his intention, in creating the trust, that the shares be retained.

The court ordered the trustee to be replaced as "the trustee has failed to maintain an even hand between the life tenant and the remainderman." The court said that the settlor's subsequent affidavit was immaterial in the face of clear and unequivocal discretion in the trust agreement.

► PETTKUS V. BECKER

In this 1980 Canadian Supreme Court decision, a 19-year old common law relationship had ended acrimoniously. During the relationship, Mr. Pettkus had developed a thriving beehive operation and when the relationship ended, Ms Becker claimed half of it. Ms Becker's salary had gone towards numerous "family" expenses such as meeting ongoing expenses while Pettkus was able to save his income, which went towards the purchase of the bee-hiving farm.

Ms Becker's first argument was that an implied trust had developed in the farm and in which resulted her half-interest. If this was not the case, then she argued that a constructive trust, that of unjust enrichment had developed. These trusts are court-imposed and are designed to cure injustices where three conditions are met: where (1) someone has benefitted (2) at the expense of another and (3) the enrichment is "unjust" or without legal justification.

Decision: Ms Becker was given a 50% share of the farm and beehive operation.

Justice Dickson writing for the majority and in a brilliant display of legalese:

"... where one person, in a relationship tantamount to spousal, prejudices herself in the reasonable expectation of receiving an interest in property, and the other person in the relationship freely accepts benefits conferred by the first person in circumstances where he knows or ought to have known of that reasonable expectation, it would be unjust to allow the recipient of the benefit to retain it."

Since this decision, most Canadian provinces have passed legislation which recognizes common law relationships and establishes support standards for them.

► RE POCHE

This was an Alberta case in which the testator established a trust by his will and named his sister as trustee with his wife and daughter as beneficiaries.

The relevant trustee legislation required trustees to convert high-risk investments to safer investments, unless the trust document says otherwise.

The trustee, in this case, totally neglected to do so, or to keep good accounts of the trust. She also failed to make payments as they came due to the beneficiaries and lost about $7,000 of the trust property.

The problem the Alberta Court faced was a clause in the will which exonerated the trustee from any liability even if any loss ensues from her "dishonesty" or "wilful commission of a breach of trust."

But the Court adopted 19th Century equity decisions on the law of trusts and held that although the settlor has freedom to set the terms of the trust as best they see fit, they cannot shield their trustee from gross negligence no matter how they might word a liability exoneration clause. In other words, even the trustee who benefits from a liability exoneration clause in the trust document, will still be held accountable to the beneficiaries for losses which are due to the trustee's gross negligence (the decision actually refers to the Latin phrase of culpa lata which means gross negligence). The Court stated that such a rule was necessary because "no trust property would be safe if such gross negligence were not to make those who are guilty of it liable to the party injured." In law, gross negligence is defined as more than just inadvertence but intentional failure to perform a duty in reckless disregard to the damages this omission could cause to the rights of another.

► RE ONTARIO SECURITIES COMMISSION AND GREMAC CREDIT CORP. 

Due to the sale of trust property, Gremac Credit received over $1-million for several beneficiaries. This money, rather than being turned over, was deposited into another Gremac Credit account which already had $4-million in it belonging to three other companies. It later took out $4-million from this account and put it into an account in the name of only one of the companies. Through other expenditures, the original account was whittled down to a balance of less than a half-million dollars, with a net loss to the beneficiaries of over half-a million dollars. Gremac Credit went bankrupt and the fight for the money remaining in the accounts was brought to the court.

The court refused to apply the rule in Clayton's case stating that it was a prima facie rule only which can be set aside if impracticable or if it would create an injustice.

The case was appealed to the Supreme Court of Canada which adopted the Ontario Court of Appeal's reasoning stating that the "first-in, first-out" rule in Clayton's case did not apply "in the allocation of losses between beneficiaries where a trustee has made unauthorized disbursements from an active bank account into which the beneficiaries' funds have been placed and insufficient funds remain to reimburse each of the beneficiaries in full" ((1988) 2 SCR 172)

► GEFFEN v. GOODMAN

The Supreme Court of Canada reviewed a case from Alberta where a trust was set up by a "manic depressive and immature" woman. She went to see a lawyer recommended by her brothers and set up a trust.

After her death, her son was not happy with the trust and tried to have it set it aside arguing that his mother was unduly influenced by either the brothers or the lawyer.

The Supreme Court refused to buy the argument and allowed the trust to stand. The Court was unable to agree on some fundamental principles but the following is what Justice Wilson came up with: a presumption of undue influence can arise in certain relationships {editor's note: this issue is also discussed in the Contract Law section under Privity of Contract}; each relationship must be looked at individually; the existence of confidentiality between the parties is not a absolute requirement; a presumption of undue influence arises between parent/child and solicitor/client; in commercial transactions, undue disadvantage or benefit must also be shown; that once the presumption exists, it must be rebutted with evidence that the transaction was entered into "as a result of his own full, free and informed thought." Justice La Forest refused to endorse Wilson's "commercial transaction" dicta, saying that this case did not even involve a commercial transaction. La Forest noted that the deceased had a "deep-rooted poor relationship" with her brothers which tended to negate the suggestion of undue influence.

► PETER V. BEBLOW

This 1993 Supreme Court of Canada decision can be referred to as a "lawyer's decision" because of it's highly technical content although that is the nature of trust law. In this case, Canada's highest court again considered the unjust enrichment constructive trust in certain family law situations.

While all the justices of Canada's Supreme Court agreed to impose a constructive trust on Mr. Beblow to the benefit of his ex-common-law spouse, Ms Peter, they fought a furious written battle in their opinions. A minority decision written by Justice Cory even attempted to water-down the doctrine of unjust enrichment in family cases by concocting a number of presumptions.

Decision: the majority refused to go along insisting that the principles of unjust enrichment, even as they would exist in commercial law environments, transpose perfectly well to family law cases and no presumptions were required nor should they be concocted.

The majority added two new principles to be followed in family cases of unjust enrichment: (1) that the courts retained the option of imposing a monetary award instead of imposing a constructive trust and (2) before imposing a constructive trust, monetary compensation must be shown to be inadequate and the connection between service rendered and the property must be direct and sufficient.

REFERENCES: