This is an extract of our The Quistclose Trust document, which we sell as part of our Trusts and Equity Notes collection written by the top tier of Oxford students.
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The Quistclose Trust Basic principle: Where A pays money to B for a specified purpose (such as the payment of B's debts to a third party, C), the money does not become part of the general property of B, but is clothed with a primary trust, to be used for that purpose and no other. If the primary purpose fails, a secondary trust arises, whereby B holds the unexpended money on trust for the donor, A.
Difficulties: (i) Who is the settlor?
In each of the cases above, the settlor is clearly the donor, A. However, Quistclose trusts have also been held to exist in cases where the initiative for setting aside the fund for a particular purpose has come from the donee, B. In this situation, B will arguably be the settlor.Re Kayford ; Re Chelsea Cloisters (1981);
- Twinsectra v. Yardley; Facts: Money was loaned to buy land. The solicitors undertook that they would only use the money the money to buy land for T. This was passed between solicitors and then onto a borrower without enforcing the purpose to acquire land. There was no repayment of this borrowed money. General decision:
+ Lord Hoffman: Held that repayment of the money was owed because of the undertaking.
+ Lord Millett however, held that there was a Quistclose trust and rejected Lord Wilberforce's two trust analysis in favour of the following: that the beneficial interest rests with the lender, the borrower has a mere power to use the loaned money for a stipulated purpose. Regarding intention: CA focused upon the intentions of both donor and donee.
+ Potter LJ, CA: Cited Re Goldcorp Exchange Ltd , where Lord Mustill said that what is required is 'a mutual intention that the moneys should not fall within the general fund of the (donee's) assets but should be applied for a designated purpose'. This focus on common intention does, however, leave uncertainty as to the identity of the settlor.
+ Lord Millett, HL: Similarly unspecific as to the identity of the settlor. He said that the question is 'whether the parties intended the money to be at the free disposal of the recipient' or not (at ).
? Whoever is regarded as the settlor, there must be certainty of intention to create a trust:Re Multi Guarantee Co ;
- Twinsectra; Held at the CA stage that this certainty of intention requires more than merely a declaration that the loan money is to be used for a specified purpose; some 'additional indication' is required that the money is to be held on trust. This will normally be satisfied, for example, by the agreement that the loan money be segregated from the donee's other assets, though segregation may not be essential in every instance.
+ Lord Millett, HL: Emphasised that intention to create a trust is to be based on an objective judgment of the parties' dealings rather than upon their subjective wishes (para ). (ii) Is the purpose for which the trust can be created limited to the payments of debts?
Although Quistclose trusts have generally involved loans to be used for the payment of the donee's debts, they are not limited only to this situation.Twinsectra v. Yardley; decided that a trust can arise where a loan is made for any specified purpose, provided it is stated with sufficient certainty to allow the lender (A) to restrain misapplication of the loan moneys by the borrower (B).
+ Lord Millett: "In the earlier cases the purpose was to enable the borrower to pay his creditors... but the principle is not limited to such cases" .Re N (A Child)(Payments for Benefit of Child)  EWHC 11 (Fam);
(iii) The relationship between trust and loan Normally a trust and a loan are mutually exclusive. If B holds property on trust for A, A's rights and remedies are equitable and proprietary; if A loans money to B, A's remedy is a personal action for debt at common law. However, in a Quistclose trust, the two co-exist. If the money is expended by B in fulfilment of the primary purpose, B owes A a simple debt, but if the purpose fails, the money is held by B on trust for A.Quistclose; Per Lord Wilberforce: "I can appreciate no reason why the flexible interplay of law and equity cannot let in these practical arrangements".
(iv) Express or resulting trust?
The 'Quistclose trust' has been categorised as a species of resulting trust by writers (Parker and Mellows, The Modern Law of Trusts, 9th ed., p. 316) and in judicial dicta (Lord BW in Westdeutsche Landesbank, p. 708). Given further force by Lord Millett in Twinsectra. Vs. However, other commentators argue that it might be seen as express (see Hanbury and Martin, Modern Equity, 17th ed., p. 241). Traditional analysis: The primary trust was normally seen as express, arising out of the donor's clearly stated intentions as to the use of the money (or the donee's intentions, in cases such as Re Kayford). The secondary trust looked like an 'automatic' resulting trust, arising by operation of law upon failure of the primary trust.
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