The Bundle of Rights “doctrine”:  Can appointors do whatever they want?

The “Bundle of Rights” doctrine assumes that a person who has the power to appoint and remove Trustees, and/or beneficiaries, is not subject to fiduciary restraints.

Is this correct?

I recently asked Matthew Conaglen this.  Matthew is a successful young New Zealand academic who lectures at Cambridge University.  He has a PhD on the nature and function of fiduciary duties for which he was awarded the celebrated Yorke Prize.

He has written a book entitled “Fiduciary Loyalty – Protecting the Due Performance of Non-Fiduciary Duties” – (Hart Publishing Ltd, 2010).  He pointed me to the cases that are set out in footnote 152 of his text.

The footnote relates to the following proposition:

“A fiduciary can avoid liability for what would otherwise be a breach of fiduciary duty if his conduct has been properly authorised.  Such authorisation can come … from a person who created the fiduciary relationship at the outset.”

In other words, if I settle a Trust of which X is a trustee and give him the power to make a distribution to himself as a beneficiary, I have probably impliedly authorised him to act selfishly.

A recent case to which he refers is Jones & Ors v Firkin-Flood & Anor [2008] EWHC 2417 (Ch), a decision of Briggs J whose decisions in Equity are typically thorough and interesting.  Briggs J says that when a Settlor places Trustees “in a position of inevitable conflict” they can exercise their rights “on a beneficial owner basis without being liable to account … for any remuneration or benefit obtained by them directly or indirectly …”.

Another of the cases to which he refers is Hobkirk & Anor v Ritchie & Ors (1933) 29 Tas LR 14,48 where it was said that:

“The Testator knows his own friends and those with whom he is about to appoint and many a Testator would say ‘I care not for any rule as to conflict of duty with interests; I know So and So.  Nothing in my opinion would ever make him swerve from the line of duty.  I will appoint him’. 

I do not read this case as giving a license to a Trustee to act selfishly.  Rather, the Court is saying that the person can be a Trustee even though he or she has a potential conflict of interest.

In Tempest v Lord Camoys (1888) the Law Times Vol. LVIII, NS 221, Chitty J said:  “It has never been decided that the donees of a power could not appoint themselves”.  This is not a statement that appointors can act selfishly.

The cases to which Mr Conoglen refers are generally focussed on whether a person should continue to be a Trustee in circumstances where he/she has a conflict of interest and duty.  The exception is Jones v Firkin-Flood which appears to authorise selfish dealing.

None of the cases are focussed on the kind of crude and cavalier appointments that are sometimes made in family Trusts in New Zealand.  I refer to Trusts that typically contain property that was once relationship property.  A husband with a power to remove beneficiaries will, after separation, swiftly remove his wife from the list of beneficiaries:  see for example Olliver v Sparkes FAM-2004-002-000082, 12.12.06.  Are such brazen actions impliedly authorised by the Trust?

First, I would say that the law is uncertain and there do not appear to be the bright lines of guidance that practitioners seek.  The decision in Jones v Firkin-Flood suggests that such actions can be authorised by implication.

Second, if such actions are impliedly authorised by the Trust the question may arise whether there was a valid Trust in the first place.  In this game of charades the settlor pretends to be the dispassionate possessor of property for the benefit of others, but in truth the property is always intended to remain under the Settlor’s complete control for him/her to deal with as he/she likes.  In Olliver v Sparkes Judge O’Dwyer found that Mr Sparkes intended from the outset to retain personal control of the so-called “Trust property”.

She did not treat the Trust as a sham but imposed a constructive Trust over its assets for the benefit of Ms Olliver.  An argument that could have been advanced for Ms Olliver was that there was no Trust since one of the three certainties was missing, namely the certainty of an intention to create a Trust.

On this analysis the Bundle of Rights “doctrine” is valid, not because the husband has Trust powers that enable him to appropriate the Trust property but because there was never a Trust in the first place. 

When the law is in a state of uncertainty like this, what should a settlor do to avoid this outcome?  One answer is to diversify the powers of appointment so that one person cannot “control” the Trust.