The nature of trusts

It is often argued that there are “traditional trust principles” which ought to be observed. We can call this the “traditional view” of trusts. This view is fundamentally wrong. In fact, the trust has survived because lawyers and judges have repeatedly adapted it to meet new commercial needs. Let’s call this the “true nature” of trusts.

The true nature of trusts law is not rigidity, but evolution. Lawyers modify trust structures to achieve their clients’ objectives. Throughout history, the courts and Parliament have decided whether to recognise, restrict or reject these legal innovations. 

Origins of the trust

Trusts are a creation of Equity, which has always performed a corrective and adaptive role within private law. This is the first argument against the traditional view.

The trust’s origins illustrate this point. In medieval England, trusts were known as “uses”. Landowners used them to avoid the burdens of feudal ownership. Parliament prohibited this practice with the Statute of Uses 1535, but Chancery courts continued to recognise arrangements which circumvented the Statute. 

This cyclical development appeared again in the 18th century. Parliament restricted the formation of joint-stock companies without Crown authority with the Bubble Act of 1720. Lawyers responded by using trusts and settlement deeds to provide some of the practical advantages of incorporation before statutory companies became generally available.

Trust law therefore develops cyclically: pressure generates new drafting techniques; the courts or legislature respond; and lawyers adapt again. Therefore, trust arrangements should not be rejected on the grounds of novelty alone.

Arbitration clauses in trust deeds

A modern example of this cyclical development is the use of arbitration clauses in trust deeds. Such clauses are common in contracts entered into by trustees with third parties. However, difficulty arises when the trust instrument itself requires disputes between the trustees and the beneficiaries to be resolved by arbitration.

This is because the courts have an inherent supervisory jurisdiction over trusts which may conflict with arbitration clauses. In Re Wynn [1952] Ch 271, a clause purporting to give trustees a binding power to resolve questions arising from the administration of the trust was held to be ineffective. Similarly, in the New South Wales case Rinehart v Welker, Young JA doubted whether disputes concerning the removal of trustees could properly be resolved by arbitrators.

There is also a problem of consent. An arbitration agreement is ordinarily contractual, but a beneficiary is not necessarily a party to the trust deed agreed between settlor and trustee. It is therefore uncertain whether the beneficiary can be treated as claiming “under or through” a party under the Arbitration Act 1996.

These concerns do not necessarily make trust arbitration invalid. Arbitral tribunals can grant substantial remedies, while courts can make supporting and enforcement orders. Historical authority also suggests that internal trust disputes are not inherently incapable of arbitration. For example, In Auriol v Smith (1823) 37 ER 1041, an arbitral award was held not to be invalid merely because the dispute arose between trustees and beneficiaries.

A settlor may also make the beneficiary’s acceptance of an arbitration clause a condition of receiving a benefit under the trust. However, authority shows that such a clause cannot entirely exclude the court’s jurisdiction, especially regarding vulnerable beneficiaries or in matters involving a trustee’s irreducible duties, fraud or wilful misconduct. 

Therefore, arbitration clauses in trust deeds should be assessed by their practical effect and public policy, rather than rejected simply because they are novel or unfamiliar.

Intermediated securities

A second example concerns the use of trusts in modern finance. Investors often do not hold securities directly, but rather through a chain of intermediary actors. Such investors have a beneficial interest in the securities rather than legal title.

Re Lehman Brothers International (Europe) (No 4) demonstrates the resulting complexity. In that case, LBIE acted as a “hub” for its affiliated companies and dealt with securities transactions through an automated system called RASCALS. When the group collapsed in the financial crisis of 2008, disputes arose over whether the affiliates had beneficial interests in the securities. The court concluded that the arrangements were capable of creating trusts. 

Robert Stevens criticised this conclusion, arguing that there was insufficient certainty of intention and subject matter. At times, Lehman did not hold the securities themselves, but only rights to obtain equivalent securities from the market. On that analysis, the judgment created a “floating trust” whose subject matter could change or disappear while trading continued.

The criticism exposes a genuine tension. Traditional doctrine requires certainty of intention and subject matter. However, the intention to create a trust is assessed objectively. Courts may therefore infer a trust from the substance of a transaction even where the parties did not use orthodox language.

The move from paper securities to electronically recorded and intermediated holdings has made innovation unavoidable. Trusts and sub-trusts enable investors to assert proprietary interests where direct legal ownership is absent. At the same time, lengthy custody chains can distance investors from issuers and weaken the practical content of their rights.

The solution is not necessarily a return to nineteenth-century forms. New technologies, including distributed ledgers and blockchain systems, may permit securities to be held through less intermediated structures. Legal drafting will continue to evolve alongside those technologies.

Conclusion

The history of trusts law is a history of adaptation, with lawyers applying established equitable structures to new circumstances.

Not every innovation should be upheld. Trust arrangements may fail for lack of certainty, defective formalities, inconsistency with the parties’ intentions or conflict with public policy. But “non-orthodoxy” is not itself an objection. Rather, the true nature of trusts law is its capacity to evolve while remaining anchored in equitable principle.

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