Re Baden (No. 2) [1973]

Key Notes

• Facts: This case arose after the McPhail v Doulton decision, where the House of Lords referred the case back to the High Court to apply the new "is or is not" test for determining the certainty of the objects in the discretionary trust.

◦ The case involved a trust that included beneficiaries described as "relatives" and "dependents" of the settlor. The issue was whether these terms were sufficiently certain to allow the trust to be valid under the "is or is not" test.

• Outcome:

◦ The Court of Appeal (CoA) held that the terms "relatives" and "dependents" were conceptually certain enough to create a valid trust.

◦ Judges applied the McPhail test, with different approaches to how certainty should be determined for these classes of beneficiaries.

◦ Ultimately, the case reaffirmed the validity of discretionary trusts even when the class of beneficiaries was not exhaustively defined, as long as the beneficiaries could be determined by the "is or is not" test.

Judges' Approaches

• Stamp LJ:

◦ Argued that both conceptual and evidential certainty were required.

◦ Denied that “relatives” could be defined as “descendants of a common ancestor,” suggesting instead that they should be defined as "next-of-kin."

◦ Stamp's approach was seen as returning to the old IRC v Broadway Cottages test of list certainty, which had been criticised as too rigid and likely to cause many trusts to fail due to uncertainty.

• Sachs LJ:

◦ Held that only conceptual certainty was required, and evidential certainty (proof of who falls within the class) was irrelevant.

◦ Stated that where there is uncertainty due to a lack of evidence, the person should be treated as not falling within the class of beneficiaries.

◦ Emphasised that trustees were not required to create an exhaustive list of potential beneficiaries but only needed to identify those who could be clearly categorised as beneficiaries.

• Megaw LJ:

◦ Suggested that a class could be conceptually certain as long as there was a "substantial number" of objects that could fall within the class, accepting some evidential uncertainty.

◦ Megaw's approach sought to find a middle ground between the more flexible Sachs approach and the stricter Stamp approach, which he believed was too harsh.

◦ His view allowed for a larger group of potential beneficiaries ("don’t knows") but sought to avoid the rigid list certainty approach rejected in McPhail.

Problems & Analysis

• Issues with Stamp's Approach:

◦ Stamp's insistence on evidential certainty could lead to many trusts failing due to the difficulty in proving exactly who qualifies as a beneficiary.

◦ His approach was seen as a return to list certainty, which had been rejected in McPhail.

◦ The "next-of-kin" definition was also considered unworkable due to its harshness and the complexity of defining "relatives."

• Sachs’ Approach:

◦ Sachs' position, which emphasised conceptual certainty over evidential certainty, was considered more flexible. However, it might leave some uncertainty, as people whose status as beneficiaries is unclear would be excluded.

◦ This approach was seen as more consistent with the McPhail decision, which rejected the need for an exhaustive list.

• Megaw’s Middle Ground:

◦ Megaw’s approach allowed for a more pragmatic solution, accepting some evidential uncertainty as long as the class of beneficiaries was conceptually certain.

◦ However, his approach was also criticised for allowing too much uncertainty, particularly the concept of the "don’t knows," which might cause administrative difficulties in determining who qualifies as a beneficiary.

Impact

• Reaffirmation of McPhail Test: The decision reaffirmed that the “is or is not” test, established in McPhail v Doulton, would govern the certainty of objects in discretionary trusts.

• Conceptual Certainty: The case marked a shift away from the rigid list certainty requirement and towards a more flexible approach, where a trust could still be valid as long as the class of beneficiaries was conceptually certain and could be identified with reasonable effort.

• Ongoing Debate: The different approaches to certainty (conceptual vs. evidential) continued to generate debate, with Stamp’s approach seen as too strict, while Sachs and Megaw’s positions allowed for more flexibility but also uncertainty in application.