McPhail v Doulton is a landmark decision by the House of Lords that fundamentally reshaped English trusts law, particularly in relation to the certainty of beneficiaries in discretionary trusts. Also known as Re Baden’s Deed Trusts (No 1), the case addressed the stringent “complete list” test for certainty of objects that had previously rendered many discretionary trusts invalid due to impractical requirements.
The House of Lords replaced this with a more flexible “is or is not” test, significantly expanding the practical use of discretionary trusts in estate planning. This case brief examines the facts, legal issues, judgement, and significance of McPhail v Doulton, highlighting its lasting impact on trust law.
Facts of McPhail v Doulton
The dispute in McPhail v Doulton arose from a trust established by Bertram Baden, who settled a fund for the benefit of the staff of Matthew Hall & Co Ltd and their relatives and dependents. Baden died in 1960, leaving executors to administer the trust.
The relevant provision, clause 9(a) of the trust deed, stated that the trustees had the power to apply the net income of the fund at their absolute discretion to or for the benefit of any officers or employees (including ex-officers and ex-employees) of the company, as well as any relatives or dependants of those persons.
The clause further provided that the trustees “shall be under no obligation to see to the application of the money,” suggesting a discretionary power rather than an absolute duty. The executors contested the validity of the trust, arguing that the class of beneficiaries was too uncertain.
They claimed the arrangement was not a trust but rather a mere power of appointment, which did not bind the trustees to distribute the property. The key legal question was whether the trust was valid given the alleged uncertainty of the objects (beneficiaries).
Legal Issues
The primary legal issues in McPhail v Doulton concerned the nature of the instrument created by the settlor (trust or power) and the applicable test for the certainty of objects in discretionary trusts:
- Trust or Power? Did the wording of the trust deed create a trust (which imposes an obligation on trustees to distribute the property) or a power of appointment (which gives trustees discretion to distribute but no binding duty)?
- Certainty of Objects in Discretionary Trusts: Assuming it was a trust, was the class of beneficiaries sufficiently certain to uphold the trust? More specifically, which test should apply to ascertain certainty—the older “complete list” test requiring the ability to list all beneficiaries, or a more flexible test?
Before McPhail v Doulton, English law generally required that for discretionary trusts, trustees had to be able to draw up a complete list of all beneficiaries for the trust to be valid. This stringent requirement often led to the invalidation of trusts with broad or vague classes of objects. Conversely, powers of appointment only required that it be possible to say whether any given individual was or was not a member of the class (the so-called “is or is not” test).
McPhail v Doulton Judgement
The House of Lords, led by Lord Wilberforce, delivered the seminal judgement in McPhail v Doulton, which significantly altered the legal landscape.
Trust or Power?
The court held that clause 9(a) created a discretionary trust rather than a mere power of appointment. The use of the word “shall” imposed an obligation on the trustees to distribute the trust property, albeit at their absolute discretion. Thus, the trustees were under a duty to consider the beneficiaries within the defined class and apply the trust fund accordingly. This distinguished the trust from a power, which merely grants discretion without an enforceable duty.
Certainty of Objects Test
Critically, the House of Lords rejected the complete list test traditionally applied to discretionary trusts. Lord Wilberforce explained that requiring trustees to compile an exhaustive list of all beneficiaries was impractical and contrary to the settlor’s intentions, especially in cases involving large or ill-defined classes.
Instead, the court adopted the “is or is not” test, previously applied to powers of appointment, as the appropriate standard for discretionary trusts. Under this test, the trust would be valid if it could be said with certainty whether any given individual was or was not a member of the class. This meant that while the entire class need not be exhaustively identified, the trustee must be able to determine whether particular individuals qualified as beneficiaries.
Lord Wilberforce also emphasised the difference between conceptual certainty and evidential certainty. Conceptual certainty refers to clear and precise criteria defining the class of beneficiaries, while evidential certainty pertains to the ability to prove whether particular individuals meet those criteria. A trust may be conceptually certain but evidentially uncertain if it is difficult to gather proof of membership. The court held that conceptual certainty was the crucial test.
Applying this reasoning to the facts, the court found that the class of employees, ex-employees, relatives, and dependants was conceptually certain. Therefore, the trust was valid despite practical difficulties in identifying every possible beneficiary.
Conclusion
McPhail v Doulton stands as a cornerstone decision that modernised English trust law by making discretionary trusts more workable and flexible. The House of Lords replaced the rigid and often unworkable complete list test with the more practical “is or is not” test for certainty of objects. This shift better aligns with settlors’ intentions and administrative realities.
