Introduction
The case of McPhail v Doulton [1971] AC 424 represents a significant judgment in the law of trusts, specifically concerning the certainty of objects in discretionary trusts. A discretionary trust is a trust where the trustees have the authority to select the beneficiaries from a defined class and allocate the trust property among them. This area of law requires conceptual certainty, ensuring that the class of potential beneficiaries is sufficiently defined. The technical principle at stake involved the correct test for determining whether the class of potential beneficiaries is defined with sufficient certainty, thereby allowing the trust to be legally valid. The case addresses the key requirement that for a discretionary trust to be valid, the class of beneficiaries must be identified with sufficient clarity to enable the trustees to carry out their duties. This means that it must be conceptually certain, not administratively unworkable, and there must be an evidential method by which the trustees can ascertain who fits within the class of potential beneficiaries. This ruling substantially altered the existing approach to discretionary trust object certainty.
The Facts and Issue in McPhail v Doulton
The factual background of McPhail v Doulton centered on a trust established by a settlor who directed trustees to distribute the net income of a fund to individuals who were either employees of his company, their relatives, or their dependents. The terms of the trust granted the trustees discretion to decide which members of this class would receive distributions and how much they would each receive. The core issue before the House of Lords was whether the trust created by the settlor was valid given the nature of the beneficiary class defined as employees, relatives, and dependents. At the time, the existing legal precedent, largely shaped by IRC v Broadway Cottages, stipulated that discretionary trusts were valid only if it was possible to compile a complete list of all potential beneficiaries. This required that the class was so certain in its definition, that the court could order an equal division of the trust assets among all the members of the class, should the trustees fail to distribute the funds. The legal challenge in McPhail v Doulton thus involved determining whether a trust could be valid even if a complete list of potential beneficiaries could not be generated, thereby testing the established ‘complete list’ principle.
The Overruling of IRC v Broadway Cottages
The decision in McPhail v Doulton dramatically departed from the previous approach, which was based on the concept of the ‘complete list’ test formulated in IRC v Broadway Cottages. This older test held that a discretionary trust was only valid if the court could compile a complete list of all the potential beneficiaries. This approach implicitly assumed that a court could only execute a discretionary trust by ordering an equal distribution of the trust property among all the members of the class, if the trustees failed to do so. Lord Wilberforce, in delivering the leading judgment in McPhail v Doulton, explicitly rejected this assumption. He noted that equal distribution was often the last thing the settlor intended, rendering the ‘complete list’ test impractical and unsuitable for discretionary trusts. The ruling acknowledged the impracticality of enforcing a trust that, by its very nature, involved the trustees' discretion in selecting beneficiaries. The House of Lords determined that the need to identify each and every potential beneficiary was unduly rigid and did not reflect the true nature of discretionary trusts. This rejection of IRC v Broadway Cottages marked a critical shift in the legal understanding of discretionary trusts.
The "Is or Is Not" Test and Conceptual Certainty
In replacing the ‘complete list’ test, Lord Wilberforce introduced the ‘is or is not’ test, which serves as the benchmark for assessing the conceptual certainty of objects in discretionary trusts. This test stipulates that a discretionary trust is valid if it can be determined with certainty whether any given individual is or is not a member of the class of potential beneficiaries. This does not require the ability to identify every single beneficiary, but rather a method for determining whether a claimant falls within the specified class. The emphasis was placed on conceptual clarity as opposed to the practicalities of ascertainment. The test focuses on the definition of the class rather than the capacity to locate each of its members. For instance, if the class is defined as ‘relatives’ of a specific person, the court should assess whether this description provides enough certainty to determine, in principle, whether an individual qualifies as a relative. This shift from a requirement of complete ascertainability to conceptual certainty was a major outcome of McPhail v Doulton, establishing a more practical and adaptable standard for discretionary trusts.
Administrative Unworkability and Practical Limitations
Although McPhail v Doulton introduced the ‘is or is not’ test, it also recognized a concept known as administrative unworkability, which can invalidate a trust even if it satisfies the test for conceptual certainty. This principle acknowledges that some trusts, despite being conceptually certain, may be so unmanageable or impractical that they cannot be executed effectively. This principle was illustrated in R v District Auditor ex p West Yorks MCC, where the trust involved a wide class of objects including the entire population of West Yorkshire. The court deemed it administratively unworkable to manage such an extensive group of potential beneficiaries, as the class was deemed too broad and unwieldy. This highlights the distinction between a conceptually certain trust and a workable trust. The concept of administrative unworkability serves as a practical check to prevent the creation of trusts that are theoretically valid, but impossible to administer effectively. The principle ensures that, alongside conceptual certainty, the trust’s scope should remain within the practical bounds of manageability for the trustees and the court.
Evidential Certainty and the Decision in Re Baden (No 2)
Following the ruling in McPhail v Doulton, the case was remitted to the High Court to assess whether the trust was indeed valid under the new ‘is or is not’ test. This case became Re Baden (No 2) and involved a debate around what it meant to determine whether an individual ‘is or is not’ a member of a class. The issue that arose was how evidential uncertainty should be handled. The judges in the Court of Appeal adopted different approaches. Sachs LJ suggested that if a person could not prove they were in the class, it should be presumed they are not. Megaw LJ suggested that the ‘is or is not’ test was met if a substantial number of objects fell within the trust. Stamp LJ adopted the strictest approach, suggesting that it must be possible to say with certainty whether any person is, or is not, in the class. These different approaches showcase the ongoing complexities with establishing what constitutes ‘evidential certainty’ and highlight the impact on how the new ‘is or is not’ test was to be applied in practice. Ultimately, all judges held the trust valid. Re Baden (No 2) further expanded the understanding of the test set out in McPhail v Doulton, by delving into how the test should be applied in situations where the evidential proof of beneficiary status was unclear.
Conclusion
The case of McPhail v Doulton represents a pivotal development in the law of trusts, specifically concerning the certainty of objects in discretionary trusts. The ‘is or is not’ test established by the House of Lords supplanted the older ‘complete list’ test, which required the ability to create a full catalog of all potential beneficiaries as previously established in IRC v Broadway Cottages. This shift reflects a more flexible understanding of the nature of discretionary trusts, accepting that precise identification of every beneficiary is not always feasible nor reflective of settlor intentions. The concept of administrative unworkability, also part of the McPhail v Doulton framework, imposes a practical limit on the breadth of discretionary trusts, preventing their application in situations where they are simply too unwieldy to execute. The subsequent case of Re Baden (No 2) further explored the evidential complexities of the ‘is or is not’ test. These rulings together have shaped modern trust law and provide a complex, but more workable method to establish the validity of discretionary trusts.
