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Justin Corleone
Justin Corleone

The Quistclose Trust: A Legal Device to Protect the Lender's Interest and Intention



The Quistclose Trust: Critical Essays by William Swadling




Have you ever wondered what happens when you lend money to someone for a specific purpose, but they use it for something else or go bankrupt? How can you get your money back? Is there a special type of trust that can protect your interest and intention? If you are interested in these questions, you might want to read The Quistclose Trust: Critical Essays by William Swadling. This book is a collection of essays by leading scholars in the field of trusts law, who examine and critique one of the most controversial and debated topics in this area: the Quistclose trust. In this article, I will give you an overview of what a Quistclose trust is, why it is controversial, what are the main arguments in the book, and how to evaluate them. I will also provide some FAQs at the end to help you understand this topic better.




the quistclose trust critical essays by william swadling


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Introduction




What is a Quistclose trust?




A Quistclose trust is a type of trust that arises when a lender lends money to a borrower for a specific purpose, but the borrower fails to use it for that purpose or becomes insolvent. In such a situation, the lender can claim that the money is held on trust for them by the borrower or by a third party (such as a bank), and that they have a right to get it back. A Quistclose trust is named after the case of Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, which is considered to be the origin of this concept.


Why is it controversial?




A Quistclose trust is controversial because it challenges some of the fundamental principles and doctrines of trusts law and contract law. For example, it raises questions such as:



  • How can a trust arise without an express declaration or intention by the settlor?



  • How can a trust be created for an uncertain or contingent purpose?



  • How can a trust be enforced against third parties who are not aware of its existence?



  • How can a trust override the rights of creditors in insolvency?



  • How can a trust be reconciled with the doctrine of consideration and the rule against fettering of discretion in contract law?



These questions have generated a lot of academic debates and judicial decisions, but there is still no clear and consistent answer to them. Different courts and scholars have adopted different approaches and interpretations of the Quistclose trust, resulting in confusion and uncertainty.


What are the main arguments in the book?




The book, edited by William Swadling, who is a professor of law at Oxford University and a leading expert on the Quistclose trust, contains 13 essays by distinguished authors, including Peter Birks, Robert Chambers, Lionel Smith, James Penner, and others. The essays cover various aspects and perspectives of the Quistclose trust, such as its history, nature, classification, rationale, advantages, disadvantages, and implications. The book also includes a foreword by Lord Millett, who was one of the judges in the case of Twinsectra Ltd v Yardley [2002] UKHL 12, which is another important case on the Quistclose trust.


The main arguments in the book can be summarized as follows:



  • Swadling argues that the Quistclose trust is a type of resulting trust, which arises from the presumed intention of the lender to retain a beneficial interest in the money until it is used for the specified purpose. He rejects the view that it is a type of express trust or constructive trust, or that it is not a trust at all but a contractual arrangement.



  • Birks argues that the Quistclose trust is a type of express trust, which arises from the actual intention of the lender to create a trust for the specified purpose. He rejects the view that it is a type of resulting trust or constructive trust, or that it is not a trust at all but a contractual arrangement.



  • Chambers argues that the Quistclose trust is not a trust at all, but a contractual arrangement between the lender and the borrower, which gives rise to a personal right of restitution in favour of the lender. He rejects the view that it is a type of resulting trust, express trust, or constructive trust.



  • Smith argues that the Quistclose trust is a type of constructive trust, which arises from the unconscionability of allowing the borrower to use the money for a different purpose or to keep it in insolvency. He rejects the view that it is a type of resulting trust or express trust, or that it is not a trust at all but a contractual arrangement.



  • Penner argues that the Quistclose trust is a type of express trust, which arises from the actual intention of the lender to create a trust for the specified purpose. However, he differs from Birks in that he does not regard the purpose as being part of the terms of the trust, but rather as being part of the terms of the contract. He also argues that the Quistclose trust does not override the rights of creditors in insolvency, but rather creates a subordination agreement between them.



These are just some examples of the arguments in the book. There are many more nuances and details that I cannot cover here. I encourage you to read the book yourself if you want to learn more about this fascinating topic.


The history and development of the Quistclose trust




The origin of the Quistclose trust: Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567




The facts of the case




The case involved a loan agreement between Quistclose Investments Ltd (Q), who was the lender, and Rolls Razor Ltd (R), who was the borrower. Q agreed to lend R 209,719 for R to pay dividends to its shareholders. Q transferred the money to R's account at Barclays Bank (B), with instructions that it should be used only for that purpose. However, before R could pay dividends to its shareholders, R went into liquidation. B claimed that it had a right to set off R's debt to B against R's credit balance in its account, which included Q's money. Q claimed that B had no right to do so because Q's money was held on trust for Q by R or by B.


The judgments of the House of Lords




The House of Lords held that Q's money was held on trust for Q by R or by B, and that B had no right to set off R's debt against R's credit balance. The majority (Lord Wilberforce, Lord Guest, and Lord Pearson) based their decision on the ground that there was an implied resulting 's intention to lend the money for a specific purpose. They held that if the purpose failed or became impossible, the money would revert to Q by operation of law. Lord Wilberforce also suggested that there was an alternative ground for finding a trust, which was based on an express or constructive trust arising from the common intention of Q and R to create a trust for the specified purpose. He held that this intention could be inferred from the circumstances of the case, such as the instructions given by Q to B and the acceptance of those instructions by R and B. Lord Reid dissented on the ground that there was no trust at all, but rather a contractual arrangement between Q and R, which gave rise to a personal right of action for Q against R for breach of contract. He held that there was no evidence of any intention to create a trust by Q or R, and that the instructions given by Q to B were not sufficient to create a trust. He also held that even if there was a trust, it would not affect the rights of B as a creditor of R, because B was not aware of the existence or terms of the trust. The implications of the case




The case established the concept of the Quistclose trust as a legal device to protect the lender's interest and intention when lending money for a specific purpose. It also opened up a lot of questions and debates about the nature and classification of the Quistclose trust, and its relationship with other areas of law, such as contract law, insolvency law, and restitution law. The case also generated a lot of subsequent cases and academic discussions on the Quistclose trust, which I will examine in the next section.


The subsequent cases and academic debates on the Quistclose trust




Twinsectra Ltd v Yardley [2002] UKHL 12




This case involved a loan agreement between Twinsectra Ltd (T), who was the lender, and Mr Yardley (Y), who was the borrower. T agreed to lend Y 1 million for Y to invest in a property development project. T transferred the money to Y's solicitors (S), with instructions that it should be used only for that purpose. However, Y used the money for his own benefit instead of investing in the project. T claimed that S had breached their fiduciary duty as trustees of T's money by allowing Y to use it for a different purpose. S claimed that they had no fiduciary duty because they were not aware of any trust imposed on T's money.


The House of Lords held that S had breached their fiduciary duty as trustees of T's money by allowing Y to use it for a different purpose. The majority (Lord Hoffmann, Lord Hutton, and Lord Millett) based their decision on the ground that there was an express or constructive trust in favour of T arising from the actual intention of T to create a trust for the specified purpose. They held that this intention could be inferred from the circumstances of the case, such as the instructions given by T to S and the acceptance of those instructions by S. They also held that S were aware or ought to have been aware of the existence and terms of the trust, and therefore they owed a fiduciary duty to T as trustees. Lord Browne-Wilkinson dissented on the ground that there was no trust at all, but rather a contractual arrangement between T and Y, which gave rise to a personal right of action for T against Y for breach of contract. He held that there was no evidence of any intention to create a trust by T or Y, and that the instructions given by T to S were not sufficient to create a trust. He also held that even if there was a trust, it would not affect the rights of S as agents of Y, because S were not aware or could not reasonably have been aware of the existence or terms of the trust. Lord Rodger dissented on the ground that there was no breach of fiduciary duty by S, because they acted in good faith and in accordance with Y's instructions. He held that S were not aware or could not reasonably have been aware of any restriction on Y's use of T's money, and therefore they did not act dishonestly or in bad faith. The implications of the case




The case confirmed the concept of the Quistclose trust as a legal device to protect the lender's interest and intention when lending money for a specific purpose. It also clarified the test for finding a Quistclose trust, which is based on the actual intention of the lender to create a trust for the specified purpose, and the awareness or reasonable awareness of the trustee of the existence and terms of the trust. The case also raised some issues and controversies about the nature and classification of the Quistclose trust, and its relationship with other areas of law, such as contract law, restitution law, and criminal law. The case also generated a lot of academic discussions and criticisms on the Quistclose trust, which I will examine in the next section.


Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207




This case involved a loan agreement between Carreras Rothmans Ltd (C), who was the lender, and Freeman Mathews Treasure Ltd (F), who was the borrower. C agreed to lend F 200,000 for F to pay its tax liability. C transferred the money to F's account at National Westminster Bank (N), with instructions that it should be used only for that purpose. However, F used the money for its general expenses instead of paying its tax liability. C claimed that N had no right to set off F's debt to N against F's credit balance in its account, which included C's money. C claimed that C's money was held on trust for C by F or by N.


The Court of Appeal held that C's money was not held on trust for C by F or by N, and that N had a right to set off F's debt against F's credit balance. The court based its decision on the ground that there was no intention to create a trust by C or F, and that the instructions given by C to N were not sufficient to create a trust. The court distinguished the case from Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 on the basis that in that case, there was a clear intention to create a trust by both parties, and that the instructions given by Q to B were more specific and restrictive than those given by C to N.


The implications of the case




The case showed that not every loan agreement for a specific purpose gives rise to a Quistclose trust, and that there must be evidence of an intention to create a trust by both parties, and that the instructions given by the lender to the trustee must be clear and precise. The case also showed that a Quistclose trust does not affect the rights of third parties who are not aware or could not reasonably have been aware of the existence or terms of the trust. The case also generated some academic discussions and criticisms on the Quistclose trust, which I will examine in the next section.


Re EVTR Ltd [1987] BCLC 646




This case involved a loan agreement between EVTR Ltd (E), who was the lender, and British Car Auctions Ltd (B), who was the borrower. E agreed to lend B 1.5 million for B to purchase cars from E. E transferred the money to B's account at Midland Bank (M), with instructions that it should be used only for that purpose. However, B used the money for its general expenses instead of purchasing cars from E. E claimed that M had no right to set off B's debt to M against B's credit balance in its account, which included E's money. E claimed that E's money was held on trust for E by B or by M.


The Court of Appeal held that E's money was held on trust for E by B or by M, and that M had no right to set off B's debt against B's credit balance. The court based its decision on the ground that there was an intention to create a trust by E or B, and that the instructions given by E to M were sufficient to create a trust. The court followed the case of Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 and distinguished the case from Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207 on the basis that in this case, there was a clear intention to create a trust by both parties, and that the instructions given by E to M were more specific and restrictive than those given by C to N.


The implications of the case




The case confirmed the concept of the Quistclose trust as a legal device to protect the lender's interest and intention when lending money for a specific purpose. It also clarified a Quistclose trust can affect the rights of third parties who are aware or ought to have been aware of the existence or terms of the trust. The case also generated some academic discussions and criticisms on the Quistclose trust, which I will examine in the next section.


The views of Swadling, Birks, Chambers and others




As mentioned earlier, the book The Quistclose Trust: Critical Essays by William Swadling contains 13 essays by leading scholars in the field of trusts law, who examine and critique various aspects and perspectives of the Quistclose trust. Some of the main views expressed in the book are as follows:



  • Swadling argues that the Quistclose trust is a type of resulting trust, which arises from the presumed intention of the lender to retain a beneficial interest in the money until it is used for the specified purpose. He criticizes the view that it is a type of express trust or constructive trust, or that it is not a trust at all but a contractual arrangement. He also criticizes the cases of Twinsectra Ltd v Yardley [2002] UKHL 12 and Re EVTR Ltd [1987] BCLC 646 for adopting an incorrect approach to finding a Quistclose trust.



  • Birks argues that the Quistclose trust is a type of express trust, which arises from the actual intention of the lender to create a trust for the specified purpose. He criticizes the view that it is a type of resulting trust or constructive trust, or that it is not a trust at all but a contractual arrangement. He also criticizes the case of Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 for adopting an incorrect approach to finding a Quistclose trust.



  • Chambers argues that the Quistclose trust is not a trust at all, but a contractual arrangement between the lender and the borrower, which gives rise to a personal right of restitution in favour of the lender. He criticizes the view that it is a type of resulting trust, express trust, or constructive trust. He also criticizes all the cases on the Quistclose trust for adopting an incorrect approach to finding a Quistclose trust.



  • Smith argues that the Quistclose trust is a type of constructive trust, which arises from the unconscionability of allowing the borrower to use the money for a different purpose or to keep it in insolvency. He criticizes the view that it is a type of resulting trust or express trust, or that it is not a trust at all but a contractual arrangement. He also criticizes some of the cases on the Quistclose trust for adopting an incorrect approach to finding a Quistclose trust.



the specified purpose. However, he differs from Birks in that he does not regard the purpose as being part of the terms of the trust, but rather as being part of the terms of the contract. He also argues that the Quistclose trust does not override the rights of creditors in insolvency, but rather creates a subordination agreement between them. He criticizes some of the cases on the Quistclose trust for adopting an incorrect approach to finding a Quistclose trust.


These are just some examples of the views expressed in the book. There are many more nuances and details that I cannot cover here. I encourage you to read the book yourself if you want to learn more about this fascinating topic.


The analysis and evaluation of the Quistclose trust




The nature and classification of the Quistclose trust




As you can see from the previous sections, one of the most contentious and debated issues about the Quistclose trust is its nature and classification. There are four main views on this issue:



  • The resulting trust view: This view holds that the Quistclose trust is a type of resulting trust, which arises from the presumed intention of the lender to retain a beneficial interest in the money until it is used for the specified purpose. This view is supported by Swadling and by some of the judges in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567.



  • The express trust view: This view holds that the Quistclose trust is a type of express trust, which arises from the actual intention of the lender to create a trust for the specified purpose. This view is supported by Birks, Penner and by some of the judges in Twinsectra Ltd v Yardley [2002] UKHL 12 and Re EVTR Ltd [1987] BCLC 646.



  • The contractual arrangement view: This view holds that the Quistclose trust is not a trust at all, but a contractual arrangement between the lender and the borrower, which gives rise to a personal right of restitution in favour of the lender. This view is supported by Chambers and by some of the judges in Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207 and Twinsectra Ltd v Yardley [2002] UKHL 12.



the unconscionability of allowing the borrower to use the money for


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