A Strange Genesis: Section 2 of the Trusts (Scotland) Act 1961
DOI | 10.3366/elr.2020.0648 |
Published date | 01 September 2020 |
Date | 01 September 2020 |
Pages | 323-341 |
Author |
When a trustee transfers property in breach of trust, any third party who receives that property will be protected against the claim of a beneficiary only if in good faith. That is the law, at least, in most jurisdictions where the trust is recognised. Yet in Scots law, a third party will be secure even if in bad faith.
How the section 2 protection arose is in many ways a remarkable story. To tell it, this article briefly reviews the operation of section 2 in its comparative context before exploring the origins of the provision in detail. This examination sheds light on one of the most distinctive aspects of the Scots law of trusts as well as on the haphazard process of law reform by which it was formulated.
Section 2 of the Trusts (Scotland) Act 1961
Where, after the commencement of this Act, the trustees under any trust enter into a transaction with any person (in this section referred to as “the second party”), being a transaction under which the trustees purport to do in relation to the trust estate or any part thereof an act of any of the descriptions specified in paragraphs (a) to (ee) (eb) of subsection (1) of section four of the Act of 1921 (which empowers trustees to do certain acts where such acts are not at variance with the terms or purposes of the trust) the validity of the transaction and of any title acquired by the second party under the transaction shall not be challengeable by the second party or any other person on the ground that the act in question is at variance with the terms or purposes of the trust:
Provided that in relation to a transaction (other than a transaction such as is specified in paragraph (ea) of that subsection) entered into by trustees who are acting under the supervision of the Accountant of Court this section shall have effect only if the said Accountant consents to the transaction.
Nothing in subsection (1) of this section shall affect any question of liability between any of the trustees on the one hand and any co-trustee or any of the beneficiaries on the other hand.
The protection conferred by section 2 is expressed in blanket terms. In principle, then, it extends both to transactions made for no consideration as well as to those where the transferee is in bad faith.
As has already been suggested, the extent of the protection conferred by section 2 makes Scotland unique among jurisdictions in which the trust exists. The vast majority of those jurisdictions make the application of comparable protections conditional upon,
It is not necessary, however, to venture beyond the confines of Scots law to show that the protection conferred by section 2 is exceptional in nature. Prior to the enactment of section 2, the rule – which rested upon common law – required that a transferee be in good faith and provide onerous consideration to be secure against the beneficiary's claim.
How the section 2 protection arose against a background of this near universal requirement of good faith is the subject of the remainder of the article. The story of the provision, which today can be examined with reference to its preparatory materials preserved in the National Records of Scotland,
The origins of section 2 lie in another important 20th century statute on the law of trusts in Scotland, the Trusts (Scotland) Act 1921.
(1) In all trusts the trustees shall have power to do the following acts, where such acts are not at variance with the terms or purposes of the trust, and such acts when done shall be as effectual as if such powers had been contained in the trust deed,
The act then lists various powers: the first of these is the power to “sell the trust estate or any part thereof, heritable as well as moveable”.
The requirement that the exercise by the trustees of the powers conferred by the section should not be “at variance with the terms or purposes of the trust” was to prove problematic. Although this condition was not a novel one, it was used in the 1921 Act for the first time to qualify the powers of trustees and judicial factors to sell trust property.
Of the cases decided immediately after the passing of the 1921 Act, some supported the notion that a judicial factor (or, as the case may be, a trustee) had considerable discretion to determine without an application to the court whether the exercise of a power was at variance with the terms or purposes of the trust. Thus in
I am prepared to lay down the general proposition that, by the provisions of the 1921 Act, every judicial factor who is appointed by the Court, and whose duties are supervised by the Accountant of Court, is entitled to sell the heritable portion of the factorial estate without the sanction of the Court.
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