LAW OF TRUSTS

UNIT – 5
 Law of Trusts with Fiduciary Relations
 A person in a position of trust, or occupying a position of
power and confidence with respect to another such that he is
obliged by various rules of law to act solely in the interest of
the other, whose rights he has to protect.

 He may not make any profit or advantage from the

relationship without full disclosure.

 The category includes trustees, company promoters and

directors, guardians, solicitors and clients and other similarly
placed.
 Examples for Fiduciary Relations
 The following are the examples of kind of persons bound by
fiduciary character-
 Trustee
 Director of a Company
 Partner
 Agent
 Executor
 Legal Adviser
 Manager of a joint family
 Parent and Child
 Religious, medical and other advisers
 Guardians and ward;
 Licensee appointed on remuneration to purchase stocks on behalf
of Government
 Confidential transactions wherein confidence is reposed
 Definition of Fiduciary Relationship
 The Advance Law Lexicon, 3rd Edition, 2005 defines fiduciary
relationship as a relationship in which one person is under a
duty to act for the benefit of the other on the matters within
the scope of the relationship.
 Fiduciary relationship usually arise in one of the four
situations-
 When one person places trust in the faithful integrity of another,
who is a result gains superiority or influence over the first
 When one person assumes control and responsibility over and
another
 When one person has a duty to act or give advice to another on
matters falling within the scope of the relationship
 When there is specific relationship that has traditionally be
recognized as involving fiduciary duties, as with a lawyer and a client,
or a stock broker and a customer.
 Case Law for Fiduciary Relationship
 The Delhi High Court in WP(C) 228/2009, CPIO, Supreme
Court of India V. S.C. Agarwal & another 2009 (162) DLT 135
(Del) discussed the concept of fiduciary relationship in some
detail. The Court categorized the following kinds of
relationships as fiduciary
 Trustee/beneficiary/ (Section 88, Indian Trusts Act, 1882)
 Legal guardians/wards (Section 20, Guardians and Wards Act, 1890)
 Lawyer/client
 Executors and administrators/legatees and heirs
 Board of directors/company
 Liquidator/company
 Receivers, trustees in bankruptcy and assignees in insolvency/
creditors
 Doctor/patient
 Parent/child
 Indian Trust Act 1882
 Inclusion
 Covers the subject of private trusts
 Exclusion
 Excludes application of the Act
 To the rules of Mohammaden Law as to waqf
 The mutual relation of the members of the undivided family as
determined by customary or personal law
 To public or private religious or charitable endowments
 To trusts which are created to distribute among captors prizes taken
in war
 A person who is neither a trustee nor a beneficiary under a trust deed will
have no locus standi to correct private breaches of trust unless such
breaches are unconstitutional or ultra-vires – JatinderNath Seth v. Jadavpur
University , 63 Cal.W.N. 914
 Definition of Trust
 Section 3 of Indian Trusts Act, 1882 defines trust as:-
 An obligation annexed to the ownership of property, &
 arising out of a confidence reposed in &
 accepted by the owner for the benefit of another or for another and owner

 The person who reposes or declares the confidence is called the “author of the
trust”
 The person who accepts the confidence is called the “trustee”
 The person for whose benefit the confidence is accepted is called the “beneficiary”
 The subject-matter of the trust is called “trust property” or “trust money”
 The “beneficial interest” or “interest” of the beneficiary is his right against the
trustee as owner of the trust property
 The instrument, if any, by which the trust is declared is called the “instrument of
trust”
 A breach of any duty imposed on a trustee, as such, by any law for the time being in
force, is called a “breach of trust”
 Trust and Debt
Trust
A trustee is bound to use his rights in a
certain way either for the benefit of the
1.
beneficiary or of the accomplishment of a
purpose
Trustee has to preserve the property for
2. the benefit of the beneficiary. He cannot
use it any way he likes and make profit.
The trustee cannot mix the trust
3.
property or money with his own.
A beneficiary can trace the trust fund
from investment to investment and has
right to follow the trust property in the
4.
hands of a third person for recovery.
Debt
A debtor is not a trustee for his creditor.
The debtor does not owe any such
obligation of using his rights in a
particular way for benefit of his creditors.
When money is deposited with the
banker, he can deal with it as he likes and
make profit out of it.
The banker can mix depositors money
with his own.
If the banker goes bankrupt, the
depositor can only realize dividend from
him along with other creditors. He has
no right to follow his money or property
and recover it from the hands of third
persons.
 Trust and Ownership
Trust
A trustee is bound to use his rights in a
certain way either for the benefit of the
beneficiary or for the accomplishment of
a purpose
Ownership
Owner uses for his benefits and on every
owner of lands or goods there lies the
duty of not using them in various ways.
The law of torts legally consists of rules
which limits the general rights of the
owner.

Illustration: I must not dig a quarry in my land so as to

cause the subsidence of my neighbour’s land. If I do so I
commit a wrong and give my neighbour a cause of
action, but ofcourse I am not a trustee of my land for
him.
 Trust and Bailment
Trust
A trust is a obligation annexed to
ownership of property, and arising out of a
confidence reposed in and accepted by
1.
the owner, or declared and accepted by
him. For the benefit of the another, or of
another and the owner.
The trustee becomes the full legal owner
of the trust property with an obligation to
2.
deal with it for the benefit of the
beneficiaries.
A trustees right is a equitable right.
3.
A bonafide purchaser for the value
without the notice of the trust gets a
4. good a title from the trustee. And the
recovery from the purchaser cannot be
made.
Bailment
A bailment is the delivery of a thing by a
party called bailor, to a person called
bailee, for a limited purpose on the terms
that when the purpose is complete, the
identical thing shall be resorted or
redelivered to the bailor.
In a bailment the bailor does not divest
himself of the ownership of the property,
he merely curtails his enjoyment for the
time being of the thing bailed.
A bailees right is a legal right.
If the bailee sells the goods , which is not
authorised by the terms of bailment, a
bonafide purchaser for the value does
not get a good title to the goods and the
bailor can recover from the purchaser.
 Trust and Agency
Trust
A trustee has full title to the property in
law. He is the legal owner of the property.
1.
For a trust there must be some property
to which it can attach.
2.
There need not be an agreement between The agency implies a contractual
3. the trustee and the beneficiary. agreement between the principal and
agent.
The trust is personally responsible for all
the contracts entered into by him in
4.
relation to the trust. A trustee cannot
subject the beneficiary for any liabilities.
Agency
An agent is not the owner of the
property. He is mere a representative of
the principal with regard to the subject
matter of agency. His principal is the sole
owner.
Agency is the result of an express or
implied contract to act for some other
person, and property need not be
involved at all.
The agent is not personally liable for the
contracts entered into, for he acts on
behalf of the principal. An agent may thus
subject principal for personal liabilities.
 Trust and Contract
Trust Contract
A trust is a duty deemed in equity to rest All agreements are contracts if they are
on the conscience of a legal owner. made by free consent of parties
1.
competent to contract, for a lawful
consideration with a lawful object.
Obligations under a trust is equitable. Obligations under contract are legal
2.

A trust may be created by a unilateral act A contract is completely created by a

3.
or bilateral act. bilateral act.
It creates right in rem It creates right in personam.
4.

It can be enforced only by a beneficiary. It can be enforced only by the parties to

5.
the contract.
There is a fiduciary relationship between a There is no fiduciary relationship
6.
trustee and a beneficiary. between parties to the contract.
 Kinds of Trusts
 Classification based upon nature of  Constructive Trust
duties of the trustees:  Classification according to
 Simple Trust Consideration of Creation of
 Special Trust Trust:
 Classification according to the  Trust of Value
Purpose of the trust:  Voluntary Trust
 Pubic Trust  Other classification:
 Private Trust  Completely and incompletely
 Classification according to mode of constituted trusts
creation:  Trust of Imperfect Obligation
 Express Trust  Illusionary Trust
 Implied Trust  Trust in favour of creditors
 Executed Trust  Discretionary Trusts
 Executory Trust
 Kinds of Trusts
 Simple Trust – Trustee is just a passive depository of the Trust property.
There are no active duties expected from Trustee and no directions are
given to him.
 Special Trust – Trustee is active and acts as an agent to execute the
Grantor’s wishes.This Trust is operative.
 Public Trust – Beneficiaries are the general public or a class as a whole. It
has some charitable end as its Beneficiary.
 Private Trust – Settlor creates a Trust primarily for benefit of one or
more particular individuals as its Beneficiary.
 Express Trust – Here, the Settlor creates a Trust over his assets either in
present or upon his death. It can be either by way of a will or Trust deed.
 Implied Trust – It is created where some legal requirements for an
Express Trust are not met, but intention on behalf of the parties is to create
a Trust that is presumed to exist.
 Kinds of Trusts
 Executed Trust – A trust is executed when no further
instrument is necessary and the trust is finally declared in the
first instance.
 Executory Trust – A trust is executory when a further
instrument is necessary to carry into effect the general
intention expressed in the first instrument.
 Constructive Trust - A constructive trust is an implied trust.
An implied trust is established by a court and is determined
from certain facts and circumstances. The court may decide
that, even though there was never a formal declaration of a
trust, there was an intention on the part of the property
owner that the property be used for a particular purpose or
go to a particular person. While a person may take legal title
to property, equitable considerations sometimes require that
the equitable title of such property really belongs to someone
else.
 Kinds of Trusts
 Trust of Value: A trust for value or consideration is created when the
consideration moves from the beneficiary. Here the relation between the settlor
and the beneficiary is contractual. Eg.: A trust created in favour of X if he marries
Y.
 Voluntary Trust: A voluntary trust is created when no consideration proceeds
from the beneficiary.
 Completely and incompletely constituted trusts: A trust is said to be
completely constituted when the trust property has been vested in trustees for
the benefit of the beneficiaries, until that has been done the trust is incompletely
constituted.
 Trust of Imperfect Obligation: Trusts which are incapable of enforced by
beneficiaries and yet court will give the liberty to the trustees to carryout the
trust if they so wish.
 Illusionary Trust: This is not a real trust, as the form of the instrument only
shows that some persons are apparently beneficiaries.
 Trust in favour of creditors: Trusts created by debtor for payment of
creditors .
 Discretionary Trusts: Trust which does not afford to a beneficiary a right to
any part of the income of the trust property, but gives the trustee a discretionary
power to pay him such part of the income as they think fit