The recent case of Pennington & Breen v. Waine & others has given much greater
scope for arguing that apparently incomplete gifts are nevertheless effective in equity.
More than that, the case is another useful illustration of the power of equity to extend
existing doctrine to do justice in the individual case but at the expense of certainty.
The facts of Pennington
Ada Crampton held 1500 of the 2000 shares in the family company. She wanted to
give 400 of those shares to her nephew, Harold. She consulted Mr. Pennington, the
company’s auditor, and executed a stock transfer form in respect of those shares. Ada
told Harold that she wanted to give him some of her shares and wanted him to become
a director of the company. Mr. Pennington wrote to Harold enclosing a form 288A
(the prescribed form of consent to act as a director) and said that Ada had instructed
him to arrange to transfer to him 400 shares in the company. He added that this
required no further action on Harold’s part.
Harold signed and returned the form 288A. Mr. Pennington prepared a stock transfer
form, which Ada signed. He then placed the stock transfer form on a file he kept for
the company’s affairs but took no further action. The share certificates remained at the
company’s registered office throughout. Ada died shortly afterwards having made a
will, which dealt only with her remaining 1,100 shares.
As the share transfer had not been registered by the time of Ada’s death, legal title to
the shares remained with her and passed to her executors. However Harold argued
that nevertheless title to the shares had passed to him in equity. He relied on the
doctrine of Re Rose. This doctrine is usually expressed as follows: where the donor
has done all in his power to vest the legal interest in the property in the donee the gift
will not fail even if something remains to be done by the donee or some third person.
It is clear therefore that in case of a transfer of shares, if the donor has executed the
share transfer form and delivered it together with the share certificate to the donee, the
donee is owner of the shares in equity notwithstanding that he has not been registered
as owner in the books of the company.
Harold’s difficulty was that he had not received either the transfer form or the
certificate. Indeed he only found out after Ada’s death that the transfer form had been
executed. He had a subsidiary difficulty that the transfer was in breach of the preemption provisions in the articles of association of the company.
The Judgment
His Honour Judge Howarth (sitting as a judge of the Chancery Division) was
untroubled by those difficulties. Although none of the cases concerning the Re Rose
doctrine supported the view that it applied in such circumstances, he found in favour
of Harold reasoning as follows.
First, it cannot be literally true that the donor must have done everything in his or her
power to vest the legal interest in the donee for the gift to be effective in equity since
a donor could always secure that legal title had in fact passed to the donee.
Secondly, since it is well established that a gift may be effective both at law (see
Standing v. Bowring) and in equity (see Re Way’s Trusts) even if the donee is
unaware of it and subject to the donee’s right to repudiate the gift when he does
become aware of it, it cannot be necessary for the doctrine of Re Rose that the donee
receives the share certificate or executed transfer form
Thirdly, an assignment made in breach of pre-emption rights is nevertheless valid and
effective: see Tett v. Phoenix Property and Investment Co Ltd.
The Appeal
Two of the beneficiaries of the estate appealed to the Court of Appeal (Schiemann
Clarke and Arden LJJ) arguing that Judge Howarth had construed the doctrine of Re
Rose too widely. They accepted that the pre-emption provisions in the articles did not
prevent the doctrine operating. The court unanimously dismissed the appeal but for
different reasons.
Clarke LJ was persuaded to dismiss the appeal essentially for the same reasons as
Judge Howarth: since a gift could be effective without the donee being aware of it, the
doctrine of Re Rose cannot depend on the share transfer form or share certificate
being delivered to the donee.
The majority (Arden LJJ with whom Schiemann LJ agreed) reached the same result
on a broader basis. The underlying principle was that “the donor will not be permitted
to change his or her mind if it would be unconscionable, in the eyes of equity, vis a
vis the donee to do so”. The court held that it would have been unconscionable for
Ada to have changed her mind in these circumstances.
They also held alternatively that the result could be justified by holding by a
“principle of benevolent construction” that when Mr. Pennington wrote to Harold
informing him about the proposed transfer of shares he became Harold’s agent for the
purpose of submitting the share transfer to the company. So if the doctrine of Re Rose
did require delivery of the transfer form to the donee this was satisfied here by the fact
that it was retained by Mr. Pennington as agent for Harold.
There are difficulties with the reasoning of both the minority and the majority. The
reasoning of Clarke LJ is open to criticism since he assumed that the executed transfer
form amounted to a valid equitable assignment of the beneficial interest in the
property. But that was the very question which was to be determined. With respect, if
a purported disposition of the legal interest in property was in every case a valid
disposition of the equitable interest there would have been no need for the doctrine of
Re Rose at all.
Clarke JL’s reasoning represents a failure to take account of the principle in Milroy v.
Lord. This provides that a person can make a voluntary settlement in one of three
modes: transferring the property direct to the beneficiaries, transferring it to the
trustees on trust for them or declaring himself a trustee for the beneficiaries. But if he
tries to use one of these modes and fails, the court will not give effect to it by treating
it as having being effected by another mode. The doctrine of Re Rose is a specific and
limited exception to this since it allows an in effective assignment of the legal interest
in property to take effect as a trust, albeit a constructive trust, of the property.
Properly understood, the separate doctrine that a gift can be effective where the donee
was unaware of it was of no relevance. The doctrine deals with gifts which take effect
precisely in the way in which they purport to take effect. The doctrine of Re Rose is
concerned with whether a purported gift at law which is ineffective can nevertheless
take effect as a gift in equity.
Unconscionability
There is no reason to quibble with majority’s view that the doctrine of Re Rose is
based on the idea on unconscionability. The courts now increasingly recognize that
unconscionability is the foundation of many of the principles of equity: see for
example BCCI v. Akindele on knowing receipt, Gillett v. Holt on proprietary estoppel
and Frawley v. Neill on laches. This is both good and bad. It is good in that it is a sign
that equity has been shaken out of the rigidity of the 19th and early 20th century. But it
is bad in that there is little or no guidance on the circumstances, which a court will
make a finding of unconscionability.
This case is a good illustration of that. Arden LJ treated it as obvious that it would
have been unconscionable for Ada to have gone back on the gift to Harold after she
had executed the stock transfer form and Harold had been made aware of her
intentions. But why? It was not suggested that Harold had relied in any way on the
fact that he was going to get those shares, still less that he had incurred any
expenditure or suffered any detriment as a result. For Arden LJ
“unconscionability”seems to be an easy test to satisfy. But that is not always so. For
the doctrine of estoppel to operate detrimental reliance is required in order for it to be
unconscionable for one party to go back on his assurance. Even where detrimental
reliance is found, the court may not be prepared to make a finding of
unconscionability in every case: cf. Actionstrength Ltd. v. International Glass
Engineering SpA where despite the Claimant’s detrimental reliance on an oral
guarantee it was not unconscionable for the Defendant to rely on the absence of
writing as required by s.4 of the Statute of Frauds.
The problem is that the courts have started from the proposition that the foundation of
an equitable doctrine is unconscionability and moved from there to the proposition
that the test for the application of that doctrine is also unconscionability. But the
second proposition need not necessarily follow from the first. Whilst the underlying
notion of unconscionability can and should infuse equitable principles and allow them
to adapt to modern circumstances, it does not follow that the old case law should
simply be abandoned.
The doctrine of Re Rose needed a fundamental re-appraisal and the Court of Appeal
were right to attempt it. But they could have done so in ways which were less drastic
and did not involve disrupting existing case law. There is much to be said for the
view of Lord Hoffmann in Trustees of the Property of Pehrsson v. von Greyerz that
the doctrine applies only where “the donor has clothed the beneficiary with the power
to obtain registration”. Any injustice which might result to a beneficiary where he has
not received the documents necessary to obtain the legal title could be dealt with by
the doctrine of estoppel.
Benevolent Principles of Construction
The majority held that even if the doctrine of Re Rose required the stock transfer form
to have been handed over to the donee they were entitled to hold by “the principle of
benevolent construction” that the effect of Mr. Pennington writing to Harold was that
Mr. Pennington became Harold’s agent for the purpose of submitting the share
transfer form to the company. Since Mr. Pennington held the executed transfer form
the traditional requirements of Re Rose were thus satisfied.
This principle of benevolent construction is troubling. It seems to follow that, had
ordinary principles been applied, Mr. Pennington would not have been considered as
the agent for Harold but that a different principle applies in the case of gifts. Arden
LJ cited Lord Browne-Wilkinson in T. Choithram International v. Pagarani in
support of this principle. But it is doubtful whether Lord Browne-Wilkinson really
intended that the principles of construction to be applied to gifts be different from
those to be applied in other areas. Furthermore the implication of cases such as
Mannai v. Eagle Star (in which the strict rule for construction of notices to determine
leases was abandoned) and I.C.S. v. West Bromwich Building Society (on the
relevance of the factual matrix in construing contractual documents) is that there are
no longer any special rules of construction whether strict or benevolent.
Arden LJ gave no guidance as to what these benevolent principles of construction in
fact entail. When will they be satisfied and when will they not be satisfied? We are
left with uncertainty and a feeling that the court will find that a gift is valid simply if
that is the just result.
In Summary
Pennington & Breen v. Waine & others provides much that will be useful for those
seeking to uphold gifts which are not formally complete.
An appeal to
unconscionability or benevolent principles of construction may enable a successful
argument that the gift is valid even though the donee has not in his possession the
documents necessary to obtain legal title. But although a donee can be advised in
such circumstances that he may have a respectable argument that the gift is valid, it
will be difficult to predict the chances of success and much seems to depend on how
the court perceives the justice of the individual case.
At another level, Pennington & Breen v. Waine & others provides a useful snapshot
of the state of equity at the start of the 21st century. Not only is equity not “past the
age of childbearing”, it is still a child with zest and vigour for life. But as with many
children it requires parental direction to truly flourish. It remains to be seen whether
the courts are up to the task..
Case References
Pennington & Breen v. Waine & others [2002] WTLR 387
Standing v. Bowring (1885) 31 Ch.D. 282
Re Way’s Trusts (1864) D.J. & S. 365
Re Rose [1952] Ch. 499
Tett v. Phoenix Property and Investment Co Ltd [1948] B.C.L.C. 599
Milroy v. Lord (1862) 4 De. G.F. & J. 264
BCCI v. Akindele [2001] Ch. 437
Gillett v. Holt [2001] Ch. 210
Frawley v. Neill [2000] C.P. Rep. 20
Actionstrength Ltd v. International Glass Engineering SpA [2002] 1 W.L.R. 566
Trustees of the Property of Pehrsson v. von Greyerz Privy Council 16 June 1999
unreported.
T. Choithram International v. Pagarani [2001] 1 W.L.R. 1
Mannai v. Eagle Star [1997] A.C. 749
I.C.S. v. West Bromwich Building Society [1998] 1 W.L.R. 896
John McGhee represented the successful party in Pennington & Breen v. Waine &
others both at first instance and on appeal. He is a barrister in the Chambers of
Michael Driscoll QC at 9 Old Square, Lincoln’s Inn and the editor of the 30th edition
of Snell’s Equity.
© John McGhee 2003