Trust: meaning and comparison with other relationships

1. Definition: section 3

A trust is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.

Section 3 also defines the parties and terms:

• the person who reposes or declares the confidence is the author of the trust;
• the person who accepts the confidence is the trustee;
• the person for whose benefit it is accepted is the beneficiary;
• the subject-matter is the trust property or trust-money;
• the beneficiary's right against the trustee as owner of the trust property is his beneficial interest;
• the instrument, if any, by which the trust is declared is the instrument of trust;
• a breach of any duty imposed on a trustee by any law for the time being in force is a breach of trust.

2. Elements drawn from the definition

• An obligation, enforceable in law, not a moral duty or a mere wish.
• Annexed to the ownership of property. The trustee is the owner in law; the obligation attaches to that ownership. There can be no trust without property.
• Confidence reposed and accepted (where the author is someone else), or declared and accepted (where the owner declares himself trustee).
• For the benefit of another, or of another and the owner. A person cannot be a trustee solely for himself: if the sole trustee and sole beneficiary are the same, the interests merge and the trust ends.

The trust comes from the English Court of Chancery, which enforced the “use” against the legal owner in conscience. Indian law codified the private trust in the Act of 1882 but kept the dual notion of legal and beneficial ownership, though Indian courts often say that the beneficiary has no ownership in the English sense, only a right against the trustee.

3. Scope of the Act: section 1

The Act governs private trusts. Section 1 saves the rules of Muhammadan law as to waqf, the mutual relations of members of an undivided family under customary or personal law, public or private religious or charitable endowments, and trusts to distribute prizes taken in war. Public charitable and religious trusts are governed by s.92 of the Code of Civil Procedure, 1908, the Charitable and Religious Trusts Act, 1920, and State legislation.

4. Trust and debt

• A debtor owns the money he has borrowed and may use it as he likes; he owes only an equivalent sum. A trustee holds the property for the beneficiary and must use it only for the trust.
• The creditor's right is personal; the beneficiary can follow the trust property into the hands of third persons who are not bona fide purchasers (s.63).
• On the debtor's insolvency the creditor ranks with other creditors; trust property does not form part of the trustee's estate and goes to the beneficiary.
• A debt carries no fiduciary duty; a trustee owes the duties in ss.11 to 20 and cannot profit from his position (s.51).

5. Trust and ownership

An absolute owner holds property for his own benefit and answers to no one for it. A trustee is an owner too, in the sense that the property is vested in him and he can deal with it and give good title, but his ownership is burdened with an obligation in favour of another. He is owner for others, not for himself.

6. Trust and bailment

• Property. Bailment applies only to goods (movables); a trust may be of any property, movable or immovable.
• Title. A bailee gets possession only; ownership stays with the bailor (s.148, Contract Act, 1872). A trustee gets the ownership.
• Transfer to third parties. A bailee normally cannot pass title to a third person; a trustee can, and a bona fide purchaser from him takes free of the trust.
• Origin. Bailment arises by contract; a trust may arise by declaration, by will or by operation of law, without any contract.

7. Trust and agency

• An agent acts on behalf of and under the control of his principal; a trustee acts in his own name, under the trust instrument and the law, and is not controlled by the beneficiary in the day-to-day management.
• The agent does not usually own the principal's property; the trustee owns the trust property.
• Agency is created by agreement and can be ended by the principal at will; a trust once created cannot generally be revoked (s.78).
• An agent binds his principal by contracts within his authority; a trustee binds himself, and is indemnified out of the trust property.
• Both are fiduciaries. An agent who holds money of his principal may hold it as trustee, so the two can overlap.

8. Trust and contract

• A contract needs agreement between parties for consideration; a trust may be created by a unilateral declaration and needs no consideration.
• A contract binds only its parties (privity); a beneficiary who is a stranger to the creation of the trust can enforce it.
• Contractual rights are personal; the beneficiary's interest attaches to specific property and can be followed.

How this is examined

The usual question is “Define trust. Distinguish it from bailment, agency and contract” (10 marks) or a short note on the definition. Begin with s.3 word for word, break it into elements, then take each comparison in a few clear points. A line on s.1 and the exclusion of public trusts earns a mark.