The Contract Holding Theory and Unincorporated Associations.

There is no precise legal definition of an ‘unincorporated association’, but according to Lawton LJ in Conservative Central Office v Burrell , there must be some mutual duties and obligations between the members of the association. The general

idea seems to be that an unincorporated association will comprise of a group of individuals who attach themselves as members of the association in order to achieve some particular purpose.

Unlike an incorporated company, an unincorporated association possesses no legal personality, it cannot be separate and distinct from its individual members, and so cannot be afforded the same rights and liabilities entitled to an independent person . Consequently, it cannot, generally speaking, hold donated property or assets unless the donation is for it’s purposes.

If the purposes of the association are charitable under the provisions in section 14 of the Charities Act 1993 (to be replaced by similar provisions in the Charities Bill 2005), then the gift can be for charitable purposes and will therefore be valid. However, the problem of property holding in unincorporated associations arises where the association is formed for non-charitable purposes, since gifts to these associations must be held on trust, but the trust will be automatically void simply because the association has no legal personality and therefore cannot be a beneficiary under the trust .

The idea that a trust must have someone to compel performance of it forms the basis of the beneficiary principle established by Grant MR in Morice v Bishop of Durham . In response, the courts have tried to avoid the effect of the beneficiary principle on non-charitable unincorporated associations in a variety of ways.

The initial idea that a gift be interpreted as belonging to the members of the association is virtually redundant in today’s law, since it allows members to spend the assets however they like, and not specifically for the purposes of the association – which is more than likely what the donor intended (as noted in Leahy v Attorney-General for New South Wales ).

There appear now to be only two significantly identifiable possibilities in overcoming the property holding problem.

Firstly, the courts could construct a gift to an association as a gift for the benefit of the members, to be held on trust (Re Denley approach) , or alternatively, as a gift to the members to be held on the basis of the contractual obligations between them contained in the rules of the association (contract-holding theory ).

The ‘Re Denley’ (or trust analysis) approach is really an exception to the beneficiary principle, rather than a direct solution to its consequences on non-charitable unincorporated associations, as it validates what would otherwise be an invalid private purpose trust as in (Re Endacott ). Nonetheless, since it does not infringe the beneficiary principle it can be a workable approach if the objects of the trust are certain . One of the main benefits of this approach is that gifts on trust will no doubt mirror the settlor’s intentions, however, this construction is weakened by its limitation only to inward looking associations – existing solely to promote the members interests.

On the other hand, the contract-holding approach goes a step further than the Re Denley approach, in that it is also applicable to outward looking unincorporated associations, which operate to promote some external cause or purpose. This approach was duly followed in Re Recher’s Will Trusts , where Brightman J held that a gift to a non-charitable society could be construed as a gift to benefit the members of the association, subject to their contractual obligations contained in the rules of the association. In addition, the approach ensures that the settlor’s intentions are observed, insofar as it ties a contract over how the money is to be spent by the members.

Comparison would, prima facie, suggest that the contract-holding theory is more advantageous as a solution to the property holding problems in unincorporated associations, particularly as the scope of its application is that much wider than the trust analysis approach. However, the contractual analysis approach is not without its flaws either.

For one, the whole idea that the members hold trust property on the basis of their contractual obligations is evidently a risky one, since the members will always be free to alter the terms of the contract at a general meeting. Worst still, if this occurred, neither the donor nor his estate could do anything since s/he will not be privy to that contract if s/he is not a member of the association. In addition, following the decision in Re Bucks, the contract-holding approach implies that only existing members of the association can have entitlement to its assets on its dissolution. The resulting effect is that a newly acquired member of the association will acquire entitlement to the assets, even though no formal transfer has ever taken place with the previous member. This seems inappropriate; since it may well be that the settlor never intended this to be the case.

Further, in reality, by the very informal nature of their construction, many unincorporated associations exist without contractual agreements between the members, and in such cases the contract-holding theory cannot operate. The need for a contract is also problematic when dealing with testamentary gifts, because, to put it simply, dead people cannot possibly contract. This problematic area within the contract holding theory has not gone without notice in the past, and it was noted by Brightman J in Re Recher’s Will Trusts , who commented in his judgment that:

“…It would astonish a layman to be told that there was a difficulty in his giving a legacy to an unincorporated non-charitable society which he had, or could have, supported without trouble during his lifetime.”

Application of the contract-holding theory also has its difficulties when deciding how any surplus property or assets should be distributed if an unincorporated association dissolves under a rule in Re William Denby & Sons Ltd Sick and Benevolent Fund .
In such instances, the courts can choose to hold the property on a resulting trust for the donors ; or give the property to the Crown as bona vacantia . However, these two options were disfavoured in Re Bucks Constabulary Widows’ and Orphans’ Fund Friendly Society (No.2) where the court took a more pragmatic approach, recognising that surplus property could be distributed equally between members. It follows that since the decision in Re Bucks, this is now the preferred method adopted by the courts, thereby supporting the use of the contract-holding theory.

In spite, of its numerous imperfections, the courts still tend to favour contractual analysis over trust analysis when dealing with property holding, since cases such as Leahy(above), and Neville Estates(above) insinuate that Re Denley approach rarely works.

Whatever the case, even where the contract-holding theory or the Re Denley trust construction can be used as a solution to the property-holding problem, they may still fall victim to the unforgotten ‘rule against perpetuities’ – which will make a potentially valid trust for property in an unincorporated association void if it can potentially last for more than 21 years after the death of the death of the specified objects in the trust .

In conclusion, considering the array of problems within the contract-holding theory, it would not, in my opinion, be unfair to assert that it is in need of heavy reform, but in the interim I would agree that in light of the various other methods of construction of a ‘gift’ that the courts have adopted in the past, the contract-holding theory remains the best, and most workable, approach so far.

There has been suggested by writers Hayton and Mitchell , that non-charitable purpose trusts held in unincorporated association should have an enforcer who will be able to take charge of the trust. This would undoubtedly solve the problem the contract-holding theory has in satisfying the beneficiary principle with regard to non-contractual members, thereby extending the scope of its application to non-contract situations. However, if there is no contract between the members there would be nothing to bind the appointed enforcer to his duties and obligations, and so, in practice this solution might prove to be wholly unworkable.

BIBLIOGRAPHY

TEXTBOOKS

Watt, Gary. Trusts and Equity. 2nd edn. Oxford University Press

Martin, Jill. Hanbury and Martin: Modern Equity. 17th edn. Sweet & Maxell Ltd

Hayton and Mitchell. Cases and Commentary on Trusts and Equitable Remedies 12th edn. pp.201-6

Ramjohn, Mohammed. Unlocking Trusts (Unlocking Law). 2005 Hodder Education

ARTICLES

Emery (1982) 98 LQR 551

Warburton. ‘Holding of Property by Unincorporated Associations’ (1985) Conv. 318

WEBSITES

Westlaw – www.westlaw.co.uk

Wikipedia – en.wikipedia.org

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