A Fraud on a Power

Legal Principle:

The proposed amendments must be to promote the purpose of the trust and must not be made for any improper purpose or ulterior motive.

Geraint Thomas in Thomas on Powers (2nd Edition) states in Chapter 9 – “Fraud on a Power” at [9.01]:

“The doctrine of ‘fraud on a power’ has always been central to the law of powers; and as one of the few bases upon which an exercise of a power can be challenged, it has also been one the most frequently invoked….the basic notion is relatively straightforward. The donee (eg a trustee) of a limited power must exercise it bona fide for the end designed by the donor, which requires that the power can only be exercised in favour of the objects of the power and in furtherance of the purpose for which it was conferred.”

Geraint Thomas continues:

“As Lord Westbury LC put it in Duke of Portland v Topham 1, the donee (eg trustee) ‘must act with good faith and sincerity, and with an entire and single view to the real purpose and object of the power, and not for the purpose of accomplishing or carrying into effect any bye or sinister object (sinister in the sense of being beyond the purpose and intent of the power)’.

The phrase ‘fraud on a power’ does not ‘carry the sense of deceit which the word “fraud” bears in other contexts’ (although, of course, such deceit may be involved): ‘it indicates the doing of something which is not right, using those words in their broad sense – at least, a deliberate defeating of what the donor of the power authorised and intended’2. Or in Lord Parker’s much-cited words3:

“The term fraud in conjunction with frauds on a power does not necessarily denote and conduct on the part of the appointor amounting to fraud in the common law meaning of the term, or any conduct which could properly be called dishonest or immoral. It merely means that the power has been exercised for a purpose, or with an intention, beyond the scope of, or not justified by, the instrument creating the power”.

(1) Duke of Portland v Topham (1864) 11 HLC 32,54

(2) Re Dick[1953] Ch 343, 360, per Lord Evershed MR

(3) Vatcher v Paull [1915] AC 372,378. See also Cachia v Westpac Financial Services Ltd [2000] FCA 161; (200) 170 ALR 65; Lancedale Holdings Pty Ltd v Health Group Australisia Pty Ltd [1990] NSWSC 609 (per Bryson J);[1999] NSWCA (on appeal); Gambotto v WCP Ltd [1995] HCA 12; (1995) 182 CLR 432.

Geraint Thomas elaborates at [9.03]:

“The doctrine of fraud on a power is not founded upon a state of conscience of imputed to the donee (eg a trustee) in equity. Dishonesty of some kind is often present, but it is not essential. Indeed, the donee’s intention and motive may be perfectly honest.

The doctrine applies to the power conferred on the committee of management of a pension scheme to amend the scheme’s trust deed, ‘which can only be exercised for the purpose of promoting the purpose of the scheme, namely to provide pensions for those employed in the undertaking and not to bring about the unnecessary dissolution of the scheme.4

(4) Re Courage Group’s Pension Scheme [1987] 1 WLR 495. Millet J’s judgement is clearly couched in terms of a fraud on a power (of amendment)

Austin J in Arakella v Paton5 stated at [119]:

“The doctrine of fraud on a power expresses an equitable limitation on a power conferred by an instrument such as a trust instrument”

(5) Arakella v Paton [2004] NSWSC 13

Hely J inn Cachia v Westpac Financial Services Ltd6 stated at [74]:

“The equitable doctrine of “fraud on the power” requires that a power, including an amendment power, reserved in a trust must not be exercised for a purpose, or with an intention beyond the scope of or not justified by the instrument creating the power 7. The same principle applies to the exercise of a statutory power. In each case, the power has to be exercised bona fide, for the purpose for which it is given 8

(6) Cachia v Westpac Financial Services Ltd [2000] FCA 161; 170 ALR 65

(7)Vatcher v Paull [1915] AC 372 at 378

(8) Lancedale Holdings Pty Ltd v Heath Group Australasia Pty Ltd [1999] NSWSC 609 (per Bryson J); [1999] NSWCA 460 (on appeal).”

Examples of how the Courts have applied this legal principle is covered in the following cases:

  • Metropolitan Gas Company v FCT [1932] HCA 58; (1932) 47 CLR 621. More details can be found here
  • Re Courage Group’s Pensions Schemes (1987) 1 WLR 495. More details can be found here
 

Santow J in Andco Nominees Pty Ltd v Lestato Pty Ltd (1995) 17 ACSR 239 stated;

“The formulation of fraud on a power generally can be taken from Duke of Portland v Topham (1864) 11 HL Cas 32 (1ER 1242 as adopted by the High Court in Gilbert v Stanton (1905) 2 CLR 447; Cock v Smith (1909) 9 CLR 733; Redman v Permanent Trustee (1916) 22 CLR 84 at 93,94 and by the Federal Court in Dwyer v Ross (1992) 34 FCR 463. That formulation is as follow:

“….the appointor under the power, shall at the time of the exercise of that power, and for any purpose for which it is used, act with good faith and sincerity, and with the entire and single view to the real purpose and object of the power, and not for the purpose of accomplishing or carrying into effect any bye or sinister object (I mean sinister in the sense of its being beyond the purpose and intent of the power) which he may desire in effect in the exercise of the power” (11 ER 1242 at 1251)”

In Vatcher v Paull [1915] AC 372 at 372 it was held that fraud on a power “merely means that the power has been exercised for a purpose or with an intention beyond the scope of or not justified by the instrument creating the power”; see also Re Crawshay [1948] Ch 123.”

The Supreme Court of New South Wales reviewed the equitable doctrine of “A Fraud on a Power” in Hancock v Rinehart [2015] NSWSC 646 at [57 – 61]. A Transcript of this case can be found here.

In Wong v Burt [2004] NZCA 174; [2005] 1 NZLR 91, the New Zealand Court of Appeal explained:

[27] The notion of a fraud on a power itself rests on the fundamental juristic principle that any form of authority may only be exercised for the purposes conferred, and in accordance with its terms. This principle is one of general application.


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This tab updated on 28 February 2016