Contents

Chapter 9
Revocation and variation of trusts

Variation pursuant to a trust deed

Proposal
P41 New legislation should continue the status quo and have no statutory provision regarding variation clauses under a trust deed.
Please give us your views on this proposal.

Current law

9.62Variation and resettlement powers are commonly included in trust deeds. Variation powers usually lie with the trustees, but may be reserved to the settlor or some other person. It is also possible to include a revocation power in a trust deed, although such provisions are uncommon these days.

9.63The extent of any such power will depend on the interpretation of the clause and deed itself. The principles applying to the interpretation of contracts are also applied to the interpretation of trusts. As Garrow and Kelly illustrates, the nature of a trust, for example, whether it is a family trust, a superannuation trust, debenture trust, or energy trust, also influence how its provisions are interpreted.243  It is therefore difficult to identify definitive rules from the case law that could guide the use of variation clauses. Clauses need to be construed in the context of the type of trust involved and the particular wording employed.
9.64Generally speaking, it seems that “clear words” giving a power of variation are required and the court is to “construe each provision according to its natural meaning, and in such a way to give it its most ample operation”.244  A general broad power giving the trustees the fullest possible powers or the powers of a natural person cannot be used by trustees to change or add to their own powers and duties created by the trust deed. These types of general powers are normally interpreted as supplementing the other specific powers given by the deed, but not as intending to convey a power of variation. There appears to be a rebuttable presumption that a variation power cannot be used to extend its own scope or amend its own terms.245  Trustees cannot use variation powers to remove a specific restriction to which they were subject from the very foundation of the trust.246
9.65In a number of cases the courts have held that a power of variation cannot be used by the trustees to change the fundamental purpose of the trust (the substratum).247  The rationale is that the variation clause needs to be interpreted consistently with the settlor’s intention and purpose in establishing the trust. However, it is not clear whether this approach of preserving the substratum would hold up where a variation clause explicitly authorised the trustees to make fundamental changes to the terms of a trust.

Issues

9.66We have considered whether the common law should be stated in legislation and whether legislation should impose limits on how far a trust deed can allow a trust to be varied.

Options for reform

9.67The options are:
(a)maintaining the status quo and not using legislation to limit the scope of variation powers in trust deeds. Variation clauses would continue to be construed on a case by case basis according to the existing common law principles of interpretation.
(b)enacting a provision stating the common law position that deed trusts may include variation powers, and that such clauses should be construed on a case by case basis according to the common law principles of interpretation.
(c)enacting statutory guidance for interpreting variation clauses. Guidance might, for example, include the rebuttable presumptions that a variation power cannot be used to extend its own scope or amend its own terms and that a variation power may not be used by the trustees to change the fundamental purpose of the trust.

Discussion

9.68Given the need for a contextual approach to be taken to the interpretation of variation and resettlement powers, we indicated in the Third Issues Paper248  that we thought little could be gained from enshrining guidance in legislation. However, while unnecessary from a remedial perspective, enacted guidance could have some educative and explanatory benefit. People may find it confusing or misleading for other aspects of the law on variations to be in legislation but not the law on variation clauses in trust deeds.

9.69In our view variation clauses should continue to be construed on a case by case basis according to the existing principles of interpretation. The existing principles of interpretation are well understood and flexible and that enacting statutory guidance in this area risks stifling further development of the principles of interpretation. There is merit in allowing a consistent approach to the interpretation of legal documents to be developed by the courts in all areas of law.

9.70There would therefore seem to be little value in restating the common law in legislation as this is not an area where the status quo is causing any problems. There are also risks that unintended legal consequences could arise from the enactment statutory guidance in this area.

243Garrow and Kelly, above n 219, at ch 11.
244Kearns v Hill (1990) 21 NSWLR 107 (SC) at 109.
245David Hayton, Paul Matthews and Charles Mitchell (eds) Underhill and Hayton: Law Relating to Trusts and Trustees (17th ed, LexisNexis Butterworths, London, 2007) at [47.19].
246Re UEB Pension Plan [1992] 1 NZLR 294 at 301.
247Garrow and Kelly, above n 219, at [26.4].
248Third Issues Paper, above n 220, at [5.56]−[5.60].