The case of Air Jamaica Ltd v Charlton [1999] 1 W.L.R. 1399 offers law students a profound look at trust law, particularly in the context of pension schemes and resulting trusts. This Privy Council decision delves into the intricate issues of trust amendments and their validity, making it an essential case for understanding the dynamics of trust administration and beneficiary rights.

  • In the case of Air Jamaica Ltd v Charlton [1999] 1 W.L.R. 1399, it was held that an automatic resulting trust is not based on the presumed intention of the parties. A resulting trust of surplus assets arises in favour of the contributors whether they intended to see their money again or not.

Facts of the Case Air Jamaica Ltd v Charlton

  • D created a pension scheme to benefit their employees, their widows and dependants, funded by member’s contributions and matching payments by D.
  • The trust deed provided that no money which at any time had been contributed by C was in any circumstances to be repayable to D.
  • The plan allowed D to amend the plan from time to time and discontinue the plan at any time, but not so that any part of the trust could be used for anyone but the members and their beneficiaries.
  • Upon its discontinuance, the plan directed the trustees to convert the fund into money and purchase annuities for those receiving or entitled to future pensions.
  • In May 1994, the government decided to dispose of its controlling interest in D and entered into an agreement for selling their shareholding. No further contributions were made to the trust fund.
  • Under the agreement on 30th June, D made all but 4 employees redundant. A substantial balance remained in the trust fund after the payment of benefits.
  • C, as representative members of the pension scheme, sought a declaration against D that the pension plan had been discontinued by D and that the funds be dealt with according to the plan.
  • In August 1994, D amended the trust deed and pension plan to enable the surplus to be paid to D.
  • C challenged the validity of those amendments and obtained an injunction to prevent their implementation. 

Issues in Air Jamaica Ltd v Charlton

  • Should the surplus be distributed under the original rules or the amended rules?

Held by the Privy Council (Jamaica)

  • Finding for C (in part), that the surplus was held on a resulting trust for C.
  • The pension scheme would ordinarily be void for offending the rule against perpetuities. However, each time a new member joined the scheme, a new settlement was created and added a ‘life in being’ that renewed the fund’s lifespans.
  • The powers granting the trustees the right to change the terms of the settlement were void for perpetuity.

Lord Millett

  • The only obligation undertaken by D, and one which it has fully performed, was to contribute to the fund. The obligation to make payments was not a contractual obligation undertaken by D, but a trust obligation imposed on trustees. Each employee becomes a scheme member by virtue of his employment, but his entitlement to a pension arises under the trusts of the scheme.
  • The rule against perpetuities applies not only to the trust, but also to the administrative trusts and powers of trustees. Such powers must not be capable of being exercised outside the perpetuity period, and they may be void even if the trusts to which they are attached are valid.
  • The 1994 amendments are incurably bad. Any power to amend the trusts is void for perpetuity. An amendment is not wholly without effect. An employee who joins the plan after an amendment makes his settlement upon the trusts as amended. But an amendment cannot affect existing members. The 1994 amendments, which were made after the plan had been closed, were therefore without effect.
  • “In the second place, and perpetuity apart, D’s power to amend the plan was subject to an obligation to exercise it in good faith…D was not entitled simply to disregard or override the interests of C. Once it became likely that the plan would be wound up, D would have to take this fact into account, and it is difficult to see how the plan could lawfully be amended in any significant respect once it had actually been discontinued. But even if it could, their Lordships are satisfied that it could not be amended in order to confer any interest in the trust fund on D. This was expressly prohibited by clause 4 of the trust deed. The 1994 amendments included a purported amendment to the trust deed to remove this limitation, but this was plainly invalid. The trustees could not achieve by two steps what they could not achieve by one” [1411E].

Significance of the Case in Legal Development

Air Jamaica Ltd v Charlton is pivotal for its exploration of trust law principles and has influenced several key legal areas:

  • Re Kayford Ltd [1975]: This case helps understand how funds are treated when set aside from a company’s assets, relevant for determining how trusts can be created.
  • Westdeutsche Landesbank Girozentrale v Islington BC [1996]: It discusses the conditions under which a resulting trust arises, essential for interpreting Air Jamaica’s implications on trust funds.
  • Target Holdings Ltd v Redferns [1996]: This case is important for understanding the obligations of trustees, especially regarding the proper application of trust funds.

Exam Questions and Answers

Below, you will find answers to questions that are most commonly asked based on this case.

What are the specific legal implications for trustees who fail to comply with the terms of a pension plan as outlined by trust law?

Under current UK trust law, trustees who fail to adhere to the specific terms of a pension plan may face significant legal consequences, including liability for breach of trust. Trustees are legally obligated to manage the trust in accordance with its terms and for the benefit of the beneficiaries. An example of such a case is Armitage v Nurse [1998], where it was held that trustees could not be exempt from liability for gross negligence.

How does the rule against perpetuities affect other long-term financial instruments similar to pension plans?

The rule against perpetuities, which prevents trusts from lasting indefinitely beyond a certain period (usually 125 years under the Perpetuities and Accumulations Act 2009), also affects other long-term financial instruments like certain types of annuities or charitable trusts. This rule ensures that assets are not unreasonably tied up for generations, potentially affecting pension plans if not properly structured within the legal framework.

What are the potential consequences for beneficiaries if a trust amendment deemed invalid after the plan’s termination?

If a trust amendment is later deemed invalid, particularly after the trust’s termination, beneficiaries may have the right to seek restitution or compensation for any losses incurred. This could potentially lead to a situation where the trust assets need to be redistributed in accordance with the original terms of the trust, as demonstrated in Re Lehman Brothers International (Europe) (In Administration) [2012], where the court had to deal with misallocated funds due to improper trust amendments.

Exclusive Industry Scoop

  • This field is for validation purposes and should be left unchanged.