Law of Trusts
Trust Distinguished from Contract, Agency, Bailment, Gift and Debt
Many legal relationships involve one person holding or dealing with property for another. A trust is only one of them. Agents act for principals, bailees hold goods for bailors, donees receive gifts, and debtors hold money owed to creditors. Distinguishing a trust from these relationships matters because the consequences differ sharply: who owns the property, whether it survives insolvency, which limitation period applies, and whether the arrangement can be revoked. This note sets out the key distinctions.
1. Trust and Contract
Point | Trust | Contract |
|---|---|---|
Source | A confidence reposed and accepted; may be declared unilaterally by the owner | Agreement between parties with consideration (Indian Contract Act, 1872) |
Who can enforce | The beneficiary, even if not a party and a volunteer | Generally only parties; privity applies |
Consideration | Not required | Required, subject to exceptions |
Property | Necessarily involves property held by the trustee | May or may not involve property |
Remedies | Proprietary as well as personal; following and tracing | Mainly personal: damages, specific performance |
Limitation | None for following property against an express trustee (Limitation Act, Section 10) | Ordinary periods |
The two can overlap: a contract may require a party to hold property on trust (Section 92), and a trust deed may be accompanied by contracts with trustees or managers.
2. Trust and Agency
- Ownership: trust: trustee is owner of the trust property; agency: principal remains owner; agent acts on his behalf.
- Acting: trust: trustee acts in his own name and right, for the beneficiary's benefit; agency: agent acts in the principal's name, binding the principal.
- Control: trust: beneficiary cannot direct the trustee, except as the Act allows; agency: principal controls and can instruct the agent.
- Termination: trust: not revocable by the beneficiary alone; trustee cannot renounce after acceptance; agency: generally revocable by the principal.
- Common ground: both trustees and agents owe fiduciary duties of loyalty and accounting.
The key distinction, stated in W.O. Holdsworth (1957), is that a trustee holds in his own right, for the benefit of the beneficiary, while an agent holds on behalf of the principal (Topic 6). An agent who receives money for his principal may also hold it on trust if it is to be kept separate, and Section 88 makes agents hold secret profits for their principals.
3. Trust and Bailment
A bailment (Indian Contract Act, Section 148) is the delivery of goods for a purpose on condition that they be returned or disposed of as directed. The bailee has possession but not ownership; the bailor remains owner. A trustee has ownership. Bailment applies only to movable goods; a trust may be of any property. In practice both protect the owner in insolvency: goods held under bailment are also excluded from a corporate debtor's liquidation estate (IBC, Section 36(4)(a)(ii)).
4. Trust and Gift
Point | Trust | Gift |
|---|---|---|
Effect | Separates legal ownership (trustee) from benefit (beneficiary) | Transfers full ownership to the donee |
Continuing obligation | Trustee bound by continuing duties | No continuing obligation on the donee |
Formalities for immovables | Registered instrument or will (Trusts Act, Section 5) | Registered instrument signed by the donor and attested by two witnesses (Transfer of Property Act, Section 123) |
Revocation | Irrevocable unless an exception in Section 78 applies | Revocable only in limited cases (Transfer of Property Act, Section 126) |
A failed gift will not be treated as a declaration of trust (Topic 10), and words of gift accompanied only by a hope or wish do not create a trust (Section 6, illustrations; Topic 8).
5. Trust and Debt
When A pays money to B, B may become either A's debtor or a trustee of the money for A. The difference is crucial:
- Ownership of the money: trust: remains beneficially with the beneficiary; debt: becomes the recipient's own.
- Use: trust: must be kept for the purpose, usually separately; debt: recipient may use it freely, owing an equivalent sum.
- Insolvency of recipient: trust: excluded from the recipient's estate if identifiable (Topic 53); debt: payer is an unsecured creditor.
- Interest: trust: trustee accounts for income and profits; debt: interest only if agreed or by statute.
The test is the intention of the parties, shown by the agreement and conduct: whether the money was to be kept separate and applied for a specific purpose (suggesting trust), or mixed with the recipient's own funds (suggesting debt). An ordinary bank deposit creates a debt; money paid for a specific purpose and kept in a separate account may be held on a Quistclose trust (Topic 51).
⚠ Key point A trust differs from a contract (no consideration or privity needed; proprietary remedies; no limitation for following property), from agency (trustee owns and acts in his own right for the beneficiary's benefit, not on his behalf: Holdsworth, 1957), from bailment (bailee has possession, not ownership, of goods only), from gift (a gift passes full ownership without continuing obligation), and from debt (a debtor owns the money and owes an equivalent; trust money remains the beneficiary's and survives the recipient's insolvency). The intention of the parties, shown by separation and purpose, decides between trust and debt. |
6. Related Topics and Provisions
- Concept and essential elements (Topic 1)
- Nature of the beneficiary's interest (Topic 6)
- Trust property in insolvency (Topic 53)
- The Indian Trusts Act and English trust law (Topic 56)