Beware the conditional gifts – High Court rules children of beneficiary take gift subject to conditions subsequent in will despite lack of knowledge

A recent decision of the High Court clarified that where a beneficiary of a will predeceases the testator and the gift vests in the beneficiary's children under s. 33 of the Wills Act 1837, those children take the gift subject to the same condition subsequent that would have bound the beneficiary. The ruling also confirmed that a beneficiary's (or their issue's) ignorance of a condition subsequent does not make the condition impossible to fulfil, and provides useful guidance for practitioners in respect of drafting conditions subsequent in wills.

Background

The case was brought by the executors of the estate of a Mr Hine to determine the correct distribution of the trust funds. Mr Hine was the owner of a family farm, and had four children; John, Philip, Beryl and Basil. Clause 3 of his will devised Mr Hine's interest in the farm to his wife and two sons (John and Philip) in equal proportions, but the gift to his sons was made subject to the condition that within the period of nine months from the testator's death, John and Philip each had to pay £15,000 to Mr Hine's other children; Beryl and Basil. If either son failed to satisfy this condition, their interest in the farm would pass to Beryl and Basil (the "clause 3 condition").

Mr Hine passed away in 1992, and the nine month time period for satisfying the clause 3 condition expired on 4 October 1992. John did not satisfy the clause 3 condition by the deadline, and his interest therefore passed to Beryl and Basil. This was not disputed in these proceedings.

The principal questions in the proceedings related to the treatment of Philip's share of the farm under the will. Philip passed away in 1990, predeceasing his father. Thus he was unable to satisfy the condition in his father's will. His surviving children, Judith and Janet, who were two of the defendants in the case, argued either that Philip's share vested in them free from the condition, or alternatively that they were relieved of the consequences of their non-compliance with it because they had not known about it in time to satisfy it, and compliance was therefore impossible.

Hodge J considered that there were two "interesting and difficult" questions on the law of wills arising on the facts of this case:

1. Where issue succeed to the interest of a parent who predeceased the testator under s. 33 of the Wills Act 1837, do they take subject to any condition subsequent which would have bound that parent?
2. If so, what is the effect of their failure to fulfil the condition because they were never informed of its terms before the time had passed for them to fulfil the condition and it is by then too late for them to do so?

The rest of this article will examine Hodge J's answers to these questions and the practical implications of the same.

Decision

Question 1

Did the gift lapse?

1. 33 of the Wills Act 1837 sets out that a gift to a child who predeceased the testator, but left issue alive at the time of the testator's death would take effect as a gift to the issue, unless contrary intention appears in the testator's will. In respect of the "contrary intention", Hodge J concluded that "there was no requirement that a contrary intention should be expressed in particular terms or that there should be any reference to [s. 33]." Rather, what was necessary was for the "language of the will to show that the devise or bequest in question should not take effect … as a devise or bequest to the living issue of the deceased beneficiary". Hodge J emphasised that the contrary intention must appear by the will, and not by reference to some extrinsic factors or consideration.

The parties and the judge all agreed that s. 33 prevented the gift to Philip from lapsing. On the facts, Hodge J concluded that there was no contrary intention and the gift to Philip took effect as a gift to his two children, Judith and Janet.

Were the substituted beneficiaries subject to the clause 3 condition?

The starting point for determining whether Philip's daughters were subject to the condition subsequent in the testator's will was the case of Ling v Ling [2002] WTLR 553, which sets out that a substituted beneficiary under s. 33 is subject to the same contingency as the original beneficiary who predeceased the testator would have been. Hodge J confirmed the applicability of this principle in the present case and summarised the legal position: "… where a testator clearly intends a gift to be subject to a condition subsequent, and statute intervenes so as to save the gift and pass it to the beneficiary’s issue so as to avoid the effect of the doctrine of lapse in the event of the named beneficiary predeceasing the testator, there is every reason for Parliament to have provided that the substituted gift should be subject to precisely the same conditions as that subject to which the deceased father or mother would have taken. That seems to me to be the clear rationale and effect of s.33(3). It would be an excessive, intrusive and unwarranted interference with the principle of testamentary freedom and autonomy for the court to construe s.33 so to permit the issue of the deceased beneficiary of a testamentary gift to take free from any condition that attached to that gift in the hands of their deceased parent." (emphasis added)

Hodge J confirmed that the testator clearly never intended John or Philip to take their share in the farm free from the obligation to make payment to Beryl and Basil under clause 3. Accordingly, he found it difficult to see why any condition attached to the gift to Philip should not also apply to the substituted beneficiaries, Judith and Janet. He concluded that the substituted beneficiaries step into the shoes of the original beneficiary for all purposes.

Question 2

Does the impossibility of complying with the condition excuse the substituted beneficiary?

The defendants' alternative submission was that Judith and Janet should be excused from their non-performance of the clause 3 condition because they did not know about it until it was too late for them to comply with it, and that the failure to communicate the condition to them rendered their compliance impossible.

Hodge J rejected these arguments and concluded that ignorance of a condition did not make it impossible to fulfil it (confirming the same proposition in Astley v Earl of Essex (1874) LR 18 Eq 290). He distinguished between the present case, and the authorities relied on by the defendants where a gift was held to take effect notwithstanding the fact that compliance with the condition subsequent was practically impossible (e.g. where the condition required a village hall to be completed within a certain time period, which was made impossible by war conditions).

The judge confirmed the distinction in law between the situation where (1) a beneficiary fails to fulfil a condition otherwise capable of fulfilment simply because he does not know about it in sufficient time to do so; and (2) the situation where it is physically impossible for him to fulfil the condition. In the former it had been within the testator's power to make fulfilment of the condition contingent upon it having been notified to the beneficiary in sufficient time to enable him to fulfil to condition (e.g. requiring it to be performed within a specified time after it had been notified to the beneficiary), whereas in the latter situation neither the testator, nor the beneficiary has any control over whether or not the condition can be fulfilled. The law here operates to strike a balance between the competing interests of the primary beneficiary and those who would take in default of fulfilment of the condition.

Accordingly, the judge concluded that the condition subsequent was not complied with and the gift over took effect; the substituted gift of the testator's share in the farm to Judith and Janet failed and that share passed to Beryl and Basil.

Failure to fulfil condition vs. neglect or refusal

The judge also rejected the defendants' argument, based on Re Quintin Dick [1926] Ch 992, that the gift should take effect because a beneficiary who had never heard of the existence or terms of a will could not be said the have either "refused" or "neglected" to comply with a clause. Hodge J confirmed that the law draws a distinction between the refusal or neglect to fulfil a condition on the one hand, and a failure to do so, on the other hand, as a matter of "true construction" and to promote the free expression of testamentary wishes and autonomy.

The will in this case provided that the gift over to Beryl and Basil will take effect in the simple event that the condition is not satisfied (i.e. failure), and was not contingent upon there being some neglect or deliberate refusal to comply with the condition by the original/substituted beneficiaries.

Condition precedent vs. condition subsequent

The parties and the judge agreed that the clause 3 condition was a condition subsequent, not a condition precedent. Hodge J confirmed that Re Greenwood [1903] 1 Ch 749 remained good authority for the proposition that if a condition to a testamentary gift is capable of being construed either as a condition precedent or subsequent, the court will prefer the latter construction.

Is a legatee entitled to notice of the condition?

The judge also confirmed the principle in Re Hodges' Legacy (1873) LR 16 Eq 92 that "a legatee is not entitled to notice of the condition unless the terms of the condition expressly provide that an interested party is to give him notice thereof". He suggested that expressly making the time for compliance run only from the time of notification of the condition to the relevant beneficiary (rather than, as was the case in clause 3, with reference to e.g. the death of the testator) would be good drafting practice in relation to conditions similar to that in clause 3 in a will.

Comment

The decision provides a helpful example of the law striking a balance between protecting testamentary freedom and autonomy, giving effect to the wishes of the testator as a matter of construction, and balancing the competing interests of the primary beneficiary and those secondary beneficiaries who would benefit in the event that a condition is not fulfilled.

For legal practitioners, there are some useful lessons to be learnt from the judgment in respect of drafting wills and conditions subsequent, and the courts' interpretation of such clauses:

1. If a condition subsequent is to be fulfilled within a specified time period, it is good practice to define the start of that time period by reference to the time of the notification of the condition to the relevant beneficiary, rather than from e.g. the death of the testator.
2. Consider the distinction in the effect of using wording such as the beneficiary's "failure" (which will be triggered by the simple event of the condition not being satisfied), as opposed to "refusal" or "neglect" to fulfil a condition subsequent (which will be applicable in more limited circumstances) when drafting a condition.
3. The courts will prefer to interpret a condition as a condition subsequent, rather than a condition precedent. This should be borne in mind both when drafting such conditions and also in respect of disputes about their interpretation.