Breach of Trust and Personal Liability

Question 1

Steps to establish liability

Answer 1

1. Does D owe an equitable duty to C?
2. Has D breached their duty?
3. Has the breach infringed C’s rights?
4. Are there any defences?
5. What remedies are available?

Question 2

Personal remedy

Answer 2

A monetary remedy amounting to the value of the claim, e.g. reconstitution of the trust fund, reparation of the trust fund

Question 3

Proprietary remedy

Answer 3

Seeking to gain a security interest in the defendant’s property or recover property from the defendant

Question 4

Target Holdings v Redferns 1996 on primary duties

Answer 4

The primary duty of the trustee is to administer the trust in accordance with the terms of the trust instrument and the statutory/common law principles that we have already discuss

Question 5

Primary duty

Answer 5

Duty to comply with the principles/obligations of trusteeship and fiduciary relationships

Question 6

Secondary duty

Answer 6

Arises from the breach of the primary duty and relates to the duty to compensate for the loss suffered

Question 7

Tito v Wadell (No 2) 1977 on breach of trust

Answer 7

Breach of trust occurs where there is a violation of any duty which the trustee owes as trustee to the beneficiaries

Question 8

Fiduciary duties (Bristol v Mothew) (5)

Answer 8

• Act in good faith
• Act honestly
• Not make an unauthorised profit
• No conflict of interest
• Not act in his/her own interest

Question 9

Non-fiduciary trustee powers and duties (9)

Answer 9

• Maintain fair balance between beneficiaries
• Delegation (Part IV TA 2000)
• Exercise duty of care (s1 TA 2000)
• Safeguard trust assets
• Keep accounts
• Maintenance (s31 TA 1925)
• Advancement (s31 TA 1925)
• Distribution
• Appointment

Question 10

What did Millett LJ say in Bristol v Mothew about the nature of the breach?

Answer 10

Breach of fiduciary obligation, therefore, connotes disloyalty or infidelity

Question 11

What did Browne-Wilkinson LJ say in Westdeutsche about the nature of the breach?

Answer 11

Since equitable jurisdiction to enforce trusts depends upon the conscience of the holder of the legal interest, he cannot be a trustee of the property if and so long as he is ignorant of the facts alleged to affect his conscience

Question 12

Self-dealing rule

Answer 12

Conflicts the rule against conflict of interest
If a trustee purchases trust property from himself, any beneficiary may have the sale set aside ex debito justitiae, however fair the transaction (Tito v Wadell)

Question 13

What does the rule against self-dealing entail? (3)

Answer 13

• Trustee cannot sell property to themselves
• Trustee cannot sell their own property to the trust
• If the trustee breaches the rule, the transaction is voidable

Question 14

Exceptions to the self-dealing rule (4)

Answer 14

• Where the trust instrument expressly excludes self-dealing rule
• The Limitation Act 1980 will apply
• Ex p James 1803 - where the court or the principal has provided their full consent for the trustee/fiduciary
• Holder v Holder 1968 - here executor announced that he’s not executor anymore and bid on the property, although not legal everyone knew about this

Question 15

Fair-dealing rule

Answer 15

If a trustee purchases his beneficiary’s beneficial interest, the beneficiary may have the sale set aside unless the trustee can establish the propriety of the transaction, showing that he had taken no advantage of his position and that the beneficiary was fully informed and received full value (Tito v Wadell)

Question 16

The rule against unauthorised profits

Answer 16

It is an inflexible rule of the Court of Equity that a person in a fiduciary position is not, unless otherwise explicitly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict (Bray v Ford)

Question 17

Keech v Standford 1726

Answer 17

F: A trustee held a lease for an infant, infant couldn’t renew so he tried to renew it
I: Was he entitled to do it?
H: No, because the rule against unauthorised profits inflexible and strict - “where a trustee takes advantage of an opportunity which is really owned by the beneficiary, he holds the consequent proceeds for the beneficiary”

Question 18

Regal Hastings v Gulliver 1942

Answer 18

The rule against unauthorised profits arises “from the mere fact of a profit having, in the stated circumstances, been made”

Question 19

Bhullar v Bhullar 2003

Answer 19

Directors must avoid conflict of interest especially in relation to corporate opportunities

Question 20

Boardman v Phipps 1966

Answer 20

F: A solicitor helped a trust make a profit, not only for himself, but also the trust
I: Was he entitled to do it?
H: Majority 3-2 no, Keech applied, solicitor had made an unauthorised profit which was held on CT for the trust and even his personal profits were also on CT

Question 21

What are the consequences of a breach of non-fiduciary obligations?

Answer 21

The trustee will be liable for a breach of trust where they have acted beyond the scope of their powers and where they have failed to execute their powers properly, even where they believed they were acting in the best interests of the trust

Question 22

Armitabe v Nurse 1998

Answer 22

Liability would attach only where the trustee acted fraudulently

Question 23

S61 TA 1925

Answer 23

Power to relieve a trustee from personal liability by the court

Question 24

Statutory framework for limitation period

Answer 24

Limitation Act 1980 s21 - limitation periods

Laches - Limitation Act 1980 s36(2)

Question 25

S62 TA 1925

Answer 25

Court can impound the beneficiaries’ interest if they consent to the breach

Question 26

Target Holdings v Redferns on breach of trust

Answer 26

A trustee will be liable for breach of trust if that breach of trust causes loss to the beneficiaries

Question 27

Historically, what was the principal remedy for breach of trust?

Answer 27

Taking of an account - this involves a court assessing the trust fund and determining the extent of relief that should be owed in the light of the breach

Question 28

Different functions of the remedy

Answer 28

• Restitution of gain
• Disgorgement of profit
• Unwinding the transaction - rescission of the contract

Question 29

Falsification of the trust account

Answer 29

The mechanism through which the trust fund can be reconstituted, the beneficiaries can apply for the court to take an account of the trust and where it is found that the trustee has misappropriated an asset belonging to the trust fund, the court can falsify the transaction – treat it as though it had been funded using the trustee’s own assets

Question 30

What happens if the unauthorised investment resulted in a loss?

Answer 30

The transaction may be falsified by the court

Question 31

What happens where the unauthorised investment results in a gain?

Answer 31

The beneficiaries may consent to it becoming the part of the trust fund via retrospective authorisation

Question 32

Target Holdings v Redferns 1995

Answer 32

A trustee is liable to compensate the beneficiary only for losses caused by the breach, not losses that the beneficiary would have suffered even if there had not been a breach
Reconstitution of the trust fund is not an automatic right

Question 33

Reparation of the trust fund

Answer 33

Where the trustee misses an opportunity e.g. to invest through negligence, then the beneficiaries may be entitled to reparation of the trust fund - not reconstitution because no property has been misappropriated

Question 34

Fry v Fry 1859

Answer 34

In taking an account in reparation, the court will consider the extent of the loss from the missed opportunity at the time of the trial rather than the time of the breach

Question 35

Equitable compensation

Answer 35

An equitable monetary remedy available when the equitable remedies of restitution and account are not appropriate

Question 36

Function of compensation (Canson Enterprises re-cited in Target Holdings)

Answer 36

To make good a loss in fact suffered by the beneficiaries - exactly what the word compensation suggests

Question 37

AIB Group (UK) Plc v Redler & Co

Answer 37

Any compensation liable will be limited to breach

Question 38

Unless there is fraud…

Answer 38

There will be no penal element to the monetary award

Question 39

Account of profits

Answer 39

A mechanism through which D must account for any gain or profit that they have acquired through the breach of trust, and where that profit exceeds the loss suffered by C, D will have to transfer the profit to C

Question 40

Where does account of profit apply?

Answer 40

Equally to both breach of trust and breach of fiduciary duty

Question 41

Defences to personal liability (9)

Answer 41

• Lack of causal link between breach and loss
• Breach committed by another trustee
• The beneficiary has failed to minimise her loss (not a full defence)
• Formal release of liability by the beneficiaries
• Exemption clause
• S61 TA 1925 - court may grant relief
• Terms of trust permit the action
• Action not connected to the trustee’s fiduciary duties
• Beneficiary consents or authorises the breach

Question 42

Can a trustee request an order from the court for the other trustees to make a contribution to the liability?

Answer 42

Yes, an equitable rule (Chillingworth)