Introduction

• personal claims seek to make trustee personally liable to replace loss as a result of their breach of trust
• breach of trust: if trustee fails to comply with duty or improperly exercises power

  Armitage v Nurse [1998] Ch 241

  • Breaches of trust are of many different kinds. A breach of trust may be deliberate or inadvertent, it may consist of an actual misappropriation or misapplication of the trust property or merely of an investment or other dealing which is outside the trustees' powers, it may consist of a failure to carry out a positive obligation of the trustees or merely of a want of skill and care on their part in the management of the trust property, it may be injurious to the interests of the beneficiaries or be actually to their benefit.
• if breach of trust claimed: establish which duty has been broken by trustee (cannot be sued if done nothing wrong)
• all trustees often liable as duty to act unanimously when exercising powers & discretions
• individual trustee may be liable for his own act (not possible to vicariously liable for co-trustee)
• passive trustees liable if loss caused by their inactivity

  Townley v Sherborn (1633) J Bridg. 35

  • passive: trustee leaves running of trust to co-trustee without inquiry

  Styles v Guy (1849) 1 Mac&G 422

  • duty of trustees: to watch over and if necessary, correct the conduct of each other
  • including if trustee knows breach of trust & not seek redress
• trustees guilty of breaches of trust are jointly & severally liable
  jointly: beneficiaries can sue all trustees for loss to trust fund
  severally: beneficiaries could sue one of trustees for entire loss
• newly appointed trustees: not liable for breaches committed by existing trustees, but if discover past breach must act to recover loss or guilty of own breach
• retired trustees liable for breaches when in office, but not after retirement unless retired to enable breach

Compensation

• breach of trust: beneficiaries seek compensation to restore trust fund to what properly due
• Ts holding on trust for A for life remainder to B
  Ts steal £20 000
  B no interest in possession so cannot sue Ts for damages for personal loss suffered
  B can sue Ts on behalf of trust & require Ts to restore lost £20 000
• must be causal connection between breach & loss (but for the breach the loss would not have occurred)

  Target Holdings v Redfern [1996] AC 421

  • liability is fault-based: the defendant is only liable for the consequences of the legal wrong he has done to the [claimant] and to make good the damage caused by such wrong. He is not responsible for damage not caused by his wrong or to pay by way of compensation more than the loss suffered from such wrong.
• breach of trust does not need to be sole or main cause of loss

  Re Dawson [1966] 2 NSWR 211

  • breach of trust: if started sequence of events that causes loss, even if loss increased due to factors beyond trustees' control
  • change of exchange rates increased loss

  Target Holdings v Redfern [1996] AC 421

  • slump in property prices increased the loss
• traditionally once causation established trustee liable for all loss which flows from breach
  principle of remoteness of damage not applied
  loss assessed at date of judgement (aim: restore trust fund to level would have been at date of judgement but for breach)
  to assess equitable compensation: court looks back from date of judgement & asses loss actually caused directly or indirectly by breach
  rather than considering reasonably foreseeable loss at time of breach

  Canson Enterprises v Boughton (1991) 85 DLR 129

  • The basis of compensation at equity, by contrast, [to contract & tort] is the restoration of the actual value of the thing lost through the breach. The foreseeable value of the items is not in issue. As a result the losses are to be assessed at the time of the trial, using the full benefit of hindsight
• however if trustee breaches duty of care remoteness may apply

  Bristol & West Building Society v Mothew [1998] Ch 1

  • Equitable compensation for breach of the duty of skill and care resembles common law damages in that it is awarded by way of compensation to the [claimant] of his loss. There is no reason in principle why the common law rules of causation, remoteness of damageand measure of damages should not be applied by analogy in such a case.
• trustee may invest trust fund (under Trustee Act 2000) but owe duties to:
  exercise reasonable care
  consider the suitability of the investment & diversification
  review investments
  take advice when investing & reviewing
• if trustees breach investment duties trust fund value make not decline but real value (taking account of inflation) may reduce
• question: whether trustee have to restore loss to original value of trust fund or make up fund to real value?

  Nestle v National Westminster Bank [1994] 1 All ER 118

  Facts:

  • R (remainderman) alleged trustee (Bank) breached investment duties (misunderstood power in trust instrument, did not review, did not diversify investments (company shares) & unduly favoured life tenant)

  Issue:

  • did breach of trust occur?

  Held:

  • Court of Appeal: R had to prove breaches caused loss to trust fund:
    loss will be incurred by a trust fund when it makes a gain less than would have been made by a prudent businessman. [R] had to show that a prudent trustee knowing the scope of the trustee's investment power and carrying out proper reviews would have invested the trust fund in such a way that it would have made more profit than that achieved by the Bank.
  • in instant case Bank found to have breached duties but R did not prove caused loss & therefore no remedy
  • standard of prudent trustee is undemanding
  • aim of minimising tax, balancing interest of life tenant & remainderman, avoiding speculative investments: contributed to not achieving as much growth as other portfolios
• restoring amount of trust capital lost will often not fully compensate beneficiaries
  Ts wrongly distribute trust shares to Y
  loss: value of shares & dividends that have been paid since shares wrongly transferred
• compensation must either include: sum for income or interest on amount of compensation

  Wallersteiner v Moir (No. 2) [1975] QB 373

  • court assumes trustee has misapplied his own money & that trustee retained the trust money, therefore having opportunity to earn interest on it
• traditionally interest rate was 4%

  Bartlett v Barclays Bank [1980] Ch 515

  • interest rate: court's special account for funds invested with the court or 1% above base rate
  • higher rate applied if trustees actually received a higher rate or used money for own purposes
• if trustees commit more than one breach of trust & some breaches result in loss & other in gain: set off is not permitted

  Dimes v Scott (1828) 4 Russ 195

  • set off not permitted if separate transactions: beneficiaries entitled to gain as result of breach & compensation for loss as result of another breach

  Bartlett v Barclays Bank [1980] Ch 515

  • set off may be permitted if gain & loss arise out of same breach
  • in instant case, same wrongful investment policy

Defence: s.61 Trustee Act 1925

• trustee to have breached trust may have defence under s.61 TA 1925

  Trustee Act 1925

  • s.61: court has discretion to relieve trustees wholly or partly from liability if:
    they acted honestly & reasonably
    & ought fairly to be excused for the breach of trust & for omitting to obtain directions of the court in the matter
• acted reasonably if exercised same degree of care & skill as reasonable man
• trustees can seek directions from court if trust terms unclear but in small trust court may be satisfied that directions would be too costly & therefore reasonable to dispense with directions
• court will balance interest of beneficiaries & trustees & anyone else affected
• court generally reluctant to relieve paid professional trustees

Defence: knowledge & consent of beneficiaries

• defence may be available if beneficiary (claiming breach of trust) consented to trustee's actions
• valid consent must have been provided: freely given without undue influence & with full knowledge of the facts
• main issue whether fair & equitable for beneficiary to sue

  Re Pauling's ST [1964] Ch 303

  • The court has to consider all the circumstances in which the concurrence of the [beneficiary] was given with a view to seeing whether it is fair and equitable that, having given his concurrence, he should afterwards turn round and sue the trustees: that subject to this, it is not necessary that he should know that what he is concurring in is a breach of trust provided that he fully understands what he is concurring in, and that it is not necessary that he should himself have directly benefited by the breach of trust.
• if non-consenting beneficiary sues: trustees can ask court to 'impound' equitable interest of consenting beneficiary & use it to pay compensation to claimant

  Trustee Act 1925

  • s.62: court has discretion to order impounding of a beneficial interest if the beneficiary has instigated, requested or consented in writing to the breach
• court will consider whether consenting beneficiary benefitted or was intended to benefit from breach

Defence: Limitation Act 1980 & laches

• beneficiary must bring action for breach of trust within prescribed limitation period
• periods for some breaches of trust are set out in Limitation Act 1980

  Limitation Act 1980

  • s.21(1): no period of limitation prescribed for:
    fraudulent breaches of trust
    actions to recover trust property wrongly taken by the trustee
    where trustee has purchased trust property or beneficial interest
  • s.21(3): beneficiaries must bring action for breach of trust within six years from date right of action accrued
    time not start running against beneficiary entitled to future interest in trust property until his interest falls into possession
  • s.28(1): if right of action accrues when beneficiary is infant time starts running once he reaches 18
  • s.32(1): if any relevant fact to claimant's claim gas been deliberately concealed by defendant, time not start running until claimant has discovered or could with reasonable diligence have discovered the concealment
• if no prescribed limit, equitable doctrine of laches applies

  Lindsay Petroleum v Hurd (1874) LR 5 PC 221

  • Where it would be practically unjust to give a remedy, either because the party has by his conduct, done that which might fairly be regarded as a waiver of it, or where by his conduct and neglect he has , though perhaps not waiving that remedy, yet put the other party in a situation in which it would not be reasonable to place him if the remedy were afterwards to be asserted, in either of these cases, lapse and delay are most material.

Defence: exclusion clauses

• settlor may confer a defence by clause in the trust instrument or will for certain types of breach
• exclusion or exemption clause must be valid

  Armitage v Nurse [1997] 3 WLR 1046

  Facts:

  • Ts held agricultural land & property on trust for P
  • P alleged Ts had beached duties & disregarded her interests in favour of family (non-beneficiaries)
  • clause 15 of trust instrument: No trustee shall be liable for any loss or damage which may happen to Paula's fund or any part thereof or the income thereof at any time or from any cause whatsoever unless such loss or damage shall be caused by his own actual fraud
  • P argued clause 15 removed irreducible core of obligations & therefore void because repugnant to nature of a trust

  Issue:

  • was exclusion clause valid?

  Held:

  • clause 15: valid & effective to exempt trustees from liability for all breaches of trust apart from those committed dishonestly
  • P's argument would have been accepted if clause had removed all liability for any breach, as would be no enforceable duties (& no trust)

Contribution from other trustees

• trustees in breach of trust are jointly & severally liable
• A & B are trustees & both guilty of breach of trust
  beneficiary may sue A for entire loss (as A is wealthy)
  question: whether A can recover contribution from B or even indemnity of 100% of compensation claimed?
• equitable rule of indemnity applies if:
  co-trustee has wrongfully misapplied trust property to his own use
  co-trustee acted fraudulently when the others acted in good faith
  co-trustee is also a beneficiary & benefited from the breach of trust (indemnity is limited to value of his equitable interest which will be impounded to meet the claim)

  Re Partington (1887) 57 LT 654

  • can claim full indemnity from solicitor

  Head v Gould [1898] 2 Ch 250

  • only claim full indemnity from solicitor if trustee blindly followed advice & did not actively participate in breach
• if indemnity not applicable, trustee may be able to sue for contribution under Civil Liability (Contribution) Act 1978

  Civil Liability (Contribution) Act 1978

  • s.1: trustee may claim contribution
  • s.2: court will order contribution amounting to proportion of the loss as is just & equitable, having regard to responsibility for the loss
• however, trustee cannot claim contribution or indemnity form any co-trustee who is completely innocent of any breach