A more recent version of these Breach Of Trust notes – written by Cambridge/Bpp/College Of Law students – is available here.
The following is a more accessble plain text extract of the PDF sample above, taken from our GDL Equity and Trusts Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:
Equity & Trusts : Breach of Trust
?????There can be breach of duty even if the beneficiary hasn't even lost anything---you can make money on an investment for example, but not have much as you could have done. Breach of Trust
? Basic right of beneficiary: to have trustees carry out their (1) distributive and (2) managerial roles properly. Failure to do so, by act or omission = breach.
? Breach of trust occurs when: a trustee does any act which they ought not do; or fails to do anything which they ought to do, re distributing trust assets to beneficiaries or managing the trust assets.
? Breaches occasioning a Personal liability to pay a sum of money: two types: o (1) Positive misapplication of the trust property (eg paying the property wrong person/making an unauthorized investment). o (2) Failing to manage the trust assets with due care and skill (eg, failing to invest money or investing negligently).
? Type 1--Liability for ultra vires misapplication of trust property = strict liability: any reason for it is irrelevant. o The beneficiaries do not need to allege any breach of trust. o They can simply ignore what has happened and 'falsify' the trustee's accounts. o Amount payable = amount needed to make up the objective value of the trust fund if the trustee had done what he ought to have done (since equity looks on as done that which ought to be done). [nB---the beneficiary may also have a proprietary claim, if the trustee/unauthorized recipient retains trust property or its traceable proceeds]. So they can insist that the trustee must be taken to have specifically performed their duty like a good trustee, and the trustee cannot deny this.
? Type 2--Liability for failing to manage the trust assets with due care and skill is based on proof that there has been a breach of trust, and that, but for the breach, there would not have been loss suffered. o The trustee's accounts are 'surcharged' with the amount of the loss o [On 'falsify' and 'surcharge', see Ultraframe (UK) v Fielding (2005)].
? Primary remedy for beneficiary: to have the accounts taken, to falsify and surcharge them, and to require the trustee to make good the difference between the value of the trust fund and its actual value.
Target Holdings v Redferns (1996), per Lord Browne-Wilkinson: "The basic right of a beneficiary is to have the trust duly administered in accordance with the provisions of the trust instrument, if any, and the general law." o Though Browne-Wilkinson says this occurs even if we only have a trust instrument. o In fact, there isn't always a trust instrument, and that isn't necessary. You can have, for example, statute, and common law, governing what a trustee can/cannot do. o So a flaw in the quote: but it does go to the heart of the right of beneficiary.
Useful structure to follow
? (1) Has there been a breach of a specific duty---and was it (a) a misapplication of trust assets; or (b) a failure to manage trust assets with due care and skill.
? (2) What is the measure of liability?
? (3) How would liability be shared between the trustees?
? (4) Are there any defences the trustees can rely on?
Types of personal claim against the trustee for breach of trust
? (1) Reparation claims: o When breach involves a failure to manage the trust with due care and skill, o compensation is calculated by reference to the amount the trust would have received if the trustee had acted with due care and skill. o Beneficiary claiming that the trust fund has under-performed and thus seeks payment of an additional sum into trust fund (Nestle v National Westminster Bank (1993)). o Can be difficult to prove that a trust fund would have performed to a certain level had the trustees not acted without due care and skill. o It is only where a fiduciary obtains shares as a bribe that he can be made accountable for his profit based on the highest price that the shares could have been sold for (Target Holdings v Redferns (1996)).
? (2) Substitutive performance claims o Where breach = ultra vires misapplication of trust funds---
trustee is required to restore the trust fund to value it would have had if they had properly performed their duties, either by returning the very same property to the trust; or (more commonly) by reimbursing the trust fund in money up to the value required to replace the misapplied trust property. Breach of Trust---Cause of Action
2 ??? ?This is a very basic structure to help in assessing whether there's been a breach; if so, whether trustee is liable; if so, what is extent of liability.
? ?? ? Cause of action = breach of trust: o Strict liability---doesn't matter why you breach, whether innocently, negligently, dishonestly.
? ?? ? (1) Duty: o Trust deed: what does trust instrument allow the trustee to do? Have they acted outside the powers (ultra vires) given to the them by the trust instrument? If the trust instrument authorises the trustee to do something (eg self-dealing), then it's not a breach.
? But sometimes there is no trust instrument in existence; or is silent/not clear on a particular area, then we can look at statute . . . o Statute
? Eg if trust instrument doesn't specify investment powers, we look at statute. The TA 2000; and also the TA 1925 (some things aren't covered in 2000 Act). o Common law
? ?? ? (2) Breach o Will depend on each specific scenario.
??? ?If there's a breach . . .
? ?? ? (3) Causation (what losses are trustees liable for?) o [[just basic detail on GDL]]. o Where breach is an ultra vires misapplication of property
- trustees are liable for all losses, whether directly or indirectly, and however unlikely/unexpected they were to occur. o Where breach was failure to manage with due care &
skill ? the award of monetary compensation is based on similar principles to award of common law damages for negligence.
? Need causation (including NAI), remoteness of damage, and measure of damages
? D liable if, but for his breach, loss would not have happened (Bristol & West BS v Mothew (1998); Target Holdings v Redferns (1996)). o Target Holdings v Redferns (1996): 'some causal connection' between the breach of trust and the loss sustained by the beneficiaries. 'but for' test of causation.. o But criticism of Target Holdings: 'but for' test is a common law test of causation---this has no place in a case involving breach of trust, is too simplistic. o AIB Group v Redler (2014), SC, approved 'but for test' from Targets Holdings v Redferns o Note: a fiduciary cannot invoke contributory negligence as a defence against his beneficiary, who is entitled to trust the 3
fiduciary to act loyally to further the beneficiary's best interests to the exclusion of their own (Lloyds TSB v Markandan (2010). o In context of a fiduciary relationship arising in an arms' length commercial context when the beneficiary has become aware that the fiduciary is not to be trusted, losses flowing from the beneficiary's clearly unreasonable passive behaviour from a particular date will be judged to have been caused by the beneficiary: Lipkin Gorman v Karpnale (1992); Corporacion Nacional del Cobre v Sogemin Metals (1997). o But, trustees will only be liable for losses that result from a breach of duty on their part: if the trustees exercised due care and skill, but the trust fund depreciated through no fault of their own (eg a market recession), trustees not responsible for the loss. o i.e. you need causation: Loss must be caused by the breach. o But if they misapplied trust assets, they will be responsible for all the losses flowing from that breach, regardless of causation. o For GDL purposes, key point is: there must be some causal connection between the breach and the loss
? ?? ? (4) Damage---quantification o Loss can be several things: could be lost to the trust fund (eg investments have decreased in value); if trustee has taken trust property. But can also cover things like investment where the investments have not lost money, but have not done as well as other investments might have done, or as the reasonable prudent person of business might have done. o So loss doesn't require the trust fund to have actually diminished---could be not appreciating as much as it could have done.
? ?? ? (5) Remedies: o Proprietary or personal claim?
o Proprietary remedy = an interest in the property itself, so can follow/trace that property, and trace into substitute assets. o Breach of trust is a PERSONAL claim, do not give a proprietary claim, so you cannot trace. o Westdeutsche Landesbank v Islington (1996). o Equitable compensation: don't look at in much detail on GDL. Whether awarded depends on facts of each case. o Wallersteiner v Moir (No 2) (1975). Measure of liability
? ?? ? Re substitutive performance claims, where misapplication of trust funds (eg buys unauthorised shares; or uses a Ming vase in their own house, which is then stolen. As a good trustee, they could not possibly benefit by enjoying the vase in their own home. Since a
4 beneficiary does not have the vase, the trustee cannot deny that they must have kept it in a safe place. The, the trustee must produce it or its value: Clough v Band (1838); Target Holdings.
? ?? ? Re intra vires breach--Nestle v National Westminster Bank: a trustee who failed to carry out his intra vires managerial duties with due care & skill ? liable only for the loss that would have occurred but for his negligent conduct. Misapplication/ultra vires/substitutive performance claims:
? ?? ? Interest: o Trustees are liable to compensation not just lose capital value, but also any interest in respect of misapplied trust funds. o Rate of interest at court's discretion (Barlett v Barclays). o In C19, inflation low, judges set interest at 4%, 5% punitive rate in cases of fraud of active misconduct (AG v Alford (1855)). o Bartlett v Barclays: rate payable in respect of money in the courts' short-term investment account (now the basic account under the Court Fund Rules 2011). o Commercial rate: Wallersteiner v Moir (No 2) (1975): CA, imposed a commercial rate at 1% above the London clearing banks' base rate in force at the time. o This applied again, for commercial rate, in Fiona Trust &
Holding Corporation v Primalov (2011). o Westdeutsche Landesbank Girozentral v Islington LBC (1996): a court may only award compound interest in the case of fraud, of it a trustee made an improper profit from the breach.
? ?? ? Unauthorised investments o With wide powers of investment in TA 2000---less probably that such cases are likely to arise in the future.
? ?? ? Authorised investments o Rule before 1926, laid down in Re Chapman (1896), CA: trustee not liable for any loss arising through retention of an authorised investment, unless loss arose from trustee's 'wilful default' = displaying a lack of 'ordinary prudence'. o Now requirements in TA 2000, re making and revising investments, to which the duty of care applies.
? ?? ? Failure to invest o Trustee must not leave trust money uninvested for an unreasonable period. If breached, chargeable with interest on the uninvested sum (AG v Alford (1855)). o Or could be liable for an alterative claim for loss of profit that would have been made if they had exercised their power to invest in a tracker fund.
Buy the full version of these notes or essay plans and more in our GDL Equity and Trusts Notes.