Breach Of Trust Notes

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:

  • (1) Positive misapplication of the trust property (eg paying the property wrong person/making an unauthorized investment).

  • (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.

  • The beneficiaries do not need to allege any breach of trust.

  • They can simply ignore what has happened and ‘falsify’ the trustee’s accounts.

  • 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.

  • The trustee’s accounts are ‘surcharged’ with the amount of the loss

  • [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.”

  • Though Browne-Wilkinson says this occurs even if we only have a trust instrument.

  • 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.

  • 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:

  • When breach involves a failure to manage the trust with due care and skill,

  • compensation is calculated by reference to the amount the trust would have received if the trustee had acted with due care and skill.

  • 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)).

  • 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.

  • 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

  • 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

• 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:

  • Strict liability—doesn’t matter why you breach, whether innocently, negligently, dishonestly.

• (1) Duty:

  • 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 ...

  • 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).

  • Common law

• (2) Breach

  • Will depend on each specific scenario.

• If there’s a breach ...

• (3) Causation (what losses are trustees liable for?)

  • [[just basic detail on GDL]].

  • 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.

  • 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)).

  • Target Holdings v Redferns...

Buy the full version of these notes or essay plans and more in our GDL Equity and Trusts Notes.