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Remedies For Breach Tracing And Defences Notes

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Remedies against trustees
Two kinds of legal duties:

1. Primary duties set down the basic standards which the law expects us to meet:
these duties are mirrored by primary rights.
a. C may seek to enforce his primary rights through a primary claim.

2. Secondary duties which arise upon the commission of wrongs: these duties are mirrored by secondary rights.
a. C may seek to enforce his secondary rights through a secondary claim  (i)
compensation reflecting C's losses caused by D's breach, or (ii)
disgorgement/restitution reflecting D's gains made through his breach.
C will not always have a choice between these types of claim.
Claims for breach of trust:

1. Primary claims a. Injunction i. Fox v Fox - An injunction was granted to prevent T from distributing the trust property improperly (contrary to the provisions in the testator's will).
b. Distribution i. Re Locker - Where discretionary Ts desire to repair their breach of duty, the court may exercise its own discretion to permit the Ts to repair their breach by distributing the trust property.

1. The breach here was failing to distribute the trust property within a reasonable time (this will only be a breach where T's duty to distribute is obligatory and not optional).

2. The remedy of late distribution by Ts is still closer to S's intentions than late distribution by the court.
ii. Smith v Bolden - T was withholding payment to B on the ground that he was holding the property for B's own beneficiaries. The court held that T can only act as trustee for the Bs under his trust  was ordered to distribute the trust property to B.
c. Rescission i. Tito v Waddell (No 2) - When the trustee breaches the self-dealing or fair-dealing rules, the sale which constitutes the breach can be avoided by B.

1. NB: For self-dealing, any B can void the sale. For fair-dealing, it is the B from whom T purchased the beneficial interest who can avoid the sale.

2. NB: In Tito, the fair-dealing rule was held by Megarry VC to not be applicable on the facts  obiter?
d. Liability to account i. Enforcement of T's primary duty to account for the value of the trust fund as it should be (as opposed to how it actually is).
ii. Unauthorised transactions:

1. Essentially the idea that: 'this unauthorised transaction must have actually come from T's own funds - not the trust fund'
a. E.g. invested in a gambling company which is prohibited by an ethical investment clause.

2. Three stages:
a. Require trustee to provide an account of what was done with the trust assets.
b. Adjust the account to reflect what ought to have been done with the trust assets.
i. Falsify: delete unauthorised items ii. Adopt: accept unauthorised items, if they wish iii. Surcharge: add items that ought to be there
(e.g. bc a better investment should have been made)
c. Require the trustee personally to pay for any shortfall.
iii. Breaches of fiduciary duty (e.g. making of unauthorised profits):

1. T has entered into a specific transaction on behalf of the trust where they are in a conflict of interest, or have made unauthorised profits.
a. E.g. invested in a company because they have received a bribe by the company to do so.

2. B has a power to rescind the transaction and be compensated for loss, but also a right to an account of profits. Can require T
to treat his personal profit as money he received for B, as opposed to money he received personally for his own benefit.
It must be added to the account as a receipt, and thus added to the amount he must account for.
a. In some situations, e.g. Boardman v Phipps, T has made a profit and has incurred expense in doing so but did so honestly, T can also include in the account expenses in making the profit to the trust.
b. The logic of treating the receipt as receipt of trust property gives rise to a proprietary claim to that property (as in FHR v Mankarious Ltd)

2. Secondary claims: equitable compensation a. Enforcement of T's secondary duty to pay for loss caused by breach of duty.
i. NB: It has been argued that the old conception of 'account' has been swallowed up by the new concept of equitable compensation.
ii. Causation of loss - B must show that but for the breach, T would have acted differently in accordance with their duties and the loss would not have occurred (Nestle v National Westminster Bank (1993)). 1. Do the rules governing trustees' DoC differ to ordinary DoC
under negligence? No. Millett LJ in Bristol and West BS v
Mothew (1996): "Although the remedy which equity makes available for breach of the equitable duty of skill and care is equitable compensation rather than damages, this is merely the product of history and in this context is in my opinion a distinction without a difference. 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 plaintiff for his loss. There is no reason in principle why the common law rules of causation, remoteness of damage and measure of damages should not be applied by analogy in such a case. It should not be confused with equitable compensation for breach of fiduciary duty, which may be awarded in lieu of rescission or specific restitution." Thus, apply the CL rules of causation, remoteness and measure of damages to breach of a trustee's duty of care.

2. Swindle v Harrison (1997) = case involving breach of a fiduciary duty - solicitor offered to lend Mrs H money, but breach of fiduciary duty bc he failed to inform her of how this would result in a conflict of interest - Mrs H did not want to rescind, but instead equitable compensation bc she only entered a mortgage thinking she had the loan - BUT court held that even if the solicitors had explained the situation, she still would have taken out the loan and suffered the same loss.
a. Evans LJ distinguished between two types of equitable compensation for breach of fiduciary duty:
i. A very stringent measure which requires D to restore C to the position she was in before the breach. [causation of loss not relevant]
ii. A less stringent measure which requires D to restore C to the position she would have been in but for the breach. [causation relevant]
b. Evans LJ held that the more stringent measure could only be used where T "acted fraudulently or in a manner equivalent to fraud" - and breach of fiduciary duty is not in itself fraudulent. Otherwise, can only use the less stringent measure by proving but for causation.
c. Mummery LJ instead suggests that "Foreseeability and remoteness of damage are, in general, irrelevant to restitutionary remedies [equitable compensation] for breach of trust or breach of fiduciary duty." BUT
causation is always relevant. b. There are two key questions here:
i. What is the QUANTUM of the remedy?
ii. What is the FORM of the remedy?
c. QUANTUM: B can only recover in respect of losses which he would not have suffered but for T's breach (i.e. losses caused by the breach) (HoL in Target v
Redferns (1996) and UKSC in AIB v Mark Redler (2014)). This fixes the quantum REGARDLESS OF THE FORM of the equitable remedy. Loss is assessed at the date of trial - not at the date of breach (important bc the value of what is paid away may have decreased in the interim).
i. Broad reading. Lord B-W in Target applied this "basic equitable principle" very broadly to any "breach of trust" - not distinguishing between e.g. breach of the trustee's DoC, or of the trustee's fiduciary duty, or an unauthorised dispersal (as was OTF).

1. BUT are there any cases where there is an unauthorised dispersal of trust property and you just get the money back?
a. Lord B-W's distinction between 'commercial' and
'traditional' trusts - should Target only apply to the former? Given Lord Toulson in AIB, very unlikely.
b. Evans LJ in Swindle v Harrison suggested that Target is limited in scope bc the unauthorised transaction in
Target was later fixed - the Ds ultimately remedied
When does Giambrone apply?
their default by bringing about the purchase and
Young v Bristol Aeroplanes completion of the grant of the mortgage (which on the says that CoA must apply terms of the trust was a precondition for the money to previous CoA decisions unless be paid out).
an exception applies. The two i. BUT this does not fit the facts of the later AIB -
main exceptions are:
where there is no stage at which the condition
 If it was overruled (not the for releasing the fund is met.
case here, as Target and ii. Lord Toulson at [76] of AIB: "Equitable compensation and common
AIB occurred before law damages are remedies based on separate legal obligations. What
Giambrone, so did not has to be identified in each case is the content of any relevant overrule it).
obligation and the consequences of its breach."
 If the decision was made

1. Lord Toulson in AIB at [135] emphasised that "The per incuriam, i.e. in foreseeability of loss is generally irrelevant, but the loss must ignorance of past decisions be caused by the breach of trust, in the sense that it must flow
(not the case here, because directly from it."
Giambrone cites Target and

2. BUT: Main v Giambrone (2017, CoA) - Where T misapplied the
AIB extensively).
trust property, if the duty breached was the passive
Therefore, in a PQ say there is
(custodial) duty to keep hold of the trust property, then the a conflict of authority. The counterfactual adopted will be that where T continued to outcome depends on which hold the trust property. The court (incorrectly) held that it is court decides the case: UKSC
irrelevant whether but-for the breach T would have can overrule Giambrone bc not transferred the subject-matter. The duty was to retain custody bound, but CoA is bound to of the trust funds unless and until the trustee relevant follow Giambrone unless an exception applies (which is unlikely). Williams (see article summary below)
Target and AIB both support the availability of Counterfactual Orders
(i.e. based on loss wrongfully caused) as a form of equitable compensation against any trustee for breach of any duty. Unclear whether there are any exceptions to this rule.
Target and AIB are both inconsistent with the availability of
Non-Counterfactual Orders (i.e.
based on value of property wrongfully transferred) against any trustee for breach of any duty.

guarantees - unlike in Target or AIB, there was no duty to take active steps to secure the guarantees (i.e. to secure the condition for disbursal of the trust money).
a. A consequence is that if the value of the trust property has increased since the breach, then quantum will be greater than the amount misappropriated.
b. (This is inconsistent with Target and AIB. The court likely adopted this test because of the difficulty of measuring the counterfactual. Instead of following
Target/AIB, the court did not even engage in the question of whether, but for the breach, the guarantee would have come and thus whether, but for the breach, the money held on trust would have been paid away anyway. (see analysis below)).
i. MAX: Main is essentially a falsification order by the back door. The non-breach counterfactual constructed by the court was one where the trustees held onto the deposit money until the transaction was cancelled. While packaged as a counterfactual assessment, in practice it's a non-counterfactual assessment (i.e. a falsification order).
c. Jackson LJ: "where the duty is the passive duty to keep hold of the trust money, the quantum of damages is the "contractual measure of damages", which here equated to the amount of money wrongfully transferred.
d. Davies & Virgo criticise this rule, because (1) it is not clear why active and passive duties should attract different remedies, and (2) the distinction is very thin
(in Target and AIB the Ts' duty was also to act as custodians of the mortgage monies).

3. BUT: ITC v Ferster (2018, CoA) held that, where "trustees or other fiduciaries" (seemingly excluding non-fiduciary trustees)
commit unauthorised transfers of trust property (i.e.
breaching the duty to follow S's communicated intentions in the declaration of trust), the quantum should be the "value of assets or funds removed without authority".
a. Quantification under Ferster therefore depends on
WHEN the value of the property is assessed - the value may change with time. The Australian case of Re
Dawson holds it should be the date of judgment.
b. BUT: Williams: This conflicts with Target and AIB,
which are inconsistent with the availability of Non- Counterfactual Orders. THUS, it depends on which court decides the case…
i. EWHC is obligated by CA authority to apply
Target and AIB.
ii. UKSC is obligated to apply Target and AIB
subject to invoking the practice direction.
iii. CA is obligated to apply Ferster under the rule in Young v Bristol Aeroplane Co UNLESS an exception applies. (Unclear whether an exception applies. Most likely would be if a future CA found there was a "manifest slip or error" in Ferster, rendering the decision per incuriam, but it is uncertain whether a CA
would so find.)
iii. Composite breach. Occasionally, the court will treat what appears to be separate breaches as aspects of a single composite breach, so allowing gains and losses to be offset (Bartlett v Barclays Bank

1. On the facts, two development schemes were undertaken in breach of trust. One was highly profitable, and the other was sold at a significant loss. The court treated them as part of a composite breach given that they "stemmed from exactly the same policy and … exemplified the same folly as the Old Bailey project. Part of the profit was in fact used to finance the Old
Bailey disaster"  suggests they must be breaches of the same obligation (here, Ts did not obtain sufficient information before using their powers of investment).
iv. Remoteness and causation. While Lord B-W in Target stated that "the
CL rules of remoteness of damage and causation do not apply", Millett
LJ in the later CoA case of Bristol & West BS v Mothew asserted that the rules determining what losses were recoverable should depend on the nature of the duty breached by T. Given that T owes the same
DoC to that recognised in the CL tort of negligence, there is "no reason in principle why the CL rules of causation, remoteness of damage and measure of damages should not be applied by analogy".

1. BUT: UKSC in AIB qualified this, holding that insofar as T's obligations extend beyond those he owes, or would owe, in contract and tort, we should NOT expect the same measure of compensation for breach of those obligation to be the same as that adopted by the CL.
v. In Target v Redferns, Redferns breached its trust duty by transferring the money before the purchase was complete (i.e. before the contracts had been exchanged). However, Target would have suffered the exact same loss even if Redferns had properly performed their

FACTS duties - Target would still have ended up with a mortgage on a property worth only £500,000, where it had given a loan for £1.7m - a sum insufficient to pay off the debt Crowngate owed to it.

1. NB: Something dodgy (fraudulent?) is happening on the facts -
a sequence of transactions to make it look to the lender
(Target) like the borrower (Crowngate) has bought the land for
£2m, where in reality it has been bought for much less
(£775k). The different between the actual purchase price and the value of the land is hidden from the lender.
vi. In AIB v Mark Redler, only a small portion of AIB's losses were due to the breach of trust. The rest was due to the fall in the property market and would have been suffered even if Redler had performed its duty.
vii. In Main v Giambrone, the duty breached was the solicitors' (passive)
duty to hold the money as custodians until the developers provided compliant guarantees. (On the facts, the solicitors (Giambrone)
released the despite moneys on a guarantee from the wrong institutions.) By contrast, in Target and AIB, the solicitors were under duties to take active steps.

1. This case highlighted the deficiency of the causal test in
Target and AIB. On the facts, it was unclear whether, had the breach not occurred, Giambrone would have received a compliant guarantee or not. If Giambrone would have received a compliant guarantee, the money would have been lost anyway. Had they not, Giambrone would have retained the deposit moneys.
d. FORM: What form does this compensation take?
i. Two possibilities:

1. An order for compensation to be paid into the trust fund (i.e.
to reconstitute the trust fund), OR

2. An order to pay compensation directly to B.
ii. Target v Redferns - Lord Browne-Wilkinson (leading judgment) held that "in the ordinary case where the beneficiary becomes absolutely entitled to the trust fund the court orders, not restitution of the trust estate, but the payment of compensation directly to the beneficiary". In such cases, Lord B-W says the trust has "come to an end". For example, where the person with a life interest in the trust fund dies, the remainderman becomes "absolutely entitled" to the trust property. In such a case there is "no reason for compensating the breach of trust by way of an order for restitution and compensation to the trust fund as opposed to the beneficiary himself".

1. Webb: Some view Lord B-W's talk of 'traditional' and
'commercial' trusts as advocating for separate rules governing

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