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Trust Remedies Including Tracing Knowing Receipt Trust Dutiies And Powers And Equitable Damages Notes

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REMEDIES FOR BREACH OF TRUST Any breach of a trustee's fiduciary/trustee obligation will lead to a remedy. This may be a personal or proprietary claim:
 Personal claim: claim is made against the trustee/fiduciary personally; it is not based upon the recipient having the property in his or her possession.
 Proprietary claim: based on D having the property or its replacement in his or her possession and being required to return it, or its substitute, to C. PERSONAL REMEDIES Proprietary remedies will have an advantage in insolvency proceedings. However, if there's no insolvency, then a personal claim for the value of C's loss / D's gain may be preferable. Personal remedies are also preferable where the property has been dissipated by D. Primary v Secondary obligations: duties imposed directly by the law of trusts — breach of a primary obligation (e.g. a trust duty) can give rise to a secondary obligation (e.g. duty to compensate C for loss suffered). Distinction is important because remoteness is irrelevant for assessing damages for breach of primary obligations.
 Equity is less tolerant than the common law (e.g. breach of contract is seen as a necessary element of commercial life). Courts have a number of ways of enforcing the trustees' primary duties: (i) compel distribution of the trust property to the beneficiaries; (ii) prevent trustees from distributing trust property improperly; (iii) require the sale of unauthorized investments and reinvestment in authorized ones: (iv) declare a trustee should not act in a particular way; (v) replace trustees. TAKING INTO ACCOUNT This isn't really a remedy; just a process for beneficiaries to assess the state of the trust. However, can be used to enforce trustee's primary duty to provide information to beneficiaries / keep accurate accounts of the trust. Where the account shows the trust fund has suffered a loss, a claim may be brought against the trustees to restore the fund to the position it would have been in had there been no breach of duty. Where an account is taken, two principal problems may be revealed:
 Trustees may have misappropriated assets from trust (making unauthorised investments). o Remedy: beneficiary can falsify the unauthorised disbursement.
 Trustees may have breached their duty in failing appropriately to safeguard the value of the fund (where trustee negligently failed to diversity assets held by the trust). o Remedy: beneficiary can surcharge the account to bring value up to right level. For both remedies, trustee will have to use his own resources to repair the fund.

Falsification:
 Under a presumption of innocence T is assumed to have used his own money, rather than the funds to make the unauthorised investments.
 Falsification compels the performance of the primary obligation to maintain the proper state of the trust fund, essentially through restoring the trust to its previous position. As such there is no remoteness restriction here — T must reconstitute the fund using own assets. Surcharge
 Lord Millett (extra judicially): surcharge is effectively T being charged with negligence: "the analogy with common law damages for negligence is almost exact." Difference is liability is enforced via taking an account, rather than damages. Therefore, CL rules of causation and remoteness should apply "to their fullest extent."
 When assessing loss suffered, the assessment is made at date of judgment rather than date of breach. Burden of proof is on C (Nestle v NatWest [1993]). Classifying these remedies:
 Doesn't need to be a breach of trust for B to ask T to take account. All it does is enforce T's primary obligation to account for the administration of the trust. However, it might be possible to view falsification / surcharge as secondary obligations, triggered by a breach of trust, hidden behind T's primary duty to take proper account of the trust.
 Edelman and Elliott: falsification is the enforcement of T's primary duty to maintain proper state of the trust fund. Whereas surcharging is the enforcement of a secondary obligation flowing from a breach of trust. Distinction helps explain why remoteness rules are only relevant to latter. Development of the law Nocton established that damages are available for breach of fiduciary duty: need: (i) breach; (ii) loss caused by breach. If established, the remedy is to put C in the position he would have been in but for the breach. No fraud (under Derry v Peek) on D's part must be shown.
 Nocton v Lord Ashburton [1914]: A brought an action against N (his solicitor) for the loss suffered as a result of N's negligent advice that A should release a mortgage security. HL: although N had not acted fraudulently, A was entitled to equitable relief due to N's breach of fiduciary duty. N must restore A's estate. o Lord Dunedin: If D puts himself in "a fiduciary position," which "imposes on him the duty of making a full and not misleading disclosure of facts known to him when advising his client" then, if he fails to do so "Equity will give a remedy to the client." In Henderson, HL considered the scope of fiduciary duty: (i) the extent of the duty is to be determined by asking what F has assumed responsibility for; (ii) the extent of the duty can be shaped by contract.
 Henderson v Merrett Syndicates Ltd [1995]: case arose from substantial losses suffered by Lloyd's Insurance Syndicates in the 90s (due to freak hurricanes in America). Members of the syndicates 'Names' brought actions against those responsible for managing the syndicates in tort

and contract. HL: The managers were liable to the names. Lord Browne-Wilkinson considered the nature of fiduciary duty: o A fiduciary duty is the same as general duty of care: fiduciary duty is part of the general duty of care involved in a relationship where someone has assumed responsibility for another's affairs. "It arises from the circumstances in which Ds were acting, not from their status or description. It is the fact that they have all assumed responsibility." o Not all fiduciary duties are the same: they can fall to be determined by reference to an underlying contract between the parties. A contract won't preclude the co-existence of concurrent fiduciary duties, but it can modify their nature / extent. Same as contract can modify the extent of tort duty. LEADING CASE I: TARGET HOLDINGS Target Holdings Ltd v Redferns [1996]
 Facts: X owned a commercial property. Agreed to sell it to Y for £775k. Y apply for a loan from TH. The loan application fraudulently valued property at £2m. TH loan Y £1.7m on security of the property. R (solicitors) acted for both X and Y. TH paid R the mortgage advance, which was held on trust for TH. R, as trustees, could release the money to Y on receipt of the executed conveyances. R released the money before the charge was executed. o TH argument: sue R for breach of trust. Ask R to reconstitute the trust fund by paying the difference in value of the property and the money advanced to Y. o CA: allow TH's claim. As soon as the money had been transferred in breach of trust, TH had a right to have the fund reconstituted, even though TH later received the security it was intending to obtain, because CL rules of causation / remoteness didn't apply to a claim for breach of trust.
 HL (Lord B-W): reject TH's argument. No compensation was payable, since once the charge was executed TH was in the position it would have been had there been no breach of trust. o General approach: If there had been no breach by R of their instructions, TH would have lost £1.2m, wholly caused as a result of the third party's fraud. Therefore, ""the breach of trust by R left TH in exactly the same position as it would have been in had there been no such breach … the breach by R cannot be said to have caused the loss ultimately suffered by TH unless it can be shown that, but for the breach of trust, the transaction would not have gone through." Points arising from Target: B-W Traditional v Commercial trusts:
 Traditional trusts: where there is: (i) a traditional trust fund; (ii) several beneficiaries are entitled to the trust fund; (iii) the trust fund continues to exist after transaction. T will still be liable to reconstitute the fund: "the only way in which all the beneficiaries' rights can be protected is to restore to the trust fund what ought to be there." E.g. Nocton.
 Bare trusts in a commercial context: the trust will come to an end by the time of action for breach (because B will have become absolutely entitled to trust property and will collapse the trust). In such cases, there is no reason for the fund to be restored. Damages will be the correct remedy. Different rules should apply here because such bare trusts are usually part of a wider commercial transaction involving agency and the relationship between the parties will be

regulated largely be contract. Once the transaction is completed, an obligation to restore the trust would be "artificial". Commentary on the commercial / traditional distinction:
 Nolan: distinction is "novel, though not unreasonable: there are arguments for and against." o For: commercial parties who vest fund in a nominee, so the nominee can deal on behalf of a beneficial owner, should not be able to look to the nominee as the guarantor of the fund. If such an onerous duty is actually intended, the agreement should be clear on the matter. If it is silent (and the arrangement is, in substance, more akin to agency than trusteeship) then the duties imposed should be more akin to an agent's duties. o Against: if a person vests an asset in a nominee, "he should have the same protection as any other beneficiary of a trust." Further, where the trusts of a settlement have become exhausted, leaving one person beneficially entitled to the trust fund, "why should his rights /
T's duties, suddenly become different from those subsisting before the trust vested in him absolutely."
 Lord Millett (extra judicially) questions whether there is a "specialist rule applicable only to family trusts which excludes the principle limiting the amount of recoverable compensation to the loss actually occasioned by the breach?" If there is such a rule it "must be of general application." The result shouldn't depend on whether the context is traditional / commercial.
 Virgo: unclear why the equitable principles should differ between traditional / commercial trusts (and has been rejected in Australia). A better approach is to focus on the scope / purpose of the trust. If a commercial trust continues to exist / the fund is held for the benefit of the beneficiaries, the fact that it's a commercial trust should prevent beneficiaries seeking reconstitution. B-W: Compensation for breach of trust: two CL principles "fundamental to the award of damages": (i) D's wrongful act must cause the damage complained of; (ii) C is to be put in the position he would have been in had he not sustained the wrong. These principles also apply in equity. B-W: Effect of breach:
 CA loss should be assessed at the moment of breach — "there is an immediate loss placing the trustee under an immediate duty to restore the moneys to the trust fund." Therefore subsequent events diminishing the loss are irrelevant.
 B-W: T is under an immediate secondary obligation to remedy the breach, but quantum of compensation is fixed at the date of the judgment — it this point, the question is 'how much is required to put C in the position he would have been but for the breach'. To "stop the clock" would be to compensate C "for a loss which, on the facts known at trial he has never suffered o Virgo: 'Stopping the clock' on breach of trust is sensible (and a key difference with CL, where loss is usually assessed at the date of breach). However, unlike breach of contract, a breach of trust does not put an end to D's role as trustee — the trustee still has obligations under the trust. One important consequences of this is that D continues to exercise the powers and duties of a trustee — so in Target, R was able to accept documents for TH. B-W Establishing loss: value of the claim is assessed at the date of judgment — it is at that point that C must establish loss. If C can show no loss, he is due no compensation, despite the breach.

Virgo: this is consistent with taking an account — if account is taken and the fund is not deficient, then there is no reason for B the beneficiary to complain. However, even if the beneficiary hasn't suffered loss, he may be entitled to a gains based remedy where T has profited from breach.

B-W: Causation and remoteness: The underlying principles in equity / CL are the same. Some form of 'but for' causation is required. One difference is that, even if the immediate cause of loss is a third party's dishonesty / failure, the trustee is liable to make good loss that wouldn't have occurred but for the breach — "the common law rules on remoteness of damage and causation do not apply". However, there does need to be some "causal connection" between breach and loss.
 Virgo: note the distinction within taking an account: where a beneficiary seeks to enforce the performance of the trustees' primary duties through falsification, remoteness issues don't arise. But they are relevant to surcharge. o On mitigation and contributory fault: Target confirms that mitigation and contributory negligence don't apply to breach of trust. Beneficiaries under a trust don't - and shouldn't - have to protect themselves against breach. This is clear from the nature of relationship
— trustees have to act in beneficiaries best interests. So, unless the beneficiaries' acts are so extreme they have caused the loss suffered, the trustee shouldn't be able to use the beneficiaries conduct as a defence. o No remoteness here: if the claim in target had succeeded, a fall in the property market would have been accounted for in relief. The same is not true if it was a CL negligence claim.
 Millett (extra judicially) has criticised B-W's approach. B-W "proceeds to speak exclusively in terms of causation, including the 'but for' test while at the same time rejection other tests of causation and remoteness of damage which have been adopted by the common law. This fails to explain why the trustee's liability is strict or why equity should not adopt the common law rules of causation and remoteness in toto." Davies and Virgo: 'Explaining Target Holdings' Ratio: hard to determine, but Virgo suggests: "where a bare commercial trust has terminated as a result of the underlying commercial transaction being completed, the trustee will be liable to compensate the former beneficiary only if it can be shown that, but for the breach of trust, any loss would not have been suffered." This is narrow and broader interpretations have been suggested. Fusion: case made it clear that the same compensatory principles underlie both CL and equity.
 Rickett (1996): hoped the decision will give the remedy of equitable compensation greater prominence. Suggests that tort principles are the way to go in giving scope to the remedy
— that's the approach that NZ and Aus have adopted.
 Virgo: there is scope for equity following CL in the remedial sphere, but any assimilation can't be taken too far because there are key differences (causation, remoteness, mitigation, contributory negligence). Equitable compensation


Edelman and Elliott: consider Target to be an instance of 'substitutive compensation' (falsification) rather than 'reparative compensation' (surcharge). Virgo: there is merit in keeping the two types of compensation distinct because they don't function in the same way. Lord B-W cited Canson Enterprises, a Canadian case, as support for a single category of equitable compensation, but this seems to be based on a misreading of the case. Perhaps better to use the term 'equitable compensation' where it is not possible to take an account — e.g. where there's a breach of a fiduciary duty, but the fiduciary is no longer a steward of any property.

Account
 Millett's approach: There was no need to invoke 'equitable compensation' in Target; substitutive compensation (via falsification) was appropriate because T had paid money out of the trust fund in breach of trust. The majority in the CA in Target seemed to have recognised this, although they were incorrect to use this to justify B recovering over £1m, since they decided that the value of the claim crystallised at the date of breach. The trustee has obligation to restore the trust fund, not to restore it "in the very form in which he disbursed it", but "to restore it in any form authorised by the trust" (so, here, since C did authorise acquisition of the mortgage, nothing should be paid).
 Virgo: favour Millett's approach, instead of adopting a "sweeping concept of equitable compensation", which has loads of difficulties, they would adopt the course taken by Lord Millett, and see Target as an example of the orthodox, traditional taking of an account, which, at the time of judgment, was in an appropriate state. However, there's clearly some tension between this approach and the more novel one, based on causation, that the HL did take in the case itself. LEADING CASE II: AIB AIB Group (UK) Plc v Mark Redler & Co [2014]

Facts: Case involves a re-mortgage of a residential property. S applied to AIB for a loan of
£3.3m to be secured as a first charge over his home. S already had a charge in favour of Barclays. The money from AIB was to be used to buy-out B's charge, with the rest being paid to S. MR (solicitors acting for both parties) negligently underpaid B (by £300k). Effect was that B's charge remained in place; AIB only got a second charge. S defaulted, the property was sold for £1.2m. o Issues (i) could AIB recover the 'full' extent of its loss from MR, including that attributable to a fall in the property market; or (ii) was its remedy was limited to compensation sufficient to put it in the position it would have been in but for the mistake. o Court of Appeal: found in favour of MR, following Target to find that equity will apply CL rules of causation and remoteness when quantifying what remedy an errant trustee must pay.
 SC: upheld the decisions of the CA
 Lord Toulson: o General principle: "the basic purpose of any remedy will be either to put the beneficiary in the same position as if the breach had not occurred or vest in the beneficiary any profit which the trustee may have made by reason of the breach." Therefore, "a monetary award

which reflected neither loss caused nor profit gained by the wrongdoer would be penal." It would be unrealistic to treat the trust fund as having lost £2.5m as a result of the MR's conduct, when most of that sum would have been lost if MR had performed their duty. o On commercial trusts: "a commercial trust differs from a typical traditional trust in that it arises out of contract rather than the transfer of property by way of gift." Although the principles of equity are no different for different types of trust, the purpose of a trust may have an effect on the appropriate relief for breach and that the entire commercial transaction including its contractual roots and its ultimate purpose are to be taken into account when assessing the situation.
 The purpose of the trust in AIB was to obtain security in the borrowers' property, and security was eventually obtained, albeit it was worth less than the initially contemplated first charge. As he proper performance of T's obligations would only have made AIB
£275,000 better off, that was to be the amount of recovery.
 Lord Reed: o "A breach of trust involving the misapplication of trust property can be remedied by means of proceedings designed to secure the performance of the trust." The trustee must restore the trust to the position it would have been in 'but for the breach'. o By analogy with tort, the rules appropriate for a breach of duty by a trustee are to be determined by reference to the characteristics of the obligation being breached. A negligent trustee must compensate for the reasonably foreseeable loss caused by his negligent conduct. o Equitable compensation aims to provide "the pecuniary equivalent of the performance of the trust." Thus, the important focus is on the nature of the parties' relationship and the nature of their obligations. FICUCIARIES Essence of the duties
 Key obligation is of loyalty: the principal is entitled to the single-minded loyalty of the fiduciary.
 'No conflict' duty: fiduciary cannot put himself in a position where his interests/duties conflict.
 'No profit' duty: fiduciary is not entitled to make a profit Fiduciaries and trustees
 Express trustees have a fiduciary relationship of trust and confidence with their beneficiaries
 Thus, as well as owing duties specific as trustees, they also owe fiduciary duties.
 A fiduciary is an individual in a relationship of trust and confidence; not all fiduciaries are trustees Nature of fiduciary obligations
 Breach of duty: Fiduciary duties must be breached by an intentional act, not an unconscious omission. The liability is strict so the fiduciary need not act fraudulently or in bad faith.
 Non-fiduciary duties: Not all breaches are breaches of fiduciary duty. E.g. duty to use proper care/skill arises from assumption of responsibility, not position as a fiduciary. Impacts applicable rules of causation/remoteness and available remedy — remedy for breach of

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