Equity and Trusts

1. Equity and Trusts Breach of a trust

2. Breach of trust Breach of trust failure by trustee to comply with duties laid out in trust instrument or under law

3. Breach of trust Breach can be act or omission Acting inconsistently with terms of trust e.g making unauthorised investments, incorrect distribution, profiting from trust

4. Breach of trust • If trustee does not fulfil duties to trust through neglect / omission then breach of trust.

5. Standard of duty of care Breach of trust indicates failure to meet the duty of care The standard of care was the objective standard of the ordinary prudent man of business (Speight v Gaunt) Higher standard expected of professional trustees.

6. Trustee Act 2000 Duty of care statutory: applies in the situations outlined in Schedule 1 of the Act, basically to investment, acquisition of land and appointment of agents Under s1 TA 2000 trustees must exercise such care and skill as is reasonable in the circumstances having regard in particular –  any special knowledge or experience that they hold or hold themselves out as having, and (b) if acting in the course of a business or profession, to any special knowledge that it is reasonable to expect of a person acting in the course of that kind of business or profession. Speight v Gaunt standard still applies to other functions e.g. maintenance and advancement under s31 and 32 TA ’25.

7. Exclusion of liability • Possible on trust instrument: see e.g. Armitage v Nurse [1998] Ch 241 CA: clause restricting liability other than for fraud • See also Sch 1 para 7 TA 2000: exemption clauses.

8. Liability • Liability is personal • Trustee can be liable for others actions if he facilitates their breach Four main situations: (i) leaving matter in hands of co-trustee without inquiry (ii) stands by whilst breach occurs (iii) allow funds to be in sole control of co-trustee (iv) failing to prevent / rectify breach of co-trustee

9. Extent of liability Trustee liable only during trusteeship (and on taking up trusteeship at time of inspecting trust)

10. Extent of liability • Trustee remains liable for own acts even after retirement • Not liable for co-trustees after retirement unless this was to facilitate breach

11. Liability • Liability for breach is compensatory • Award may be a personal remedy against the trustee as individual or proprietary remedy against specific assets.

12. Personal liability • Personal liability is from trustees own funds • Can carry interest

13. Proprietary remedies • Proprietary remedies allow beneficiary to recover trust property. • If trust property liquidated then beneficiaries may trace the property and recover exchange assets.

14. Remedies • Beneficiaries can often choose which remedy • Personal and proprietary often both available • If breach of fiduciary duty and breach of trust then necessary to determine if remedies are cumulative: can bens recover compensation for loss and an account of profits or whether remedies are alternatives.

15. Electing remedies Tang Man Sit v Capacious Investments Ltd. [1996] Ac 514 PC Joint land development. Defendant provided land, claimant funded development. Def to transfer 16 houses to claimant which he held on trust. Def never assigned title and received rent from properties. Account of rental profits and breach of trust claimed for rent claimant would have obtained. PC: where defs conduct both breach of trust and breach of fiduciary duty respective remedies are alternative. Claimant must elect.

16. Nature of remedies • Trustees must account for unauthorised profits • For other breaches liability is compensatory not punitive: equitable compensation for loss to trust.

17. Breach and loss • If a breach which causes no loss then no liability on trustees • Must be causal link between breach and loss • But for the breach the loss would not have occurred.

18. Target Holdings v Redferns Target Holdings v Redferns [1996] AC 421 HL Defs were solicitors acting for purchasers of property also acted for Target who agreed to lend money for acquisition and take mortgage over property. Target placed funds with Redferns before purchase. In breach of trust Redferns passed money to seller before completion. Completion went ahead, purchaser later defaulted on mortgage and Target repossessed. Fraud by purchaser (of which Redferns knew nothing) property value had been overstated.

19. Target Holdings v Redferns • Were Redferns liable? • CA: Target entitled to recover whole loss payment of money in breach had caused loss.

20. Target Holdings v Redferns On appeal to HL: Target not entitled to final judgement. Must be causal connection between breach and loss. If transaction would have continued irrespective of the breach, the breach did not cause the loss.

21. Target Holdings v Redferns • Redferns granted leave to defend • HL doubted Redferns would show breach did not cause the loss • If assumed facts wrong and Target’s advance was necessary for transaction then Target entitled for entire loss suffered because but for breach nothing would have been paid over.

22. Target Holdings v Redferns See speech of Lord Browne-Wilkinson at 791.

23. Foreseeability • On establishing causal connection, is trustee liable for whole of loss or does the principle of remoteness operate? • Controversial question.

24. Foreseeability • In Target: liability to pay sufficient compensation to return trust had the breach never occurred • True even where immediate cause if dishonesty of third party if but for the breach the loss would not have occurred • Common law remoteness does not apply.

25. Attempts to limit trustee liability Bristol & West v Mothew [1996] 4 All ER 698 Millett LJ: if trustee negligent the equitable compensation should be assessed in same way as common law damages. Causation and remoteness of damage should be applied.

26. Compensation • In assessing compensation • Date of damage assessment is date of judgement • See Jaffray v Marshall 1WLR 1285 where date of assessment was date of breach when fund at highest. Overruled in Target. • Does not apply to profits – can be highest value e.g. of shares.

27. Interest • See Buckley J in Wallersteiner v Moir (no 2) (1975) CA • Interest from date of misapplication • Court assumes trustee has retained misapplied property and had opportunity of earning interest on it.

28. Interest • Traditionally awarded at 4-5% p.a. • Now 1% above base rate or rate of court short-term investment account (court special account rate) • Simple/compound +rate at court’s discretion • See West v West court awarded interest at 1% above special account rate. No compound rate.

29. Losses and gains • No liability on trustee for breach that does not give rise to a loss • If breach gives gain – any gain belongs to the trust • Losses and gains therefore dealt with separately • See Dimes v Scott (1828) [1824-34] All ER Rep 653 All ER Rep 653. Trustee retained unauthorised investment with high income all paid to tenant for life. Then sold into authorised investments for lower value than at time when this should have been nought. Trustees liable for excessive interest.

30. Losses and gains Trustees can sometimes set-off losses against gains See Fletcher v Green (1864) 33 Beav 426 trustees retained investment too long – paid proceeds into court Then invested in consuls which rose in value and court held could set of gain against loss as associated transaction.

31. Losses and gains Bartlett v Barclays Bank Trust Company Ltd. [1980] Ch 515 Trustees had interest in company that made two speculations in land – first made a again the second a greater loss. Brightman: trustees in breach because could control company. Because two transaction stemmed from same investment policy, loss could be set-off against profit. Q’s: is stemming from investment policy same as associated transaction?

32. Liability • General rule: trustee liable for own breach • Trustees jointly and severally liable to bens • Bens can sue all or any one.

33. Liability • Rule was: trustees equally liable regardless of fault • Under Civil Liability Contribution Act 1978 person liable for damages can recover such amount as may be found by the court to be just and equitable • S2(2) can amount to complete indemnity.

34. Indemnities • Court may not make order to recover against another trustee • Trustee sued would be entitled to indemnity against: (a) a fraudulent co-trustee (b) a trustee with specialist knowledge on which he relied (c) a trustee beneficiary Beneficiary trustee must indemnify to extent of interest above which liability is equal.

35. Relief of liability • Lapse of time – is claim limitation barred? • Limitation Act 1980 s21(1) no time limit in cases of fraud or fraudulent breaches of trust or to recover trust property or its proceeds • S21(3) non-fraudulent limitation is 6 years from date of breach (if beneficiary under disability then does not run from until the disability ends).

36. Laches • Where no period of limitation (e.g. s21(1)) then def may be able to rely on “laches” unreasonable delay • Discretionary remedy depends on hardship to def by delay / effect on third parties / balance of justice.

37. Laches See Fraser v Oystertec [2003] All ER (D) 46 For good defence of laches must be unconscionable for claimant to succeed in the circumstances having regard to his behaviour in advancing complaint.

38. Exemption clauses • Express provision can relieve Trustee of liability • Nature of liability is relatively unrestricted – common therefore to have clauses in trust instrument excluding / restricting liability • Terms /construal traditionally narrow • Widening of clauses now common – typical now is all except fraud • Courts now adopt less restrictive approach • Protection of beneficiaries has been weakened.

39. See Armitage v Nurse (supra) • Trustees can exclude liability for all breaches except fraud hence poor protection in light of wider clauses – have they gone too far? • Law Commission looking at problem.

40. Stricter approach? • NB stricter approach of CA in Walker v Stones [2000] 4 All ER 412 • Transaction dissipated entire net value of principal assets of trust • Claimant brought action against solicitor trustees alleging breach in entering into risky bond issue transaction with aim of benefiting bens father • Defs relied on clause exempting liability other than for fraud or dishonesty • Claimants alleged dishonesty.

41. Stricter approach? • CA: trustee solicitor who deliberately committed a breach of trust which no reasonable trustee solicitor could have believed in interest of bens was acting dishonestly • Claimants had basis for charge of dishonesty therefore.

42. Law Commission • Consultation paper on trustee exemption clauses • Not absolute ban but considers strong case for regulation by professional trustees • Law too deferential to professionals who charge etc • Recommends no reliance on exemption for professional trustee arising from negligence – such clauses should be ineffective • No report yet on responses to proposals.

43. S61 TA 1925 • Trustee may be relieved from liability under s61 TA 1925: If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach, then the court may relieve him either wholly or partly from personal liability for the same.

44. Standard to be applied? • In “acting reasonably” standard is assumed to be that in Speight v Gaunt • Bartlett v Barclays Bank (supra) trustees not entitled to s61 because hid behind directors speculative investments – not reasonable.

45. ought fairly to be excused? • Fairness considered in relation to all parties + at judges discretion • Trustee might have acted honestly.

46. ought fairly to be excused? • Courts reluctant top relieve under s61 • Each case looked at on merits • Reluctant to in particular relieve Professional trustees • Honest mistakes only – relief denied where carelessness in conduct.

47. Consent by beneficiary • If beneficiary consents to breach then cannot sue trustee • See Re Pauling’s Sett Trusts [1961] 3 All ER 713 If trustee can establish valid request or consent by the advance beneficiary to the advance in question that is a good defence to the part of the trustee …

48. Conditions Four conditions to claim of consent: • beneficiary is full age • of sound mind • acted freely without undue influence • full knowledge of facts.

49. Undue influence In Re Pauling’s Sett Trusts (supra) trustees made advancements of capital to adult beneficiaries parents exercised under influence and spent advancement on overdraft. Trustees in breach because should have checked application to purpose of advance Bank trustee relied on consent CA rejected defence – trustee knew or ought to have know of undue influence.

50. Consent after breach Beneficiary can consent after breach and release trustee from liability.