Breach of trust and trustees liability

This section only deals with claims brought against a trustee for his breach of trust. Duties, wrongs and remedies Primary duties e.g. not to harm Secondary duties arise when primary duties breached. So harmed someone then secondary duty to compensate for that harm Reflects 2 types of claims a claimant may bring 1. Enforce his primary right 2. Assert secondary rights a) Make good the losses caused to him (compensation); or b) Give up to him the gains made by D (disgorgements/restitution as a result of the breach of duty So in trusts 1. Primary claims for performance of the breached duty 2. Secondary claims which can be subdivided into a) Compensation claims for losses caused by D breach b) Restitution/ disgorgement claims in respect of gains made by the defendant through his breach Distinction usually ignored especially in equity Bad because lose sight of objectives of different claims

Primary claims Equity more willing to enforce primary duties than common law So ask court to force trustee to do what he should have been doing all along and trust is carried out according to its terms But class of primary claims significantly wider Need to examine notion of trustees liability to account

Liability to account 1. 2. Several meanings Basic meaning: trustee under duty to provide account of dealings with trust property fundamental, administrative duty Other meanings court given it: claims that follow from breaches of duty (even though not really) Case of trustee causing loss to trust by investing negligently beneficiary entitled to surcharge accounts change to show good investment and trustee pays out of own pocket to make it a reality Trustee breached by giving trust property away to someone else- falsify account to show transfer never occurred and trustee pays to make up for discrepancy between truth and record So this is all a duty to keep accounts in check with conditions of trust it is a primary claim because aim is secure performance of trust rather than secondary claim where getting compensated (even if this is indirect effect) Other argument that case (2) is a claim for a form of substitute performance trustee forces performance through trustee paying himself Take form of primary claim but in reality a secondary claim

Compensation claims Where trust property misapplied and cant be recovered, any claim for breach of trust is secondary claim Leading case: Target holdings ltd v Redferns 1996 CA: held misapplication of trust property generated an immediate liability on part of trustee to reconstitute trust fund which did not depend on showing that the loss would not have been suffered but for the breach HL: allowed appeal Because not responsible for the loss. Even if hadnt done the action and breached duty, loss would have still occurred. Clear message has been confused by subsequent dicta Not arguing for development of separate law of commercial trusts but rather saying that what trusts law will require from parties depends on context Just saying form of compensation will vary depending on nature of trust but in all cases the beneficiary can only recover for losses which he would not have suffered but for the breach Simplest case one absolutely entitled beneficiary any loss suffered may as well be paid directly to him rather than back into trust and held on original terms Where several beneficiaries, with different interests- arbitrary or impossible to allocate losses fairly so best to pay compensation into trust and hold it on original trust conditions When Lord Browne-Wilkinson talks about restoration or reconstitution of the trust fund he is simply referring to a form of compensatory claim But subsequent courts confused Eg Bristol and West Building Society v Mothew Millett LJ distinguished fiduciary and non-fiduciary duties fiduciary duty breach remedies are primarily restitutionary or restorative rather than compensatory o Sees distinction in object of claims brought for fiduciary or non-fiduciary breach o Sees distinction between restitutionary and compensatory o So follows that he only applies rule to breach of non-fiduciary duties Swindle v Harrision [1997] same confusion Reality is that completely inconsistent with Target Holdings judgement judgment did not limit rule at all and no reason that it should be

Limits on recovery of losses Target holdings Browne-Wilkinson said that the common law rules of remoteness of damage and causation do not apply Drew no distinction between different types of breach of trust Bristol West Building Society v Mothew Millett said rules determining what losses are recoverable should depend on nature of the duty breached by the trustee But breaches of fiduciary duty do not mirror standard common law claims in contract or tort and given the strictness of fiduciary duties, may be justifiable, as Lord Browne-Wilkinson suggests, not to limit recovery to foreseeable losses. Elliot, 2002: limits on recoverability of losses caused by trustees breach should depend not on nature of the duty breached but on the character of that breach dont understand When calculating losses court in general wont make deduction because of gains the trustee has brought for the beneficiary in other administration of trust question is how affected by breach, not by general running of trust

But when gains and losses come from same breach will offset Difficulty is then identifying relevant breach of duty example Bartlett v Barclays Bank Trust CO trustee failed to oversee company. Company directors made 2 risky investments one bad, one ended up profitable. Judge allowed the gain of one to offset loss of other. So may see 2 separate investments as one breach Equity judges and lawyers speak of equitable compensation mean damages

Disgorgement claims If trustee makes gains, cant get away with it by showing that would have made same gains in some other venture Test is asking where gains came from if from breach of trust then have to give up even if could have made such gains legitimately

Murad v Al-Saraj [2005]Breached fiduciary duty because of misrepresentation (about price being paid for hotel) and for negotiation and receipt of secret commission. unauthorised gains Argued would have still done deal if knew about it so would have made same gains CA rejected not about what would have happened, but about what happened Conclusion criticised but court argued that transaction Murads entered not what they thought they were entering but for test doesnt apply for gains. Dont say that if this breach apparently didnt do anything (but for this breach, gains would not have been made = and you answer no. breach did not cause gains. Then test fails) Court said reason that need but for test for losses but not gains is because of difficulty in determining what would have happened had fiduciary not breached duty. But courts have to answer hypothetical all the time and why can answer for losses and not gains? probably because but for test is fair on both T and B and there was still a breach of duty so if you get it wrong and mistakenly do punish T even if breach wasnt cause of loss, he still breached his duty so it is not so bad. But if you dont do the but for test for gains, then fine because why are you rewarding breach but if you did do it and you got it wrong the T would be rewarded and B left worse off. The priority is B and we should favour them. Arden LJ says maybe rule should be relaxed given advances in rules of evidence Maybe just a point of principle? But court also confirmed could retain gains that can be seen as product of own skill and labour rather than because of breach - mitigates rule. Problem though that difficult to see where the gains came from. Consequence of rule can keep any gains not attributable to breach Example of High Court of Australia decision in Warman International Ltd v Dwyer [1995] if make gains, sometimes fair because significant portion is result of own efforts and risks (court found that only had to give up profits from first 2 years of business) Maybe should think about these rules in terms of free riding dont want to free ride on opportunities etc. that trust gives someone. But if put so much of own effort in, cant say its free-riding. Webb says not to ask to what extent benefit from efforts because inevitably will be from that - rather we should inquire into scope of fiduciary duties and so how far they extend. Ask to what extent they require D to employ his skills and efforts on behalf of the principal- once we know this, we are in a position to work out what profits derive from breach (how? What?) Thinks if we think its unjust and workable to give all profits to B, then should say so rather than pretending that such profits do not derive from fiduciarys breach in first place. if we are thinking in

terms of free-riding on trust then can actually say because we dont want them to free ride, we acknowledge that is is unjust and unworkable to give all gains to B if not actually free-riding. It also works to say that such profits do not derive from breach because not free-riding but putting own effort in. ask Duxbury. This could be the logic when thinking about gains made from breach Although keep in mind that court retain discretion to allow trustee to retain some of his profit as remuneration for work put in Boardman v Phipps Murad and Warman show that even dishonest trustee may be rewarded to some extent Ultimately T is protected anyway because can be rewarded some of his gains that he made. Where trustee or other fiduciary makes an unauthorised gain 2 ways law may strip profits from him 1. Pay B sum equal to unauthorised gain 2. Specific property or traceable proceed received by trustee to be held on trust for B AG for HK v Reid [1994] property held acquired as a result of breach of trust held on constructive trust court seemed to be giving B choice between a personal gain to the value of the property and a proprietary claim to property itself Now ^ doubtful b/c Sinclair Investments v Versailles Trade Finance [2010] held Reid doesnt yet constitute English law If so B wanting to recover a trustees unauthorised gains - only the option of a personal claim to the value of those gains leaves B as simple unsecured creditor - no priority in the event of Ts insolvency

Defences: consent Free and informed consent of all relevant beneficiaries Can give consent before or after act ACTUAL consent needed (Murad would have consented not enough) Where beneficiary authorises breach of trust, effectively trumps wishes of settlor to impose relevant duty on trustee in the first place So fact that can authorise breach similar to Saunders v Vautier rule Consent full age, sound min, informed of all relevant info, not subject to duress or undue influence Holder v holder doesnt necessarily know it will amount to breach If one out of several authorises breach court may order Bs interest impounded compensation paid out of their share of trust fund rather than trustee likely only when B instigated breach or derived some benefit from breach

Defences: Sections 61 of Trustee Act 1925 Ask Did trustee act honestly? Did he act reasonably? Would it be fair to excuse him in the circumstances? (since if it is burden falls on B who may be just as innocent) Need to answer yes to all Burden of proof on trustee Broad discretion on courts so no concrete test of when excused Unlikely if breach duty of care Probably for those who have innocently breached strict duties e.g. reasonably miscontructed trust instrument and paid wrong person Courts more understanding of lay trustees than pros 1. 2. 3.

Exclusion clauses (general principle that trust will not fail because no trustee- new trustee will be found) Can exclude himself from duty of care or need to compensate B Obviously all works against B Allow it probably to make trustee position more attractive because trustees are ultimately good and beneficial instruments Reflects basic principle that its the settlors decision what kind of trust it is Armitage v nurse [1998] can exclude for negligent and even grossly negligent breaches of trust cant for dishonest breaches because goes against irreducible core Still possible to exclude liability for honest breaches of fiduciary duty Point: says that just because cant sue for duty doesnt mean it doesnt exist Saying if exclude liability for dishonest breaches of trust, doesnt necessarily leave trust stripped of anything If do think that, then thinking that only reason trustees do it is out of fear of being sued I dont agree why is law involved in any way then? May as well tell them to do it. Purpose of law is to enforce it. How do you enforce honest care of trust property after there has been dishonest breach? If dont, what is the law doing exactly? Also, reason people set up trusts if to make sure they are properly enforced. Dont understand why anyone would bother setting up a trust according to law to only get rid of all safeguards law provides Idea that there may be a deliberate breach of trust, but trustee may be doing it in Bs best interests (Millett LJ) Millett held that when doing that it isnt dishonest because dishonesty connoted knowledge that acting contrary to B best interests or reckless indifference to it Dont want to tell trustees that can breach trust whenever they think is appropriate would make the rule pointless (this seems to conflict with desire to not make rule pointless) Liability for deliberate but well intentioned breaches can be excluded Law commission report [2006] thinks professional trustees should be excluded for negligent breaches Abandoned it because of mixed response Final report said practice-based approach =- trustees should take reasonable steps to ensure settlors aware of meaning and effect of exclusion clauses Shows that real objection to exclusion clauses isnt unfairness but that they werent what settlor meant If settlor wants such exclusions, why not

Limitation Limitation Act 1980 section 21(1) No time limit for claims that trustee hand over trust property to B where T has committed fraudulent breach of trust If innocent or negligent breach 6 year limit Ds liable for knowing receipt or dishonest assistance dont fall under this just 6 years

Liability of co-trustees If fail to intervene or prevent other trustee from breaching, then breach duty of care and also liable (behan v Hughes) All decisions are collective Where 2+ trustees breached jointly liable

B can sue either Trustee can bring action of contribution from co-trustee How much can recover from other depends on courts view of proportion of liability both should bear though usually equally