Law of Equity and Trusts - Exam Revision Notes (Part 5)
Term 2 week 7 lecture
Breach of trusts and personal liability of trustees
Last year – beneficiary principle – searching for identifiable pools of beneficiaries to enforce trust.
Moving back – what does it mean to enforce the trust?
Last two lectures have been looking at breaches of trusts, breaches of fiduciary duties and breaches of care and skill
Today -Consequences of breaching the trust, the extent of the trustees’ personal liability and any defences or reliefs from liability he may have.
This is important because we may have to advise trustees as to how to administer the trust and their potential personal liability
This is personal liability of the trustees – out of their own pocket.
Personal liability is severe – even if you’re not being paid for the work you do for the trust, you are liable unless you have a defence/ relief – will see later on.
RE Brogden – ohp .. example of a case that illustrates how severe personal liabilities can be.
One of the trustees was a mr budget. He was a newly appointed trustee of a marriage settlement . One of the first duties of a trustee when they are newly appointed is to get in the trust assets. It was a family trust. Some of his co trustees owed money to the trust but he was embarrassed to ask and delayed because they were family.
The problem was that his delay cost the trust money.. 1.2 million pounds was lost because he delayed it. He delayed getting in the trust funds
So nothing dishonest, morally what he did was understandable but the law held him strictly liable for his breach of trust. He had to reconstitute the trust, recompensate the trust for 1.2 m.
As with breach of fiducidiary duties – law wants it to be severe to encourage trustees to do their job properly.. it is coming out of their own pockets
Law is faced with difficult choice – who bears cost? Is it the honest but careless trustee? Or innocent beneficiary? If one has to, the law chooses trustee over beneficiary
The law mitigates their effects 0 armitage case – authority that trustees can exert experlertory./ can exclude liability for negligence, gross neg, anything other than actual fraud
Difficulty is that it is usually only the paid trustees to know to insert the clause. Amateur unpaid trustees wouldn’t know to insert the clause
Slightly unfairly it works
Nestle v nat west – authority for the point that there has to be some loss before you can have liability. abit like negligence, same with berach of trust. There has to be strong evidence that breach of trust has caused some loss to the fund. Hard to predict with stock market..whether loss is caused
Facts: bank were trustees of fund worth 1922 --- ..fund worth 54000.. the bank misunderstood their powers. Invested cautiously.. in 1986 the fund had only grown to 270000 pounds. In real terms, the trust should have been a million.. so
Court said the actiosn of the trustees (the bank) was inaccusable in not reviewing their investemtns and seeking legal advice as to their powers. The court were not satisfied that that brach had caused loss.
This was harsh
Bartlet case – and also re milligan suggest a more common sense approach. Look at stock market as a whole to see how others have performed.. judge against what trustees had achieved
Nestele was cautious and conservative and proved no loss had occurred
Skipping section b on handout.
Section c remedies –
If there is a breach of trust, the beneficiaries can apply to court for 2 options:
1 – to force the trustees to perform their duty properly.
2 – account
3 – compensation
As know, although teh trustee is teh legal owneder of the property, no real owners. Trustee cant do what he wants woth the trust property. He has to explain to the true owners..
If there has been a breach of trust, if the trust has mde a loss or trustee has made an authorised gain..then trustee will have to account for loss ..talking about it in this case – remedy
Account being a procedure and also an account being a remedy for breach
Situation wihere T may have made an authorised gain; may have misspalied trust assets and made profit. May be mistake
As he is a trustee he has to be loyal, boredoman and Phipps.. has to give it back
He has to account for his profit to the trust..give it back
Effectively the remedy of the account strips the trustee of his gain and returns to teh trust
Uncontentious – amount of money ha gained. In bordemon – shares.. (he was a f but same)
Sullivan – amount that agent had made in the contracts with Sullivan.. undue influence
Sometimes there may be a loss to the trust
He has to account the trust for the loss.
HE HAS TO PUT THE TRUST IN POSITION IT WOULD HAVE BEEN IN IF THERE WAS NO BERACH. LIKE TORT. RETURN AS IF THERE HAD BEEN NO BREACH
It is about compensating the trust rather than individual beneficiaries. There is a reason for this. Tlaking as if teh trust is a separate entity to the beneficiaries. B’s exist in the background. In a traditional settlement trust – a for life remaineder to b, the trustee has relationship to trust fund..
Therefore, when the trustee is making compensation he accounts to the fund
If it is a bare trust, using the trust in this way is a little more artificary
In a traditional settlement trust
THIS SLIDE IS KEY. Diagram with box.. eek.
Hulbert case – the duty to reconsittite the trust fund..
So you can account for the gain and loss
Loss – might be that what teh trustee has to do is put the specific asset back into the trust fund. Specific restitution of that specifc asset.
Specific restitiuon fancy word for getting that specific asset back into teh trust fund.
Not to be confused with resution with unjust enrichment.. different area. Not this
Sometimes its not possible to get teh specific asset back.. trustee would replace the value of the asset back into the trust fund. This is called equitable compensation. Again this is similar to compensation for brechking trust through want of care
Specific restution by returning assets back to fund and if not possible, use money
Can be difficult to assess the loss that’s caused. Espesh with investments, they rise and fall. Point of next cases. It might be that trustee has been told to buy
If the trustee has been told to buy a particular set of shares in a particular company the beneficiary might assist upon specific restitution. Which will mean the trustee has to buy the shares and give back to trust. If they are more expensive , he is personally liable for the difference in value
If it’s not possible then the trustee has to pay the difference between the value of the assets now and what they would have been
If the trustee should have bought shares but they’ve actually fallen in value then there wont be liability. There has been a breach but it hasn’t caused any loss to the fund.
Shepherd v Mouls – directed to invest in a range of products. Difficult to assess teh loss that would have been caused. Traditional view – cautious assessment
Following bartlet and re mulligon, the courts will take more of a common sense view
B can also be faced with a choice. There may be both a loss to trust and gain to t. If there is an asset to the trust that has been taken by t himself, disappropriated to trustee. So trust loses value of asset and..gain to trustee
Issue where asset appreciates in value. Loss to trust is less than gain to trustee. Or if the asset depreciates in value...
Can make a difference where..
Tang man sit v capacious investments case – deals with instances where the claimant ..
So same breach of trust can be viewed as a gain to trustee or loss to trust. Before judgement, the claimant has to decide whether he wants an account for gain or account for loss.
Only at point of judgement, that claimant has to decide this. In some cases it is mutually inconsistent to claim for both. Claimant would be doubly satisfied. In this case- property deal ..tan man sit = owner of land.. agreement was that he would assign some of the properties to capacious investments but he actually did not. He kept hold of them and let them out, go rents on them. Breach of trust AND the trustee gained the rent that was paid in breach of trust. Claimant also asked for account of loss.. couldn’t be let to anyone else ..
So tried to recover for rent paid and sue for loss of opportunity. If court had agreed, the claimant would be gaining twice.
So he had to elect whether wanted to claim for loss/gain. Reason: can’t be double satisfied. Court has to pick one remedy ..
When you account for gain, the trustee is adopting..loss – rejecting. If you account for the loss, you are effectively saying that the trustee made an unauthorised transaction.. if gain.. good thing – adopt back into trust and keep gain on it
So looked at accounting for gain and accounting for loss...spec rest or its value and the need to make an election
Now – equitable compensation for breaches of trusts for lack of care and skill on part of trustee. No such thing as damages for breach of trust. Common law damages for neg. Or equitable compensation for breach of trust due to want of care and skill...listen
Returning to section b – differences that are..
Motheew – distinction without a difference. So judges saying no difference between e...adn common law damages
If you have breached your trust.. sounds like negligence. Also putting back in position ..similar to neg – victim back in position.
Where there is a bare trust, this looks like a tortuous relationship.
Distinctions --- otherwise when we read teh reading, distinction betrwen bare trust and traditional settlement trust seeee slide! Diagram!
Moffat also distinguishes between types of breaches – type 1 – doing something that the trust doesn’t allow u to do
Or type 2 where you do something you’re allowed to do but without sufficient care and skill.
So dist between types of trust – bare and trad.. and types of breaches
Confusion in readings this week – Bartlett case 0 the judge says that there is no distiniciton between the two.. millet in moffew says the same. In reading we will see that this is not the same when talking about fid duty,,,
Some of the cases say that remoteness is not a feature of compensation.. not limited to common law principles. But then nationwide building soc.. no
Judges say different things
Target holdings v redfern case- lord brown Wilkinson suggests that different rules apply between the two types of trust,,
So 2 reasons why teh judgements are so confusing. The judges don’t usually make a distinction.
Now comcepsating calculating the loss..
Look at notes where compensation. Cases Target holdings and case of swindle v harrison both good cases where they explore issue of compensation. Target case involved bare trust in commercial context. Solicitors were acting for mortgages.. target..land valued at 2million punds, but there was..dodgy evaluation of 2m pounds..
Target advanced to redfern, 1.5m punds..hold the money until the mortgage had been finalised. In breach of trust, they advanced too early. Sol gave money to mortgagers too early
Problem was was that the mortgager was defaulted on the loan.. valued at 500 000 pounds. Mortgages made a loss. Tried to say that redfern had breached the trust. Breached terms of their power, advanced it early. and so they should return the advance..and reconstitute the fund.
HL – technical beach of trust. Rejected argument. Loss caused by false valuation. Swindle and co similar thing happend (slide). Mrs Harrison trying to buy hotel. Couldn’t get finance. Sol offered to give loan. They didn’t tell her that hotel had poor commercial history. Harrison..said that the sol had breached the trust by failing to give her information about poor history.. failing to disclose info.
Lord jstice vans said – not the breach of trust that had caused the loss. Even if she had known, she would have accepted the loan. So breach but not reason for loss. Secret profit made, she should have tried to get an account for unauthorised gain but she did not pursue this
Target is authority ....listen.. says calculation of loss is based upon common sense, assessed at date of judgement with the full benefit of hindsight.
Hulbert – compernsating .. difference between trad and bare trust,
So problems defining loss – back to what was mentioned before- nestle. Where the bank ghad invested cautiously ..the court found it too difficult to asses what teh loss was. Gave up and said cant decide what was lost. Harsh. Moved on – common sense approach – Bartlett and mo...case new Zealand case – prudent man
At common law- can only give simple interest. In equity, judge has discretion to give compound interest. This means interest on interest. Listen. Compound –adding interest onto debt and charging interest on that.
2 situaitosn – where fraud or where fiduicry makes an unauthorised gain. Get more if compound.
Award compound to ensure trustee has been stripped of all gain. Compound int awarded by equity only
See notes –law comm...suggesting that common law debt should be able to carry ...
Position in temrs of tax – bartle and Barclays –
Justice brightman talking about tax when loss is amde to trust. Because of breach of trust, bemefmciiries not recived as much income so not paid as much tax. Said – in a traditional sett trust, you have to compensate trust.. not go into tax implications. So that means beneficiaries are being overcompensated. Justice brightman says for reasoning – overllokk fact that they are being overcompensated. Errodite reasoning give.. it is a lot easier. See slide.
May not be such a good excuse if bare trust. Its easier to calculate..
One instance where the distinction between types of trust is important.
Bartlem and Barclays – ignore tax.. different for bare trust. Or sense that it was an honest mistake.. more lenient on trustee.
O sullivant case – agent who had unduely influenced, he had paid tax. Question of, when stripping –
O Sullivan... ssee diagram on handout.
So est libailit, est it has caused the loss..etc.
Trustee may come up with one of 2 defences -1 – that the b has either instigated, acquiesced in the breach... or trustee might say.. he told ben what he was going to do.. so consent. Or trustee may say –b knew about it and didn’t complain. Acquiescence
Good defences --- provided
1 –b of full age
2- b is acting freely
3 – b must be fully informed
Three f’s must be fulfilled.
These are only good agasint a b who has...
What does the b have to know befre they can be said to be fully informed? If there is a delibertate breach of trust tehn the b has to be told that.
If the b is innocent.. then b needs to know facts but not know its a breach
Holder adn holder case- brothers – one brother had very briefly acted as an executor in a trustee position.. wanted to be released. Hadn’t been released but ebryone thought he had. Went ahead and brought .. borther -- self dealing. Judge said – this was a case where the plaintiff acquiased in teh brech.. didn’t know it was a breach but not did his brother.
In re somerset – on the face of the trust, a certain investemetn was permitted.
Limitation act- 2 ways..
1st = above
2nd – too much of a delay. 2 ways in this – first is limitation act; or laches.
Limitation act- section 21 subsec 3 – claimant has 6years to seek a remedy for breach of trust. This doenst run if there has been fraud or if trustee still holding property.
Limit act is beneficial to trustee.. court is conscious to this and intereprets in a certain way
Martin and merees –said that contrcutive trustees are also not trustees..
Limitation act applies unless there has been fraud...etc..
If there is a structured setttketmnt trust...you have until life interest dies before 6 years starts to run. If structured interest, 6 years from point at which interest vests in possession
Section 32 – if a trustee has concealed –6 years starts to run from time the fradudeltn concelemtnt is discovered
Re howlett – law trying to be kind to b, stretching idea of property.father was trustee, living in trust prop rent free. When he died, ben.. son tried to recover.. the limitation may have barred it – over 6years. Here, judge said that the rent that should have been paid..was stil in the fathers estate..
Almost as if teh father had been keeping it safe..so when he died the moeny was still within the estate. Trust property still considered in trust.
Suggested – 2tier limitation period – either 3 years from time ben knew or 10 years from cause of action. This would not apply if beneficiary was a child. Three cats of people would still not have time running against them
Where there are areas in equity.. concur..then the limitation act can bar by analgy..
Either limitation act and analgy or laches. Not both
Re sharpe – old case said judge should consider time that has elapsed between breach of trust....and balance of justice in allowing or refusing claim
Exeption clauses – u can use them to offset liability for neg. Not dishonesty. Not recklessness.. interepreted against interest of person seeking to rely on it..
Contributory neg – allowed in common law. Cases- equitable compensation shouldn’t be reduced because ........
If you can see braches are oart of linked trasnsatction = some gone ...bartlett..
See diagram set off