#2528 - Breach Of Trust - Trusts and Equity

Breach of Trust

PQ Structure:

1. Identify duty breached - Identify the relevant power or duty that has been exceeded or breached? What does the breach of trust consist of? Pay careful attention to whether Ts liability in strict or fault-based, i.e. unauthorised investment is strict liability, but if act within their power but imprudently, then that is fault-based. Type of liability affects measure of liability.

2. Defences - Are there any entire or partial defences to the claim?

   • Exculpatory clauses

   • Beneficiary concurrence

   • Limitation of actions

   • Relief under Trustee Act 1925, s.61

3. Quantify liability - If there is no defence, or if the defence is only partial, then quantify the liability. Work of what loss has been caused to the trust estate.

   • Restoration

   • Taking of accounts: (i) Falsifying; (ii) Surcharging

   • Interest

4. Allocate quantum - Once the quantum is worked out, allocate it. Who owns the quantum? Do all Ts in breach have to pay equally? Do the Bs have to pay anything?

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1. ‘Breach of Trust’: There is no accepted or universal definition of what a trust is in English law, so there is no agreement on what a breach of trust us. However, there are specific rules that deal with specific types of breach of trust. E.g. Unauthorised investment, authorised investment made imprudently, payment of wrong beneficiaries.

Working definition: “A breach of trust occurs if a trustee does any act which he ought not to do, or fails to do any act which he ought to do with regard to the administration of the trust, or with regard to the beneficial interests arising under the trust” (Oakley, 2003).

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2. Defences

(i) Exculpatory clauses – Look at the trust deed. As a trust is a bargain there might be a clause exculpating the T from any liability. There are different types of clauses that can be used in combination.

(a) Enlarged powers – Trust deed may enlarge T’s powers. Important because the T does not act in breach of trust, but they might without the enlarged powers. Does not necessarily avoid all duties T has – T must still exercise care within that broad range. So often get a combination of enlarged power and an abridgement of care.

(b) Abridged duties – T will not owe a duty of care when exercising specific powers. Means there is no breach of trust.

• Wilkins v. Hogg (1861); Trust said T was not obliged to oversee trust fund’s application. Clause took away duty of T to control the trust fund. T allowed a co-T to control it. Co-T misapplied the fund but the first T was not liable because his duty to control the trust had been taken away. Co-T had acted in breach of trust.

(c) Exemption from liability – Exemption clauses presume that there has been a breach of trust (unlike the first 2 situations) but that T is immune from liability and cannot be sued. If the clause exempts T from liability, it may not exempt other people from liability – a third party who dishonestly assisted in the breach may still be liable. Also, it may exempt a third party but not T. Depends on what the trust says.

Issue: Are exemption clauses legitimate in trusts?

Some argue exemption clauses are repugnant to nature of trust – you cannot give Bs rights and then take them away by taking them away in the trust deed.

+ Conaglen: This makes no sense as Bs only get what the trust deed gives them. Invalid view.

• Armitage v Nurse [1998];

Facts: There was an exemption clause excluding T from liability due to any cause, apart from his own fraud. Valid?

Decision: This was a valid clause because it had not exempted irreducible core of obligations (T’s duty to act honestly and not fraudulently). But there are limitations: “The duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts, but in my opinion it is sufficient.”

‘Fraud’: “[Fraud] connotes at the minimum an intention on the part of the trustee to pursue a particular course of action, either knowing that it is contrary to the interests of the beneficiaries or being recklessly indifferent whether it is contrary to their interests or not.” (Armitage v Nurse [1998]).

Issue: What happens if the clause is overruled? What if it purports to exclude liability for fraud? Unclear in UK as people do not generally exlude liability for fraud.

Three possibilities:

1. No trust - Could say there is no trust at all because T does not even have to act honestly, can act only for themselves and not another, so here is no real trust;

2. Ignore exemption clause entirely – Harsh on T and does not really construe words.

3. Ignore the bit of the clause that is too broad – Exclude fraud. Pragmatically seems what the court what do; this was done in Jersey but on the basis of statute.

Effect of T’s fraud - If T does something knowing that they do not have the power to it/it is unauthorised, the exemption clause will not protect them if they know and are recklessly indifferent to B’s best interests. If they know they do not have the power but think it is in B’s best interest then they are protected by the exemption clause.

• Walker v. Stones [2001]; CA emphasised that if T honestly believes they are acting in B’s best interests, but that view is so unreasonable that no reasonable T could hold it, then that view is unreasonable and T will be liable. Dishonesty is an objective standard in this context.

= Exemption clauses do not give as much protection to T as other 2 types of clauses because there is a risk that the clause may not protect T if they act recklessly - “a trustee who relied on the presence of a trustee exemption clause to justify what he proposed to do would thereby lose its protection: he would be acting recklessly in the proper sense of the term” (Armitage).

- Law Commission, Trustee Exemption Clauses (Consultation Paper 171, 2002): LC favoured regulating exemption clauses for T; in particular professional Ts should not be allowed to exempt liability for negligence. Policy argument – if you stop Ts being liable for negligence will they go abroad to avoid English law restrictions (i.e. Jersey) so the government would lose tax. Empirical studies show they would not because most offshore places already ban exempting liability for negligence for professionals so this would actually bring UK into line.

- Law Commission, Trustee Exemption Clauses (Law Com No 301, 2006); LC recommended a rule of practice: if your T is a professional they can rely on the exemption clause but they expected to make sure it was brought to the settlor’s attention when the trust was set up. If they fail they can still rely on the clause but may expose themselves to professional disciplinary proceedings, i.e. Law Society – regulatory discipline.

E.g. SRA - Solicitors’ Code of Conduct 2007, rule 2.07: “If you are a principal in a firm you must not exclude or attempt to exclude by contract all liability to your clients. However, you may limit your liability, provided that such limitation: (a) is not below the minimum level of cover required by the Solicitors’ Indemnity Insurance Rules for a policy of qualifying insurance; (b) is brought to the client’s attention; and (c) is in writing.”

Gov has announced it will encourage professional bodies to follow this rule = debate at a stand still. Prevents 2002 LC approach.

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(ii) Beneficiary concurrence – B consents to the trust. If the B is sui iuris and of sound mind and is fully informed of the facts that make Ts conduct a breach of trust, then they cannot sue T because it would be unfair.

What does ‘fully informed’ mean? B does not have to know the conduct is a legal breach of trust, but must know all the facts that make it a breach of trust:

• In re Pauling’s Settlement Trusts [1962];

Facts: Involved a trust where there was a life tenant. Remainder were the children of the LT. The LT made advances of capital to the children for their benefit, but the children were giving money to their parents to lead an extravagant lifestyle – improper purpose so advances made in breach of trust. One advance was made by the elder children – these had independently been advised, consented and were over age, so they could not sue. But an advance had also been made by a younger child, who was also independently advised, and purported to consent. But the advice she received was about another issue and was deemed to be under undue influence of her parents so Ts had no defence to her claim as her consent ineffective.

Decision: Consent is an immunity against the specific B who gives the consent, not against all of the other Bs – other non-consenting Bs can still sue you. Must all be sui iuris – if they are children then you need guardians to be appointed.

Principle: B “should know that what he is concurring in is a breach of trust, provided that he fully understands what he is concurring in, and that it is not necessary that he should himself have directly benefited by the breach of trust.”

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(iii) Limitation of actions - Limitation Act 1980, s.21; basic rule is same as contract and trust – there are 6 years within which to sue after the cause of action has accrued. 6 years...