Breach of Trust notes PDF

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Breach of Trust notes...

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Breach of Trust -

Virgo the clearest on this topic

Trustee’s Liability Starting point: what type of claim to make Proprietary claims - Seeking to gain a security interest in the defendant’s property or recover property from the defendant Personal claim – a monetary remedy amounting to the value of the claim. Can take a number of forms: - Reconstitution of the Trust Fund - Reparation of the Trust fund - Equitable compensation - Account of profits - Interest - Action can be brought in the alternative Assess the merits of both claims FOCUS FOR TRUSTEES WILL BE ON PERSONAL CLAIMS. PROPRIETARY CLAIMS WILL BE LOOKED AT IN NEXT FEW LECTURES. What amount to a breach of trust? “One of the more unexpected curiosities of this case is that it became common ground between counsel that the term "breach of trust" had not been defined in any case or textbook known to them.” – Tito v Wadell (No 2) In that same case, Megarry V-C explained that a breach of trust occurs where there is a “violation of any duty which the trustee owes as trustee to the beneficiaries” (Same para) Trustee have: - Exceeded their powers - Failed to meet their duties (both fiduciary and non-fiduciary- see earlier doc on these duties + PP 4.1 for the flow charts) FIDUCIARY DUTIES - Bristol v Mothew - Act in good faith - Act honestly - Not make an unauthorized profit - Most not have conflict of interest - NonAct in self interest Non-fiduciary powers and duties -

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Delegation (Part IV TA 2000)

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Appointment of new trustees S36 TA 1925 Exercise duty of care S1 TA 2000 DISPOSITIVE POWERS ‘beneficial powers’

Breach of Non-Fiduciary  No absolute rule – depends on the nature of the obligation  Acting ULTRA VIRES  Where trustee has positively acted so as to exceed their powers  ‘Unauthorised action’  Strict liability  Acting INTRA VIRES  Actions which are authorised but have not been properly carried out OR  Failure to act  ‘Inadequate action’  Must prove some fault on part of trustee - negligence Trustee’s liability for breaches- what breaches? - Trustees are liable for BOTH breaches of fiduciary and non-fiduciary duties - Liable for his own breach of trust - Following retirement, liable for actions during his period of office (retrospective) NO vicarious liability for co-trustees - Townley v Sherborne (1633) Bridge 35 - BUT remember trustees’ duty of care o Bahin v Hughes (1886) LR Ch D 390 BUT all trustees have duty of care. o one T did all the work, the other 2 did nothing (no duty of care). Breach in relation to the investments. o Passive duty was breach on duty. Not just the active trustee o No vicarious liability, BUT other 2 T’s were in breach also since they breached their duty of care (if you stick your head in the sand, you are in breach= similar to company DD’s) -

Generally, not liable for breaches prior to his own appointment – but T’s have an obligation to “survey the trust” on appointment (should spot breaches)

Issue of delegation: - What if you have appointed an agent? if they breach is the T responsible? o There is a power to delegate -

Duty to act personally BUT power to delegate S11 Trustee Act 2000 governs what can be delegated: o NOT distribution of trust assets or appointment of trustees.

Acts of delegation must meet statutory standard of care in relation to: - Original appointment - Ongoing appointment (s22) (critically) 2

Trustee only liable for agent’s breach IF the trustee has not complied with these requirements. (s.23)- if they have met these, then they will not be liable Must the breach have caused the loss? Question of causation- there must be a causal link between breach and loss: Target Holdings Ltd v Redferns [1995] - Crowngate contract to purchase property for £775k. C fraudulently apply to Target for mortgage of £1.5m, valuing the property at £2m - Redferns are solicitors acting for T and C (perfectly standard to act for both) - Mortgage advance sent by T to R in advance. HELD ON TRUST FOR T - Money released by Redferns to the vendor before completion – BREACH OF TRUST (trust said money was not to be released until completion) Q= WERE REDFERNS LIABLE TO TARGET FOR THE LOSS SUFFERED? Held: loss not directly caused by the release, therefore no liability - Needs to be a causal link Joint liability of trustees: Remember no vicarious liability BUT - Trustees are jointly and severally liable for breaches committed together o B’s can ‘pick and choose’ which T’s to pursue in regards to:  Contribution  Indemnity Joint Liability- contribution: Civil Liability (Contribution) Act 1978 -

Trustee who has paid out to beneficiaries makes application to court seeking order that contribution from the other trustees involved in the breach.

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Such contribution as the court considers ‘just and equitable’ s2(1) (clear example of flexibility+ discretion given to the court)

Must meet two requirements s1(1) o The claimant trustee must be liable for ‘any damage suffered by another’ and o The defendant trustee(s) must be liable for that same damage C asking from D for paying out (remember only going after other T’s involved in the breach since no VL) -

Joint Liability- Indemnity - Inherent jurisdiction of the court - Allows claimant trustee to seek full indemnity from the other trustee Requires one of three situations:

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Situation 1: Where the defendant T has obtained the benefit arising from the breach Situation 2 (professional client relationships) - Where a relationship exists between the trustees resulting in one being viewed as solely responsible for breach - So often 1 lay T and 1 professional, court says if lay relies on experience of professional o Usually professional advisors o Re Partington authority for this Situation 3 - Where the defendant trustee is also a beneficiary (who has benefitted from the breach – quite frequently e.g house) o Indemnity limited to interest in the trust o Chillingworth v Chambers- authority for this o Rule in Re Dacre  B will receive no further benefit until the loss is made good Trustee defences against liability: - Exemption clauses - S61 Trustee Act 1925 - Limitation - Acquiescence or consent to the breach by the beneficiaries o S62 Trustee Act 1925 (impounding)

Exemption clauses: - Clause within the trust deed which exempts the trustees from liability from actions. -

Recognised by the courts, but with limits o Para.7 sch.1 TA 2000

Key issues: - Can you exclude liability for breaches of all types of trustees duties? - How relevant is the level of fault on the part of the trustee? - Does the position differ for the professional trustee What type of duties can be covered under exemption clauses? - i.e you cannot exclude the obligations of: honesty, good faith etc - You fwhit Armitage v Nurse: - Trust deed included clause purporting to exclude all trustees’ liability other than that caused by the trustees ‘own actual fraud’ -

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HELD: liability can be excluded but not for trustees’ fundamental duties

“there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts. But I do not accept the further submission that these core obligations include the duties of skill and care, prudence and diligence. 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” (per Millett J) What level of fault is required? - All liability can be excluded other than fraud / dishonesty / bad faith - Negligence (even gross negligence) CAN be excluded Armitage v Nurse: - Fraud = dishonesty = intention on the part of the trustee to pursue a course of action which he either knew was contrary to the beneficiaries best interests or was recklessly indifferent to the fact. - NOT fraud (merely negligent) where reasonable person would have viewed action as dishonest but the trustee did not, nor where trustee has acted in good faith. o Subjective standard.  Consider possible impact of Ivey (Appellant) v Genting Casinos (UK) Ltd t/a Crockfords [2017] UKSC 67 dishonesty is objective? o Objective standard for professional trustees – Walker v Stones [2001] QB 902

Professional trustees: - Exemption clauses upheld BUT - Criticisms – Law Commission Consultation Paper 1999 - Subject to stricter interpretation o Bogg v Raper [1998] EWCA Civ 661  Valid only because the professional trustee had drawn the testators attention to the clause o Wright v Olswang [1999] EWCA Civ 1309  Contra proferentum rule applied (if there is doubt, words will be construed against the person who drafted them) Exemption clauses Professional Trustees s.61 TA 1925 -

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Court has discretion to remove liability (either in whole or in part) where the trustee has ‘acted (i) honestly and (ii) reasonably, and (iii) ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court’ Only absolves the specified trustee (not all of course)

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Honesty o Objective standard for professional trustees o Subjective standard for all others o Ivey?

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Reasonable o Ordinary meaning – does not mean perfect o Nationwide Building Society v Davisons [2012] EWCA Civ 1626 o Re Evans

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Fairness o Generally, coincides with first two limbs but gives additional discretion – Re Evans (deceased)

If R and H, Re Evans: father’s estate being administered by daughter, believed brother to be dead. Received legal advice. Brother reappears - court found that this coincides with the reasonableness requirements (+ fairness) These reqs tie in together Limitation periods: - Statutory period for breach of trusts: o 6 years from the accrual of the cause of action o S21(3) Limitation Act 1980 o Does not apply to fraudulent breaches (e.g dishonesty) -

ALSO: Equitable doctrine of Laches o Applies in circumstances where there is no statutory limit o ‘Delay defeats equity’ maxim- may be limitation even when statutory period does not apply

Beneficiaries’ Acquiescence: - Beneficiary knows (or ought to know) of their rights yet stands by and allows the breach. - Passive - Analogies with estoppel - Allcard v Skinner (1887) 36 Ch D 145: o Skinner- Ms A became a nun and handed over all her goods (over lots of pressure by mother superior)-> undue influence?  A waited 5 years until made aware of her rights, therefore acquiesced the breach -

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Holder v Holder [1968] Ch 35-> didn’t know that he was a trustee o No absolute requirement that the beneficiary to be aware that he is agreeing to a breach of trust

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Court must ask whether in all the circumstances it is fair and equitable for the beneficiary to sue the trustee when he has agreed to the action amounting to the breach., about balancing the parties’ interests. (shows the flexibility+ discretion by the court in equity)

Beneficiaries’ Consent - Differs from acquiescence due to its ACTIVE nature - Where a beneficiary has consented to a breach, he is considered to have joined in that breach so is barred from complaining Per Lord Eldon in Walker v Symonds (1818) 3 Swans 1, 64 - Only the consenting party is barred - Beneficiaries must be of age and capacity to be consenting - Beneficiaries need not have obtained a benefit - It is for the courts to decide whether it is, in all the circumstances, fair and equitable to bar the claim Per Lord Wilberforce in Re Pauling’s Settlement Trusts [1962] 1 WLR 86, 106 - Trust set up for benefit of children of family. Money paid on a regular basis to parents. They were quite extravagant towards this money, and children knew about it- questioned whether they consented to it. o some instances= yes that consent is valid therefore barred o other children (younger)= no, not fair to bar from claim (really good example to show court’s flexibility) s.62 TA 1925- impounding - Relevant only where beneficiary has CONSENTED to the breach o At instigation of or with written consent of the beneficiary Allows court to impound the beneficiaries interest in the trust - This is then available to indemnify the trustee Why? -

Power is exercised at the discretion of the court where it is just to do so. o Active encouragement by beneficiary o Full knowledge of the circumstances o Need not know that actions amount to a breach of trust

Remedies: (refer back to ‘types of claim’) Personal claim – a monetary remedy amounting to the value of the claim - Reconstitution of the Trust Fund - Reparation of the Trust fund - Equitable compensation (compensating the B for the loss suffered) - Account of profits (see Boardman v Phipps) - Interest 7

Proprietary remedies: B looking to recoup losses, or recover gains made by T, they can seek: - Personal remedy (see above) or - Proprietary remedy (against either trustee or third party) rd - (or personal remedy against 3 party- see below) Difference between personal vs proprietary? (usually have a choice between) - Personal= claim that T (or another) must (personally) make good any losses or hand over value of any profits Or - Proprietary= claim that specific assets (in the hands of T or elsewhere) should be returned to the trust –relates to property specifically “[W]hereas a proprietary claim amounts to asserting ‘that thing is mine’, personal claims say ‘do this’ (Webb & Akkouh) Why does it matter? Proprietary remedy has certain advantages - Enables recovery even if Trustee has disappeared or is bankrupt - Priority for claimant (over other creditors) on Trustee’s insolvency - Ability to recover secondary profits o If property has increased in value - Tracing property into hands of other people and into new forms of property Although … - Only valuable if the property is still identifiable - Property value may have decreased o Then you make (personal) claim for shortfall - Fails once property in hands of bona fide purchaser for value (equity’s darling) (THE MAIN BAR) Example= FHR European Ventures v Cedar Capital Partners: Issue arose as to whether bribes paid in breach of a fiduciary duty gave rise to a proprietary or merely personal claim. HELD: -

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in all cases where an agent has acquired a benefit in breach of his fiduciary duty, he is treated as having acquired the benefit on behalf of his principal, so that it is beneficially owned by the principal. i.e. a constructive trust arises This gives rise to a proprietary claim. a principal will be able to elect between a personal and a proprietary remedy.

Addresses the importance of the distinction.

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‘The distinction is significant for two main reasons. First, if the agent becomes insolvent, a proprietary claim would effectively give the principal priority over the agent’s unsecured creditors, whereas the principal would rank pari passu, ie equally, with other unsecured creditors if he only has a claim for compensation. Secondly, if the principal has a proprietary claim to the bribe or commission, he can trace and follow it in equity, whereas (unless we develop the law of equitable tracing beyond its current boundaries) a principal with a right only to equitable compensation would have no such equitable right to trace or follow. (Lord Neuberger [1) This case confirms that the benefit (bribe in breach of fiduciary duty) gives rise to a proprietary claim since it is held on CT. -

property which gained a profit can be claimed via the CT method.

In FHR the Supreme Court confirmed that a secret commission such as this will be held on constructive trust Seeking a proprietary remedy: - This requires the claimant to identify ‘his’ property in the hands of someone else o Effectively saying ‘that thing (or part of that thing) is mine’  Pointing to trust property  Or assets representing trust property  (ie substituted property) -

Why do we allow claimant to assert rights in this way? o Based on continuing proprietary rights: Foskett v McKeown (‘vindication of property rights’ principle; rejecting alternative theory based on unjust enrichment)  “[T]his branch of the law is concerned with vindicating rights of property” (Lord Millett)  It represents the state of English law and rightly so. It is logical and consistent with fundamental principles of Equity as to the nature of equitable rights in property.” (Virgo)

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How does the claimant identify the property in which he has an interest? o This process is known as tracing (or following and/or tracing)

Tracing: - “Tracing is … neither a claim nor a remedy. It is merely the process by which the claimant demonstrates what has happened to his property...”(Lord Millett, Foskett v McKeown) Tracing = the process by which trust property, or the value inherent in trust property, can be identified (NOT IN ITSELF A CLAIM) - Enables the claimant to bring a claim for a proprietary remedy against the holder of property 9

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(or to provide the basis for a claim for a personal remedy against a third party)

It is important to distinguish between: - Following - Tracing - Claiming Following - Identifying property as passes from one person to another, ie locating the trust property itself Tracing - Identifying asset which substituted for the trust property, ie locating where the value inherent in the trust property lies Claiming - The claimant asserts his rights in the asset in order to recovered property (see authority for this in- Lord Millett in Foskett v McKeown at 102) Complex example of this-> case of Foskett: Facts: - Development trust held money (£2.6m) for investors (B) - T had life insurance policy (£1m), settled on children - T paid annual premiums (£10k) for 3 years himself and used trust money for premiums 4-5. (breach) - Died -> £1m death benefit due to children - Key point: (Benefit would have been payable even without premiums 4-5) Q= Could B trace into death benefit? - What rights should B have in the death benefit? - Amount taken from trust (£20k)? - Proportionate share of £1m? (40%?- 2/5 payments were invalid) - Nothing? (because the 2 premiums didn’t need to be paid?) Held: -

Bs had equitable interest in money misappropriated from trust fund Could not follow money into death benefit as mixed with other money But could trace money into premiums paid to insurance co, on into the insurance policy, and then into the death benefit – ‘transactional links’. So Bs could claim against money in hands of children Looking for value attributable to the trust property, not causation Proportionate share reflecting contribution of ‘their’ money

[2001] 1 AC 102 “We speak of tracing one asset into another, but this … is inaccurate. The original asset still exists in the hands of the new owner, or it may have become untraceable. The claimant claims the new asset because it was acquired in whole or in part 10

with the original asset. What he traces, therefore, is not the physical asset itself but the **value** inherent in it.” (Lord Millett) Tracing as a process: - So tracing is a process whereby B shows what has happened to his property, and thus justifies the claim that the new asset can properly be regarded as B’s property you’re following through the transactional process o See e.g Shalson v Russo : “[Tracing is] the process by which a claimant seeks to show that an interest he had in an asset has become represented by an interest in a different asset” (Rimer J) o ‘Vindication of property rights’ as noted in Foskett The claimant (B): - Follows the trust property while it remains identifiable - Traces into any substitution - And then asserts/claim his equitable interest in that substituted property -

But there are requirements before tracing is po...