DIGESTIBLE NOTES
BREACH, REMEDIES, AND DEFENCES
Subjects | Law Notes | Trusts Law
BREACH OF TRUST
⇒ Where a trustee fails in his duties and that causes a loss, a beficiary may claim in breach of trust.
⇒ In Armitage v Nurse [1998] it was said that “breaches of trust are of many different kinds” → so a breach of trust
can be beneficial to the beneficiaries. For example, if a trustee invests in something he shouldn't have invested in
and that investment makes a greater profit, technically that is a breach of trust but a court will not give a remedy
⇒ Target Holdings v Redferns [1996] said although court will ensure the trust is duly adminsitered, this doesn't
mean they will always give a remedy where there is a breach
⇒ In Target Holdings Ltd v Redferns [1996]the House of Lords held the breach did not cause a loss, so the claim
failed
⇒ In Nestle v National Westminster Bank [1994] the claimant was unable to prove a loss, so the claim failed
⇒ In AIB Group (UK) v Mark Redler & Co Solicitors [2014], the Supreme Court applied Target Holdings and
applied the ‘but for’ test
LIABILITY
⇒ The primary duty of the trustee is to account to the beneficiary. The beneficiary may then require a trustee to
restore any property disposed of in breach of trust, set aside a transaction (falsify account), or to compensate for any
loss caused by a transaction in breach of trust (surcharge account)
• Falsifying an account = don’t accept the accounts
• Surcharge account = compensate for loss caused by breach
⇒ There is power to order the payment of compound interest: it was on this point that the case of Westdeutsche
Landesbank was brought.
RECONSTITUTION OF THE TRUST FUND
⇒ In Target Holdings Ltd v Redferns [1996], the Plaintiff had sought an order to have the trust fund – i.e. the
whole £1.7m held by Redferns on bare trust in their client account – restored.
• Lord Browne-Wilkinson held this remedy wasn’t available to beneficiaries absolutely entitled to the trust
fund: the remedy was available where it was the only means of ensuring that all beneficiaries’
interests were protected. In this case, the appropriate remedy was equitable compensation.
• So, the remedy was refused: to have granted it would have given Target Holding a substantial windfall,
unjustified by the circumstances of the case → So the courts will not allow beneficiaries to recover more
than they deserve, and certainly not more than they lost
ACCOUNTING FOR SECRET PROFITS
⇒ Secret profits are profits not consented to by the beneficiaries
⇒ In Regal (Hastings) v Gulliver [1967], directors of a cinema company took advantage of a commercial
opportunity in their own right instead of for the company. Lord Russell said if a fiduciary makes a profit by use of
their position they are liable to account for it
⇒ In Boardman v Phipps [1967], a solicitor had to account for profits he had made as he was in a fiduciary
position, despite acting in good faith and making the beneficiaries money
SET OFF
⇒ As a general rule, the trustees cannot set off any amount gained by another transaction against the loss to the trust
property: Bartlett v Barclays Bank [1980]
• If a trustee invests in one set of unauthorized transactions that makes a loss and another that makes a
gain, they cannot off set each other
• In this case, trustees were majority shareholders in company and didn’t keep eye on it. The company
made speculative property developments. One made a small profit and the other made a huge loss. The
court held there was no set-off so they and were liable for the loss caused
• However in that case, Brightman LJ did allow the profit made by one land transaction to be set off
against a large loss on another (so he bent the rules a little)
RIGHT OF ADOPTION
⇒ If the trustees have made an unauthorised investment, which makes more money than the authorised investment
would have made, the beneficiary has no cause of action: see Nestle v National Westminster Bank [1994] → they
can only require trustees to reinvest
⇒ If the unauthorised investment loses money, the beneficiary (if sui juris) may elect to keep the investment (adopt
it) and require the trustees to make good the loss. If they do not adopt it, the trustees must sell the investments,
invest in an authorised manner and make good the loss
RIGHT OF ELECTION
⇒ Right of election: the beneficiary must decide whether to require the trustee to restore the trust property or to
provide equitable compensation.
⇒ Tang Man Sit v Capacious Investments Ltd [1996]: a wronged beneficiary will often have alternative and
inconsistent remedies e.g. (1) an account of the profits made by the defendant in breach of his fidudciary obligations
and (2) damages for loss suffered for the breach. Faced with this scenario, a claimant must choose, or elect, between
them and must make this choice before the judgment is given by the court (Lord Nicholls)
FALSIFICATION AND SURCHARGE
⇒ The trustees’ duty is to demonstrate their stewardship and management of the trust, by providing an account. On
receipt, the beneficiaries have the option of accepting the account; if there has been a breach of trust, they can falsify
the account or surcharge the account.
⇒ Falsifying account means the beneficiary does not accept the account and requires the trustees to put the trust
property into a state which is consistent with them having properly managed the trust property. If necessary, they are
required to use their own money to bring this about by, for example, replacing trust property
⇒ Surcharging account means trustees have to compensate for loss caused by the breach.
⇒ This way of considering remedies for breach of trust has undergone something of a revival: see AIB Group (UK)
v Mark Redler & Co Solicitors [2014]
JOINT & SEVERAL LIABILITY
⇒ It is presumed trustees act jointly, meaning they have joint and several liability: a beneficiary can sue any one of
the Trustees and recover fully (Townley v Sherbourne 1620)
⇒ Bahin v Hughes (1886): Hughes was an active trustee and Edwards was not. Despite this, due to the joint and
several liability of the trustees, “all the trustees were in the wrong, and everyone equally liable” to indemnify the
beneficiaries including Edwards
• Also, see the Civil Liability (Contribution) Act 1978: the court has discretion to allocate liability on a just
and equitable basis.
⇒ However, where one trustee has acted fraudulently, or appropriated the trust property for his own use, the other
trustees will not be liable.
⇒ Chillingworth v Chambers [1896]: where 1 of the trustees is also a beneficiary of the trust, that trustee has to
indemnify other trustees to extent of his own beneficial interest.
DEFENCES
⇒ A trustee cannot plead ignorance or that they were not playing an active role as a trustee
⇒ However, a non-active trustee may have a defence if they can show they never accepted position of trustee → In
re Clout and Frewer's Contract [1924]
⇒ A trustee may escape liability for breaches which took place before appointment. However, there may be a
breach if new trustee allowed breaches to continue. Following retirement or resignation, liability continues (even
post mortem against estate)
⇒ A retiring trustee can gain an indemnity from other trustees.
INDEMNITY
⇒ As seen, trustees who together commit a breach of trust are jointly and severally liable. However, a trustee may
be entitled to receive a full indemnity from liability for his breach by his fellow trustees e.g. where one trustee has
acted fraudulently, the others are entitled to receive a full indemnity from liability for his breach (this was the
example given by Cotton J in Bahin v Hughes 1886)
⇒ However, the courts now have power to allocate liability by the Civil Liability (Contribution) Act 1978 or relieve
one or all of the trustees of liability s.61 Trustee Act 1925.
⇒ Trustee Act 1925 s.61: “If it appears to the court that a trustee is or may be personally liable for any breach of
trust, but has acted honestly and reasonably, and ought fairly to be excused for the breach, then court may relieve
him either wholly or partly from liability.”
LIMITATION
⇒ Limitation Act 1980 sets a limit of 6yrs for breach of trust (s.21(3)), from the time the property vests in the
beneficiary or the breach occurs; or, for minors, the time they reach 18.
⇒ There is no limitation for fraud or fraudulent breach of trust
⇒ The court has a discretion to extend this period, particularly where the delay in bringing an action is caused by
the trustee: e.g., if they refuse to provide info or mislead the beneficiaries
ACQUIESCENCE
⇒ A beneficiary who consents knowingly to a breach cannot sue (except minors, incapacitated individuals, and
those subject to undue influence). It is not necessary that the beneficiary knew that it was in breach; nor that he
should personally benefit. The beneficiary can acquiesce or agree to release the trustee from liability.
EXEMPTION IN THE TRUST INSTRUMENT
⇒ In Armitage v Nurse [1998] Lord Millett said trustees do have an irreducible core of obligation from which they
cannot be exempted from, but competence is not required → you can be incompetent without being in breach,
because you will not be in breach of the fiduciary duty of good faith
⇒ In Spread Trustee Co Ltd v Hutcheson [2011], the Privy Council observed that Armitage v Nurse correctly
stated the law of England, as well as the customary law of Guernsey
⇒ Law Commission → “Any paid trustee who causes a settlor to include a clause in a trust instrument which has
the effect of excluding or limiting liability for negligence must before the creation of the trust take such steps as are
reasonable to ensure that the settlor is aware of the meaning and effect of the clause.” (Law Com 301 para 6.65)
• The rule has been adopted by STEP (The Society of Trust and Estate Practitioners) and the Government is
‘urging’ the regulatory bodies to adopt it (Hansard, 14/9/2010).
CONTRIBUTORY NEGLIGENCE
⇒ The contributory negligence of the beneficiary does not afford a defence to the trustee: Lloyds TSB Bank plc v
Markandan and Uddin [2010]
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