Chapter 8: Liability for Breach of Trust

Question 1

Who has the burden of proving loss?

Answer 1

The beneficiaries

Question 2

Can a loss from a breach be offset against a gain from another breach?

Answer 2

No, beneficiaries are able to keep the gains resulting from one breach and sue to recover for the losses from the other breach

Question 3

Are trustees vicariously liable for the acts of their co-trustees?

Answer 3

• No, only the trustee responsible for the breach and loss will be liable.
• However, the co-trustees may have committed another breach e.g. failing to supervise the actions of the trustee in breach

Question 4

Is liability for breaches of trustees joint and several?

Answer 4

• Yes
• This means that any one trustee could be held liable for the whole loss
• The Court has the power to apportion liability as it deems just an equitable in the circumstances

Question 5

What are the four defences to a trustee’s breach of trust?

Answer 5

1. Consent of beneficiaries
2. Limitation period
3. Exclusion clause
4. Relief in the court’s discretion

Question 6

If a beneficiary has consented to an action which later gave rise to a breach, can they later sue the trustees in relation to that breach?

Answer 6

No, not if all beneficiaries consented to the action with full knowledge of all material facts

Question 7

Generally, what is the limitation period for bringing an action against trustees?

Answer 7

6 years

Question 8

When will the limitation period for bringing an action against a trustee begin to run?

Answer 8

Time will not begin to run against a beneficiary with an interest in remainder until their interest falls into possession

Question 9

In what two circumstances will there not be a limitation period for bringing an action against a trustee?

Answer 9

1. Trustee was party to fraud
2. An action to recover trust property from the hands of a trustee

Question 10

When will an exclusion clause be upheld?

Answer 10

When no bad faith, intentional breach of recklessness is involved.

Clauses purporting to absolve a trustee from liability for fraudulent breaches are void

Question 11

When will the court use their discretion to award relief from a trustee’s liability?

Answer 11

If they conclude that the trustee has met the necessary standard of care, acted honestly and reasonably and ought fairly to be excused

Question 12

Trustees in breach are liable to account or pay equitable compensation for their wrongdoing. What is the liability to account?

Answer 12

The obligation to pay money into the trust to restore the value of any losses suffered due to breach

Question 13

What is equitable compensation for breach?

Answer 13

Beneficiary is compensated directly by monetary payment

Question 14

The court has the power to indemnify one trustee at the expense of another. What does this mean?

Answer 14

One trustee will be protected from the liability generated by another

Question 15

In what two circumstances can a trustee claim an indemnity from a co-trustee?

Answer 15

1. Co-trustee alone was guilty of fraud or was a solicitor to the trust and advised of the breach
2. Co-trustee is a professional trustee while the other is a lay trustee

Question 16

When will beneficiaries be able to pursue a proprietary claim?

Answer 16

When trust property or its proceeds can be identified in the hands of a trustee

Question 17

What are the two reasons that a proprietary claim more advantageous than a personal claim?

Answer 17

1. If the trustee is insolvent, the beneficiaries can claim the trust property from the trustee ahead of creditors
2. If the value of trust property has increased, a proprietary claim enables the beneficiaries to claim the increase

Question 18

What is tracing?

Answer 18

The process of identifying trust property in the hands of the trustee

Question 19

What can beneficiaries do if the original trust property is in the hands of the trustee?

Answer 19

The beneficiary may simply claim back the property. If the trustee has directly substituted the property for another asset, the beneficiaries may claim that asset

Question 20

What can beneficiaries do if a trustee has combined trust funds with their own to purchase an asset?

Answer 20

The beneficiaries may claim a proportionate part of the asset or claim a charge over the asset for the amount of trust property used

Question 21

What can beneficiaries do if a trustee has mixed trust funds with their own funds in a bank account?

Answer 21

• Beneficiaries may claim charge over account
• Trustee treated as withdrawing their own money first

Question 22

What can beneficiaries do if a trustee withdraws money from bank account (mixed with their own funds as well as trust funds) to purchase an asset and then go on to empty bank account?

Answer 22

The beneficiaries may claim a share of the asset or a charge over it

Question 23

What can beneficiaries do if a trustee empties a bank account (mixed with their own funds as well as trust funds) but goes on to add funds to the account?

Answer 23

Subsequent payments are not treated as replacing trust money unless the trustee showed a clear intention to repay trust money

Question 24

What is the lowest intermediate balance?

Answer 24

The balance after the last payment out but before the next payment in

Question 25

What can beneficiaries do if a trustee purchases an asset from two different trust funds?

Answer 25

The asset would be shared proportionally

Question 26

What is the position if a trustee mixes funds from two or more trust in the trustee’s personal bank account?

Answer 26

Current account: First in first out rule applies (court can displace rule and divide proportionately)

Savings account: Funds are divided proportionately

Question 27

Can a claim be brought against a third party involved in a breach of trust?

Answer 27

Yes, beneficiaries may be able to bring a personal or proprietary claim against the third party

Question 28

Do beneficiaries have a claim against a bona fide purchaser?

Answer 28

If a third party acquires legal title to trust property for value and without notice of the trust, they will take the property free of the equitable interests of the beneficiaries. Therefore, a claim cannot be brought against a bona fide purchaser

Question 29

Can beneficiaries bring a claim against a person who has come into possession of trust property, did not pay the value of the property but nevertheless had no knowledge or suspicion that a breach of trust occurred?

Answer 29

A personal claim cannot be brought, but a proprietary claim may be brought if the property is identifiable and can be traced back to trust property

Question 30

What can beneficiaries do if an innocent recipient uses trust funds along with funds of their own to purchase an asset?

Answer 30

• The beneficiaries may claim a proportionate share
• The beneficiary cannot claim a charge over the property as the recipient is an innocent volunteer
• Any loss in value is shared proportionately between the innocent volunteer and the recipient

Question 31

How will third party be treated if they received money or property traceable to a breach of trust with knowledge of the breach?

Answer 31

• They will be treated as if they were a trustee
• The recipient will be personally liable to the beneficiaries to make good the loss