Compensatory Liability for Breach of Trustee Duties Flashcards
Target Holdings v Redferns
Where the trust is a bare trust involving a wider commercial transaction, rather than a traditional trust with a beneficiary absolutely entitled, then there must be CAUSATION between breach of T duty and the loss suffered by B for substitutive performance claims.
Lord B-W introduced the distinction and argued that these trusts were very different from traditional trusts, which justified departing from the traditional rules on SP claims for breach of primary trustee duties.
Facts: D was a solicitor who negligently released trustee money to a fraudster earlier than they were supposed to under the trust, so technically this was a primary breach of trustee duty and so C made a SP claim, normally doesn’t involve causation rules etc. However, even if D had released the money in accordance with the trust, C would still have lost their money - hence Lord B-W introduced the causation requirement here
AIB v Mark Redler
Lord Toulson, giving the leading judgment, affirmed Lord B-W’s reasoning in TH and held that for bare trusts involving a wider commercial transaction, then there needs to be causation for SP claims - even though usually no causation is required for these are they are a primary breach of T duty (unauthorised use of trust property). He argued that equitable compensation should be based on either loss caused or profit gained by the wrongdoer.
Lord Toulson noted that the main criticism of TH was that it muddled reparations claims and SP claims by introducing a causation requirement for certain SP claims. However, he maintained Lord B-W’s argument that there should be a distinction between traditional and bare trusts involving a wider commercial transaction, which justified this exception to general SP claims (by requiring causation).
FACTS: AIB agreed to loan money to 3P on the basis that they would be the only creditor with a mortgage charge over 3P’s property. However, the solicitor acting for 3P failed to completely repay a debt owed by 3P to Barclays, who had a mortgage charge over the property. Due to this breach of 3P’s primary duty, AIB only acquired a secondary charge over the property, meaning that when 3P went insolvent they could not recover all of their money owed.
Note that the key difference here with TH is that here, by the time of the court case D had not put the breach right by performing what they were supposed to, since AIB only had a secondary charge (whereas in TH, C had received the documents etc. as required, even though the money was released too early). This extends the scope of TH slightly - still applies even where D has not effectively put things right by the time of the case.
Bartlett v Barclays Bank
Brightman J explained that reparation claims are essentially similar to claims made in tort - principles of causation and remoteness apply in terms of what B can recover for T’s breach of trustee duty. But for causation test for reparation claims.
T is liable for a reparation claim where they failed to take reasonable steps that no reasonable trustee would have failed to take - e.g. where they failed to sell property for profit for the trust property.
(So SP claims are for unauthorised dispositions of trust property, i.e. unauthorised breaches of T duty - this is a breach of T’s primary obligations, hence why normally causation etc. is not relevant and the court just falsifies the account, requiring T to replace the property in specie or repay it themselves.)
Reparations claims apply to an authorised but negligent (e.g.) breach of T duty - here the principles of causation and remoteness ARE relevant. Court typically uses surcharging, which is adding credited items to the account which T must repay to make up for the lost they have caused.
Nestle v National Westminster Bank
Damages for reparation claims is for loss of profits - the court looks at the difference between what was actually in the account, and what would have been made had T invested the trust money.
So the level of damages is the difference between the authorised but negligent investment (or failure to invest) and the average performance of ALL authorised investments which could have been made.
T’s performance is not judged with the benefit of hindsight for the duty they owed.
Libertarian Investments v Hall
Lord Millet set out the current principles of holding Ts to account - irreducible core duties of trustees is the duty to account to Bs for what they have done with the trust property.
Bs are entitled to request from Ts what they have been using the trust property for, but they can also obtain a court order as part of their proceedings to enforce their rights to performance of T’s primary duties, or to recover reparative compensation for breaches of T duty.
Three main types of accounting orders that courts can make for trust disputes:
1) An order to an account in common form - this requires Ts to submit a set of accounts which identify the original trust property, property received and disbursed, and property distributed to Bs.
2) An order for account on the basis of wilful default - this is entirely grounded on T misconduct, including all breaches of duty
3) An account of of profits, which requires Ts to account for specific gains they have made in the course of administering trust affairs
s.61 Trustee Act 1925
This provides a discretionary defence for compensatory liability of trustees for breach of trustee duty that the courts may use. Where T has committed a breach of trustee duty, but has acted honestly and reasonably and ought fairly to be excused for the breach, then the court may relieve him either wholly or partially from personal liability
Re Stuart
The burden is on T to demonstrate that he meets the three requirements to be relieved from liability under s.61 Trustee Act 1925:
1) Acted honestly
2) Acted reasonably
3) Ought fairly to be excused for the breach
Santander v RA Legal Solicitors
Where a law firm, acting as a trustee, departs from its best practice and this plays a material part in the loss suffered by a lender, then it would not be fair to grant the firm from any relief of liability under s.61. Material cause test applied here, not ‘but for’.
So if there is poor conduct by a professional trustee that departs from their usual standards of practice, then it is unlikely they will be entitled to a defence for personal liability for the breach under s.61 Trustee Act 1925.
Re Wynn
Jurisdiction of the courts as to pure matters of law cannot be ousted by exemption clauses in the trust deed - so in general, T cannot escape personal liability by relying on a clause in the trust instrument which provides that he is not liable for breach of T duty.
Armitage v Nurse
However, there is an exception to the rule in Re Wynn regarding T avoiding personal liability through an exemption clause. Provided that T demonstrates that S knew of the exemption clause, then if T can rely on a fair interpretation of that clause to escape liability for a negligent but authorised breach, then T CAN escape personal liability through such an exemption clause.
But note that there are two requirements for this exception:
1) S was aware of the exemption clause in the trust deed
2) T’s breach of duty was not fraudulent/unauthorised
Re Dawson (NOT ENGLISH CASE) - SP Example
A trustee who had improperly dealt with trust funds was ordered to pay equitable compensation to restore the trust to the position it would have been in had there been no default on his part.
