Duties of Trustees and Liability for Breach Flashcards

Question

Defences - Beneficiary Involved in Breach? Re Pauling's ST

Answer 1

The effect of a beneficiary being in some way involved in a BoT - he who participates in or consents to a breach of trust with knowledge will not be able to sue. Consent must be ‘effective consent’ mentally able person of age of consent and no undue influence. The beneficiary must also know and fully understand the facts and what action they are consenting to. He doesn’t have to know it is a BoT though. There is no requirement for the beneficiary to benefit from the BoT or even to hope to do so.

Answer 2

Possibility of impounding the Interest of a beneficiary who has somehow been involved in a BoT – their interest is taken off them and used to reimburse/indemnify the trustee and through him any other beneficiaries as much as possible. Can be done by the High Court where the beneficiary instigated, requested or consented to the breach with knowledge and with the motive of getting a personal benefit (if just consented they must have ACTUALLY benefited). Knowledge again means of the facts and not that it was a BoT. OR: S62(1) Trustee Act 1925 refers to where the trustee commits a BoT with the consent or at the behest of a beneficiary the court may make order for impounding where it sees just. It is only consent that must be in writing (instigation or request needn’t be). It makes no reference at all to any need for the beneficiary to have the motive of benefiting or to actually benefit. On the face of it it is a wider power than under the inherent jurisdiction of the high court. The power is discretionary and it seems likely the courts will in practice require the motive/actual personal benefit. The ability to impound the interest of the beneficiary means that that beneficiary is primarily liable for the loss of other beneficiaries (in fact he has to pay compensation before the trustee does). So there has to be a good reason for saying that they are more liable (liable before the trustee).

Answer 3

Has been held that they can exclude liability for all actions of a trustee except fraud (can be negligent or grossly negligent and still not be liable for any losses of the beneficiaries). It can exclude the statutory duty of care. Under s61 Trustee Act 1925 it is possible for a trustee to be relieved of liability. "If it appears to the court that a trustee, whether appointed by the court or otherwise, 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 of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach, then the court may relieve him either wholly or partly from personal liability for the same."

Answer 4

“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.” – Millett LJ

Answer 5

It is a question of fact whether there is a fiduciary relationship. Some relationships are undoubtedly fiduciary such as trustee and beneficiary, banker and client, company director and company. The list of fiduciaries is not closed. In some cases the courts may even be prepared to find a fiduciary relationship in order to be able to give a remedy.

Answer 6

They made a profit, having taken advantage of their position, when the company and the subsidiary were sold. The new owners claimed the profits. The HoL held that the Directors did have to account for those profits. Russel LJ: “The rule of equity, which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.”

Answer 7

In his fiduciary capacity as solicitor to a trust, Boardman obtained information about a company in which the trust had invested. He realised that the company could be made more profitable and purchased a controlling share to enable him to carry through his plans. All of the competent trustees and the beneficiaries had been made aware of this opportunity, but due to the trust's restrictive investment powers, the trustees could not make the purchase themselves. Through his hard work, the company made substantial profits for both himself and the trust. Despite this, the House of Lords held on a 3:2 majority that Boardman held his profits on constructive trust for the trustees. Note: Boardman was able to retain a portion of the profits on a quantum meruit basis for his efforts. However, this does not alter the fact that all of the profits were held on trust. Hodson and Guest LJ – clearly stated there is a strict rule that a fiduciary must account for any profit he makes through his position. It doesn’t matter whether he acquires this because of knowledge he thus acquires, or because of an opportunity therefrom. They relied on precedent that it was irrelevant if the principle could have taken advantage of the opportunity. The only exception to the rule is where they have the fully informed consent of the principal. Cohen LJ held B was strictly liable because the opportunity to buy the shares came from his position. He took the opportunity to comment on the fiduciary’s use of knowledge acquired from his position and basically seemed to say that if the knowledge is something that is not otherwise available then the use of that knowledge can lead to liability. It was important in this case that it was a private company and the information was not available to the public. Had B simply acquired knowledge about shares in a public company then bought them through the open market there may not have been liability. Unclear regarding conflict of interest.

Answer 8

The only possible exception, other than fully informed consent, would be if a fiduciary could show that they were acting outside of their fiduciary duties when they were making a profit. Here it was held the use of information acquired from a fiduciary position would not amount to liability if they were used for a purpose totally outside of the scope of their fiduciary duties. This was held as good by the HoL in Boardman but they made it clear that what was relevant in this case was a partnership and there was a clearly defined area of business within which it operated. They expressed the view that a more general fiduciary relationship like B was in doesn’t have such clear boundaries. It may be very difficult for a fiduciary such as B to show they were acting outside of their duties.

Answer 9

This is one of a few recent cases where it has been held that a fiduciary cannot exploit any opportunity arising from his position for his own benefit without the consent of his principle. This prohibition applies even if the principle is not interested in or cannot take up that opportunity, as shown here.

Answer 10

HL should reconsider the rule for liability – more flexibility as long as the rule continues to have a deterrent effect. References were made to a possibility that a fiduciary acting in good faith in the best interests of the principal shouldn’t be liable.

Answer 11

Need to either be acting outside the scope of fiduciary duties, or obtain valid consent from principal. In some situations there is no problem deciding who’s consent is required. For a trustee this is of the beneficiaries who must all be of full age and competence. Sometimes who’s consent is required is less clear. Who consents on behalf of a company? (shareholders or directors - which was resolved in statute as the Directors)

Answer 12

Most commentators think that liability is too strict and that there should be a more flexible approach. The law as it is does more than prevent improper conduct on the part of a fiduciary. It is designed to deter the fiduciary from even contemplating making a profit from his position regardless of the circumstances. This is considered too strict in modern commercial situations because it militates against an entrepreneurial approach. A fiduciary might put in extra effort if he/she might personally benefit from it. If they cannot personally benefit from it there is no incentive to do more than is strictly necessary. There are clear advantages of the present law. It is certain. It has a clear deterrent effect. There is no need to look into the motives. The fiduciary who wants to make a profit always has the opportunity to ask for the consent of his principal. However, one of the suggested alternatives is the minority approach in Boardman – is there an actual or real/sensible possibility of a conflict of interest. This is an objective approach still – motives are irrelevant. There is still a deterrent effect. It is all well and good saying you can ask for consent but this may not be practical. The flexibility of the approach seems fairer. It is of course less certain.

Answer 13

No doubt the fiduciary has personal liability – a duty to account for the profit to the principal. The obligation extends only to the original profit made so if the fiduciary has successfully invested that profit there is no duty to account for the further profits. In most cases personal liability may be a sufficient remedy. But in some cases the principal will want to claim a proprietary remedy – that the profit made by the trustee is held on trust for them. The first situation where a proprietary remedy will be preferred is where the fiduciary has invested the original profit and made a further profit with it. A proprietary remedy ensures that the principal gets this further profit as well. It will also be useful if the fiduciary has disposed of the original profit (passed it on to 3rd Parties) because if a proprietary remedy is available against the fiduciary this will enable the principal to pursue remedies against the 3rd Party as well. Lister v Stubbs A-G for Hong Kong v Reid [1993] – The Privvy Council took the opposite approach (not binding authority whereas the AC is). Sinclair Investments (UK) Ltd v Versailles Trade Finance FHR European Ventures LLP v Mankarious [2013] These 4 cases provided unsatisfactory authority on the matter for a long time. Mankarius went to the SC last year under the name: FHR European Ventures LLP v Cedar Capital Partners LLC. Neuberger LJ gave the opinion of the court. The SC was specifically asked to consider the position of bribes/secret commissions. FHR had engaged Cedar as its purchasing agent to secure the purchase of a hotel at the best possible price. Cedar had failed to disclose a €10 million commission it received from the sellers. FHR needed a proprietary remedy as Cedar had no assets so it wanted to be able to follow the money to Mr Mankarious who had controlled Cedar. The bribe had been passed from Cedar to him. They needed a proprietary remedy. The SC held that a proprietary remedy in the form of a CT is available in all cases where a fiduciary makes an unauthorised profit from their position. There is no exception for bribes/secret commissions. The fiduciary should never receive a bribe, it was a clear conflict of interest with their duty. Moreover, they said that there is a strong possibility that the payment of a bribe disadvantages the principal in some way (if they hadn’t needed to pay 10m euros to the fiduciary they would probably have reduced the price of the property by this amount an thus you could argue that indirectly the principal was paying the bribe). The final reason they gave for why a proprietary remedy was always available was that it would be wrong if a less advantageous remedy was all that was available against a defendant whose conduct had been more ‘opprobrious’. They did accept that the argument that by allowing a proprietary remedy this can operate to the disadvantage of a fiduciary’s other creditors. This argument can be made stronger by the fact that in a number of cases looked at the principal receives a windfall. They may have suffered no loss and the fiduciary’s other creditors will have suffered one if they cannot be paid. But this argument applies whatever the breach of duty. Thus it cannot justify an exception for bribes/secret commissions.

Answer 14

* If trustee has failed to act then the first approach may be an injunction to force them to do so. If they won’t act at all then maybe replacement trustees. * If the failure to act has led to a loss then the trustees will have to pay equitable compensation (example of personal liability). * If trustee has acted outside of their powers their unauthorised actions will be void. An unauthorised investment will be ordered to be sold though beneficiaries could decide to adopt it if it was profitable. * If wrongly paid away the trustees are under an obligation to restore the trust fund. The starting point will be to see if they can get back the property wrongfully given away and we will look at the rules that might enable the trust to assert property rights over assets in the hands of a third party. If the actual property cannot be restored then the trustee must pay equitable compensation. * Where trustees make a poor decision beneficiaries may ask the court at its discretion to avoid any transaction. In so far as any loss is caused the trustee may be liable to pay any equitable compensation. * If you breach the duty of loyalty (where they make an unauthorised profit rather than harm the trust fund) there seems to be personal and proprietary liability imposed on the trustee according to the recent SC decision (FHR).