Duties of Trustees and Liability for Breach

Question 1

Issues that can arise? (4)

Basic Overview

Answer 1

The trustees have not acted at all:
o May have failed to distribute the funds or not invested them - clearly a breach of trust.

The trustees may have acted outside their powers:
o This usually involves doing something they shouldn’t with the trust property. They may have made an appointment of capital/income to someone who is not a beneficiary. Maybe they took trust property for themselves. They may have made an unauthorised investment - again clearly breach of trust. Strict liability. Possible relief under TA 1925.

Trustees may have made a poor decision:
o Act is within their powers but they probably shouldn’t have done it. Trustees are under certain obligations when they exercise discretions. Firstly, they are under a fiduciary duty to act honestly and in good faith in the best interests of the beneficiaries. This overall duty has effectively led to certain things that they should take into account: relevant factors when making a decision; must ignore irrelevant factors; may need to take advice from experts.
o Here terminology varies – sometimes it is a breach of fiduciary duty, sometimes because it is a trustee it is called a BoT.
o In addition to this fiduciary duty to act honestly and in good faith they are under a duty to exercise due care and skill. A trustee can be liable for negligence or for a failure to be involved in any decision making. Every trustee is required to be actively involved in the administration of a trust.
o One trustee will not be liable for the wrongful acts of another trustee, but a trustee who does nothing (particularly while the other trustees breach trust) will be liable for doing nothing. The terminology here is even worse – sometimes the duty of care/skill is treated as an aspect of the fiduciary duty. Sometimes a distinction is drawn between the two. Additionally sometimes a failure to act as a reasonable trustee is considered a BoT. Any breach here will take into account a trustees honesty, ability and experience. Also any reliance on professional advice may enable a trustee to avoid liability.

• Trustees may be in breach of the fiduciary duty of loyalty:
o This is an aspect of the fiduciary duty to act honestly and in good faith for the benefit of the beneficiaries. There is a conflict of conflict between the interests of the beneficiaries and the trustee’s personal interests. Strict liability.

Question 2

Duty to Invest - Power?

Answer 2

Powers to invest are either express (found in trust deed), statutory, or given by the court. If a trustee invests outside of these powers it is a BoT.

Question 3

Duty to Invest - Statutory Power?

Trustee Act 2000

Answer 3

Available to any trustee unless restricted or excluded by the trust deed or any legislation. Special rules apply to charitable trusts and pension funds.

The basic power of investment is in s3 of the 2000 Act – 3(2) calls it the ‘general power of investment’. It is very wide – may make any kind of investment they could make if absolutely entitled to the assets of the trust - practically unlimited – very flexible.

S.3(3) has one exception: “The general power of investment does not permit a trustee to make investments in land other than in loans secured on land (but see also section 8 – allows the purchase of land within the UK).

Question 4

Duty to Invest - Court Extension of Power?

Answer 4

The courts have the power to extend investment powers of trustees. The powers under the Trust Act are so wide it is unlikely this will be needed. 3 possibilities may exist where: trustees wish to invest in overseas land or (possibly) where assets do not produce income, or where the powers are restricted by the trust deed.

The trustees can make an investment not otherwise authorised with the consent of ALL of the beneficiaries. Failing this there are 2 statutory provisions where the trustees can apply to the court for extension of their powers but they will have to make out a good case.

Question 5

Duty of Care and Skill in Investment -

s.1 Trustee Act 2000

Answer 5

Clearly there are a wide range of investments available.

Firstly, they are under a duty of care and skill. There is a statutory DoC in the Trustee Act 2000 – applies to most though not all activities of trustees. It definitely applies to trustees who are investing from whatever source they get this power (unless the trust deed says otherwise). S.1 of the Trustee Act contains this: “must exercise such care and skill as is reasonable in the circumstances”. The duty is flexible – to act reasonably in the circumstances – and it takes into account expertise (that a trustee claims to have and that they may be expected to have).

There is no case law on s.1 – but the general view seems to be that the courts’ attitude to the DoC will reflect the case law which predated the act. Before the act there was simply an equitable DoC placed upon trustees (replaced by s1 in most situations but still relevant where the act doesn’t apply). It is also the view that the cases on the equitable DoC will be relevant in interpreting the statutory DoC.

Question 6

Duty of Care and Skill in Investment - Equitable?

Speight v Gaunt

Answer 6

Equitable duty of care: “a trustee ought to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own.”

This in many cases has been replaced by the wording of s.1. What is more relevant of the case law is that a higher than usual DoC is placed on the trustee in relation to the duty of investment.

Question 7

Duty of Care and Skill in Investment - Standard?

Re Whiteley

Answer 7

A trustee must “take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide.” (Lindley LJ)

This higher standard which it is thought will be applied under s.1 to the duty of investment basically mitigates against risk. If the person were considering what investment to make with there own money they may be willing to take risk. But, this standard presupposes investment for those they feel morally bound to provide – suggests you cannot take a risk which may mean you can no longer provide for them. This doesn’t mean you can take no risk at all but the courts have accepted the ‘portfolio’ approach – you don’t look at the risk level of any one investment but of the entire portfolio of investment. You must balance risky with safe investments. The nature, size and purpose of the trust fund will all be relevant.

Question 8

Duty of Care and Skill in Investment -

Investment Criteria?

s.4 Trustee Act 2000

Answer 8

Refers to standard investment criteria.

Refers to the ‘suitability to the trust’ of this type of investment. Relevant to this will be the size of the trust fund, the needs of the beneficiaries, the tax position of the beneficiaries, etc. Also consider the other investments of the trust.

Question 9

Duty of Care and Skill -

Nestle v National Westminster Bank

Answer 9

Trustees have a duty to act even-handedly towards the different classes of beneficiary.

Question 10

Duty of Care and Skill in Investment - Moral Objections?

Cowan v Scargill

Answer 10

Held the paramount duty is to act in the interest of the beneficiaries and this normally means their best financial interest. Trustees should therefore take advantage of the range of investments available. They should choose investments on the basis of their financial worth and not for other reasons. In this case it was held that the social and political views of the trustees and their personal interests are generally irrelevant and cannot be considered (unless provided for in trust deed).

However, financial benefit is not the ONLY criteria (though it is the main one). It is suggested that if the beneficiaries are all of full age and share the same strong views, it would not be in those beneficiaries best interests to invest in particular companies. Such cases will be rare.

Question 11

Duty of Care and Skill in Investment - Moral Objections?

Harries/Bishop of Oxford v The Church Commissioners for England

Answer 11

The starting point is that trustees of a charitable trust are equally under a duty to get maximum financial return. However, it was said that trustees of a charity may, in limited circumstances, refuse to make certain investments even though there may be a risk of financial detriment. Some examples include:
• Investments which would conflict with the object of the charity.
• Investments which might hamper the work of the charity. For example if it might make potential recipients of help from the charity unwilling to accept it or if they may alienate the supporters of the charity. Here the trustees should weigh up difficulties and the risk of financial detriment.

Question 12

Duty of Care and Skill in Investment - Advice?

s.5 Trustee Act 2000

Answer 12

A trustee should get professional advice. Sometimes this is just under the common law as part of their general duty. We saw that trustees must decide on the suitability of investments for the trust and may need to consider the tax consequences. Obviously a tax expert should advise them.

In relation to the duty of investment there is a statutory requirement (Trustee Act 2000) to get advice – s.5.

Who it is appropriate to take advice from will depend on the type of investment and the circumstances.

There is an exception provided if the trustee ‘reasonably concludes that in all circumstances it is unnecessary or inappropriate to [take advice]’. It may be unnecessary if the trustee themselves has the expertise and may be inappropriate if the fund is so small that they cannot afford advice.

The trustee taking the advice must still make their own decision. However, if they take advice from an appropriate person and relies upon it then they are unlikely to be found in breach of duty. Even if he were to be, he probably could rely on a defence under s.61 Trustee Act 1925.

Question 13

Duty of Care and Skill in Investment - Retention?

Public Company -

S4(2) Trustee Act 2000

Answer 13

Imposes an obligation to carry out a periodic review of investments.

Question 14

Duty of Care and Skill in Investment - Retention?

Trust has controlling stake in Private Company -

Bartlett v Barclays Bank Trust Co Ltd (No 1)

Answer 14

Trustees do not have to sit on the board of directors but must make sure they receive all of the information they otherwise would have received had they done so. They cannot simply rely on the directors to run the company properly. They have to be able to take an informed decision. They must be ready and able to take action.

This imposes a significant requirement on trustees.

Question 15

Proving a Breach of Trust -

Nestle v National Westminster Bank plc

Answer 15

Trustee was a corporate trustee (the bank) and had made significant mistakes misunderstanding the trust, not taking advice and not reviewing investments. The decisions were arguably made for the wrong reasons but it could not be shown that a prudent trustee would have made better ones.

The case makes it very hard to establish a BoT – it has been criticised as people say that the decisions of a good trustee should be relevant not for deciding liability but quantifying loss. Beneficiary has to prove they have suffered loss because of an investment decision which cannot be justified.

Question 16

Personal Liability of a Trustee

Answer 16

Cannot recover twice for the same loss.

Question 17

Personal Liability of a Trustee - Equitable Compensation?

AIB Group v Redler

Answer 17

Affirmed Target Holdings v Redferns. Beneficiary entitled to compensation for any loss they would not have suffered ‘but for’ the breach in question - compensation is assessed at the date of judgment and the rules may require a payment into the trust fund.

If the trust is already at an end or it arose through a commercial arrangement (such as in Target Holdings) then the equitable compensation may simply go directly to the beneficiaries. Must look at the specific breach and loss in question.

Question 18

Personal Liability of a Trustee - Equitable Compensation?

Swindle v Harrison

Answer 18

The AC applied the same basic rule as in AIB Group v Redler to a breach of fiduciary duty (rather than BoT).

Comments here appeared to suggest that in cases of fraud by the trustee there is no need to prove causation. The court will assume it.

If the loss would have happened anyway then this will fail the “but for” test.

Question 19

Personal Liability of a Trustee - Equitable Compensation?

Canson Enterprises Ltd v Boughton & Co

Answer 19

Canadian case. Causal link cannot be too tenuous - additionally this chain can be broken. Goes along with dicta from Millet LJ in Bristol and West Building Society v Mothew - however this is not Binding, nor English law.

Question 20

Breach - Unauthorised Profit

Dimes v Scott

Answer 20

Set-off between wrongful transactions? No. If you make £5 wrongfully and then proceed to lose £10 in another unauthorised transaction, you cannot set-off these amounts.

Question 21

Breach - Unauthorised Profit - Exception?

Fletcher v Green

Answer 21

Where the profit/loss arises from the same transaction/BoT. Here they had made an unauthorised investment and sold it as a loss. The proceeds were paid into court and invested by the court and a gain was made. The court said the trustee could set the gain against the loss but gave no reasoning for this decision. The case is explained on the basis that the facts involved a continuing BoT relating to the same property.

Question 22

Breach - Unauthorised Profit - Exception?

Bartlett v Barclays Bank Trust Company

Answer 22

Took a flexible approach to the exception though. This was the case where trustees failed to oversee the directors of a company in which the trust had shares. They had invested in two property development schemes, one was a success and the other a disaster. It was held the trustee could offset the gain from the successful investment from the loss from the bad one.

There is clearly less of a connection between the transactions than in F v G thought they stemmed from the same policy (speculative investment) and in fact part of the profit from the good investment was used to finance the unsuccessful one. The profit/loss clearly didn’t come from the same transaction, in general terms you could say they come from the same wrongful course of conduct. It clearly seems to be flexible in allowing some set off.

Question 23

Liability Between Trustees -

Civil Liability Contribution Act 1978 – s1(1)

Answer 23

Where 2+ trustees are guilty of a breach which has led to the same loss they will be jointly and severally liable for it. If one trustee alone is sued and another helped to cause it they may seek at least a contribution from the other.

s.1(1) CLCA 1978 allows for any person liable in respect of any damage suffered by another to recover a contribution from any other person liable for the same damage.
The court has a discretion as to the respective contribution required. It will be what is just and equitable given each person’s responsibility for the damage in question.

Question 24

Liability Between Trustees -

Indemnity? (4)

Answer 24

• Where one trustee is guilty of fraud.
• Where a trustee is a solicitor and has a controlling influence: Head v Gould
• Where a trustee has exclusively benefited from the breach of trust.
• Where a trustee is a beneficiary and his interest is capable of being impounded: Chillingworth v Chambers

Here the impounded interest will be used first to satisfy the claim, thereafter the trustees share liability.

Question 25

Defences -

Beneficiary Involved in Breach?

Re Pauling’s ST

Answer 25

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.

Question 26

Defences -

Impounding?

S62(1) Trustee Act 1925

Answer 26

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).

Question 27

Defences -

Exemption Clauses

s.61 Trustee Act 1925

Answer 27

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.”

Question 28

Fiduciaries -

Bristol and West Building Society v Mothew

Answer 28

“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

Question 29

Fiduciaries -

Reading v A-G

Answer 29

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.

Question 30

Fiduciaries - Opportunities Arising from Position

Regal (Hastings) Ltd v Gulliver

Answer 30

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.”

Question 31

Fiduciaries - Opportunities Arising from Position

Boardman v Phipps

Answer 31

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.

Question 32

Fiduciaries - Opportunities Arising from Position

Aas v Benham

Answer 32

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.

Question 33

Fiduciaries - Opportunities Arising from Position

Industrial Development Consultants Ltd v Cooley

Answer 33

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.

Question 34

Fiduciaries - Opportunities Arising from Position

Is the law too strict?

Murad v Al-Saraj

Answer 34

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.

Question 35

Fiduciaries - Opportunities Arising from Position

Is the law too strict?

Queensland Mines v Hudson

Answer 35

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)

Question 36

Fiduciaries - Opportunities Arising from Position

Is the law too strict?

Final Points

Answer 36

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.

Question 37

Remedies for Unauthorised Profit -

FHR European Ventures LLP v Cedar Capital Partners LLC

Answer 37

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.

Question 38

Remedies - Overall

Answer 38

• 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).