Liability in Equity and Trusts

Question 1

What are the Trustee Duties of a Trustee?

Answer 1

• To comply with the Trust Instrument.
• To act in accordance with prescribed standards of care and skill.

Question 2

What are the Fiduciary Duties a Trustee would be Beholden to?

Answer 2

• Duty of Prudence.
• Duty to Act Personally.
• Duty of Confidentiality.
• Duty to Act in Good Faith.
• Duty of Undivided Loyalty.
• Duty to Act Independently.
• Duty to Preserve Trust Property.
• Duty to Avoid Conflicts of Interest.
• Duty to Avoid Unauthorised Profits.
• Duty to Account and Provide Information.
• Duty of Impartiality toward all Beneficiaries.

Question 3

Regarding the Duty of Prudence, what is the Duty’s Scope?

Answer 3

Management of Trust Property must be done with the care, skill, and diligence of a Prudent Person managing its own affairs.

The standard is generally higher for Professional Trustees.

Question 4

Regarding the Duty to Act Personally, what is the Duty’s Scope?

Answer 4

The Trustee must perform its Duties personally, unless Statute or the Trust Instrument permits Delegation. Usually:

• Administrative decisions may be Delegated; but
• Core Fiduciary Decisions cannot .

Question 5

Regarding the Duty of Confidentiality, what is the Duty’s Scope?

Answer 5

• Any Information obtained during Trusteeship.
• Disclosure is only permitted if authorised by Law, a Beneficiary, or the Trust Instrument.

Question 6

Regarding the Duty to Preserve Trust Property, what is the Duty’s Scope?

Answer 6

The Trustee must:

• Protect and preserve the Trust Property, preventing loss or damage; and
• Take appropriate measures to safeguard the Assets.

This may entail insurance, maintenance, or legal action.

Question 7

Regarding the Duty to Avoid Unauthorised Profits, what is the Self-Dealing Rule?

Answer 7

The Trustee cannot buy Trust Property or sell its own Property to the Trust, unless expressly authorised.

Breach may result in Rescission at the Beneficiary’s instruction.

Question 8

Regarding the Duty to Avoid Unauthorised Profits, what is the Fair Dealing Rule?

Answer 8

Any Transaction between the Trustee and a Beneficiary must be fair, with the Trustee fully Disclosing all relevant information.

Breach may result in Rescission at the Beneficiary’s instruction.

Question 9

Can a Trustee Exploit an Opportunity arising from its Position?

Answer 9

No, even if its Principal cannot benefit therefrom.

Question 10

Under what Circumstances may a Trustee deviate from its Duties?

Answer 10

• Statute.
• Authorisation under the Trust Instrument.
• Fully-informed Consent from all Beneficiaries.

Question 11

What are the General Remedies for Breach of a No-Profit Duty?

Answer 11

At the Principal’s election:

• Account of Profits; or
• Constructive Trust over Profits or Assets.

Question 12

Does the Court have Discretion to Pardon a Trustee’s Breach of Trust?

Answer 12

Yes, but the Court will only use it if it believes the Trustee:

• Acted honestly and reasonably; and
• Ought fairly to be excused for the Breach of Trust.

This is a high standard.

Question 13

What is the Limitation Period for a Breach of Trust Claim?

Answer 13

Beneficiary with Interests Vested in Possession:

• 6 years from the Breach.

Beneficiary with Interests Vested in Interest:

• 6 years from when its Interest Vests in Possession.

Fraud or Proprietary Claims:

• No Limitation.

Question 14

Aside from the Limitation Period, what would Bar a Benficiary from Claiming against a Trustee?

Answer 14

• Consent to the Breach.
• Acquisence toward the Breach.

Question 15

Aside from Barring a Claim, what are the Consequences of Consenting to a Breach for a Beneficiary?

Answer 15

• The Court may impound the Beneficiary’s Interests to satisfy the Claims of other Beneficiaries; but
• It will only do so if it is just.

Question 16

What are the Remedies for a Breach of Trust?

Answer 16

• Removal of the Trustee.
• Compensation for Lost Property.
• Recovery of Misapplied Property.
• Compensation for Loss to the Fund.

Question 17

Regarding Remedies for a Breach of Trust, how is Loss to the Fund assessed?

Answer 17

On a But For Basis up to the Date of Trial.

Question 18

Regarding Remedies for a Breach of Trust, can the Trustee Offset Losses it has caused?

Answer 18

Yes, but only against Profits made from the Breach.

Question 19

What is the Liability of Trustees vis-à-vis one another?

Answer 19

Joint and Several Liability.

Question 20

How can a Trustee Protect itself from Liability from the outset?

Answer 20

• Insurance.
• Ouster Clauses, to remove certain Duties.
• Exemption Clauses, to remove Liability under certain Duties.

Question 21

How can a Trustee Protect itself from Liability during its Term?

Answer 21

• Seek Legal Advice.
• Seek Court Direction.
• Seek Fully-Informed Consent from all Capable, Adult Beneficiaries.
• Surrender Discretion to the Court if there is a Deadlock or a Conflict of Interest.

Question 22

How can a Trustee Minimise its Liability after a Breach?

Answer 22

• Statutory Relief.
• Third-Party Claims.
• The Equitable Doctrine of Laches.

Question 23

How can a Third-Party Claim help a Trustee minimise its Liability?

Answer 23

By demanding a Contribution from the Third Party for the Damage caused by the Breach.

Third Parties can be Co-Trustees, Advisors, or any other Party that had a role in the Breach.

Question 24

What is the Elements of the Equitable Defence of Laches?

Answer 24

• The Beneficiary knew of the Breach.
• The Beneficiary unreasonably delayed in Suing.
• It would be Unconscionable to allow the Beneficiary to enforce its Rights.

Question 25

How can a Trustee Protect itself from the Possibility that a Missing Beneficiary one day Returns?

Answer 25

• Insurance.
• §27 Notice.
• Fund Retention.
• Benjamin Order.
• Payment in Court.
• Indemnity from Beneficaries.

The Will itself may also contain exemption clauses.

§27 Notice must be in the Gazette and Newspaper local to the Deceased’s address.

Question 26

What is a §27 Notice?

Answer 26

Prerequisites:

• The Trustee must post a Public Notice of its intention to Distribute the Trust;
• In the Gazette, Newspapers local to Trust Land, and any other relevant publications;
• At least two months prior to Distribution.

Consequences:

• The Trustee can distribute the Trust as things stand.
• If an Unknown Beneficiary later appears, it can claim from other Beneficiaries, but cannot Sue the Trustee.

§27 Notice must be in the Gazette and Newspaper local to the Deceased’s address.

Question 27

What is Fund Retention?

Answer 27

The Trustee sets aside and manages a portion of Trust Assets to in consideration of Claims from Missing Beneficiaries.

This is risky, as it can give rise to Claims of Improper Distribution.

Question 28

What is a Benjamin Order?

Answer 28

Prerequisites:

• The Trustee must perform a full inquiry into a Missing Beneficiary’s whereabouts, at proportionate costs, finding no reasonable prospects of discovery.

Consequences:

• The Trustee can distribute the Trust as things stand.
• If the Beneficiary later appears, it can claim from other Beneficiaries, but cannot Sue the Trustee.

Question 29

What is a Payment into Court?

Answer 29

Prerequisites:

• The Trustee demonstartes genuine doubt as to the whereabouts of a Missing Beneficiary.
• The Trustee pays the Beneficiary’s Unclaimed Share into Court.

Consequences:

• The Trustee is no longer responsible for the Share.
• If the Beneficiary later appears, it can claim its Share from the Court, but cannot Sue the Trustee.

This is a last resort.

Question 30

What are the Advantages of a Proprietary Claim for Breach of Trust?

Answer 30

• It is independent of Fault.
• It is independent of the Defendant’s Liability.
• It can capture value increases in the Traceable Proceeds.

Question 31

What are Following, Tracing, and Claiming?

Answer 31

Following:

• The process of tracking Original Trust Property as it moves between hands.

Tracing:

• The process of identifying new Assets that have been substituted for Original Trust Property.

Claiming:

• The process of asserting Personal or Proprietary Rights over Misapplied Trust Property or Traceable Proceeds.

Followed Assets can then be Claimed.

Question 32

When can a Claimant use the Doctrine of Following, Tracing, and Claiming?

Answer 32

• The Claimant has an Equitable Proprietary Interest in the given Asset.
• The Asset was held by a Fiduciary of the Claimant.

Question 33

What are the Two Types of Mixed Funds?

Answer 33

• Wrongful Mixture: A Pool comprising Misapplied Trust Funds and the Fiduciary’s own Funds.
• Innocent Mixture: A Pool comprising Misapplied Trust Funds and an Innocent Party’s own Funds.

This also applies to the Mixture of Tangible, Fungible Goods.

Question 34

What are the Four Types of Equitable Proprietary Claims a Claimant can Assert over a Followed or Traced Property?

Answer 34

Beneficial Ownership of the Traced Asset:

• This is only possible if the Asset was purchased exclusively using Unmixed Funds.

Proportionate Share in the Traced Asset:

• This is possible if the Asset was purchased using Mixed Funds.
• This is the only available Remedy if Innocent Mixed Funds were exclusively used.

Equitable Lien over the Traced Asset:

• This is possible regardless of how the Asset was purchased, and is most useful if the Asset has decreased in value.

Subrogation:

• This is possible if Misapplied Trust Funds or Traceable Proceeds were used to satisfy a Debt.
• It allows the Claimant to assume the Creditor’s Rights vis-à-vis the Trustee.

Question 35

What is the Main Defence to an Equitable Proprietary Claim?

Answer 35

Bona Fide Purchaser for Value without Notice.

Question 36

What happens if the Trustee Exclusively uses Wrongfully Mixed Funds to Acquire an Asset?

Answer 36

The Asset is a Traceable Proceed of the Misapplied Funds because it is a direct substitute.

Question 37

What happens if the Trustee Partially uses Wrongfully Mixed Funds to Acquire an Asset?

Answer 37

The Court will use one or more of the following Models based on the facts:

• The Hallett Model.
• The Oatway Model.
• The Shalson Model.

Question 38

What is the Hallett Model of Tracing?

Answer 38

Legal Principle:

• The Trustee is presumed to have spent its Personal Funds first.

Platonic Fact Pattern:

• The Trustee adds £100 of Misapplied Funds into an empty Personal Account (now £100).
• The Trustee adds £100 of Personal Funds into the Account (now £200).
• The Trustee Withdraws £100 and dissipates it (now £100).
• The Beneficiary can Claim the remaining £100.

Dissipation means the Funds are Untraceable.

Question 39

What is the Oatway Model of Tracing?

Answer 39

Legal Principle:

• The Trustee cannot defeat the Beneficiary’s Claim by asserting the order of Withdrawal.

Platonic Fact Pattern:

• The Trustee adds £100 of Misapplied Funds into a Personal Account with £100, (now £200).
• The Trustee Withdraws £100 to purchase Shares (now £100).
• The Trustee Withdraws £100 and dissipates it (now £0).
• The Beneficiary can Trace and Claim the Shares.

Question 40

What is the Shalson Model of Tracing?

Answer 40

Legal Principle:

• The Beneficiary can cherry-pick the most profitable Assets when only competing against the Trustee.
• Cherry-picking is barred if it would prejudice Third Parties, usually Creditors.

Platonic Fact Pattern:

• The Trustee adds £100 of Misapplied Funds into a Personal Account with £100 (now £200).
• The Trustee Withdraws £100 to purchase Shares (now £100).
• The Shares appreciate in value.
• The Beneficiary can claim the appreciated Shares instead of the Funds in the Account.
  • If the Shares had cost £50, the Beneficiary could further Claim £50 from the Account.

Question 41

What happens if the Trustee uses Innocently Mixed Funds outside of a Current Account to Acquire an Asset?

Answer 41

Legal Principle:

• Withdrawals are attributed proportionately between all Contributors.

Platonic Fact Pattern — Equal Contribution:

• The Trustee Mixes £100 from Trust A with £100 from Trust B (now £200).
• The Trustee Withdraws £100 and dissipates it (now £100).
• The Dissipated Funds are attributed equally between the Trusts because their inputs.
• Each Trust can only Claim £50.

Platonic Fact Pattern — Unequal Contribution:

• The Trustee Mixes £300 from Trust A with £100 from Trust B (now £400).
• The Trustee Withdraws £100 and dissipates it (now £300).
• The Dissipated Funds are attributed at a 3:1 Ratio between the Trusts because their inputs.
• Trust A can only Claim £225. Trust B can only Claim £75.

Question 42

What happens if the Trustee uses Innocently Mixed Funds within a Current Account to Acquire an Asset?

Answer 42

• By default, the Court will use the Rule in Clayton’s Case; however
• If it is disapplied, the Court will use the Rolling Chage Method; however
• If it is too expensive or complicated, the Court will use the Pari Passu Ex Post Facto Method.

Question 43

What is the Rule in Clayton’s Case?

Answer 43

Legal Principle:

• First In, First Out.
• Withdrawals are attributable in order of Deposit.

Platonic Fact Pattern:

• The Trustee adds £100 of Misapplied Funds from Trust A into a Current Account (now £100).
• The Trustee adds £100 of Misapplied Funds from Trust B into the Current Account (now £200).
• The Trustee Withdraws £100 to purchase Shares (now £100).
• The Trustee adds £100 of Misapplied Funds from Trust C into the Current Account (now £200).
• The Trustee Withdraws £100 and dissipates it (now £100).
• Since Trust A’s Deposit was first, it is attributed to the first Withdrawal, i.e. the Share Purchase.
• Since Trust B’s Deposit was second, it is attributed to the second Withdrawal, i.e. the Dissipation.
• Since Trust C’s Deposit was third, it is attributed to the Remainder because there were no further Withdrawals.

Question 44

What is the Criteria for Diapplying the Rule in Clayton’s Case?

Answer 44

The Rule produces an outcome that is:

• Unjust;
• Impracticable; or
• Contrary to the Intentions of the Contributing Parties.

The Rule has been disapplied in every case it has been considered since 1992.

Question 45

What is the Rolling Charge Method?

Answer 45

Legal Principle:

• Trust Assets, Traceable Proceeds, and Withdrawals are attirbuted between Contributors based on their Contributions at the time of each Transaction.

Platonic Fact Pattern:

• The Trustee adds £100 of Misapplied Funds from Trust A into a Current Account (now £100).
• The Trustee adds £100 of Misapplied Funds from Trust B into the Current Account (now £200).
• The Trustee Withdraws £100 to purchase Shares (now £100).
• The Trustee adds £100 of Misapplied Funds from Trust C into the Current Account (now £200).
• The Trustee Withdraws £100 and dissipates it (now £100).
• Because Trusts A & B contributed equally before the Share Purchase, the Withdrawal is attributed equally.
• Because Trust C’s contibution is twice that of Trusts A or B, given the Share Purchase, the Remainder is attributed:
  • £25 to Trust A.
  • £25 to Trust B.
  • £50 to Trust C.

Question 46

What is the Pari Passu Ex Post Facto Method?

Answer 46

Legal Principle:

• All Trust Assets, Traceable Proceeds, and Withdrawals are attirbuted between Contributors according to Total Contributions after the fact.

Platonic Fact Pattern:

• The Trustee adds £100 of Misapplied Funds from Trust A into a Current Account (now £100).
• The Trustee adds £100 of Misapplied Funds from Trust B into the Current Account (now £200).
• The Trustee Withdraws £100 to purchase Shares (now £100).
• The Trustee adds £100 of Misapplied Funds from Trust C into the Current Account (now £200).
• The Trustee Withdraws £100 and dissipates it (now £100).
• Because each Trust contributed an equal sum of £100, everything is attributed equally between them.

Question 47

What are the Elements of Dishonest Assistance?

Answer 47

Existence of a Trust:

• A Valid Trust existed at the material time.

Breach of Trust:

• The Trustee Breached the Trust.

Faciliation by the Defendant:

• The Defendant facilitated the Trustee’s Breach, usually by helping plan, procure, commit, conceal, or instigate the Breach.
• The assistance must be more than minimal, meaning it made the Breach easier than otherwise.

Dishonesty by the Defendant:

• The Defendant’s assistance was Dishonest, judged by contrasting:
  • Its Actual knowledge or belief; against
  • The standards of ordinary, honest people.

Question 48

What are the Remedies for Dishonest Assistance?

Answer 48

Liability for Losses:

• The Claimant must show the Defendant’s conduct assisted the Breach, thereby helping cause its Loss on a But For Basis.
• If successful, the Defendant would liable for the Claimant’s Loss.

Liability for Profits:

• The Claimant must show the Defendant’s participation was the real or effective cause of the Profits beyond a But For Basis.
• The Court will only grant this Remedy if it is just, equitable, and proportionate.

Question 49

What are the Elements of Knowing Receipt?

Answer 49

Misapplication of Trust Property:

• A Trustee Misapplies Trust Property under a Valid Trust.

Beneficial Receipt by the Defendant:

• The Defendant, in its own right, Receives the Misapplied Property or its Traceable Proceeds for its own benefit.
  • This includes Receipt on the Defendant’s behalf by an Agent.

Persistence of the Claimant’s Proprietary Interest:

• The Claimant’s Equitable Proprietary Interest persists after the Misapplication.
• If the Interest is somehow Extinguished, such as by Overreaching, the Claim fails.

Unconscionability of Retention:

• The Defendant has Knowledge of the circumstances that makes retention Unconscionable.
• Knowledge may be acquired at or after Receipt, but must be present before Disposal. If it is not, the Claim fails.

Question 50

Regarding Knowing Receipt, when is a Bank considered to Receive Property Beneficially?

Answer 50

• When payments reduce or discharge a Customer’s Debt to the Bank; but
• Not when payments credit a Customer’s account in credit.

Question 51

What is the Baden Scale of Knowledge?

Answer 51

LVL 1, Actual Knowledge:

• Direct, personal awareness of the facts.

LVL 2, Wilfully Shutting One’s Eyes to the Obvious:

• Deliberate ignorance of obvious facts.

LVL 3, Wilfully and Recklessly Failing to Inquire:

• Conscious decision not to inquire when a reasonable person would.

LVL 4, Knowledge of Circumstances Indicating Facts:

• Awareness of circumstances that would suggest the truth to an honest person.

LVL 5, Knowledge Putting an Honest Person on Inquiry:

• Awareness of facts that would prompt a reasonable person to investigate further.

Question 52

What are the Implications of the Baden Scale on Findings of Unconscionability?

Answer 52

LVLs 1-3:

• Unconscionability is found without needing to prove the Defendant knew the Transaction was likely in Breach

LVLs 4-5:

• Unconscionability is only found if a reasonable person, armed with the same facts:
  • Would have appreciate a likely Breach.
  • Would have made inquiries revealing the probability of a Breach.

Question 53

What are the Remedies for Dishonest Assistance?

Answer 53

• Restitution of Property.
• Equitable Compensation.
• Personal Liability to Account as a Constructive Trustee.