Ls 19, 20 Breach of Trust Flashcards
Re Lucking’s Will Trust [1968] 1 WLR 866
Where there has been a breach of trust, the beneficiary is entitled to ‘falsify’ or ‘surcharge’ the account:
(a) The account is ‘surcharged’ where the breach does not involve a misapplication of trust property, e.g. where the trustee has been negligent in making an investment. In this case, the trustee must compensate the trust fund to the value of the losses his breach has incurred.
(b) The account is ‘falsified’ where there has been a misapplication of funds, e.g. where the trustee has made an unauthorised investment or made a payment from the trust fund to a person not entitled under the terms of the trust. In this case, the trustee must restore the trust fund – he must return the actual property misapplied or the same kind of property.
*Bristol and West Building Society v Motthew [1998] Ch 1
“Equitable compensation for breach of the duty of skill and care resembles common law damages in that it is awarded by way of compensation to the plaintiff for his loss. There is no reason in principle why the common law rules of causation, remoteness of damage and measure of damages should not be applied by analogy in such a case.” (per Millett LJ)
(i) Where the account is surcharged (i.e., where there has been, for eg., negligence), the beneficiary must prove both factual and material causation. Factual causation concerns the loss flowing from the breach; material causation considers whether an equivalent loss would have occurred in any event: if the loss would have occurred in any event, there is no material causation.
(ii) Where the account is falsified (i.e., where there has been, for eg., a misapplication of funds), the beneficiary has to prove factual causation only.
(iii) Note, however, that in Target Holding v Redferns, the House of Lords did not make this distinction but, instead, distinguished between bare (i.e., commercial trusts) and family trusts. In the former case, there needs to be proved both factual and material causation, whereas in the latter, only factual causation has to be proved.
Bartlett v Barclays Bank [1980] Ch 515
• Brightman J gave a comprehensive discussion of the duties of trustees in connection with companies whose shares are part of the trust property.
• The rule, or law principle in this case had already been accepted in Speight v Gaunt.
• Significance
o The rule from this case bears a striking similarity to that enacted in s 1 Trustee Act 2000. It can however, be excluded in a trust instrument (sch 1, para 7, TA 2000). The Act essentially adopted and strengthened Brightman J’s principles.
• Facts
o Barclays Bank was the sole trustee of the Bartlett trust. The sole asset of the trust was 99.8% of the issued shares in the family company. On the company board were two surveyors, an accountant and a solicitor. The trustee appointed none. In an attempt to raise cash, the trust appointed merchant bankers to consider taking the company public. The bankers advised that a public offering would be much more successful if the company expanded its business from managing property to developing property as well. Barclays Bank as trustee agreed to this policy (so long as the income available to the beneficiaries was not affected) The board then embarked on speculative developments, one of which ended in a disaster when planning permission could not be obtained for a large development, and the trust suffered a significant loss.
• Held
o Brightman J held that the bank, as a trustee, had not discharged its duty as trustee in failing to supervise the new ventures of the company. He held that, given the size of the shareholding, the bank should have obtained the fullest information on the conduct of the business, and it was not sufficient to rely merely on the supply of information that they received in the ordinary course as a shareholder. Their defence, that they honestly and reasonably believed the board of directors to be competent and capable of running the business was rejected.
o The court reiterated older propositions as to the duty of trustees, ‘to conduct the business of the trust with the same care as an ordinary prudent man of business would extend to his own affairs.’ However, the implication was that where a prudent man of business holds the majority of shares in a company, he would actively engage himself in the company’s undertakings rather than leaving it to the board. Brightman J distanced the court from suggestions made in Re Lucking’s Will Trusts that a controlling shareholder should insist upon being represented on the board, although he agreed that this would be one way in which the trustee could ensure that all of the necessary information was available to him.
o Brightman J
♣ ‘the bank failed in its duty whether it is judged by the standard of the prudent man of business or of the skilled trust corporation. The bank’s breach of duty caused the loss which was suffered by the trust estate. If the bank had intervened as it could and should have, that loss would not have been incurred. By ‘loss’, I mean the depreciation which too place in the market value of the BT shares.’
• Significance
o This rule bears a striking similarity to that enacted in s1 TA 2000. The duty of care, can however, be excluded. The Act essentially adopted and strengthened Brightman J’s principles.
**Target Holdings v Redferns [1995] 3 WLR 352; [1995] 3 ALL ER 785
• Concerns the test for causation and the extent of compensation for breaches of trust.
• Facts
o Target Holdings Ltd gave £1,525,000 to Redferns solicitors, ultimately to be loaned to Crowngate Developments Ltd to buy property in Hockley.
o Target Holdings Ltd would get a mortgage over the property that was bought, and Redferns were under instructions not to release the money until the purchase was complete, and the mortgage was executed.
o Until then, the solicitors were to hold the money on trust for Target Holdings Ltd. Crowngate, however had arranged a scheme to make a fraudulent profit on the property which it was buying at £775,000, while reporting that it was worth £2m.
o Breaching the terms of the agreement, Redferns in fact released £1,490,000 to a company called Panther Ltd before the purchase was completed. The sale went through, but the venture turned out to be unsuccessful.
o Crowngate failed to repay the loan, and went into liquidation, meaning that Target Holdings Ltd only ever recovered £500,000 from the sale of the property.
o Target Holdings Ltd sued Redferns solicitors, arguing that it had a duty to account for the money it had wrongly paid away. Redferns argued that, even though it had breached the trust this had nothing to do with the loss that Target Holdings Ltd had incurred. The loss was not caused by the breach.
o Warner J held that Redferns breached its trust. In the CA Hirst LJ and Peter Gibson LJ held that when Redferns misapplied the trust property, this generated an immediate liability as trustees to reconstitute the trust fund. That did not depend on showing that the loss would not have been suffered but for the breach.
• Held
o The HL held that Redferns did not have to repay the £1,490,000, because the loss to the trust would have been the same. Only losses that were caused by Redfern’s breach of the trust terms could be recovered.
o Although the test in the law of tort might differ, and allow remoteness limits or have dissimilar causation outcomes, some causal connection was needed between the fiduciary’s breach of trust and the loss that resulted to the claimant. So because Redfern’s payment away of the trust property early had nothing to do with the ultimate losses of Target Holdings Ltd, they were not liable to repay that money.
o Lord Browne-Wilkinson –
♣ ‘At common law there are two principles fundamental to the award of damages. First, that the defendant’s wrongful act must cause the damage complained of. Second, that the plaintiff is to be put ‘’in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation’’.’
Swindle v Harrison [1997]4 All ER 705
• Concerns remedies for breach of trust.
• Facts
o Mr Swindle, from a financial advice firm, passed on a bridging loan to Ms Harrison to buy a second home. She already had a mortgage on her own home. He failed to disclose to her that Ms Harrison’s son would be unable to get a loan to help with the purchase, and that Mr Swindle would profit from making the loan.
o Later on, the value of the property dropped. She sued Mr Swindle, and other members of the firm, for the loss of value of the home’s equity, which resulted from the purchase, arguing that following Brickenden v London Loan, Mr Swindle was liable to restore her to a position she was in when the breach occurred, regardless of whether she would still have made the purchase if full disclosure had been made.
• Held
o The CA held that the stringent test in Brickenden did not apply to equitable breaches of duty, unless it amounted to fraud. Otherwise it was a ‘but for’ test, like in Mothew. There was no fraud and Ms Harrison would have taken the loan even if all facts had been fully disclosed. She could not recover the drop in house price from the solicitors. Evans LJ said that where a defendant commits a fraudulent breach of duty, the beneficiary can recover damages to be in the position before the breach, in the ‘restitutionary’ measure, rather than following the ‘stringent test for causation.’ This was not in the position as if a breach had not occurred.
o Mumery LJ and Hobhouse LJ, held that Target Holdings applies to all breaches of trust, whatever the nature of the duty breached or the manner of its breach, so limiting claims for compensation or restitution when the loss or gain is caused by the breach.
*Bristol and West Building Society v Mothew [1998] Ch 1
• Fiduciary law and professional negligence case, concerns a solicitor’s duty of care and skill, and the nature of fiduciary duties.
• The case is globally cited for its definition of a fiduciary and the circumstances in which a fiduciary relationship arises.
• Facts
o Mr Mothew was a solicitor who had acted for both borrower and lender in a mortgage transaction relating to the purchase of a residential property. It was alleged that he negligently told the building society that there was no second charge on the house when the mortgage agreement was signed.
o At the time of reporting to the building society and requesting its funding, unbeknown to Mr Mothew, the borrower had a small bank overdraft facility limited to £2,000.
o After completion of the purchase and mortgage (at which time the lender’s fund were applied to the transaction) but before the transactions were registered at Land Registry Mr Mothew was approached by the borrower’s bankers [Barclays] to say that they were granting a second mortgage facility to the borrower and seeking that their second charge be registered at Land Registry.
o The second charge documentation had been prepared and executed by the borrower at the bank’s premises. By registering the second charge documentation contemporaneously with the purchase and first mortgage, there was a waiver of fees payable to the Land Registry thereby saving expenses for the borrower than if the second charge had been registered separately later.
o The Cheshunt Building Society were asked by Mr Mothew to consent to registration of the second charge which they did and they were also given formal notice of the second charge which they acknowledged.
o Mr Mothew delayed sending the application to the registry whilst the lender’s consent was being obtained since it was also required to be lodged at the Land Registry.
o At the time of their default the borrower’s overdraft facility had risen from £2,000 to £3,350. The housing market collapse, and the homeowners defaulted on their mortgage with the building society. To realise their money, the building society had the property sold off for £53,000 in 1991, a considerable time after they had taken possession of it. The lender claimed that if it had known of the borrower’s overdraft facility, it would not have granted its mortgage to the borrower. They sued Mothew.
o Mothew –
♣ He argued that Bristol and West had been aware of the second charge and even if it had not known, it would still have proceeded with the transaction and suffered the same loss, because in 1988 when the transaction was going through, the market was buoyant and the extent of the borrower; overdraft facility was commonplace. This would mean no damages would be recoverable at common law, for there would be no causal connection with Mothew’s alleged negligence and the building society’s loss. At first instance he was unsuccessful.
♣ Insurers referred the case to the CA – the CA found no penalty or payment was required to be paid by Mr Mothew or his insurers. This case is important because the CA set out authority (precedent) for a solicitor’s ‘fiduciary duty’ to a lender in the application of funds drawn down by the solicitor irrespective of negligence being established. It has never in this particular case established any negligence, default or breach of duty of care by Mr Mothew.
• Held
o Millett LJ allowed Mr Mothew’s appeal, and held that a causal link needed to be established.
o Just because the solicitor himself had fiduciary duties to his clients, that did not mean that every breach of duty of care was a breach of a fiduciary duty.
o When considering breaches of trust, causation need not be demonstrated, since these are concerned with acts of bad faith or breaches of the duty of loyalty that result in restitutionary damages. The building society had been fully informed and had consented to Mothew’s course of action, which broke the causal link.
o Also, a claim for breach of trust was not accepted, because Mothew’s misrepresentations did not lead him outside his authority to apply the mortgage money.
o See full judgement + Wikipedia for more details.
Collins v Brebner [2000] Lloyd’s Rep. P.N. 587; 2000 WL 395
• Summary
o B, a solicitor, appealed against a decision that he had fraudulently and contrary to instructions given to him by C caused the payment of funds relating to the purchase of a controlling shareholding in a Spanish company to be paid solely to I, a shareholder in that company. B contended that (1) the judge had been wrong to characterise his conduct as fraudulent, and (2) C’s action was statute barred as it had been commenced outside the prescribed time limit. C also appealed against the judge’s finding that he was not entitled to the entire amount which he had claimed.
o The court held that (1) the judge had made finding of fact as to B’s conduct and had been correct, on the evidence, to describe his conduct as fraudulent; (2) the judge’s finding that C did not discover B’s fraud until the filing of B’s defence and that time did not begin to run for limitation purposes until then could not be challenged, and (3) the judge had correctly concluded that C could not recover the principal losses which he had claimed since he had received the shares which he had paid for.
Hulbert v Avens [2003] EWHL 76; 2003 WL 116999; (2003) 100 (12) LSG 301
• Equitable compensation for breach of trust was to be assessed on the loss suffered by a trust fund or beneficiaries as at the date of judgment and not the date of the breach.
• Trust beneficiaries pursued an action against trustees for alleged breach of trust arising from a failure to pay sums to the Inland Revenue in respect of CGT liability as and when due. The breaches in question were admitted and the court was required to determine the extent of the contribution payable by each defendant trustee. During the currency of the trust certain monies had been placed on deposit, upon which interest had accrued.
• The claimant beneficiaries contended that when paying the outstanding CGT due, the trustees had wrongly taken credit for the amount of interest which had accrued upon the deposit funds as against the sums required to be paid in order to remedy the breach of trust in circumstances where those monies on deposit would not have been available to earn interest had they been paid to the Revenue as CGT when due.
• Held
o Giving judgment for the defendants, that equitable compensation fell to be assessed as at the date of trial in the light of all the information then available as to whether the relevant trust fund or, if by the date of trial the trust had come to an end, the beneficiary had actually sustained a loss as a result of the breach of trust and, if so, the amount of such loss. Target Holdings v Redferns, applied.
o On the facts of the instant case each of the beneficiaries had ultimately received more from their individual trust funds than they would have done but for the admitted breaches of trust having regard to the payments made on behalf of the defendants. In those circumstance it would not be just, fair or equitable to award any additional compensation.
Fletcher v Green (1864) 33 Beav 426
- Trust money was settled on a married woman for life, for her separate use, without power of anticipation, but with power to her to appoint the capital after her death by deed. The trustees lent part of the trust money to the husband on mortgage, and she consented to the investment by the mortgage deed. Part of the trust money having thereby been lost: Held that the wife had not, by executing the deed, appointed the reversion, so as to make it liable for the loss.
- Trustee committed a breach of trust by lending trust moneys on mortgage. They instituted a suit to realize their security, in which property was sold and the produce paid into Court and invested. In taking the accounts they were debuted with the cash and not with the investment. On further directions, the stock was ordered to be sold, and the produce, after payment of the costs, was paid to the trustees. The funds having risen, there was a gain of £251 by the investment. Held, that the trustees were entitled to the benefit of this sum in discharge of their liabilities.
Head v Gould [1898] 2 Ch 250
- To make a retiring trustee liable for a breach of trust committed by his successor, it must be proved that the very breach of trust which was in fact committed was not merely the outcome of or rendered easy by the retirement and new appointment, but was contemplated by the former trustee when the retirement and appointment took place.
- Where one of two trustees by whom a breach of trust is committed is a solicitor, he cannot, merely because he is a solicitor, be required to indemnify his co-trustee where that co-trustee has himself been an active participator in the breach of trust and has not participated in it merely in consequence of the advice and control of the solicitor.
- The rule of equity that trustees who have caused a loss by investing trust funds on an unauthorized security cannot be required by the cestui que trust to make good the loss without having the security transferred to themselves, does not apply where the cestui que trust is an infant; he being entitled to have the trust fund made good by the trustees notwithstanding the security cannot be transferred to them.
