Personal Claims against Trustees: Equitable Compensation Flashcards
Benefits of having a proprietary claim vs a personal one
If you have a proprietary claim, you can claim the painting, taking it back (or the amount for it) and don’t have to join the queue of creditors.
If you have a personal claim, you have to join the queue of creditors, may not get all your money back.
Reminder: Duties owed by trustees
Duty to follow terms of the trust.
Duty of care - Trustee Act duties
Best interests duty
No conflict duty
No profit duty
Reparative compensation definition
A personal liability to put the trust or beneficiaries in position they would have been in BUT FOR any breach (AIB).
AIB case
Settlor wanted to make a loan with first charge, Barclays already had one.
Settlor gives money to middleman, saying don’t loan it until you have got a charge or Barclays have discharged theirs.
Trustee breaches - transfers before conditions satisfied, so settlor only gets second charge.
Borrower defaults, settlor doesn’t get all money back.
But for breach, settlor would have received first charge and been 273k better off.
Reparative compensation claim awarded, giving settlor what he would have had but for the loss.
Substitutive comp denied - but for approach advocated by Lord Toulson in AIB.
Bartlett v Barclays Bank
Trustee commits two breaches - one causes loss, one causes gain.
Here, we can set-off the losses and gains if the trustee’s breaches were part of the ‘SAME TRANSACTION’
Target
Only losses but-for caused by the breach are recoverable.
If breach happens but no loss caused by it, not recoverable.
Substitutive compensation
Trustee liable for the value of property transferred in breach.
Is substitutive comp available? Argument 1 - that where the transaction is incomplete, it is.
Lord Burrows - No.
Supported by Toulson in AIB - The basic equitable principle is but-for losses.
McBride: Argues sometimes available where the trust was created for the purposes of effecting a transaction that had not yet been completed.
Problem: Why was the transaction complete in AIB? Arguably it wasn’t since the settlor didn’t get the first charge he was aiming for. Yet the SC still awarded reparative comp, no substitutive.
Williams supports this, arguing that Lord Toulson did not necessarily suggest that if the transaction was incomplete, we could have substitutive comp, it is a reach.
He also points out that both judges said you need loss to be wrongfully caused, with no exceptions, so causation is required.
Argument 2 for substitutive comp: Trustee breaches fraudulently or dishonestly
Stems from Lord Toulson’s speech - absent fraud, would not be right to award damages for loss which would have been suffered but for the breach.
Objection 1: Obiter statements, use of the word ‘might’, and Lord Reed does not discuss fraud.
Objection 2: Other authorities reject that fraud/dishonesty affects it.
This suggestion likely fails.
Argument 3 why substitutive comp is available: It arises in particular types of trust (eg non-bare, non-business, non-commercial)
Based on comments made in Target
Objection 1: Counter-intuitive - why would type of trust matter? We want clear rules
2: Rejected in Harris v Kent and AIB
Suggestion 4 where substitutive damages may exist: Breaches of custodial duties - Giambrone
Settlors needed to pay deposits to buy land in Italy, trustee was middle person.
Duty not to transfer deposit to seller unless bank guarantees received.
Trustee breaches, settlor gets neither land nor deposit as land confiscated by Italian authorities.
Applying reparative compensation, ordinary approach would be £0 - since even with the guarantee, land confiscated.
However, court held that the trustee breached duty to act as custodian, therefore but for any breach, the trustee would have returned the deposit to the settlor - full transfer value attainable - effectively substitutive comp.
So going forward, where trustee breaches a duty to act as custodian, we draw counterfactual by saying but for the breach, the trustee continues to hold the resources in the trust.
Issue with Giambrone?
Williams - didn’t engage with the trustee’s argument that but for the breach, the guarantee would have been received but it would not have helped the settlor - ignored reality. Whilst defining the content of the trustee’s obligations is one consideration, it is not the only step and you must consider what would have really happened.
Williams argues that it is not obvious that they did have active steps in Target and AIB - it is possible in both cases that the trustee had duty to hold the money, but did not need to take steps. However, it does bind courts.
Why substitutive compensation SHOULD NOT be available - Lord Burrows
What could justify holding a trustee liable for more than consequential loss? Why should we hold a trustee accountable for loss which would have happened in any situation?
One may counter argue by drawing analogy with contractual debts - Where one owes a debt in contract, it does not matter if the money would be loss regardless of repayment. Repayment is still owed.
One may also counter argue by drawing analogy with property damage in tort: Where X damages Y’s item, it is not a defence for them to say that the item would have been destroyed in a fire anyway, so no consequential loss.
You can also counter-argue with Georgiou’s view. Where a trustee transfers money out, but argues ‘I would have made this bad investment anyway but for the breach’, so there is no consequential loss, that is not a defence. If he never exercises his power to invest, his duty is to continue holding it. The fact that his breach caused no loss is irrelevant.
Exclusion and limitation clauses as a defence to losing money
Armitage v Nurse:
Can exclude liability for negligence or gross negligence.
Cannot exclude liability for dishonesty - knowingly or recklessly acting against best interests of the trust objects.
Consent/Waiver as a defence
Re Pauling: Requires free/informed consent from all beneficiaries of the trust. Must be adults.
Defences: Trustee Act 1925, s61
Requires honesty and reasonableness, and court have discretion to excuse him for the breach of trust or personal liability.
Very discretionary, almost never succeeds in the professional context.
