Trust Law- Conflict of Interest and Proper Motivation Flashcards
what type of relationship does the trustee s and the beneficiary have in nature?
Fiduciary in nature. This means it is grounded in good faith. A trustee is a fiduciary in that he is the party to whom the truster has entrusted the trust property and he is the party the beneficiaries must trust to implement the purposes of the trust whilst he remains in office.
as a fiduciary, a trustee must keep his personal interest separate from the interests of the trust. What are the two consequences of this?
a) No fiduciary may place himself in a position where his interest and his duty may possibly conflict. This is known as the rule precluding auctor in rem suam (which in translation means actor in his own cause); and
(b) A fiduciary should be motivated only by those consequences which are relevant to the trust and not by those which are personal to him. Although it is arguable as to whether this is a wholly separate rule, this is known as the rule requiring proper motivation.
what happens if the trustee does breach the rule of auctor in rem suam?
(a) The trustee will be in breach of trust;
(b) Where the trustee makes any profit or derives any property from the breach of trust a constructive trust will be created over that profit or property and the beneficiaries in the original trust are the beneficiaries in that constructive trust; and
(c) Any transaction in which a trustee is auctor in rem suam is capable of reduction and is voidable at the instance of a number of parties.
who can challenge a transaction on the basis that it is in breach of the rule of auctor in rem suam?
(a) Any beneficiary who has title and interest (JOHNSTON v MacFARLANE 1987 SLT 593);
(b) A co-trustee (see, e.g. CHERRY’S TRS v PATRICK 1911 2 SLT 313);
(c) The truster provided he has a reversionary right in the trust estate or where a title to pursue the matter is expressly reserved in the trust deed;
(d) Creditors of the truster provided the truster has a reversionary right in the trust estate; and
(e) A judicial factor appointed to the trust estate. (HENDERSON v WATSON 1939 SC 711).
is their a time limit in accounting for trust funds?
No there is not.
Prescription and Limitations act 1973 gives the beneficiary rights to recover trust property or recover the proceeds from a trustee where there has been appropriated by a trustee acting as actor in rem suam. Breaches of trust can be pursued even after the period of long negative prescription (20 years) see University of Aberdeen v Town Council of Aberdeen (1877)
what is the purpose of the common law principle of auctor in rem suam?
to try to prevent conflicts arising rather than to try to repair the damage after a conflict has arisen. In some particular circumstances the potential for conflict of interest is so dangerous that the Common law rule has been supplemented by statutory rules to ensure that a conflict of interest does not arise at all. For example in terms of BANKRUPTCY (S) ACT 1985, s.24(2)(a) and (c) the parties excluded from the position of permanent trustee include (a) the debtor in his own sequestration and (b) a person who holds an interest opposed to the general interests of the creditors.
what are the practical applications of the rules of conflict of interest?
(a) The trustee may not transact with the trust;
(b) The trustee cannot take a personal advantage or profit from his position as trustee; and
(c) The trustee is not entitled to remuneration.
A trustee may not transact in their personal capacity with the trust estate. Whet sorts of direct transactions may this apply to?
(a) Contracts for the supply of materials. In ABERDEEN RAILWAY COMPANY v BLAIKIE BROTHERS (1854) 1 MACQ. 461 it was held that a contract between a railway company and one of the directors in which the director contracted to supply the company with iron rails disclosed a conflict of interest and could be set aside on the basis of the rule auctor in rem suam.
(b) Sales of heritable property to and from the trust. For an example of the latter see UNIVERSITY OF ABERDEEN v TOWN COUNCIL OF ABERDEEN (1877) 4R (HL) 48.
(c) Loans of money to and from the trust; and
(d) Sales of goods to and from the trust. An example is CHERRY’S TRS v PATRICK 1911 2 SLT 313. A trustee in a testamentary trust continued to supply goods to the business of the truster continued by the trustees after the death of the truster. It was held that the profit from this series of sales of goods required to be paid back to the trust by the trustee.
what is irrelevant to any question as to whether a transaction should be interdicted as one in which the trustee has been auctor in rem suam?
it is irrelevant that there is no prejudice to the trust or that the transaction is actually beneficial to the trust. It is sufficient that there is a risk, The question of whether there has been an actual loss to the trust will of course be material if the transaction has already been carried out as the trustee will be liable to the trust in respect of that loss.
name the two common situations where there is a suspicion of conflict of interest
(a) indirect transactions by the trustee; and
(b) transactions with parties related to the trustee
when might an indirect transaction occur?
An indirect transaction may occur where a trustee transacts not with the trust but with a beneficiary who in turn has transacted with the trust in relation to the same matter
give an example of an indirect transaction by the trustee
CLARK v CLARK’S EXX (1989) 665 executors concluded a contract to sell part of the heritable property of the deceased’s estate to a number of third parties. The third parties then assigned their right to receive the property to one of the executors in her personal capacity. The assignation was reduced on the basis that there was a conflict of interest between the executor’s duty and her personal interest. This should not be taken to mean that all transactions between the trustee and a beneficiary even in relation to trust estate will be reduced. Nevertheless in this situation the onus will rest on the trustee to show that he has acted in good faith and that the beneficiary is fully aware of the nature of the transaction and the full surrounding circumstances.
what is the application of the rule to render a transaction invalid dependent on?
whether that party acts independently causing no prejudice to the trust.
give examples of parties acting independently
(a) In BURRELL v BURRELL’S TRS 1915 1 SLT 101 it was held that the purchase of shipping shares belonging to a trust estate by the wife of one of the trustees, on her own initiative, out of her separate estate and for an adequate consideration was valid.
(b) In ADAIR’S FACTOR v CONNELL’S TRS (1894) 22R. 116 it was held that the purchase of shares from a trust by a limited company was invalid because the trustee was a director and shareholder of the company.
(c) A partnership is recognised in Scots law as having a persona distinct from its constituent partners. Nevertheless where a trustee is a partner in a partnership which carries out work for the trust and is paid fees for doing so the trustee will be obliged to hold the proportion of those fees to which he is entitled under the partnership agreement on a constructive trust for the beneficiaries. (See, e.g. HENDERSON v WATSON 1939 SC 711).
what happens if a trustee uses his position as a trustee to obtain any personal advantage or profit?
the trustee becomes a constructive trustee of any property that he obtains as a result of the breach of trust and any profit or advantage that he derives from the breach. Demonstrated in UNIVERSITY OF ABERDEEN v TOWN COUNCIL OF ABERDEEN (1877)s significant because at no time were the University ever owners or tenants of the fishings - but the Town Council would never have been in a position to obtain a lease of these fishings if they had not abused their position as trustee.
