Trustee & Fiduciary Duties Flashcards
Barnett v Hartley [1866]
Trustee Duties
Trustees, acting as trustees, don’t get paid
When trustees can be remunerated
- Beneficiaries consent to take money out of income for the trust – if beneficiaries are sui juris and all agree
- Charging clause – clause stipulates how much trustee will be paid – to be negotiated between settlor and trustees. Professional trustees tend to prefer a proportion of how much they make from growing the capital
- ss28-29 Trustee Act 2000 – statutory regulations which allow professional trustees to be paid for what they do
Re Duke of Norfolk [1982]
Trustee Remuneration
Court can order for the trustees to be remunerated;
Trustees were being paid, but not enough so asked court to increase remuneration
Re Northcote [1949]
Trustee Remuneration
Where trust property is situated abroad and foreign jurisdiction permits trustees may charge for the transaction in question
Cradock v Piper [1850]
Trustee Remuneration
Solicitor trustees may charge for litigious work
Williams v Barton
Trustee Remuneration
Trustees are not able to take commission
Tito v Waddell (No 2)
Fair Dealing Rule
Trustee Duties
- When a beneficiary sells a beneficial interest to a trustee - NO CONFLICT: buyer & seller are different people
- only set aside if unfair,
- onus on trustee to prove beneficiary was fully informed & received fair value
Armitage v Nurse
Duties of Trustees
If the beneficiaries have no rights enforceable against the trustees, there are no trusts.’
Trustee duties only operate between the trustees and the beneficiaries.
Duties of Trustees
Distributive
- Distribute income and capital according to terms of the trust – can be to one beneficiary/multiple beneficiaries
Administrative Managerial
- Safeguard and develop the value of the trust fund according to the terms of the trust – important they understand what they can and cannot do
Breach of Trust
- Breach of trust occasions a personal liability on the part of the trustee to remedy their breach.
- Breach generally falls into 1 of 2 types –
- positive misapplication of the trust property (e.g. paying the wrong person or investing in an unauthorized investment)
- failing to manage the trust assets with due care and skill (failing to invest trust money or investing it negligently)
Eaves v Hickson
Positive misapplication of the trust property
Breach of Trust
Trustee duties are so strict that even if a mistake has been made, they will still be liable
- Individuals forged a marriage certificate which indicated they were entitled to property when they weren’t – nothing to indicate certificate had been forged and so trustee gave them property they weren’t entitled to. Trustee duties are so strict and courts don’t worry about why a mistake is made, but that a mistake has been made.
- per Sir John Romilly at 141 - ‘I am of opinion, that it falls on the person who paid the money. Here the loss falls on the trustees, and the persons to whom the fund really belongs are not to be deprived of it. The trustee is bound to pay the trust fund to the right person.’
Failing to manage the trust assets with due care and skill
Breach of Trust
- Liability for failing to manage the trust assets with due care and skill is based on:
- proof that there has been a breach of trust and that,
- but for the breach, there would not have been the loss suffered by the trust fund
Remedy
Breach of Trust
- Primary remedy of a beneficiary is to have the accounts taken and to require the trustee to make good the difference between the value of the trust fund as revealed by such finalized accounts and its actual value.
- Several issues to consider:
- Has there been a breach of a specific duty and it was a misapplication of trust assets or merely a failure to manage trust assets with due care and skill?
- What is the measure of liability?
- How should liability be shared between the trustees?
- Are there defences the trustees can rely on?
Nestle v National Westminster Bank
Measure of Liability for Breach of Trust
Trustee Duties
A trustee who fails to carry out their intra vires managerial duties with due care and skill is liable only for the loss that would not have occurred but for their improper conduct.
Interest
Measure of Liability for Breach of Trust
Trustee Duties
Trustees are also liable to pay interest in respect of misapplied trust funds.
The rate is at the court’s discretion.
Townley v Sherborne [1634]
Liability between Trustees
A trustee is liable for their own defaults and not those of their co-trustees.
Bahin v Hughes [1886]
Liability between Trustees
Trustee’s liability is joint and several – they are all liable to breaches of trust in which they participate and any trustee can be made liable for the entire loss.
- Beneficiary can sue all, some, or any of the trustees, as they choose
Civil Liability (Contribution) Act 1978
Liability between Trustees for Breach of Trust
Entitles a trustee to claim contribution or an indemnity from another trustee with whom they are jointly liable for a breach of trust. – if T3 pays more than T1 and T2, T3 is entitled to a contribution form T1 and T2 in respect of the excess.
- Court also has discretion to determine contributions each defendant must make
Re Smith [1896]
Liability between Trustees
Indemnity
Fraud
A trustee may be indemnified against liability when fraud is perpetrated against one of the trustees.
- The defrauded trustee who had done nothing wrong, was entitled to an indemnity as they had done everything right whilst the fellow trustee had defrauded them.
- UNUSUAL CASE – don’t usually get full indemnity, but can use as a reason to mitigate responsibility
Re Partington [1887]
Liability between Trustees
Indemnity
Solicitor-Trustee Relationship
Where the solicitor-trustee exercises such a controlling influence over the other trustee, the other trustee may be indemnified as they were unable to exercise independent judgement.
Head v Gould [1898]
Liability between Trustees
Indemnity
Solicitor-Trustee Relationship
If a solicitor trustee (or other professional qualification) is involved in breach, they won’t be indemnified as they should have greater knowledge / experience
Re Dacre
Liability between Trustees
Indemnity
Beneficiary-Trustee Relationship
Where a beneficiary has participated in a breach of trust, they must indemnify the co-trustee to the extent of their beneficial interest.
Re Mulligan [1998]
Liability between Trustees
Indemnity
Beneficiary-Trustee Relationship
Where beneficiary convinces trustee over making an investment, the beneficiary will be partially liable. However, the trustee will still be liable as they are responsible.
Life tenant convinced trustee to invest trust capital in investments that produce a high rate of income but limited capital growth – clearly showing preference to one beneficiary over another – remainderman sued the trustee when life tenant died. Trustee said it was the beneficiary’s fault who had forced him into investing. Court agreed that estate of deceased life tenant should bare some of the burden, but trustee was still responsible and should have said no
Chillingworth v Chambers [1896]
Liability between Trustees
Indemnity
Beneficiary-Trustee Relationship
If the liability exhausts the beneficiary-trustee’s beneficial interest, the trustees share the excess liability equally
Protection of Trustees: Defences to Breach
- Defences to breach of trust normally come in one of 4 forms:
- Beneficiary was also involved
- Court ought to relieve them of liability
- Too much time has passed
- Trust instrument relieves them of liability
Re Pauling’s ST [1963]
Act of Beneficiary Relieves Trustee
Participation and Consent
Protection of Trustees: Defences to Breach
Even where there is a breach of trust, a beneficiary cannot successfully bring an action against the trustee if the trustee can establish a valid request or consent by that beneficiary to the breach of trust.
Consent must be given by an adult of full capacity
Holder v Holder [1968]
Act of Beneficiary Relieves Trustee
Participation and Consent
Protection of Trustees: Defences to Breach
Not essential that beneficiary knows it is a breach of trust
Fletcher v Collis [1905]
Act of Beneficiary Relieves Trustee
Participation and Consent
Protection of Trustees: Defences to Breach
Not necessary that beneficiary intends to derive personal benefit from the breach, informed consent is enough
Perrins v Bellamy [1889]
Act of Beneficiary Relieves Trustee
Participation and Consent
Protection of Trustees: Defences to Breach
- “the main duty of a trustee is to commit judicious breaches of trust” (per Lord Lindley MR) – can be advantageous to commit judicious breaches of trust (e.g. old days where had limited range of investments, but a trustee discovered a very profitable investment could go to beneficiary and get permission from beneficiary to invest)
- Technical breach of trust – beneficiary acquiesces
-
Sui juris beneficiary:
- Consents / acquiesces
- Barred from suing for breach
- Beneficiaries must be Fully informed and
Exercising independent judgment (no undue influence)
Holder v Holder [1968]
Act of Beneficiary Relieves Trustee
Release and Acquiescence
Protection of Trustees: Defences to Breach
Release and acquiescence afterwards have the same effect as consent and participation before the breach
Court’s Inherent Power
Impounding
Breaches of Trust
Trustee Duties
Court has inherent power where beneficiary has consented to, requested or instigated breach of trust. Trustee must show beneficiary acted in full knowledge of circumstances
Statutory Power
Impounding
Breaches of Trust
Trustee Duties
- Court has statutory power to impound beneficiary’s interest under Trustee Act 1925, s62
- Under s62, court can impound regardless of benefit to beneficiary
- Beneficiary must have requested or instigate OR consented in writing
- Court has absolute discretion
- Once beneficiary is impounded, trustee and other beneficiaires can recoup losses
Relief of Liability under Trustee Act, S61
General section conferring wide discretion on court and requiring court to make a value judgement on trustee’s conduct.
Re Stuart [1897]
Relief of Liability under Trustee Act, S61
Trustee Duties
Burden of establishing honesty, reasonableness and fairness rests on trustee
Shaw v Cates [1909]
Relief of Liability under Trustee Act, S61
Trustee Duties
Reasonableness is judged by the standard of a prudent man of business
Re Evans (dec’d) [1999]
Relief of Liability under Trustee Act, S61
Trustee Duties
Reasonableness is judged by the standard of a prudent man of business
Lay trustee who was executor of parents’ estate and was meant to distribute property to herself and her brother. Brother had been missing for some time, took reasonable steps to find him, but unsuccessfully.
Took out insurance policy for a lost beneficiary in case he turned up. Then distributes the property as per the will. The brother later turns up and wants his share. Sister cashes in insurance property but doesn’t cover the amount of property he would have received.
Court decided that because it was technically a breach, she had acted honestly and reasonably and so was fairly excused.
Dreamvar (UK) Limited v Mishcon De Reya (a firm) [2016]
Relief of Liability under Trustee Act, S61
Trustee Duties
Reasonableness is judged by the standard of a prudent man of business
Fraudulent land conveyance – individual claims own a piece of land by Earls Court, approach a small solicitor and say they want to sell it. Small firm doesn’t take adequate steps to establish validity of claim. Represent to Mishcon that they are solicitors to the seller and Mishcon are representing Dreamvar for the purchase. Mishcon are satisfied that this is a legitmate buyer (fraudulent documentation). Purchase goes through. Money disappears to China and can’t be recovered; Dreamvar go to register the land and find out that the owner of the land is not the same and don’t want to sell. Dreamvar sue Mischon for breach of trust.
Mishcon argue S61 – acted honestly and reasonably and the fault was with the other firm. However, even though court agreed, they didn’t allow S61 because they don’t think Mishcon should be fairly excused as Dreamvar had lost a lot of money and only way to get their money back was through Mischon. They have insurance and will cover the loss
Hayim v Citibank NA [1987]
Trust Instrument Exempts Trustee from Liability
Exemptions clauses are example of a ‘duty modification’
Armitage v Nurse [1997]
Trust Instrument Exempts Trustee from Liability
- ‘No trustee shall be liable for any loss or damage which may happen to the Trust Fund or any part thereof or the income thereof at any time or from any cause whatsoever unless such loss or damage be caused by his own actual fraud.’
- Exemption clause – widespread
- Settlor free to accept or reject the clause – if you have accepted it, you can’t complain later UNLESS it’s fraud
Bristol and West Building Society v Mothew [1996]
Fiduciary Duties
- A fiduciary may not personally profit from their position and there is an overriding duty to avoid conflict between their own personal interests and the duties they owe to the principal.
‘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. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary.’
Bristol and West Building Society v Mothew [1996]
Fiduciary Relationship
Fiduciary relationship arises where a person 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.
Company Act 2006, s170(1)
Fiduciary Duties
A director owes fiduciary duties to the company and not to individual shareholders.
Peskin v Anderson [2001]
Fiduciary Duties
Company Directors
A director can be held to owe fiduciary duties to a shareholder where a special reliance has been placed on the director
Reading v Attorney General [1951]
Fiduciary Relationship
Army Officer to Crown
Sergeant in British army in Cairo was bribed by Egyptians to help them pass checkpoints. In a fiduciary relationship to the Crown so liable to account for his bribe to the Crown.
A-G v Guardian Newspapers (No 2) [1990]
Fiduciary Relationship
Security Services to Crown
Sunday Times held liable to account to the Crown for profits made by publishing extracts from Spycatcher, a book written by a former member of the security services in breach of fiduciary duties to Crown
A-G v Blake [2001]
Fiduciary Relationship
Security Services to Crown
Former member of secutiy services who disclosed information in autobiography did not owe a continuing fiduciary duty to the Crown where the information was no longer confidential. However, ordered to pay over his profits as damages for breach of contract.
Murad al Saraj [2005]
Fiduciary Relationship
Investors in a Hotel
Fiduciary duties held to apply between investors in a hotel when Mr Al-Saraj was found to have misrepresented how he was making his contribution.
Tito v Waddell (No 2)
The Self-Dealing Rule
Trustee and Fiduciary Duties
Trustee can’t buy a piece of trust property because conflict of self-interest – acting as buyer and seller – seller wants highest price and buyer wants lowest price – breach of trustee duties
Ex p James [1803]
The Self-Dealing Rule
Trustee and Fiduciary Duties
Transaction considered to be self-dealing is Voidable by beneficiaries, even if a fair value is paid – beneficiaries have a choice – sale can be set aside and property returns to the trust OR beneficiaries can approve the sale and the purchase price becomes trust property.
Re Thompson’s ST
Companies in which Fiduciary has a shareholding
Self Dealing
Fiduciary Duties
If the trustee is a majority shareholder, still considered self-dealing and sale is voidable
Farrar v Farrar
Companies in which Fiduciary has a shareholding
Self Dealing
Fiduciary Duties
If the trustee is a minority shareholder, not necessarily set aside – onus is on the company to show ‘fair value’ (any price between Minimum and Maximum)
Circumstances in which self-dealing doesn’t apply
- Self-dealing does not apply in the following circumstances
- If the trust instrument authorises it
- If all principles being sui juris, authorise it
- If the purchase is pursuant to a contract or option agreed or granted before the fiduciary position arose
- If a tenant for life under a strict settlement purchases the settled land
Holder v Holder [1968]
Authorised Self-Dealing
Trustee Duties
- Farm purchased at auction by fiduciary who wasn’t’ acting as fiduciary at time. Held to be authorised because
- purchased at auction
- beneficiary fully aware and putting pressure on fiduciary to buy the land at the time
- 1 of 3 executors
- only performed minor acts
Wright v Morgan [1926]
When Self-Dealing rule cannot be avoided
Trustee Duties
-
Self-dealing cannot be avoided where the fiduciary retires to make the purchase, having made the arrangements whilst still a trustee
- If the fiduciary retires and then makes the purchase, it should be acceptable
Re Postlethwaite [1888]
When Self-Dealing rule cannot be avoided
Trustee Duties
If a 3rd party bona fide purchases the property and sells it to the fiduciary, the fiduciary may keep the property
Taking Advantage of a Fiduciary Position
- A fiduciary is personally liable to account to their principal for any personal profit which comes to them by virtue of their fiduciary position and may hold the profit on constructive trust for the principal.
Keech v Sandford [1726]
Renewal of a Lease
Taking Advantage of a Fiduciary Position
- Fiduciary owed duties to a principal who was a baby who had inherited a lease. Baby couldn’t renew the lease as was far too young so was going to lose the lease. Fiduciary, acting on behalf of infant, took on lease himself (so benefitted from it). Court said he was the only person who could not take advantage of his position.
Re Biss [1903]
Renewal of a Lease
Taking Advantage of a Fiduciary Position
Can take advantage of a renewal of a lease where fiduciary relationship does exist
– A widow as administratix of her husband’s estate, was unable to renew the lease of the premises where the intestate had carried on business. Lease renewed in favour of the appellant, one of the sons, who helped in the business but was not an administrator or trustee and so held no fiduciary relationship.
Compare with Keech v Sandford [1726]
Re Thompson [1930]
Fiduciary must not compete with the Principal
Fiduciary Duties
A fiduciary must not compete with the principal.
One of the trust assets was a yacht broker’s business. Trustee tried to set up a similar business which would have been in competition. Court granted an injunction to prevent its formation.
Williams v Barton [1927]
Fiduciary cannot take a Commission
Fiduciary Duties
Fiduciaries are not able to take commission.
Trustee introduced some trust business to a stockbroking firm of which he was a member – had to augment trust fund by amount of commission he received from the introduction.
Re Macadam [1946]
Director’s Fees
Fiduciary Relationship
If a trustee obtains Directorships using Trust Shares, they must account for fees and any profit they make from that role must go to the beneficiaries
Re Gee [1948]
Director’s Fees
Fiduciary Relationship
If trustee is appointed to the board by other shareholders, they can keep the fees
Re Dover Coalfield Extension [1907]
Director’s Fees
Fiduciary Relationship
If trustee was a director before they became a trustee, they can always keep the director’s fees
Re Llewellin’s Will Trusts
[1949] Director’s Fees
Fiduciary Relationship
If the trust instrument authorises the trustee to appoint themselves directors and retain remuneration, they may
Boardman v Phipps [1967]
Exploiting Opportunities
Fiduciary Duties
A fiduciary is not entitled to keep a profit themselves where they have obtained the opportunity to make the profit through their position as fiduciary, even where they have exploited the opportunity not just for their own benefit but for the benefit of the trust as well, and the beneficiary could not have made the profit themselves.
Boardman v Phipps [1967]
Informed Consent
Exploiting Opportunities
Fiduciary Duties
A fiduciary may not be liable to account for the profits if informed consent is given by the principals (being sui juris) to the activities of the fiduciary.
Aberdeen Railway v Blaikie [1853]
Company Director Opportunities
Fiduciary Duties
As directors occupy a fiduciary position, they must not put themselves in a position where their personal interests conflict with their duties to the company.
They must account for any profits obtained in circumstances where there is a real sensible possibility that the director’s interest may conflict with his duty to the company.
- Individual who is director of company that makes metal benches and on board of Aberdeen railway. Makes deal for his metal benches to be used on the railway. Contracting with yourself so breach.
Regal (Hastings) v Gulliver [1942]
Company Director Opportunities
Fiduciary Duties
As directors occupy a fiduciary position, they must not put themselves in a position where their personal interests conflict with their duties to the company.
They must account for any profits obtained in circumstances where there is a real sensible possibility that the director’s interest may conflict with his duty to the company.
- Directors of a company set up a subsidiary company. Directors personally invested in this company which they would not have knowledge of, if they weren’t directors of the other company and so were using the position to make profits.
Queensland Mines Ltd v Hudson [1978]
Company Director Opportunities
Fiduciary Duties
No conflict rule is starting to be enforced less strictly with directors
- Former director of Queensland Mines held not liable to account for a profit made from an opportunity he encountered as director of the company because the other directors had decided not to take up the opportunity and were aware of what he was doing.
Remedies for Breach of Fiduciary Duty
- A fiduciary who makes an unauthorised profit will be required to disgorge it to his or her principal. Can either be a personal remedy or a proprietary remedy.
- Personal remedy – equitable duty to account – fiduciary must pay principal equivalent to profit received from their own assets
-
Proprietary remedy – fiduciary hold profit on constructive trust for the principal.
- Advantage of proprietary remedy is can be used to claim profit or if used to buy property, the substitute property instead – principal gets the increase in value.
- Also can be used to claim in priority to fiduciary’s other creditors
A-G for Hong Kong v Reid [1994]
Remedies for Breach of Fiduciary Duty
-
Reid, senior criminal lawyer for UK in Hong Kong – took bribes amounting to $NZ 2.5m from organised crime families in Hong Kong so wouldn’t prosecute criminals in that circle
- Invested that money in land in New Zealand – was caught and removed from office
- Land had increased in value – if it was a personal remedy all he would have owed was the $NZ 2.5m; as it was a proprietary remedy, Reid was seen to hold the 2.5m on constructive trust for the Crown and so the increase in value also went to the crown
FHR European Ventures LLP and others v Cedar Capital Partners LLC (2014)
Remedies for Breach of Fiduciary Duty
- Whenever fiduciary duties are breached, they will result in a proprietary constructive trust remedy
- Hotel purchased by FHR. Agent instructed to buy the hotel on their behalf, had arranged with the seller to receive a €10m commission if he got a certain price. When FHR found out, they wanted the commission from the agent. Court followed Hong Kong v Reid approach – whenever fiduciary duties are breached, they will result in a proprietary constructive trust remedy
Boardman v Phipps [1967]
Remuneration
Fiduciary Duties
A ‘liberal’ award because Boardman and Tom Phipps had used a lot of skill and been honest etc – deserved reward
Guinness v Saunders [1990]
Remuneration
Fiduciary Duties
Paying a reward must not encourage conflicts of interest
Murad v Al Saraj (obiter)
Remuneration
Fiduciary Duties
Accounting for all profit = disproportionate? Court had to adopt strict rules of fiduciary duty but gave him a reward to make up for the disproportionate effect of an overly harsh judgement
