Trustee & Fiduciary Duties

Question 1

Barnett v Hartley [1866]

Trustee Duties

Answer 1

Trustees, acting as trustees, don’t get paid

Question 2

When trustees can be remunerated

Answer 2

• 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

Question 3

Re Duke of Norfolk [1982]

Trustee Remuneration

Answer 3

Court can order for the trustees to be remunerated;

Trustees were being paid, but not enough so asked court to increase remuneration

Question 4

Re Northcote [1949]

Trustee Remuneration

Answer 4

Where trust property is situated abroad and foreign jurisdiction permits trustees may charge for the transaction in question

Question 5

Cradock v Piper [1850]

Trustee Remuneration

Answer 5

Solicitor trustees may charge for litigious work

Question 6

Williams v Barton

Trustee Remuneration

Answer 6

Trustees are not able to take commission

Question 7

Tito v Waddell (No 2)

Fair Dealing Rule

Trustee Duties

Answer 7

• 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

Question 8

Armitage v Nurse

Duties of Trustees

Answer 8

If the beneficiaries have no rights enforceable against the trustees, there are no trusts.’

Trustee duties only operate between the trustees and the beneficiaries.

Question 9

Duties of Trustees

Answer 9

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

Question 10

Breach of Trust

Answer 10

• 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)

Question 11

Eaves v Hickson

Positive misapplication of the trust property

Breach of Trust

Answer 11

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.’

Question 12

Failing to manage the trust assets with due care and skill

Breach of Trust

Answer 12

• 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

Question 13

Remedy

Breach of Trust

Answer 13

• 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?

Question 14

Nestle v National Westminster Bank

Measure of Liability for Breach of Trust

Trustee Duties

Answer 14

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.

Question 15

Interest

Measure of Liability for Breach of Trust

Trustee Duties

Answer 15

Trustees are also liable to pay interest in respect of misapplied trust funds.

The rate is at the court’s discretion.

Question 16

Townley v Sherborne [1634]

Liability between Trustees

Answer 16

A trustee is liable for their own defaults and not those of their co-trustees.

Question 17

Bahin v Hughes [1886]

Liability between Trustees

Answer 17

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

Question 18

Civil Liability (Contribution) Act 1978

Liability between Trustees for Breach of Trust

Answer 18

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

Question 19

Re Smith [1896]

Liability between Trustees

Indemnity

Fraud

Answer 19

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

Question 20

Re Partington [1887]

Liability between Trustees

Indemnity

Solicitor-Trustee Relationship

Answer 20

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.

Question 21

Head v Gould [1898]

Liability between Trustees

Indemnity

Solicitor-Trustee Relationship

Answer 21

If a solicitor trustee (or other professional qualification) is involved in breach, they won’t be indemnified as they should have greater knowledge / experience

Question 22

Re Dacre

Liability between Trustees

Indemnity

Beneficiary-Trustee Relationship

Answer 22

Where a beneficiary has participated in a breach of trust, they must indemnify the co-trustee to the extent of their beneficial interest.

Question 23

Re Mulligan [1998]

Liability between Trustees

Indemnity

Beneficiary-Trustee Relationship

Answer 23

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

Question 24

Chillingworth v Chambers [1896]

Liability between Trustees

Indemnity

Beneficiary-Trustee Relationship

Answer 24

If the liability exhausts the beneficiary-trustee’s beneficial interest, the trustees share the excess liability equally

Question 25

Protection of Trustees: Defences to Breach

Answer 25

• 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

Question 26

Re Pauling’s ST [1963]

Act of Beneficiary Relieves Trustee

Participation and Consent

Protection of Trustees: Defences to Breach

Answer 26

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

Question 27

Holder v Holder [1968]

Act of Beneficiary Relieves Trustee

Participation and Consent

Protection of Trustees: Defences to Breach

Answer 27

Not essential that beneficiary knows it is a breach of trust

Question 28

Fletcher v Collis [1905]

Act of Beneficiary Relieves Trustee

Participation and Consent

Protection of Trustees: Defences to Breach

Answer 28

Not necessary that beneficiary intends to derive personal benefit from the breach, informed consent is enough

Question 29

Perrins v Bellamy [1889]

Act of Beneficiary Relieves Trustee

Participation and Consent

Protection of Trustees: Defences to Breach

Answer 29

• “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)

Question 30

Holder v Holder [1968]

Act of Beneficiary Relieves Trustee

Release and Acquiescence

Protection of Trustees: Defences to Breach

Answer 30

Release and acquiescence afterwards have the same effect as consent and participation before the breach

Question 31

Court’s Inherent Power

Impounding

Breaches of Trust

Trustee Duties

Answer 31

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

Question 32

Statutory Power

Impounding

Breaches of Trust

Trustee Duties

Answer 32

• 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

Question 33

Relief of Liability under Trustee Act, S61

Answer 33

General section conferring wide discretion on court and requiring court to make a value judgement on trustee’s conduct.

Question 34

Re Stuart [1897]

Relief of Liability under Trustee Act, S61

Trustee Duties

Answer 34

Burden of establishing honesty, reasonableness and fairness rests on trustee

Question 35

Shaw v Cates [1909]

Relief of Liability under Trustee Act, S61

Trustee Duties

Answer 35

Reasonableness is judged by the standard of a prudent man of business

Question 36

Re Evans (dec’d) [1999]

Relief of Liability under Trustee Act, S61

Trustee Duties

Answer 36

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.

Question 37

Dreamvar (UK) Limited v Mishcon De Reya (a firm) [2016]

Relief of Liability under Trustee Act, S61

Trustee Duties

Answer 37

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

Question 38

Hayim v Citibank NA [1987]

Trust Instrument Exempts Trustee from Liability

Answer 38

Exemptions clauses are example of a ‘duty modification’

Question 39

Armitage v Nurse [1997]

Trust Instrument Exempts Trustee from Liability

Answer 39

• ‘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

Question 40

Bristol and West Building Society v Mothew [1996]

Fiduciary Duties

Answer 40

• 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.’

Question 41

Bristol and West Building Society v Mothew [1996]

Fiduciary Relationship

Answer 41

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.

Question 42

Company Act 2006, s170(1)

Fiduciary Duties

Answer 42

A director owes fiduciary duties to the company and not to individual shareholders.

Question 43

Peskin v Anderson [2001]

Fiduciary Duties

Company Directors

Answer 43

A director can be held to owe fiduciary duties to a shareholder where a special reliance has been placed on the director

Question 44

Reading v Attorney General [1951]

Fiduciary Relationship

Army Officer to Crown

Answer 44

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.

Question 45

A-G v Guardian Newspapers (No 2) [1990]

Fiduciary Relationship

Security Services to Crown

Answer 45

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

Question 46

A-G v Blake [2001]

Fiduciary Relationship

Security Services to Crown

Answer 46

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.

Question 47

Murad al Saraj [2005]

Fiduciary Relationship

Investors in a Hotel

Answer 47

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.

Question 48

Tito v Waddell (No 2)

The Self-Dealing Rule

Trustee and Fiduciary Duties

Answer 48

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

Question 49

Ex p James [1803]

The Self-Dealing Rule

Trustee and Fiduciary Duties

Answer 49

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.

Question 50

Re Thompson’s ST

Companies in which Fiduciary has a shareholding

Self Dealing

Fiduciary Duties

Answer 50

If the trustee is a majority shareholder, still considered self-dealing and sale is voidable

Question 51

Farrar v Farrar

Companies in which Fiduciary has a shareholding

Self Dealing

Fiduciary Duties

Answer 51

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)

Question 52

Circumstances in which self-dealing doesn’t apply

Answer 52

• 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

Question 53

Holder v Holder [1968]

Authorised Self-Dealing

Trustee Duties

Answer 53

• 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

Question 54

Wright v Morgan [1926]

When Self-Dealing rule cannot be avoided

Trustee Duties

Answer 54

• 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

Question 55

Re Postlethwaite [1888]

When Self-Dealing rule cannot be avoided

Trustee Duties

Answer 55

If a 3^rd party bona fide purchases the property and sells it to the fiduciary, the fiduciary may keep the property

Question 56

Taking Advantage of a Fiduciary Position

Answer 56

• 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.

Question 57

Keech v Sandford [1726]

Renewal of a Lease

Taking Advantage of a Fiduciary Position

Answer 57

• 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.

Question 58

Re Biss [1903]

Renewal of a Lease

Taking Advantage of a Fiduciary Position

Answer 58

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]

Question 59

Re Thompson [1930]

Fiduciary must not compete with the Principal

Fiduciary Duties

Answer 59

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.

Question 60

Williams v Barton [1927]

Fiduciary cannot take a Commission

Fiduciary Duties

Answer 60

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.

Question 61

Re Macadam [1946]

Director’s Fees

Fiduciary Relationship

Answer 61

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

Question 62

Re Gee [1948]

Director’s Fees

Fiduciary Relationship

Answer 62

If trustee is appointed to the board by other shareholders, they can keep the fees

Question 63

Re Dover Coalfield Extension [1907]

Director’s Fees

Fiduciary Relationship

Answer 63

If trustee was a director before they became a trustee, they can always keep the director’s fees

Question 64

Re Llewellin’s Will Trusts

[1949] Director’s Fees

Fiduciary Relationship

Answer 64

If the trust instrument authorises the trustee to appoint themselves directors and retain remuneration, they may

Question 65

Boardman v Phipps [1967]

Exploiting Opportunities

Fiduciary Duties

Answer 65

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.

Question 66

Boardman v Phipps [1967]

Informed Consent

Exploiting Opportunities

Fiduciary Duties

Answer 66

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.

Question 67

Aberdeen Railway v Blaikie [1853]

Company Director Opportunities

Fiduciary Duties

Answer 67

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.

Question 68

Regal (Hastings) v Gulliver [1942]

Company Director Opportunities

Fiduciary Duties

Answer 68

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.

Question 69

Queensland Mines Ltd v Hudson [1978]

Company Director Opportunities

Fiduciary Duties

Answer 69

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.

Question 70

Remedies for Breach of Fiduciary Duty

Answer 70

• 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

Question 71

A-G for Hong Kong v Reid [1994]

Remedies for Breach of Fiduciary Duty

Answer 71

• 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

Question 72

FHR European Ventures LLP and others v Cedar Capital Partners LLC (2014)

Remedies for Breach of Fiduciary Duty

Answer 72

• 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

Question 73

Boardman v Phipps [1967]

Remuneration

Fiduciary Duties

Answer 73

A ‘liberal’ award because Boardman and Tom Phipps had used a lot of skill and been honest etc – deserved reward

Question 74

Guinness v Saunders [1990]

Remuneration

Fiduciary Duties

Answer 74

Paying a reward must not encourage conflicts of interest

Question 75

Murad v Al Saraj (obiter)

Remuneration

Fiduciary Duties

Answer 75

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