Trustee Liability: Breach of Trust and Protection of Trustees

Question 1

what breaches can trustees commit?

Answer 1

act outside their powers
- misapply trust property
- distribute to someone other than B

fail to act in accordance with their duties
- duty of care
- duty to distribute
- duty to take advice
- duty to monitor investments
- duty to account standard investment criteria
- no profit rule
- no conflict rule

Question 2

will a trustee be liable if they breached a duty before being appointed as trustee?

Answer 2

no

unless T discovers a prior breach by an existing T once they are appointed and fails to take action

Question 3

will a trustee be liable for breaches committed during their role after they retire?

Answer 3

yes - will continue to be liable for breaches they committed

also will be liable for breaches that occur after they retire if they retired to facilitate the breach OR parts with trust property without due regard to the breach

Question 4

what is the limitation period for bringing a claim against trustees for breach of trust?

Answer 4

B with vested interests in possession: 6-year limitation from date of breach

B with contingent/future interests: 6 years from date of vested in possession.

Limitation period does not apply to fraudulent breaches or proprietary claims against T

Where limitation has not expired, Ts may rely on laches (equitable doctrine) to argue that Bs knew of a breach but delayed claim + it is unconscionable to assert their interest.

Question 5

what types of remedies can a B seek against a trustee for breach of duty / trust? (4)

Answer 5

(1) Personal claim against T for compensation if breach caused loss

(2) Personal claim against T for an account of profits

(3) Proprietary claim against property (trace misapplied trust property and claim asset or traceable proceeds) - useful if asset increased in value or T is broke

(4) where no loss is caused to the trust, removal of T from office

Question 6

how is loss apportioned between trustees if more than one was found liable for the breach?

Answer 6

Ts are jointly and severally liable

Bs can choose who to sue and recover full amount from only one T

If B sues one T, they can seek contribution from other Ts OR the court has discretion to require one T to make a just and equitable contribution to another T

apportionment = presumption of equal responsibility but court can depart from this when fair on the facts - unequal contributions will reflect differing levels of culpability for the loss or where a T had a higher standard of care due to their expertise

Question 7

how does the court measure the loss caused by T’s breach in a personal claim?

Answer 7

‘but for’ = what would the value of the trust fund have been but for the breach?

Question 8

how is loss measured in a claim regarding power of investment? (4 points)

Answer 8

• where T was required to make a specific investment but failed = loss calculated on profit trust fund would have made if T made the investment
• where T had discretion on how to invest but breached his duties = loss based on the investments that a hypothetical prudent trustee would have made
• no remedy if = (1) breach did not impact trust value, or (2) a reasonably prudent trustee would have made the same investment
• T will not be liable if they followed all of their duties but the investment nonetheless caused loss - UNLESS T continued to hold the poor investment (breach of duty to review investments)

Question 9

can T offset losses it caused against gains it brought in?

Answer 9

cannot if loss and gains were from different investments

can if loss and gains arise from same transaction

Question 10

how can T protect themselves from liability when the trust is first established? (3)

Answer 10

(1) ouster clause in trust instrument = removes the duty that T would otherwise have

(2) exemption clause in trust instrument = limits / excludes T liability for certain types of breach (cannot be for fraud or dishonesty)

(3) taking out trustee liability insurance = does not apply to fraudulent breaches; premiums can be paid from trust fund as an expense

Question 11

how can trustees protect themselves from liability during administration but before committing a breach? (5)

Answer 11

(1) seek legal advice when unsure on how to proceed / of duties = but will not protect Ts from liability

(2) seek court directions = T protected if acted in accordance with directions (expensive but may be worth it if B sues)

(3) s48 application = seek written legal opinion and apply for HC authorisation to act in accordance with it (no hearing if no dispute)

(4) seek consent from Bs for breach or actions = Ts have defence against Bs who gave consent (or acquiesced / encouraged breach)

Question 12

what can trustees do to protect themselves after they have committed a breach? (5)

Answer 12

(1) defence against Bs who gave fully informed consented to, acquiesced, or encouraged the breach (partial if not all Bs did this). Court can impound a consenting B’s interest in trust fund to indemnify Ts against claims by non-consenting Bs.

(2) Bs cannot sue Ts after limitation period (and Ts can rely on laches if Bs do but delayed claiming)

(3) court has discretion to excuse T where they acted honestly, reasonably, and ought to be fairly excused (if lay T inadvertently breached)

(4) T that was liable to compensate trust fund alone can claim contribution from other breaching Ts

(5) Ts can claim contribution or issue a separate action against third parties involved in the breach (negligent professional advisors, knowing recipients)

Question 13

what ways can a trustee protect itself when distributing the trust fund? (6)

Answer 13

(1) benjamin order = when Bs are known but missing

(2) s27 notice = when Bs are unknown

(3) retained fund

(4) payment into court

(5) missing beneficiary insurance

(6) obtaining an indemnity from Bs

Question 14

what is a benjamin order and when is it appropriate?

Answer 14

court order allowing Ts to distribute based on an assumption (B is dead) = good when Bs are unknown

Ts must make full enquiries of Bs true position and demonstrate there is no reasonable prospect of knowing true position without disproportionate cost

T is absolved from personal liability if distribute according to order

but disappointed Bs can claim against other Bs who received trust property

Question 15

what is a s27 notice and when is it appropriate?

Answer 15

protects Ts from liability of unknown Bs

Ts must publish notice in London Gazette and local newspaper - and distribute only 2 months after notice

but disappointed Bs can claim against other Bs who received trust property

Question 16

what is a retained fund and how can it protect Ts from liability? when is it appropriate?

Answer 16

Ts can set aside trust assets to discharge other duties for missing or unknown Bs

but this results in ongoing administrative duties until the fund is distributed

but it is risky because it is hard to quantify respective interests - esp if Bs are unknown

Question 17

what is a payment into court and how can it protect Ts from liability? when is it appropriate?

Answer 17

T can pay interest into court when Bs are missing

court will have control and allows T to retire

this protects other Bs

not possible where Bs are unknown

Question 18

what is missing beneficiary insurance and how can it protect Ts from liability? when is it appropriate?

Answer 18

Ts can get insurance to guard against risk for Bs claiming after fund is distributed

T will stay liable but can claim insurance

insurance is costly - t must decide if worth it

hard to get insurance for unknown Bs

Question 19

what is indemnity from Bs and how can it protect Ts from liability? when is it appropriate?

Answer 19

Bs can promise to reimburse T if T is sued

pros = cheap, quick, avoids funds being tied up

cons:
- does not actually protect T from liability
- Bs who provided indemnity may refuse to reimburse, be missing, or broke