Trusts - Breach of Trust

Question 1

What is a breach of trust?

Answer 1

• An act by a trustee that they were not authorised to perform by statute or the trust document; or
• An act by a trustee that was not exercised with the requisite standard of care

Question 2

Liability of Trustees

Answer 2

• Person claim: trustees must pay own money and beneficiaries must prove losses resulted from breach
• Two or more breaches of trust: loss from one breach cannot be offset against the gain from another (e.g. loss from bad investment and gain from self-dealing. Losses can be offset against profits if there is a linked scheme of investment)
• More than one trustee: only trustee responsible for breach is liable (however, a co-trustee may have committed a breach for failure to supervise, for example)
• More than one trustee liable: liability is joint and several (any trustee may be sued for the whole loss)

Question 3

Defences available to trustees

Answer 3

• Consent of beneficaries: beneficiary must have had knowledge of all key facts at the time of consent and if not all beneficiaries agreed the trustee is liable to those beneficiaries who did not consent
• Limitation period: six years (no limitation period in cases of fraud or actions to recover trust property, for remainder interests the six year period starts at the point when this comes into possession)
• Exclusion clause: generally strictly interpreted but are enforceable where no bad faith, intentional breach or recklessness is involved (courts have upheld exclusion clauses relieving a trustee from liability for conduct up to and including gross negligence). Clauses absolving trustee from liability for fraudulent breaches are voic
• Court concludes trustee acted honestly and reasonably and ought fairly to be excused: discretionary

Question 4

Liable to Account

Answer 4

Must re-pay the value of any losses to the trust fund arising from the breach

Not available if there is no trust

Question 5

Equitable Compensation

Answer 5

Direct compensation payment to beneficiary to cover losses suffered by that beneficiary (a money payment)

May be recoverable when there is no trust

Question 6

Joint and Several Liability

Answer 6

• If two or more trustees are liable
• Any one of the trustees can be sued for the full liability
• Court can make an order as to how liability is shared amongst the trustees as it deems just and equitable (often equal)
• Court also has the power to order one trustee to indemnify the other (1) who alone was guilty of fraud or who was the solicitor to the trust and advised the breach or (2) who is a professional trustee while the other is a lay trustee (unless they have also caused the breach)

Question 7

Proprietary Claims

Answer 7

• Trustee required to return property to trust
• Useful where trustee holds trust property following a breach of trust and is insolvent - not lost by passing to creditors
• If value of trust property has increased whilst held by trustee the trust gets the benefit of this increase

Question 8

Tracing

Answer 8

Process of identifying trust property in hands of trustees

Applies differently depending on exact situation

1. Trust property not mixed: claim back property or claim charge over asset if the trust property has been substituted for another asset
2. Assets purchased by trustee using mixed funds (trust funds and personal money): claim proportionate share or claim charge over asset for the amount of trust property used
3. Trust funds mixed with trustee’s funds: if trustee places trust funds into a bank account with their own money, the beneficiaries may claim charge over the account for the amount of the trust funds in it. Trustee treated as withdrawing / spending own money first (first in first out)

If trustee withdraws money from the account to purchase an asset and then dissapates the balance, the beneficiaries may claim a share of the asset or a charge over it

Subsequent receipts of trustee’s own money:

• After dissapating the trust money from their bank account subsequent payments of the trustee’s own money are paid into the account - these are not treated as replacing the trust money
• If trustee shows clear intention to repay the trust money then subsequent payments can be treated as replacing trust money
• Limit of beneficiary’s claim is ‘lowest intermediate balance’ - the balance after the last payment out but before the next payment in (if this is zero this is the limit of the claim)

4. Mixed funds from two trusts: beneficiaries of two trusts can share assets proportionately
5. Funds of two trusts mixed in bank account: For current accounts; first in, first out rule applies (first money into account treated as first money to leave it - unless this is contrary to intentions of the claimants, is impractical to apply the rule or applying rule would cause injustice, in which case courts will divide the money proportionately). For savings account; proportionate solution

Question 9

Liability of Third Parties

Answer 9

E.g. third party received trust property or involved in breach of trust

Likely if trustee has insufficient funds or property passed to third party has increased in value

Bona fide purchaser: someone who paid for trust property in good faith and without notice of trust = beneficiaries have no claim against third party

Innocent Volunteer Recipient: recieved trust property without paying but with no knowledge of breach of trust = no personal claim possible but beneficiaries may be able to bring proprietary claim if property is identifiable using tracing rules, property subject of a fiduciary relationship and not in the hands of a bona fide purchaser

• Property not mixed: in its original form or substituted for another asset, beneficiaries may claim the asset
• Assets purchased from mixed funds: beneficiaries may claim a proportionate share of the asset and no option to claim a charge
• Trust funds mixed with volunteer’s funds in bank account: may be necessary to apply tracing rules and traditional approach is ‘first in first out’ although recent cases apply the proportionate solution where possible
• Knowing Recipient: received trust property with knowledge of breach of trust = personal and proprietary claims allowed if beneficiaries can show third party had sufficient knowledge of breach to make it unconscionable for third party to retain money (actual knowledge, wilfully closing one’s eyes to the obvious, failing to make such inquiries as an honest and reasonable person would make, knowledge of circumstances that would indicate facts to an honest and reasonable person or knowledge of circumstances which would put an honest and reasonable person on inquiry)
• Dishonest Accessory: facilitated breach of trust and must have acted dishonestly (i.e. concious impropriety) = personally liable as a trustee (third party’s assistance can be active or passive). Personal action can be taken against them as if they were a trustee, proprietary claim unlikely to be appropriate as unlikely to have received trust property

Question 10

Equitable Remedies

Answer 10

• Supplement common law where damages would not be adequate
• Court has discretion as to whether to grant an equitable remedy

Rules for equitable remedies:

• Legal or equitable right
• No suitable remedy at common law (common in trust cases as trustees may not have the funds or the property may be unique)
• Enforcement must be feasible
• Court will balance hardship (to defendant by granting remedy vs to claimant by not granting it)
• Claimant cannot be guilty of any inequitable conduct in relation to the case (e.g. if claimant has unduly delayed in bringing claim or acted dishonestly). Must “come to equity with clean hands”