Chapter 8: Trusteeship
8.1. General Introduction
This workbook introduces you to the nature of trusteeship. A trustee is the formal (and nearly always "legal") owner of the trust property.
There are, of course, a number of rights incidental to this ownership, but in contrast with an absolute owner of property, the trustee's rights are greatly limited by the trustee's obligation to discharge the trust. Thus the practice has grown up of describing the content of trusteeship, not so much as a form of property ownership, but more as a bundle of powers subject to a number of duties.
The powers and duties of any given trustee are to be determined first by reference to the terms of the trust instrument (where there is one) and where the instrument (if any) is silent, the trustee's powers and duties are to be determined according to the principles and rules of equity established in the general law. These issues are treated in-depth under the headings fulfilling the office of trustee and failing as a trustee (see the Contents page).
We will see that the law in relation to trustees' powers and duties has undergone significant reform as a result of the Trustee Act 2000. The Act received Royal Assent on the 23rd of November 2000 and came into force on 1 February 2001.
First of all, however, the workbook takes you through the (somewhat technical) law governing the appointment, retirement and removal of trustees, in other words the very crucial task of filling the office of trustee in the first place.
The Trust Administration workbook will enable you to apply your learning in relation to a number of specific aspects of trust administration, such as investment.
Before you embark upon your exploration of trusteeship, contemplate for a moment the following dictum:
"a trust is an office necessary to the concerns between man and man, and which, if faithfully discharged, is attended with no small degree of trouble, and anxiety, it is an act of great kindness in any one to accept it" - per Lord Hardwicke LC in Knight v Earl of Plymouth (1747) Dick 120, 126; 21 ER 214, 216.
As this quote suggests, you will quickly discover that trusteeship is an onerous office. Indeed, as you study this area be sure to ask yourself every now and then, "would I accept a trusteeship?". For you never know, one day you might be offered one!
8.2. Filling the office of trustees
8.2.1. Appointment of Trustees
Why do people accept trusteeships?
Simon Gardner in his "Introduction to the Law of Trusts" observes that "human goodwill and the profit motive between them can be relied upon to produce a supply of people prima facie willing to be trustees" (Clarendon Press 1990 p165).
G W Keeton in "Modern Developments in the Law of Trusts" also attests to the mixed-motivation of the modern trustee, who, he says "has neither the time, nor the capacity, nor the inclination to spend considerable time administering a trust, at any rate where the trust has no direct connection with the affairs of himself or his family, more especially when, apart from a provision for payment in the trust instrument, he is still expected to act gratuitously" (Northern Ireland Legal Quarterly 1971 p13).
As for goodwill, a 1988 survey of solicitors who regularly deal with trust matters confirms that many a trustee still acts out of the goodness of his or her heart. Whilst, as for the profit motive, there is today no shortage of professional trustees (eg solicitors, banks) willing to act for an appropriate fee.
In a similar vein, we shall observe, when we consider aspects of fulfilling the office of trustee, that the courts have in recent years justified the increased remuneration of trustees on the pragmatic appreciation that otherwise the trustees would retire from the trust.
Vacancies in the trusteeship
Despite the varied appeal of trusteeship, there are a number of reasons why trusteeships might fall vacant. Trustees might become unfit, unable or unwilling to act.
The good news for the beneficiaries in such cases is that "a trust will not fail for want of a trustee". There are in fact a number of statutory provisions designed to ensure that there is always somebody authorised to appoint new trustees whenever the need arises.
Even if nobody can be found who is willing to accept the appointment, the court can itself appoint, in certain circumstances, the Public Trustee or a Judicial Trustee.
The court can even, as a last resort, act as trustee itself. As Lord Eldon LC acknowledged long ago in Morice v Bishop of Durham (1805) 10 Ves 539: "As it is a maxim, that the execution of a trust shall be under the control of the court,...if the trustee dies, the court itself can execute the trust".
As for the maximum number of trustees, you should note that for private trusts of land the maximum is four (s34(2) Trustee Act 1925), but for charitable trusts and trusts of pure personalty there is in theory no upper limit.
The next page of the workbook examines the various statutory provisions designed to ensure that there is always someone authorised to appoint new trustees.
Trustee Act 1925 s36(1) provides that:
Where a trustee..is dead, or remains out of the United Kingdom for more than twelve months, or desires to be discharged from all or any of the trusts or powers reposed in or conferred on him, or refuses or is unfit to act therein, or is incapable of acting therein, or is an infant, then, subject to the restrictions imposed by the Act on the number of trustees,
(a) the person or persons nominated for the purpose of appointing new trustees by the instrument, if any, creating the trust; or
(b) if there is no such person, or no such person able and willing to act, then the surviving or continuing trustees or trustee for the time being, or the personal representatives of the last surviving or continuing trustee; may, by writing, appoint one or more other persons (whether or not being the persons exercising the power) to be a trustee or trustees in the place of the trustee so deceased remaining out of the United Kingdom, desiring to be discharged, refusing, or being unfit or incapable, or being an infant, as aforesaid.
(emphasis added)
Note that subject to the trust instrument providing to the contrary, section 36 does not authorise the appointment of a sole trustee, not being a trust corporation, where the trustee, when appointed, would not be able to give valid receipts for all capital money arising under the trust (s.37 Trustee Act 1925). In practice this means that where the only trustee of the trust retires, he must be replaced by two trustees or a trust corporation (see Adam & Co International Trustees Ltd v Theodore Goddard (a firm) (2000) 97(13) LSG 44).
Trustee Act 1925 s41(1) provides that:
The court may, whenever it is expedient to appoint a new trustee or new trustees, and it is found inexpedient difficult or impractical to do so without the assistance of the court, make an order appointing a new trustee or new trustees either in substitution for or in addition to any existing trustee or trustees, or although there is no existing trustee...
Section 19 TLATA 1996
Since the 1st of January 1997, section 19 of the TRUSTS OF LAND AND APPOINTMENT OF TRUSTEES ACT 1996 applies where all the beneficiaries under the trust are sui juris and together absolutely entitled, and there is no person nominated under the trust instrument to appoint new trustees (as to which, see Re Wheeler and s36(1) above).
Section 19(2)(b) provides that the beneficiaries may by writing direct the existing trustees (or, if there are none, the personal representatives of the last surviving trustee), to appoint by writing to be a trustee or trustees such person or persons specified in the direction. (The restriction in the TRUSTEE ACT 1925, that no more than four trustees are to be appointed, still applies.)
Appointment of trustees - Test
A testator set up a trust of pure personalty in his will and nominated Tabitha and Tom to be the trustees. Albert was nominated in the will trust to be the person authorised to appoint new trustees in the event of the bankruptcy of any trustee. Tabitha, and then Tom, predeceased the testator.
The testator failed to nominate new trustees before he himself died. The beneficiaries of the will trust were all infants at the date of the testator's death.
Who has the power to appoint new trustees?
(a) Albert
(b) The personal representatives of Tom
(c) The court
(d) The beneficiaries
Answer: The Court (c)
On the facts it is certainly expedient for the court to appoint new trustees, and inexpedient to do so without the court's assistance (s41 Trustee Act 1925)..
Appointment of trustees –Test
From the following list of persons place a tick against those whose appointment as a trustee would generally be invalid under s36(1) and s41 of the Trustee Act 1925.
(a) an undischarged bankrupt
(b) a person with whom the current trustees will unreasonably refuse to cooperate
(c) a person resident abroad
(d) the spouse of a beneficiary
(e) a person approved of by some beneficiaries but not others
(f) the person nominated in the trust instrument to appoint trustees
Answer: (a), (c), (d), & (e)
8.2.2. Disclaimer of the Trust
When you have completed the trusteeship workbook you will see that trusteeship is often an onerous responsibility and you may wonder why anybody would agree to act as a trustee. The fact is, of course, that frequently the persons who are nominated in an express deed of trust to act as trustees will decline to accept the appointment. This is said to be a disclaimer.
If the person nominated to be a trustee actually carries out any of the duties of the office it will be too late to disclaim, for the trusteeship is then deemed to have been accepted and the only way for the trustee to escape is to retire. But what is the situation where disclaimer comes before actual or deemed acceptance of the trusteeship? Could it be that disclaimer might actually cause the trust to fail, and if so, how can that be reconciled with the general rule that A TRUST WILL NEVER FAIL FOR WANT OF A TRUSTEE ?
The multiple choice exercise on the next page tests these issues.
Disclaimer of trust –Test
Can disclaimer by the nominated trustees cause the trust to fail?
(a) never
(b) Yes, if the nominated trustee is essential to the particular trust
(c) always
(d) Yes, if the trust is disclaimed before it had been constituted
Answer (b) is correct.
See the case of Re Lysaght. In that case a charitable trust was set up to grant studentships at the Royal College of Surgeons to the sons of medical practitioners. However, according to the terms of the trust, no Jewish or Roman Catholic person was permitted to benefit. Accordingly, the Royal College refused to accept the trust unless the offending provision was removed. No other trustee could have accepted this trust, and Buckley J acknowledged that if the Royal College disclaimed the trust the trust would be rendered void.
For Answer (a): the general principle is that trusts do not fail for want of a trustee, but that principle only applies to trusts after they have been validly created. Sometimes disclaimer will render a trust void. Make another choice.
As for Answer (d); Whether this choice is correct or not is the subject of some debate. One thing seems certain, situations in which disclaimer might occur before a trust is properly constituted must be very rare. Consider testamentary and inter vivos trusts separately.
Trusts contained in wills are constituted by the testator's/testatrix's death, and so it is hard to see how a trustee nominated could possibly have the opportunity to disclaim the trust before it had been constituted. Even if the trustee disclaimed the trust before the testator's death, by presenting the testator with a deed of disclaimer, it must be doubtful that the testator's will trusts would fail simply because the testator happened to die before executing a codicil to his will naming new trustees.
Inter vivos trusts are different, of course. They are constituted at the moment that the settlor of the trust has done everything within his or her power to transfer title in the trust property to the trustees. It could be argued, therefore, that if the trustees disclaim the trust before the constituting transfer has been completed, the trust will fail ever to come into being. It might be said to be void ab initio (See P.Matthews [1981] Conv 141). In that article P.Matthews criticises the orthodox judgment in Mallot v Wilson [1903] 2 Ch 494 where a trustee disclaimed the trust "as soon as he heard of it" and the judge held nevertheless that the trust was not void ab initio, but valid until disclaimer.
8.2.3. Retirement from the Trust
Retirement is the decision made voluntarily by a trustee to relinquish the office of trustee.
Not surprisingly there will come a time when most human trustees (as opposed to trust corporations, the public trustee etc.) will desire to be discharged from the onerous duties and functions of the office.
As Farwell J stated in Re Chetwynd's Settlement [1902] 1 Ch 692: "No trustee accepts the responsibility for the term of his natural life, or for more than a reasonable period".
Nevertheless, despite this common sense observation, it is equally sensible to prevent trustees from simply walking away from the trust when they finally tire of it! For this reason, trustees are only permitted to retire in certain circumstances, or according to certain formalities. The following activity pages consider the possible modes of retirement and examine the extent to which trustees may continue to be liable after retirement, or attempted retirement.
Retirement from the trust –Test
By which of the following methods is it possible to retire from a trust?
1. Retirement by means of an authority expressly granted by the terms of the trust instrument.
2. Retirement by court order granting consent to retirement.
3. Retirement by obtaining the consent of all the beneficiaries, where the beneficiaries are all sui juris.
4. Retirement by executing a deed of retirement in accordance with section 39 of the Trustee Act 1925
5. Retirement under s.36(1) of the Trustee Act 1925, where another trustee is appointed in replacement.
6. Retirement by effluxion of time, because all trusteeships come to an end after a certain period of time.
Answer: 1, 2, 3, 4, & 5.
There follows a number of statements about the effect of retirement on the duties of trustees and the liability of trustees for breach of their trust. Click to indicate whether you believe the statements to be true or false.
1. If a trustee wishes to purchase trust property from the trust he or she should retire before doing so or be held liable for self dealing.
o û True ü False
Answer: False
A trustee may only purchase property from the trust after retirement if, at the time of retirement, the trustee had no idea of a future purchase in mind (see Re Boles and the British Land Company's Contract [1902] 1 Ch 244). A trustee may not retire with a view to doing that which would have been a breach of trust had he remained a trustee.
2. when a trustee retires with the consent of the remaining trustees the remaining trustees alone will be liable for any breaches of trust committed before the retirement
o û True ü False
Answer: False
If a trustee commits a breach of trust they cannot escape liability to the beneficiaries of the trust by simply retiring from the trust. In such a case, whether or not the other trustees gave consent to such retirement is irrelevant.
3. a trustee who has retired can never be liable for breaches of trust occurring after their retirement
o û True ü False
Answer: False
The case of Head v Gould [1898] 2 Ch 250 makes one thing clear: if a trustee retires in order to facilitate a breach of trust the retired trustee will be liable for that breach of trust even though it occurs after the date of retirement. Unfortunately, in other respects the judgment in Head v Gould is rather unclear (which is regrettably typical of a judgment of Kekewich J - probably the most extensively overturned judge to ever sit at Chancery!). If one can distil any ratio decidendi it is probably that liability will only arise if the retired trustee is proven to have actually contemplated the particular breach of trust which occurred after his or her retirement, and will not be liable merely because the retirement as a matter of fact facilitated the breach of trust.
4. a trustee may be held vicariously liable for the wrongful acts of their successors
o True ü False
Answer: False
5. if the formal requirements for retirement under the Trustee Act 1925 are not met, equity will not ignore the lack of formality and the trustee will potentially remain liable for all breaches of trust despite their attempt to retire
o True False
Answer: True.
8.2.4. Removal of Trustees
When trustees retire they do so voluntarily. When trustees are removed, they are removed against their will.
In addition to its inherent jurisdiction to remove trustees, the courts have a statutory jurisdiction within section 41 of the Trustee Act 1925 to remove trustees when appointing substitute trustees (see, generally, Appointment of trustees). Having read that section, attempt to answer the following multiple choice question: Which of the following circumstances might justify the removal of a trustee under section 41 Trustee Act 1925?
(a) bodily and mental infirmity consequent upon old age
(b) reneging upon a promise to retire
(c) refusal to co-operate with a new trustee appointed by the court
(d) the trustee's insolvency
Answer: All correct
8.3. Fulfilling the office of Trustee
8.3.1. Introduction
Trustees owe a duty to discharge the trust that has been reposed in them. This duty is in part a duty to serve the present and future beneficiaries of the trust, but only where that is consistent with the trustees' broader duty to fulfil the terms of the trust as laid down by the settlor.
According to recent decisions of the Court of Appeal (see Bristol & West BS v Mothew and Armitage v Nurse) there are two main ways in which trustees discharge their trust. Namely "acting faithfully" and "acting carefully". The duty to discharge the trust faithfully is called the trustees "fiduciary duty"; the duty to act carefully is called the trustees' "duty of care" or "duty of prudence".
The fiduciary duty requires that trustees must not place themselves in a position in which their duties to the trust might conflict with their self-interest, nor can they put themselves in a position in which their duties to the trust might conflict with a duty to another trust, office or person. The fiduciary duty goes further. It requires that trustees must not, unless authorised by the court or the terms of the trust, embark upon any transaction which might conceivably harm the trust or yield an advantage to the trustee. So strict is the fiduciary duty that an unauthorised transaction by a trustee will be set aside even if an advantage to the trustee is highly unlikely to materialise and (where the trustee has gained an advantage) even where the advantage to the trustee was gained without any corresponding disadvantage to the trust. The reason the fiduciary duty is so strictly applied is essentially two-fold. First, it is intended to encourage exemplary performance by trustees, after all it should not be forgotten that a great deal of societal wealth (not least pension funds) is held by trustees - this is known as the prophylactic (ie. preventative) aim of strict fiduciary duties. Second, it is arguable that the fiduciary duty is strictly applied for symbolic reasons. Some of the most significant relationships in society: doctor-patient, teacher-pupil, lawyer-client, parent-child are based on trust. By requiring higher standards of trustees than of members of society generally, the law asserts the importance of discharging faithfully offices based on trust.
To summarise, then, the office of trustee is fulfilled by obedience to the terms of the trust and by discharging the fiduciary duty and the duty of care. Before we proceed, however, we should sound a note of caution in relation to the supposedly clear distinction between trustee care and trustee loyalty. Clearly loyalty and care do not fall on all fours with each other; there is a distinction between them. One can conceive of a trustee embarking upon an imprudent course of action with the utmost loyalty. There are honest fools. And one can even conceive of a trustee embarking upon a disloyal course of action with the utmost care for the fund. An example might be a trustee who does his very best to carefully maximise the value of the trust fund, because he harbours a secret intention to misappropriate the whole of it to his own use at some future date. Right up until the moment he steals the trust fund his care of the trust fund might have been beyond reproach. Indeed, provided he invests it well after misappropriation it might be hard to criticise his care of the fund even then. He cared for the fund, but for his own disloyal ends. However, although there is an obvious distinction between loyalty and honesty on the one hand and care on the other, there is a degree of overlap.
The "reckless" trustee ie. a trustee who simply "couldn't care less" what happens to the fund, is one point of overlap between loyalty and care. When such a trustee neglects to discharge his trust, he does so by deliberate neglect of the interests of the trust. His neglect was not the product of mere oversight. Is there any great difference between that trustee and the trustee who accepts an office (eg. a directorship of a company) knowing that there is a risk that his holding that office might harm the trust? (Perhaps he is the trustee of a charity for the promotion of organic farming who has accepted a directorship in a company which promotes genetically modified foods.) The example of the reckless trustee suggests that there is sometimes a fine line between the disloyal and the careless trustee.
8.3.2. Standard of Care
This workbook commenced with the observation that trustees must discharge their fiduciary duty of loyalty and their duty of care. But how careful must they be? The answer is now provided by section 1 of the Trustee Act 2000:
(1) Whenever the duty under this subsection applies to a trustee, he must exercise such care and skill as is reasonable in the circumstances, having regard in particular-
(a) to any special knowledge or experience that he has or holds himself out as having, and
(b) if he acts as trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession.
(2) In this Act the duty under subsection (1) is called 'the duty of care'.
According to the notes which accompany the Act, this 'new precisely defined statutory duty of care' is applicable to trustees 'when carrying out their functions under the Act or equivalent functions under the trust instrument'.
In fact, the standard of care is not "precisely defined" at all. To determine what is "reasonable" in the circumstances (as those words are used in section 1) still requires one to consult the standard of care as required by Victorian case-law (see the discussion of Speight v Gaunt on the next activity page.)
According to section 2 of the Trustee Act 2000, Schedule I to the Act lists the circumstances in which the statutory duty of care will apply.
Examination of Schedule I reveals those circumstances to include:
o The exercise of general investment powers, 'however conferred', (Sch. I para. 1.);
o The exercise of any power, 'however conferred', to acquire land (Sch. I para. 2);
o The appointment of agents, nominees and custodians (Sch. I para. 3) and the insurance of trust property (Sch. I para. 5).
But '[t]he duty of care does not apply to powers conferred by a trust instrument if or in so far as it appears from the trust instrument that the duty is not meant to apply' (Sch. I para. 7). (See exclupatory clauses.)
8.3.3. Trustees’ decision-making
Gisborne v Gisborne (1877) 2 App Cas 300, House of Lords
Facts: Trustees held a fund upon trust for the maintenance of the testator's mentally infirm wife. The terms of the trust granted the trustees "Uncontrollable authority" as to how the fund should be applied. The care of "lunatics" (the unfortunately label then applied to the mentally ill) normally lay within the powers of the court, and so a decree of the Court of Chancery had recorded the court's approval of the trustees' chosen course of action. The question arose, to what degree was the court competent to give such approval? In other words, to what extent could the court review the exercise of such a discretion?
The House of Lords held: (per Lord Cairns LC): that the part of the decree "approving" of the trustees' course of action should be struck out. The court had no jurisdiction to approve or disapprove of that which was in the "uncontrollable" discretion of the trustees. Where a trustees' discretion is qualified by words which make it "uncontrollable", or by words of similar intent, it is to be without check by any superior tribunal, provided that the discretion was exercised in good faith.
Re Roper's Trusts (1879) 9 ChD 272, Chancery Division
A fund was settled upon trustees for certain infant beneficiaries. The income of the fund was to be paid by them to the mother of the infants, Fanny Keech. The will trust granted the mother discretion as to how the fund should be distributed amongst the children. The discretion was not expressed to be "absolute" or "uncontrollable".
On finding that the mother had not exercised her discretion soundly, the trustees were ordered to pay the income of the fund to the father of the infants to be distributed by them. "The sole question for present decision is, whether I have power to exercise any control over this fund. I think that Fanny Keech has not exercised a sound discretion; and that where the Court finds such to be the case, though the income is by the words of the will left to the discretion of a given person, the Court has power to control that discretion and to deal with the income".
Courts are generally most reluctant to interfere with trustee decision making in decisions of this sort. This anomalous decision may be partly explicable as a paternalism in relation to the female trustee. The case preceded the Married Women's Property Act 1882.
Wilson v Turner (1883) 22 Ch D 521, Court of Appeal
Trustees of a marriage settlement had a power to apply the whole or part of the annual income of the trust towards the maintenance of the child of the marriage as the trustees should in their discretion think fit. The trustees in fact paid the whole of the income of the trust fund to the child's father without exercising any discretion as to its application for the child's maintenance.
As the trustees had not exercised any discretion at all the father must be held liable to repay to the trust the entirety of the income he had received.
Compare Re Locker's Settlement [1977] 1 WLR 1323. In that case the trustees of the settlement were empowered to distribute the income of the fund amongst a number of beneficiaries. Their discretion was stated to be "absolute and uncontrolled". Having accumulated all the income which had accrued since the inception of the trust (and having done so in breach of trust, but in accordance with the settlor's wishes) the trustees took out a summons for directions as to how the income ought to be distributed.
The court in Re Locker’s Settlement exercised its discretion to permit the trustees to remedy their breach by making a tardy distribution of the fund. A tardy distribution by the trustees was said to be closer to what the settlor had intended than a tardy distribution by somebody else at the court's direction.
Re Hasting's-Bass [1975] Ch25, Court of Appeal
Buckley LJ asked:
"In these circumstances, can it be said that the trustees have never exercised their discretion under s32?"
He concluded:
"There is no reason to suppose that, in the light of their understanding or advice as to the law, they failed to ask themselves the right questions or to arrive in good faith at a reasonable conclusion".
His Lordship decided that so long as the end result was beneficial to the advancee, as it was in this case, it could properly be described as an "advancement" within s32.
In Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587 the rule in Re Hastings-Bass was reduced to three questions which the courts should ask when reviewing the exercise by a trustee of its discretions. Namely,
(1) what was the trustee under a duty to consider?
(2) did it fail to consider those matters?
(3) if so, what would the trustee have done if he or she had not failed to consider those matters. Warner J held that before a court will set aside the trustee's exercise of discretion, "it must be clear that the trustees would not have done what in fact they did "had they taken the proper issues into consideration".
At first it is difficult to draw a common thread from the cases considered in the previous exercise. Indeed, the situation becomes even more complex when one recalls our study of the standard of care. There we observed that in relation to many trust matters the courts compare trustee activities, including decision-making, against a paradigm standard of trustee behaviour (that of the ordinary prudent business person) and are quite willing to find trustees liable for breach of that standard.
Is it a total mystery why the courts appear to be so much more willing to review trustee decision making in some cases as compared to others, or is it possible to discern a rationale underlying the cases?
The following rationales present themselves as possibilities:
(1) The courts never interfere with trustee discretions which the trust instrument describes as being "absolute", "uncontrolled" or "uncontrollable".
This rationale of the cases goes only part of the way to explaining the courts' approach to the review of trustee decision making.
In Gisborne and Re Locker's the presence of qualifying words rendering the trustees' discretion "absolute", "uncontrollable" etc.was certainly a relevant factor in the courts' general laissez-faire approach in those cases. Similarly, one could argue that the absence of such words was the reason why the court in Re Roper's was willing to substitute its own decision for that of the trustee.
However, despite the presence of similar words in Bishop v Bonham, where the chargee (whom the court acknowledged to be analogous to a trustee) was authorised to sell shares as he "may think fit", the Court of Appeal was quite prepared to intervene. See the dictum of Slade LJ.
(2) The courts are more willing to review decision making on purely administrative/ministerial matters eg how to invest the trust fund; and less willing to review decisions relating to the disposition of the trust fund eg decisions relating to maintenance, advancement and the appointment of beneficiaries to discretionary trusts.
This rationale assumes a basic two-fold distinction in the types of trustee discretions. On the one hand, there are administrative discretions, ie those which relate to the management of the trust fund (the best example being the discretion as to how the fund should be invested). On the other hand, there are dispositive discretions, ie those which relate to the disposal of the trust property to the beneficiaries (the best example being the discretion in discretionary trusts of the McPhail v Doulton type. The discretions involved in the maintenance and advancement of beneficiaries are generally also dispositive. Although, in cases where capital or income is re-settled in new trusts by way of maintenance or advancement, it is arguable that the whole process has a more managerial, that is administrative, flavour).
(3) The courts are more willing to review decision-making where the decision is one which is common to all trustees; and are less willing to review the exercise of discretions which the settlor has expressly granted to the trustees.
Courts will be most reluctant to interfere with the exercise by the trustees of the wide discretions inherent in discretionary trusts precisely because those discretions do not arise from the general law, but arise from the particular wishes of the settlor.
In contrast, the courts are more prepared to interfere with discretions which are established by the general law (see the dictum of Slade LJ in Bishop v Bonham).
The distinction between discretions established by the general law and discretions established by the settlor of the particular trust might explain the fact that courts are willing to review certain discretions more than others. A potential difficulty with this rationale is, however, that certain types of discretion do not readily fit neatly into either category. Consider, for example, the trustees' discretion whether to make payments out of the trust by way of maintenance or advancement of the beneficiaries. These discretions are established in the general law (ss31 and 32 of the Trustee Act 1925), but we have seen (see Hastings-Bass, for example) that the courts are reluctant to review the exercise of this type of discretion.
Nevertheless, supporters of this rationale would no doubt point out that, although the powers to maintain or advance are established in the Trustee Act 1925, they only appear there to reflect the fact that most settlors already expressly include such powers in their trusts. Indeed, it is for this reason, they would argue, that the powers of maintenance and advancement can still be removed from trusts at their inception if the settlor so wishes (s69(2) Trustee Act 1925).
(4) The courts are more willing to review decision-making where there is some norm or established paradigm/standard against which the decision can be judged, eg investment; and are less willing to review decisions for which there is no norm, eg the decision whether or not it would benefit Miss X to pay her income from the fund.
Another possible rationale for distinguishing between different types of discretion is that certain discretions are more susceptible to review by the courts because there are norms (or normative standards/paradigms) against which the trustee's behaviour can be judged, whereas for other types of decision-making there are no norms against which to judge the trustee's.
An example of the former would be the trustee's discretion as to which agent to choose to carry out particular trust functions (in such a case the Speight v Gaunt "prudent businessman" standard would apply - see Fry v Tapson (1884) 28 ChD 268).
An example of the latter would be the trustee's discretion whether or not to maintain or advance a beneficiary. Judicial reluctance to review this discretion might be explicable on the basis that there is no general standard against which the exercise of that discretion can be judged. Whether the power to maintain or advance should be utilised is very much a matter for the broad, private discretion of the particular trustee, which will vary from trust to trust.
8.3.4. Conflict of interest & duty
The trust is the "fiduciary" relationship par excellence. A fiduciary relationship is one in which the fiduciary owes to the other party a special duty to act in good faith. Fiduciary relationships such as employer/employee; director/company; agent/principle are defined by analogy to the relationship of trustee to beneficiary. Note, however, that apart from the case of a trustee one should not assume that the holder of a particular office is a fiduciary. It is the presence of fiduciary duties that gives rise to a fiduciary relationship, not vice-versa (see Bristol & West BS v Mothew )
A central feature of the fiduciary nature of trusteeship is that trustees must not put themselves in a position where there might be a conflict between their self-interest (or duties to others) and their duty to the trust.
Bearing in mind the above statement, consider the factual situation set out below. Your task at this stage is to write down as many breaches of the trustees' fiduciary duty as appear from the facts.
Paul and Pamela are tenants of Chatsmoral Mews, a residential property on the Chatsmoral estate. They are, in addition, Managing director, and company secretary, respectively, of Chatsmoral Park Estate Management Co Ltd. The management company runs the commercial farming activities on the Chatsmoral estate.
In 1987 Pamela's uncle, as the sole surviving trustee of the Chatsmoral Settlement Trust (which holds the title to all the properties on the estate), appointed Paul and Pamela to be trustees of that trust. The trusteeship is unremunerated. Pamela's uncle died later that year.
Having brought their commercial know-how to the trusteeship, Paul and Pamela were very successful in their management of the trust fund. The 1997 trust accounts revealed a four-fold increase in the value of the fund. The increased value of the fund had largely been achieved by the success of the management company in which, since 1980, the trust had held a controlling block of shares, and by virtue of increased rents on estate property, although the rents on Chatsmoral Mews had remained fixed at 1987 prices.
In view of the success of the company, the board (comprising Paul and Pamela) has just awarded 50% pay rises to its two directors. Paul and Pamela would also welcome remuneration from the trust itself, but seeing that there is no charging clause in the trust instrument they presume that this will not be possible.
Recently Paul and Pamela have purchased for themselves the freehold to Chatsmoral Mews at the current market rate.
Bristol and West Building Society v Mothew [1998] Ch 1, CA
Facts: In 1988 the defendant solicitor acted for a husband and wife in the purchase of a house for £73,000 and also for the plaintiff to whom the purchasers had applied for a loan of £59,000 to finance the purchase. The plaintiff offered to advance the money on the express condition that the balance of the purchase price was provided by the purchasers without resort to further borrowing, and it instructed the solicitor to report, prior to completion, any proposal that the purchasers might create a second mortgage or otherwise borrow in order to finance part of the purchase price. The solicitor knew that the purchasers were arranging for an existing bank debt of £3,350 to be secured by a second charge on the new property but, due to an oversight, he stated in his report to the plaintiff that the balance of the purchase price was being provided by the purchasers without resort to further borrowing. The plaintiff advanced the loan and the purchase was completed. When the purchasers defaulted on their mortgage repayments the plaintiff enforced its security and the house was sold at a loss. The plaintiff sought to recover the whole of its loss on the transaction from the solicitor, alleging breach of contract, negligence and breach of trust.
Held (inter alia): That the solicitor's conduct in providing the plaintiff with the wrong information, although a breach of duty, was neither dishonest nor intentional but due to an oversight and was unconnected to the fact that he was also acting for the purchasers; that, accordingly, his conduct and subsequent application of the money advanced by the plaintiff to complete the purchase was not a breach of trust or fiduciary duty; and that the order for damages for breach of trust would therefore be set aside. Appeal allowed on other grounds.
MILLETT LJ: . . . 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. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary. As Dr Finn pointed out in his classic work Fiduciary Obligations (1977) p. 2, he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary. (In this survey I have left out of account the situation where the fiduciary deals with his principal. In such a case he must prove affirmatively that the transaction is fair and that in the course of the negotiations he made full disclosure of all facts material to the transaction. Even inadvertent failure to disclose will entitle the principal to rescind the transaction. The rule is the same whether the fiduciary is acting on his own behalf or on behalf of another. The principle need not be further considered because it does arise in the present case. The mortgage advance was negotiated directly between the society and the purchasers. The defendant had nothing to do with the negotiations. He was instructed by the society to carry out on its behalf a transaction which had already been agreed.) The nature of the obligation determines the nature of the breach. The various obligations of a fiduciary merely reflect different aspects of his core duties of loyalty and fidelity. Breach of fiduciary obligation, therefore, connotes disloyalty or infidelity. Mere incompetence is not enough. A servant who loyally does his incompetent best for his master is not unfaithful and is not guilty of a breach of fiduciary duty. In the present case it is clear that, if the defendant had been acting for the society alone, his admitted negligence would not have exposed him to a charge of breach of fiduciary duty. Before us counsel for the society accepted as much, but insisted that the fact that he also acted for the purchasers made all the difference. So it is necessary to ask: why did the fact that the defendant was acting for the purchasers as well as for the society convert the defendant's admitted breach of his duty of skill and care into a breach of fiduciary duty? To answer this question it is necessary to identify the fiduciary obligation of which he is alleged to have been in breach. It is at this point, in my judgment, that the society's argument runs into difficulty. A fiduciary who acts for two principals with potentially conflicting interests without the informed consent of both is in breach of the obligation of undivided loyalty; he puts himself in a position where his duty to one principal may conflict with his duty to the other: see Clark Boyce v Mouat [1993] 4 All 268 and the cases there cited. This is sometimes described as 'the double employment rule'. Breach of the rule automatically constitutes a breach of fiduciary duty. But this is not something of which the society can complain. It knew that the defendant was acting for the purchasers when it instructed him. Indeed, that was the very reason why it chose the defendant to act for it. The potential was of the society's own making (see Finn p. 254 and Kelly v Cooper [1993] AC 205). . . . That, of course, is not the end of the matter. Even if a fiduciary is properly acting for two principals with potentially conflicting interests he must act in good faith in the interests of each and must not act with the intention of furthering the interests of one principal to the prejudice of those of the other (see Finn p. 48). I shall call this 'the duty of good faith'. But it goes further than this. He must not allow the performance of his obligations to one principal to be influenced by his relationship with the other. He must serve each as faithfully and loyally as if he were his only principal. Conduct which is in breach of this duty need not be dishonest but it must be intentional. An unconscious omission which happens to benefit one principal at the expense of the other does not constitute a breach of fiduciary duty, though it may constitute a breach of the duty of skill and care. This is because the principle which is in play is that the fiduciary must not be inhibited by the existence of his other employment from serving the interests of his principal as faithfully and effectively as if he were the only employer. I shall call this 'the no inhibition principle'. Unless the fiduciary is inhibited or believes (whether rightly or wrongly) that he is inhibited in the performance of his duties to one principal by reason of his employment by the other, his failure to act is not attributable to the double employment. Finally, the fiduciary must take care not to find himself in a position where there is an actual conflict of duty so that he cannot fulfil his obligations to one principal without failing in his obligations to the other: see Moody v Cox [1917] 2 Ch 71 and Commonwealth Bank of Australia v Smith (1991) 102 ALR 453. If he does, he may have no alternative but to cease to act for at least one and preferably both. The fact that he cannot fulfil his obligations to one principal without being in breach of his obligations to the other will not absolve him from liability. I shall call this 'the actual conflict rule'. . . . In my judgment, the defendant was never in breach of the actual conflict rule. It is not alleged that he acted in bad faith or deliberately withheld information because he wrongly believed that his duty to the purchasers required him to do so. He was not guilty of a breach of fiduciary duty
By virtue of the fiduciary nature of the office of trustee, and the fact that a trustee must not put himself in a position where his self-interest may conflict with his duties to the trust, every transaction which trustees enter into with the trust or the beneficiaries of the trust is subject to the utmost scrutiny.
The above transactions are subject, respectively, to the self-dealing and fair-dealing rules.
The law distinguishes trustees' profits from their expenses. Trustees are able to claim an indemnity (reimbursement), out of the trust fund for any expenses incurred in the discharge of the trust (Hardoon v Belilious [1901] AC 118 and s31(1) Trustee Act 2000). The situation as regards profits could not be more different.
Lord Herschell in the House of Lords in Bray v Ford [1896] AC 44 stated that "It is an inflexible rule of a Court of Equity that a person in a fiduciary position...is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is, as has been said, founded upon principles of morality. I regard it rather as based upon the consideration that, human nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary position been swayed by interest rather than duty, and thus prejudicing those whom he was bound to protect".
Lord Herschell acknowledges in the above dictum that trustees are entitled to make a profit if authorised to do so by the trust instrument. There are, however, other exceptions to the rule that suggest it may not be as inflexible today as it was in 1896. Which of the following do you think are nowadays exceptions to the rule against unauthorised trustee profits?
(a) where a trust instrument allows the trustees to appoint themselves to remunerated directorships of trust-owned companies
Answer (a): Correct.
In Re Llewellin's WT (1949), the testator, L, by his will empowered his trustees to appoint themselves as directors of a trust owned company. Two of them did so and took out a summons to establish whether or not they were accountable to the trust for remuneration received by them in their roles as directors.
It was held that the trustees would be entitled to retain remuneration received in their capacity as directors of the trust owned company. This was so notwithstanding the rule that a trustee must not profit from their trust, for that rule is subject to the expressed intention of the settlor or testator to allow remuneration. On the proper construction of the terms of the will trust L had clearly intended to allow his trustees to hold salaried offices as directors.
(b) remuneration for trust corporations and professional trustees
Answer (b): Correct. According to section 29 of the Trustee Act 2000, in the absence of any provision about entitlement to remuneration in the trust instrument or subordinate legislation, a trust corporation or a person acting as trustee in a professional capacity (eg. a solicitor) is entitled to "reasonable remuneration" out of the trust funds in respect of his services as trustee. Trustees of charitable trusts are, however, excluded from this provision, and a professional trustee who is not a trust corporation is only entitled to remuneration under this section "if each other trustee has agreed in writing that he may be remunerated".
"Reasonable remuneration" means, in relation to the provision of services by a trustee, such remuneration as is reasonable in the circumstances for the provision of those services on behalf of that trust by that trustee.
A trustee is entitled to remuneration under this section even if the services in question are capable of being provided by a lay trustee.
This section applies to a trustee who has been authorised under a power conferred by Part IV or the trust instrument-
(i) to exercise functions as an agent of the trustees, or
(ii) to act as a nominee or custodian, as it applies to any other trustee.
(c) trustees are permitted to make unauthorised profits where they openly and honestly declare the profit in advance of making it
Answer (c): Wrong. As Oliver LJ stated in the Court of Appeal in Swain v Law Society, "the rule of equity is in no way concerned with good faith".
(d) where the trustee has produced a profit for the trust, the court may award a sum of money to the trustee in acknowledgement of the trustee's past service to the trust
Answer (d): Correct. See Boardman v Phipps [1967] 2 AC 46. See, also, O'Sullivan v MAM Ltd [1985] 3 All ER 351.
Boardman and another v Phipps (1967) House of Lords
B, a solicitor to a trust, attended the AGM of a company in which the trust had a substantial shareholding. Unhappy with the state of the company, B and one of the beneficiaries under the trust (the co appellant) decided to launch a take over bid personally for those shares in the company which were not already trust owned. The inside knowledge of the company which enabled the appellants to make the take over bid had been obtained at the AGM where they had been acting as proxies for the trustees. B wrote to the beneficiaries outlining his plans to take a personal interest in the company, thus giving them an opportunity to raise any objections they might have to his so doing. No objections having been made, the appellants proceeded with their take over. In the event the take over was highly successful and the value of all the shares in the company greatly increased in value. The trust profited, and so did the appellants. The present action was brought by P, a beneficiary under the trust, for an account of profits made by B in his fiduciary capacity as solicitor to the trust. The trial judge found as a fact that P had not been fully informed by B as to the precise nature of his plans.
Held (Viscount Dilhorne and Lord Upjohn dissenting) the appellants had placed themselves in a fiduciary position in relation to the trust and would therefore be accountable for the profits they had made on information obtained by virtue of their fiduciary position. However, they had acted honestly and openly throughout and their actions had yielded profits for the trust, they would accordingly be entitled to generous remuneration as reward for their work and skill. Lord Hodson regarded the information obtained by the appellants as property of the trust and held them liable to account as constructive trustees for profits they had made thereon. Lord Cohen, however, felt that information was "not property in the strictest sense of that word". In the event Lord Cohen held them liable to account because their personal profits had been made, not from property of the trust, but from opportunities gained from their positions of trust, that is, from the fiduciary roles into which they had placed themselves in relation to the trust. Lord Guest's reasoning was similar to that of Lord Cohen. Viscount Dilhorne, dissenting, stated that in his view the facts of the instant case did not disclose even a possibility of conflict between the personal interests of the appellants and those of the trust. Nor did he think that the information obtained at the AGM could be regarded as being property of the trust. The information was of no value to the trust because the trust had declined to take advantage of it. In the absence of any breach of duty or impropriety on the part of the appellants his Lordship refused to find them liable to account. Lord Upjohn, dissenting, accepted that the appellants would have to give an account of their personal profits if their personal interests "possibly may conflict" with the interests of the trust. However, he construed those words as meaning "a real sensible possibility of conflict". His Lordship could not find any such possibility on the facts of the present case and accordingly held for the appellants.
O'Sullivan v Management Agency Music Ltd (1985) Court of Appeal
When still an unknown artist, Gilbert O'Sullivan, a composer and performer of pop music, signed management agreements with companies controlled by Mr Mills (M), a music agent. The terms of the agreements were not as favourable to OS as they would have been had he had independent legal advice. OS had naively trusted M and had failed to negotiate the agreements in the usual "arms length" way. Nevertheless, the management and marketing prowess of M's companies brought OS great success and the wealth that accompanies such success. In due course, however, their working relationship deteriorated and ultimately OS brought an action against M and his companies, seeking to have the management contracts declared void on the basis that they had been obtained by undue influence. The trial judge set the contracts aside and ordered that M and his companies should account for profits made on the music of OS, together with compound interest on those profits. The defendants conceded that there had been undue influence on the part of M, but appealed against the companies' liability and against the remedies awarded against the companies and against M.
It was held that the companies were subject to the same liability as M because they had been under the de facto control of M. It had therefore been proper to set aside all the contracts. However, in determining the appropriate remedy it was necessary to make allowance for the work done by the companies on behalf of OS. This meant that the companies would be allowed to retain a reasonable profit even though they, through M, had been in a fiduciary position in relation to OS. Further, the defendants would not be required to pay compound interest on their account of profits because some of the monies made by the companies had been used for the benefit of OS.
Dunn LJ stated that "in taking the account the defendants are entitled to an allowance....for reasonable remuneration, including a profit element, for all work done in promoting and exploiting O'Sullivan and his compositions" (emphasis added). He observed that, "although equity looks at the advantage gained by the wrongdoer rather than the loss to the victim, the cases show that in assessing the advantage gained the court will look to the whole situation in the round". He approved the defendants counsel's submission that the maxim "he who seeks equity must do equity" should be applied.
(e) under its inherent jurisdiction to safeguard the proper administration of the trust, the court may increase trustees' remuneration beyond that authorised by the trust instrument and authorise the future remuneration of trustees where there is no charging clause in the trust instrument .
Answer (e): Correct. See Re Duke of Norfolk's Settlement Trusts [1981] 3 All ER 22, Court of Appeal.
Re Duke of Norfolk's ST (1981) Court of Appeal
A trust corporation ("SETCO") and an individual trustee, the trustees of a settlement set up in 1958, had, throughout the history of the trust, been called upon to devote increasing efforts to its good administration. The increased demands made upon them by the trust had arisen in large part due to the settlement of additional property upon the trust and changes in the tax laws. Accordingly, in 1977 the trustees applied to court for an order under its inherent jurisdiction authorising the trust corporation to claim remuneration at a level higher than that authorised by the trust instrument.
It was held that the court had inherent jurisdiction to authorise such increased remuneration if to do so would be in the interests of the good administration of the trust. It was nevertheless acknowledged that this involved balancing the proper administration of the trust against the fact that the trustee's office is essentially a gratuitous one. The court should have regard to the nature of the trust, the experience and skill of the particular trustees, the sums that they wished to charge compared with those of other trustees and all surrounding facts. The reason for such an extensive inquiry in determining whether or not remuneration would be in the interest of the good administration of the trust might be that such an inquiry should reveal whether or not the trustees will retire from the trust if they are not properly remunerated. The fact is that the choice facing the court is whether to increase the remuneration of a trustee who is familiar with the trust or to risk losing that trustee and appointing, instead, a new trustee who will probably insist on market rate remuneration in any event. The present case was remitted to the Chancery Division to decide whether, on these principles, remuneration should be awarded in the present case.
This case was followed recently in Foster v Spencer [1996] 2 All ER 672, where the trustees of a cricket club were awarded remuneration for their past services to the trust, but were not authorised to receive future remuneration because the tasks remaining to be done were not so complicated that the good administration of the trust required the trustees to be remunerated.
In Paul v Preston 12th December 1996 (unreported) Robert Walker J approved Walton J in Re Duke of Norfolk, who had doubted that remuneration should be awarded where the trustees claim comes a long time after the date of their appointment. Robert Walker J distinguished Foster v Spencer, where the trustees (of a cricket club) had been awarded past remuneration a very long time after their appointment, on the "unusual facts" of that case (there were no funds against which to claim remuneration until the sale of the cricket field some time after the trustees' appointment).
Whatever the arguments may be in relation to fiduciaries like the solicitor in Boardman v Phipps, in the case of trustees of express trusts there are arguably good reasons for maintaining a strict presumption of gratuitous service. Which of the following seem to you to be good reasons for maintaining the strict presumption of gratuitous service? In the light of your conclusions do you think that the liberalisation of trustee remuneration by the Trustee Act 2000 was a step in the right direction?
1. the settlor is always free to make express provision for remuneration in the trust instrument.
2. the trustee is always entitled to refuse to accept the terms of a trust if they do not provide for remuneration
3. if trustees were automatically entitled to remuneration (which would involve them paying cheques to themselves) the opportunity for fraud would surely increase.
4. even if there was not fraud, the risk that fee-paying work might be generated unnecessarily would surely increase.
5. retaining gratuitous service in small family trusts might ensure the continued appointment of trustees who are close family members or friends, who might be expected to work hard on behalf of the trust for no financial recompense.
Answer: All Correct.
They are all good reasons for maintaining a strict presumption of gratuitous service. This does not mean, however, that the Trustee Act 2000 was a step in the wrong direction in relation to remuneration. The Act abandons the presumption of gratuitous service (in favour of a presumption in favour of remuneration) only in the case of trust corporations and trustees acting in a professional capacity. Such trustees would refuse to act unless they were entitled to be reasonably remunerated, so in this aspect the Trustee Act 2000 is simply an acknowledgment of practical reality. Nevertheless, any further extension of the right to remuneration to trustees generally should be resisted. Of course, there would be nothing to prevent such trustees from appointing expert agents to carry out technical ministerial activities.
Now proceed to the next page, where there is an exercise designed to test your detailed knowledge of the provisions of the Trustee Act 2000 in relation to trustee remuneration.
Boardman and another v Phipps (1967) House of Lords
B, a solicitor to a trust, attended the AGM of a company in which the trust had a substantial shareholding. Unhappy with the state of the company, B and one of the beneficiaries under the trust (the co appellant) decided to launch a take over bid personally for those shares in the company which were not already trust owned. The inside knowledge of the company which enabled the appellants to make the take over bid had been obtained at the AGM where they had been acting as proxies for the trustees. B wrote to the beneficiaries outlining his plans to take a personal interest in the company, thus giving them an opportunity to raise any objections they might have to his so doing. No objections having been made, the appellants proceeded with their take over. In the event the take over was highly successful and the value of all the shares in the company greatly increased in value. The trust profited, and so did the appellants. The present action was brought by P, a beneficiary under the trust, for an account of profits made by B in his fiduciary capacity as solicitor to the trust. The trial judge found as a fact that P had not been fully informed by B as to the precise nature of his plans.
Held (Viscount Dilhorne and Lord Upjohn dissenting) the appellants had placed themselves in a fiduciary position in relation to the trust and would therefore be accountable for the profits they had made on information obtained by virtue of their fiduciary position. However, they had acted honestly and openly throughout and their actions had yielded profits for the trust, they would accordingly be entitled to generous remuneration as reward for their work and skill. Lord Hodson regarded the information obtained by the appellants as property of the trust and held them liable to account as constructive trustees for profits they had made thereon. Lord Cohen, however, felt that information was "not property in the strictest sense of that word". In the event Lord Cohen held them liable to account because their personal profits had been made, not from property of the trust, but from opportunities gained from their positions of trust, that is, from the fiduciary roles into which they had placed themselves in relation to the trust. Lord Guest's reasoning was similar to that of Lord Cohen. Viscount Dilhorne, dissenting, stated that in his view the facts of the instant case did not disclose even a possibility of conflict between the personal interests of the appellants and those of the trust. Nor did he think that the information obtained at the AGM could be regarded as being property of the trust. The information was of no value to the trust because the trust had declined to take advantage of it. In the absence of any breach of duty or impropriety on the part of the appellants his Lordship refused to find them liable to account. Lord Upjohn, dissenting, accepted that the appellants would have to give an account of their personal profits if their personal interests "possibly may conflict" with the interests of the trust. However, he construed those words as meaning "a real sensible possibility of conflict". His Lordship could not find any such possibility on the facts of the present case and accordingly held for the appellants.
8.3.5. The duty of personal service to the Trust
Delegation
The classic statement of the trustees' duty of personal service is the maxim delegatus non potest delegare, which means that "the delegate has no power to delegate".
In Turner v Corbey The Master of the Rolls, Lord Langdale, put it thus: "trustees who take on themselves the management of property for the benefit of others have no right to shift their duty on other persons; and if they employ an agent, they remain subject to responsibility towards their cestui que trust, for whom they have undertaken the duty". (1841) 5 Beav 515, 517.
The main advantage of a rule against delegation, particularly in more traditional family trusts, is that it goes some way towards ensuring a certain proximity in the relationship between the original parties to the trust (settlor, trustee, beneficiary). This proximity facilitates mutual supervision and a sense of moral accountability. The sentiment of the rule may have its roots in the Biblical warning "the hired hand does not care for the sheep" (John Chap. 10).
In the seminal text Farwell on Powers the learned authors assert that the rule only prohibits the delegation of trustees' fiduciary powers, and does not prohibit the delegation by them of "powers to do acts merely ministerial" (3rd Edn. 1916 p 498).
In any event, the rule was never absolute even in relation to the delegation of fundamental trust discretions such as the appointment of beneficiaries under a discretionary trust. According to Viscount Radcliffe in the House of Lords in Pilkington v IRC [1964] AC 612 "the law is not that a trustee cannot delegate: it is that trustees cannot delegate unless they have authority to do so". Viscount Radcliffe was referring here to the fact that authority to delegate can be expressly provided for in the trust instrument.
In addition, the Trustee Act 1925 contains a number of provisions which, if they do not all positively authorise delegation, nevertheless they at least provide the trustees with immunity from liability for delegation in certain circumstances. The key provisions are found in ss 23, 25 and 30.
The exercise on the next page considers the trustees' usual duty of prudence as it relates to the employment and supervision of agents. There then follows an exercise designed to test your knowledge of the situations covered by sections 23, 25 and 30. The final page in this section asks you to test proposals for possible future reform of this area of law, to which the Law Commission devoted a great deal of attention in its recent consultation paper (No 146, 1997) and the Law Reform Committee similarly in its 23rd Report (The Powers and Duties of Trustees, 1982).
TRUSTEE ACT 2000
Part IV Agents, Nominees And Custodians
S.11 Power to employ agents
(1) Subject to the provisions of this Part, the trustees of a trust may authorise any person to exercise any or all of their delegable functions as their agent.
(2) In the case of a trust other than a charitable trust, the trustees' delegable functions consist of any function other than-
(a) any function relating to whether or in what way any assets of the trust should be distributed,
(b) any power to decide whether any fees or other payment due to be made out of the trust funds should be made out of income or capital,
(c) any power to appoint a person to be a trustee of the trust, or
(d) any power conferred by any other enactment or the trust instrument which permits the trustees to delegate any of their functions or to appoint a person to act as a nominee or custodian.
(3) In the case of a charitable trust, the trustees' delegable functions are-
(a) any function consisting of carrying out a decision that the trustees have taken;
(b) any function relating to the investment of assets subject to the trust (including, in the case of land acquired as an investment, managing the land and creating or disposing of an interest in the land);
(c) any function relating to the raising of funds for the trust otherwise than by means of profits of a trade which is an integral part of carrying out the trust's charitable purpose;
(d) any other function prescribed by an order made by the Secretary of State.
(4) For the purposes of subsection (3)(c) a trade is an integral part of carrying out a trust's charitable purpose if, whether carried on in the United Kingdom or elsewhere, the profits are applied solely to the purposes of the trust and either-
(a) the trade is exercised in the course of the actual carrying out of a primary purpose of the trust, or
(b) the work in connection with the trade is mainly carried out by beneficiaries of the trust.
(5) The power to make an order under subsection (3)(d) is exercisable by statutory instrument which shall be subject to annulment in pursuance of a resolution of either House of Parliament.
S.12 Persons who may act as agents
(1) Subject to subsection (2), the persons whom the trustees may under section 11 authorise to exercise functions as their agent include one or more of their number.
(2) The trustees may not authorise two (or more) persons to exercise the same function unless they are to exercise the function jointly.
(3) The trustees may not under section 11 authorise a beneficiary to exercise any function as their agent.
(4) The trustees may under section 11 authorise a person to exercise functions as their agent even though he is also appointed to act as their nominee or custodian (whether under section 16, 17 or 18 or any other power).
S.13 Linked functions etc.
(1) Subject to subsections (2) and (5), a person who is authorised under section 11 to exercise a function is (whatever the terms of the agency) subject to any specific duties or restrictions attached to the function. For example, a person who is authorised under section 11 to exercise the general power of investment is subject to the duties under section 4 in relation to that power.
(2) A person who is authorised under section 11 to exercise a power which is subject to a requirement to obtain advice is not subject to the requirement if he is the kind of person from whom it would have been proper for the trustees, in compliance with the requirement, to obtain advice.
(3) Subsections (4) and (5) apply to a trust to which section 11(1) of the Trusts of Land and Appointment of Trustees Act 1996 (duties to consult beneficiaries and give effect to their wishes) applies.
(4) The trustees may not under section 11 authorise a person to exercise any of their functions on terms that prevent them from complying with section 11(1) of the 1996 Act.
(5) A person who is authorised under section 11 to exercise any function relating to land subject to the trust is not subject to section 11(1) of the 1996 Act.
S.14 Terms of agency
(1) Subject to subsection (2) and sections 15(2) and 29 to 32, the trustees may authorise a person to exercise functions as their agent on such terms as to remuneration and other matters as they may determine.
(2) The trustees may not authorise a person to exercise functions as their agent on any of the terms mentioned in subsection (3) unless it is reasonably necessary for them to do so.
(3) The terms are-
(a) a term permitting the agent to appoint a substitute;
(b) a term restricting the liability of the agent or his substitute to the trustees or any beneficiary;
(c) a term permitting the agent to act in circumstances capable of giving rise to a conflict of interest.
S.15 Asset management: special restrictions
(1) The trustees may not authorise a person to exercise any of their asset management functions as their agent except by an agreement which is in or evidenced in writing.
(2) The trustees may not authorise a person to exercise any of their asset management functions as their agent unless-
(a) they have prepared a statement that gives guidance as to how the functions should be exercised ("a policy statement"), and
(b) the agreement under which the agent is to act includes a term to the effect that he will secure compliance with-
(i) the policy statement, or
(ii) if the policy statement is revised or replaced under section 22, the revised or replacement policy statement.
(3) The trustees must formulate any guidance given in the policy statement with a view to ensuring that the functions will be exercised in the best interests of the trust.
(4) The policy statement must be in or evidenced in writing.
(5) The asset management functions of trustees are their functions relating to-
(a) the investment of assets subject to the trust,
(b) the acquisition of property which is to be subject to the trust, and
(c) managing property which is subject to the trust and disposing of, or creating or disposing of an interest in, such property.
S. 16 Power to appoint nominees
(1) Subject to the provisions of this Part, the trustees of a trust may-
(a) appoint a person to act as their nominee in relation to such of the assets of the trust as they determine, and
(b) take such steps as are necessary to secure that those assets are vested in a person so appointed.
(2) An appointment under this section must be in or evidenced in writing.
(3) This section does not apply to any trust having a custodian trustee.
S.17 Power to appoint custodians
(1) Subject to the provisions of this Part, the trustees of a trust may appoint a person to act as a custodian in relation to such of the assets of the trust as they may determine.
(2) For the purposes of this Act a person is a custodian in relation to assets if he undertakes the safe custody of the assets or of any documents or records concerning the assets.
(3) An appointment under this section must be in or evidenced in writing.
(4) This section does not apply to any trust having a custodian trustee.
S. 18 Investment in bearer securities
(1) If trustees retain or invest in securities payable to bearer, they must appoint a person to act as a custodian of the securities.
(2) Subsection (1) does not apply if the trust instrument contains provision which (however expressed) permits the trustees to retain or invest in securities payable to bearer without appointing a person to act as a custodian.
(3) An appointment under this section must be in or evidenced in writing.
(4) This section does not apply to any trust having a custodian trustee.
S.19 Persons who may be appointed as nominees or custodians
(1) A person may not be appointed under section 16, 17 or 18 as a nominee or custodian unless one of the relevant conditions is satisfied.
(2) The relevant conditions are that-
(a) the person carries on a business which consists of or includes acting as a nominee or custodian;
(b) the person is a body corporate which is controlled by the trustees.
(3) The question whether a body corporate is controlled by trustees is to be determined in accordance with section 840 of the Income and Corporation Taxes Act 1988.
(4) The trustees of a charitable trust which is not an exempt charity must act in accordance with any guidance given by the Charity Commissioners concerning the selection of a person for appointment as a nominee or custodian under section 16, 17 or 18.
(5) Subject to subsections (1) and (4), the persons whom the trustees may under section 16, 17 or 18 appoint as a nominee or custodian include-
(a) one of their number, if that one is a trust corporation, or
(b) two (or more) of their number, if they are to act as joint nominees or joint custodians.
(6) The trustees may under section 16 appoint a person to act as their nominee even though he is also-
(a) appointed to act as their custodian (whether under section 17 or 18 or any other power), or
(b) authorised to exercise functions as their agent (whether under section 11 or any other power).
(7) Likewise, the trustees may under section 17 or 18 appoint a person to act as their custodian even though he is also-
(a) appointed to act as their nominee (whether under section 16 or any other power), or
(b) authorised to exercise functions as their agent (whether under section 11 or any other power).
S.20 Terms of appointment of nominees and custodians
(1) Subject to subsection (2) and sections 29 to 32, the trustees may under section 16, 17 or 18 appoint a person to act as a nominee or custodian on such terms as to remuneration and other matters as they may determine.
(2) The trustees may not under section 16, 17 or 18 appoint a person to act as a nominee or custodian on any of the terms mentioned in subsection (3) unless it is reasonably necessary for them to do so.
(3) The terms are-
(a) a term permitting the nominee or custodian to appoint a substitute;
(b) a term restricting the liability of the nominee or custodian or his substitute to the trustees or to any beneficiary;
(c) a term permitting the nominee or custodian to act in circumstances capable of giving rise to a conflict of interest.
S.21 Application of sections 22 and 23
(1) Sections 22 and 23 apply in a case where trustees have, under section 11, 16, 17 or 18-
(a) authorised a person to exercise functions as their agent, or
(b) appointed a person to act as a nominee or custodian.
(2) Subject to subsection (3), sections 22 and 23 also apply in a case where trustees have, under any power conferred on them by the trust instrument-
(a) authorised a person to exercise functions as their agent, or
(b) appointed a person to act as a nominee or custodian.
(3) If the application of section 22 or 23 is inconsistent with the terms of the trust instrument, the section in question does not apply.
S.22 Review of agents, nominees and custodians
(1) While the agent, nominee or custodian continues to act for the trust, the trustees-
(a) must keep under review the arrangements under which the agent, nominee or custodian acts and how those arrangements are being put into effect,
(b) if circumstances make it appropriate to do so, must consider whether there is a need to exercise any power of intervention that they have, and
(c) if they consider that there is a need to exercise such a power, must do so.
(2) If the agent has been authorised to exercise asset management functions, the duty under subsection (1) includes, in particular-
(a) a duty to consider whether there is any need to revise or replace the policy statement made for the purposes of section 15,
(b) if they consider that there is a need to revise or replace the policy statement, a duty to do so, and
(c) a duty to assess whether the policy statement (as it has effect for the time being) is being complied with.
(3) Subsections (3) and (4) of section 15 apply to the revision or replacement of a policy statement under this section as they apply to the making of a policy statement under that section.
(4) "Power of intervention" includes-
(a) a power to give directions to the agent, nominee or custodian;
(b) a power to revoke the authorisation or appointment.
S. 23 Liability for agents, nominees and custodians
(1) A trustee is not liable for any act or default of the agent, nominee or custodian unless he has failed to comply with the duty of care applicable to him, under paragraph 3 of Schedule 1-
(a) when entering into the arrangements under which the person acts as agent, nominee or custodian, or
(b) when carrying out his duties under section 22.
(2) If a trustee has agreed a term under which the agent, nominee or custodian is permitted to appoint a substitute, the trustee is not liable for any act or default of the substitute unless he has failed to comply with the duty of care applicable to him, under paragraph 3 of Schedule 1-
(a) when agreeing that term, or
(b) when carrying out his duties under section 22 in so far as they relate to the use of the substitute.
S.24 Effect of trustees exceeding their powers
A failure by the trustees to act within the limits of the powers conferred by this Part-
(a) in authorising a person to exercise a function of theirs as an agent, or (b) in appointing a person to act as a nominee or custodian, does not invalidate the authorisation or appointment.
S.25 Sole trustees
(1) Subject to subsection (2), this Part applies in relation to a trust having a sole trustee as it applies in relation to other trusts (and references in this Part to trustees-except in sections 12(1) and (3) and 19(5)-are to be read accordingly).
(2) Section 18 does not impose a duty on a sole trustee if that trustee is a trust corporation.
S.26 Restriction or exclusion of this Part etc.
The powers conferred by this Part are-
(a) in addition to powers conferred on trustees otherwise than by this Act, but
(b) subject to any restriction or exclusion imposed by the trust instrument or by any enactment or any provision of subordinate legislation.
S.27 Existing trusts
This Part applies in relation to trusts whether created before or after its commencement
Test Question
Are the following transactions authorised modes of delegation under the general law (ie. ignoring any specific provision in the particular trust instrument)?
Refresh your memory of Part IV of the Trustee Act 2000.
(a) The appointment of a London-based surveyor to value land in Liverpool û Yes ü No
Answer (a): NO
In Fry v Tapson Kay J stated that "I am most reluctant to visit trustees acting bona fide with the consequences of a want of due caution, but...they most incautiously employed the mortgagor's agent...although he was a London surveyor, and it was most important to obtain the opinion of some experienced local surveyor".
(b) Appointing an agent to decide which of the beneficiaries under a discretionary trust should receive a share Yes ü No
Answer (b): NO
As section 11 of the Trustee Act 2000 provides:
S.11 Power to employ agents:
(1) Subject to the provisions of this Part, the trustees of a trust may authorise any person to exercise any or all of their delegable functions as their agent.
(2) In the case of a trust other than a charitable trust, the trustees' delegable functions consist of any function other than- (a) any function relating to whether or in what way any assets of the trust should be distributed...
(c) Where necessary, the appointment of an agent who has power to appoint his own substitutes ü Yes û No
Answer (c): YES
Section 14 of the 2000 Act provides that trustees may authorise agents to act on such terms as they may determine, even in regard to remuneration. However, unless the trust instrument otherwise provides (see s.26(b)), there are certain terms which trustees are not permitted to include 'unless it is reasonably necessary for them to do so' (s.14(2)). The terms in question are those which would permit agents to appoint substitutes (14(3)(a)), restrict the agent's liability (14(3)(b)) or permit the agent to act in circumstances capable of giving rise to a conflict of interest (14(3)(c).
(d) Appointing an agent to grant tenancies out of trust-owned freeholds in accordance with a written policy statement ü Yes û No
Answer (d): YES
Trustees are not permitted to authorise an agent to exercise asset management functions except by an agreement evidenced in writing in which the agent agrees to comply with a 'policy statement' which the trustees are obliged to provide as a guide to the exercise of asset management functions in the best interests of the trust (s.15(1) Trustee Act 2000). The agent must agree to be bound by any revisions of the policy statement made under section 22 of the Act (s.15(2)(b)(ii)). The policy statement (and presumably any revisions of it) must be in writing or evidenced in writing (s.15(4)).
According to subsection 15(5) 'asset management functions' are those functions which relate to the investment of assets subject to the trust (s.15(5)(a)), the acquisition of property which is to be subject to the trust (s.15(5)(b)) and the management of property subject to the trust, including the creation or disposition of interests in such property (s.15(5)(c)).
8.4. Failing as a Trustee
8.4.1. Introduction
Consider the following scenario:
Theresa died in 1988.
By her will she settled a trust of £20,000 cash on trustees for the benefit of her nephew, Bill and her niece Barbara, "in equal shares upon their attaining the age of 21". At the date of Theresa's death Bill was 14 and Barbara was 18. Theresa had also made a gift in her will of £10,000 to another nephew, Barry.
The trustees are Tricia, Tracy and Barry. Tricia is a solicitor.
In 1990 Tricia urged Tracy and Barry to join her in investing in a private limited company which, she said, promised to be a very profitable investment. She explained to the trustees that although the investment was "technically unauthorised", it was very secure. In the event the trustees went ahead with the investment in the company, having first of all obtained the consent of Bill and Barbara, who had been told that the investment was a "secure one".
Shortly after making the investment the shares rose in value and yielded large dividends to the trust, but later they fell in value and today they are practically worthless.
It is now April 1998 and Bill and Barbara are suing the trustees.
This set of facts raises a number of the issues which we will be going on to examine in this part of the workbook.
The obvious first issue is to determine what types of action the beneficiaries might bring against the trustees, and the possible extent of the trustees' liability.
The second issue is whether or not the trustees might be able to raise a defence to the beneficiaries' action.
Finally, if the beneficiaries have no defence, might they nevertheless be able to claim some partial or total relief from liability?
When you have completed this section on breach of trust, attempt to advise the trustees as to their potential liability on the above set of facts.
Are the trustees liable? On what basis? To which party? What is the basic extent of liability? Are the defences? What relief might the trustees be able to claim. (click here for a brief guide answer).
8.4.2.1. Beneficiaries remedies
"The basic right of a beneficiary is to have the trust duly administered in accordance with the provisions of the trust instrument, if any, and the general law"
- Lord Browne-Wilkinson in Target Holdings v Redferns
If it is too late for the trustee to remedy its breach, it may be necessary for the beneficiary to bring legal proceedings against the trustee. Trustees are, of course, permitted to make reasonable errors of judgment without being held personally liable. Nevertheless, the line between a reasonable error of judgment and a breahc of trust may be hard to define. For this reason a trustee should consider insuring the fund, as authorised by s.19 of the Trustee Act 1925 (as amended by Trustee Act 2000 s29).
The remedies that a beneficiary might seek in court are of three basic types:
a) Compensation for loss caused to the trust
b) An account of monies due to the trust
c) Specific restitution of property due to the trust
A beneficiary might seek more than one of these remedies at the same time. So, for example, if a trustee has misappropriated property belonging to the trust he will be liable to make immediate restitution to the trust fund of the specific property. If that property has been, let us say, destroyed, the trustee will be liable to compensate the trust for the loss of that property. Further, suppose that the trustee has been paid to destroy the trust property, he would be liable to account to the trust fund for the unauthorised profit he had made.
However, it is important to note that the plaintiff beneficiary must elect between incompatible remedies before final judgment is entered in the case. See Tang Man Sit (decd) (personal representative) v Capacious Investments Ltd [1996] 1 All ER 193.
Tang Man Sit (decd) (personal representative) v Capacious Investments Ltd [1996] 1 All ER 193, Privy Council, is an important case which established that the plaintiff company’s action in equity for an account of profits was incompatible with its action for an award of damages. The two remedies were alternative, not cumulative.
The facts of the case were briefly that Mr Tang, the owner of land, was party to a joint venture for the building of houses on the land. He agreed to assign some of the houses to the plaintiff after completion of the building works. No assignment was made. Instead, Mr Tang let out the houses as homes for the elderly without the plaintiff’s knowledge or approval. The plaintiff’s claim was, on the one hand, for damages for loss of use and occupation and diminution of the value of the property due to wrongful use and occupation, and on the other hand for an account of unauthorised profits and for compensation for breach of trust. Lord Nicholls held that the two sides of the plaintiff’s claim were mutually exclusive, and that the plaintiff would have to elect between the two remedies. He cited with approval Lord Wilberforce in Johnson v Agnew [1979] who had held that “Election, though the subject of much learning and refinement, is in the end a doctrine based on simple considerations of common sense and equity”. The basic rule is that election between remedies must be made before judgment is finally entered against he defendant.
Lord Nicholls referred to the “classic example” of alternative, inconsistent remedies: it is where what is claimed is “(1) an account of the profits made by the defendant in breach of his fiduciary obligations and (2) damages for the loss suffered by the plaintiff by reason of the same breach. The former is measured by the wrongdoer’s gain, the latter by the injured party’s loss”.
Equity's Approach to Trustee Liability
Brightman J in Bartlett v Barclays Bank (No1) [1980] Ch 515 stated that "the obligation of a trustee who is held liable for a breach of trust is fundamentally different from the obligation of a contractual or tortious wrongdoer".
Contractual damages aim to put the injured party in the position they would have been in had the contract been properly performed. Tortious damages aim to place the injured party, as near as possible, in the position they would have been in had the tort not been committed. Thus both common law remedies have as their primary focus the situation of the injured party.
Equitable remedies for breach of trust, on the other hand, are focussed primarily upon the situation of the wrongdoer. Equity sees as done that which ought to be done, and will thus require the trustee, so far as possible, to fulfil his obligation to the trust. It follows that the requirement to reinstate the capital element of the trust fund will not always equate to compensation of the losses actually suffered by individual beneficiaries (for example, if the trustee's misapplication of the trust fund reduced the personal tax burden of individual beneficiaries, the trustee cannot claim a concomitant reduction in his liability).
The requirement to disgorge unauthorised profits and to pay compound interest where trust funds have been used by the trustee for the purposes of his own trade or business also flow from equity's general focus upon the wrongdoer.
However, in bare trusts (most modern commercial trusts are of this sort), where there is no trust fund subject to the conflicting claims of different classes of beneficiary, equity's desire to see the trust properly discharged can usually be fulfilled by taking a more "common law" approach, namely to remedy the harm suffered by the particular plaintiff beneficiary.
The following three pages: "a capital question", "an interesting question" and "a taxing question", examine in greater depth the extent of the trustees' liability in terms of reinstating the fund, off-setting tax and paying interest on the sums due.
8.4.2.2. A “Capital” question
Read Target Holdings v Redferns [1995] 3 All ER 785.
In Target Holdings Ltd v Redferns (a firm) [1995] 3 All ER 185, House of Lords the defendants were a firm of solicitors acting on behalf of a mortgagor (an established client) and a mortgagee on the creation of a mortgage. The defendants held the loan monies on trust for the mortgagee but paid them over to the mortgagor before the mortgage had been completed. This was in breach of trust. The mortgagee sued the firm of solicitors. In their defence the solicitors argued that they had only committed a technical breach of trust and that the plaintiff had not suffered any loss because the solicitors had acquired the mortgages to which the plaintiffs were entitled. It was held In the Court of Appeal it had been held that when the trustees (solicitors) paid away the trust monies to a stranger they came under an immediate duty to reinstate the trust fund, and that an inquiry into whether the breach of trust actually caused loss to the trust fund was unnecessary, the causal connection being obvious.
The House of Lords reversed this. A common sense view of causation should be applied, with the full benefit of hindsight. Applying this test the defendant was not liable, because the plaintiffs would have suffered the same loss even but for the defendant's breach of trust. Lord Browne Wilkinson emphasised the difference between actions for compensation, for an account and for specific restitution. If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed. His Lordship also distinguished traditional trusts from bare trusts in commercial contexts. But noted that when a traditional trust has come to an end it is, on the question of compensation, very similar to a bare trust in a commercial context.
Now attempt this question:
For which of the following list of remedies is this statement true:
"Where a beneficiary successfully claims this remedy in a case where the value of the misapplied trust property has fluctuated up and down between the date of misapplication and the court judgment the trustees' duty is to account, compensate or disgorge at the highest intermediate valuation".
(a) Compensation in a bare trust, or a traditional settlement trust which has come to an end (ie where the interest of the remainderman has vested in possession).
(b) Compensation in a traditional settlement trust which is still on foot (ie where there are still different classes of beneficiary)
(c) Account of profits.
(d) Specific restitution.
Answer (a): False
Street J held in the well-known Australian case of Re Dawson: “[t]he obligation of a defaulting trustee is essentially one of effecting a restitution to the estate”. Recently, however, in Target Holdings Ltd v Redferns, the House of Lords had the opportunity to re-examine this approach in the context of a breach of a bare trust of a commercial nature. There Lord Browne-Wilkinson accepted the applicability of common law principles of causation and damage:
"At common law there are two principles fundamental to the award of damages. First, that the defendant's wrongful act must cause the damage complained of. Second, that the plaintiff is to be put ‘into the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation’ (see Livingstone v Raywards Coal Co (1880) 5 App Cas 25 at 39 per Lord Blackburn). Although...in many ways equity approaches liability for making good a breach of trust from a different starting point, in my judgment those two principles are applicable as much in equity as at common law. Under both systems liability is fault based: the defendant is only liable for the consequences of the legal wrong he has done to the plaintiff and to make good the damage caused by such wrong... The detailed rules of equity as to causation and the quantification of loss differ, at least ostensibly, from those applicable at common law. But the principles underlying both systems are the same".
In relation to breaches of bare trusts of a commercial nature and traditional settlement trusts which have come to an end at the date of the hearing Lord Browne-Wilkinson accepted the view that, at least where the breach involved a failure to invest prudently, ‘[t]he measure of...compensation is the same, ie the difference between what the beneficiary has in fact received and the amount he would have received but for the breach of trust’.
The words 'but for' which appear in the last line of the preceding quote demonstrate that the defaulting trustee will only be liable for such losses as were probably caused by him. However, any such limitation or defence based on causation will be denied to trustees who deliberately and dishonestly breached their trust and thereby caused loss to the fund. This is by analogy to the common law tort of deceit (Nationwide B.S. v Various Solicitors [1999] PNLR 606). In the absence of dishonesty the usual analogy will be the common law award of damages for negligence, according to which any award of damages (or, more accurately "equitable compensation") against the trustee will be limited to such losses as were probably caused by the trustee.
In Re Dawson [1966] 2 NSWR 211 it was stated that equitable compensation 'is not limited to common law principles governing remoteness of damage'. However, in Nationwide B.S. v Various Solicitors [1999] PNLR 606 Blackburne J suggested that an award of equitable compensation against a trustee might be reduced if the loss suffered by the trust was "too remote". His lordship was echoing the judgment of Millett LJ in Bristol and West Building Society v Mothew [1998] 1 Ch 1, who had held that "Equitable compensation for breach of the duty of skill and care resembles common law damages in that it is awarded by way of compensation to the plaintiff for his loss. There is no reason in principle why the common law rules of causation, remoteness of damage and measure of damages should not be applied by analogy in such a case".
As that quote indicates, the concept of "remoteness of damage" is borrowed from the common law tort of negligence see the case of (Wagon Mound (No2)). It has the effect of limiting the compensation for which the defendant is liable to those types of damage which were forseeable. However, given that the type of loss which breach of trust causes is nearly always direct economic loss it may be that there will be relatively few situations in which unforseeable 'types' of loss will arise, and the scope for applying remoteness of damage to cases of breach of trust might therefore be limited.
Answer (b): Depends.
After Target Holdings v Redferns it appears that the beneficiary of a bare trust in a commercial context should be compensated more or less by analogy to a common law award of damages. In other words, the beneficiary should be put in the position they would have been in had the breach not occurred.
The level of compensation should be equivalent to the plaintiff's actual loss, assessed at the date of the court hearing with the full benefit of hindsight. In contrast with the common law action for damages for negligence, an equitable award will not be limited to "reasonably foreseeable" loss. Having said that, the defendant trustee will only have to compensate to the extent to which the losses were caused by his breach, taking a common sense view of causation, with the full benefit of hindsight. The trustee will not be automatically required to compensate at the highest level.
Where the trust is of a more traditional type, however, (eg "to trustees on trust for A for life and to B and C in remainder equally") compensation to individual beneficiaries is more problematic. In such a case the first duty of the trustees is to fully reinstate the trust fund, even where there is a risk that individual beneficiaries may be over-compensated as a result. Even after Target Holdings it is still unclear whether, where a traditional trust is still on foot, the trustees' liability is limited by a common sense view of causation, or whether the presence of the fund "in between" the trustees and the individual beneficiaries leaves no room for the more straightforward common-sense approach to the question as to what loss was actually caused to the individual plaintiff beneficiaries.
Our preferred view is that the common sense approach should prevail as far as possible, accepting that the presence of the trustees' duty to reinstate the fund (rather than to compensate individual beneficiaries) makes it likely that the trustee might still over-compensate individual beneficiaries to some extent where the traditional settlement trust is still on foot.
Answer (c): True
A trustee is not permitted to profit from their trust, consequently the rule is that a trustee must reinstate the original capital and account for all profits made on it. But what if the trust property in the trustees' hands, having first of all risen in value after the breach, has decreased in value by the time of the court hearing? What should be the level of the account in these circumstances?
The answer is that the trustee will have to account to the beneficiary according to the highest valuation of the trust property during the time that it was in the trustee's hands.
For as long as the trustee is holding trust property in breach of trust the beneficiary is being denied the opportunity to realise the trust assets. Accordingly, if the opportunity to realise the trust property was there at every point during the continuing breach of trust, the defaulting party must account on the footing of the capital value of the fund at its highest point.
Answer (d): False.
Specific restitution is an action to recover specific property. So, for example, in Re Massingberd's Settlement (1890) CA the trustees of the settlement sold authorised investments and reinvested the proceeds in unauthorised mortgages. It was held that the trustees would be required, if the beneficiaries so requested, to replace the original investments with investments of a similar type, even though the value of such investments had risen since the trustees' breach, and despite the fact that the trustees had already reinstated the monies which had been misapplied in the unauthorised mortgages. The beneficiaries were entitled to elect to recover either the value of the authorised investment at the date of the writ, or (where possible) to recover the specific asset which had been sold, even where that asset had since risen in value. In the present case the trustees were required to repurchase the original authorised investment which they had misapplied, even though it was now worth more than it had been worth at the date of misapplication.
8.4.2.3. An interesting question
Read Wallersteiner v Moir (No 2) [1975] 1 QB 373 . You will note from that case that an award of compound interest may be made against a trustee in certain circumstances.
In Wallersteiner v Moir (No2) [1975] 1 QB 373, Court of Appeal the facts were as follows: M, a minority shareholder in a company, sent a circular letter to the other shareholder in which certain allegations were made against W, a director of the company. W sued M for libel. M, in his counterclaim, sought declarations that W had been guilty of fraud, misfeasance and breach of trust. The judge at first instance gave judgment for M, in the absence of any defence from W. The judge also awarded interest on the judgment. W then appealed to the Court of Appeal on the basis that there had been no jurisdiction to award interest.
On appeal it was held that the court had an inherent equitable jurisdiction to award interest where a fiduciary had improperly profited from their position. In the present case the interest rate was fixed at 1% above the minimum bank lending rate. It was further held that the court's equitable jurisdiction to award interest would extend in the appropriate case to making an award of compound interest. So, for instance, the court might consider an award of compound interest in a case where the trustee had used misapplied trust funds for the purposes of his own business. The aim of an award of compound interest is to ensure that the trustee retains no unauthorised profit from his breach of trust, the award should not be used as a means of punishing the trustee.
[NOTE: Simple interest is a sum calculated, usually on an annual basis, on the capital monies due from the trustee to the trust. Compound interest is calculated annually by adding to the capital the simple interest which has arisen during the previous year. Compound interest for the following year is calculated on the compound sum of capital and simple interest. The following year accumulated compound interest is added to capital, and the process repeated. It is, essentially, interest on interest.]
[NOTE: the type of interest awarded (Compound or Simple) is in the discretion of the court. The rate of interest is similarly in the court's discretion. In Wallersteiner the interest rate was fixed at 1% above the minimum bank lending rate. In Bartlett v Barclays Bank [1980] Ch 515 it was fixed at the rate from time to time allowed on the court's short-term investment account]
[Note: Note also that Lord Woolf in Westdeutsche Landesbank Giroxentrale v Islington London B.C [1996] 2 WLR 802 was content to extend the award of compound interest to common law remedies in the context of restitutionary claims.]
Which of the following purposes does an award of compound interest seek to achieve?
(a) to ensure that the trustee does not retain profits through the unauthorised use of trust monies for the trustee's own purposes.
(b) to punish the trustee
(c) to prevent unjust enrichment
Answer: (a) & (c)
The object of awarding compound interest on an account of profits is to ensure as far as possible that the trustee will not be unjustly enriched through the retention of profits made through the unauthorised use of trust property for the trustee's own purposes. It is not the purpose of an award of compound interest to punish the trustee!
In O'Sullivan v MAM ltd [1985] QB 428 the court awarded only simple interest against the fiduciary because the breach of duty had resulted in profits, not only for the fiduciary, but for the beneficiary also.
8.4.2.4. A taxing question: Is Liability Net of Tax?
When trustees account to the trust "net of tax" this means that they have reduced their repayment to the trust by the amount of tax that the trust has been relieved from having to pay by reason of the trustees' holding the trust property, albeit that they held the property in breach of trust. The trustees may, for instance, have already paid tax on their improper profits during the time that those profits had been in their hands. This was the situation in O'Sullivan v M.A.M. Ltd [1985] QB 428. In that case the fiduciaries were given credit for the tax which they had already paid on their improper profits, and which they would be unable to reclaim from the Inland Revenue. Clearly there could be no question of the fiduciary profiting from their tax relief in that case!
The result in Bartlett v Barclays Trust Co. (No.2) was less generous to the fiduciary. There the defendant trustee contended that by reason of its breach the sums repayable to the plaintiff beneficiaries would not, or may not, have been taxable in their hands, whereas they would probably have been taxable had the breach not occurred. The defendant therefore claimed that compensation should not exceed the amount which the plaintiff would have been left with after taxation. Rejecting that submission, Brightman L.J. stated that:
"the tax liabilit[ies] of individual beneficiaries.....do not enter into the picture because they arise not at the point of restitution to the trust estate but at the point of distribution of capital or income out of the trust estate. These are different stages..."
The judge accepted the fact that this may place a heavier burden on fiduciary wrongdoers as compared with contractual or tortious wrongdoers.
8.5. Defences to Liability
8.5.1. Exculpatory Clauses
Which of the following clauses, all of which have appeared in trust instruments, do you think would be valid?
NOTE: such clauses, referred to alternately, as "exculpatory clauses", "exemption clauses" and "exclusion clauses" are always construed strictly contra proferentem, ie "against the one who benefits from it". It follows that such clauses must be expressed in the clearest terms if they are to afford a defence, or relief, to the trustees. Professional trustees are more likely to insist on the inclusion of such clauses in their trusts, which means in practice that professional trustees, though judged by a higher standard of care, are in fact less likely to be liable for breach of their trust!
In Bogg v Raper, The Times, 22 April 1998, Millett LJ held that settlements should be fairly construed without any presumption in favour of one party or the other, but if there remained a doubt whether the matter complained of came within the scope of the exemption clause it must be regarded (in accordance with the contra proferentem principle) as falling outside it. Note also, Wight v Olswang, The Times, 18 May 1999, where a settlement contained two exemption clauses, a general one protecting all trustees, and one which specifically did not apply to paid trustees The Court of Appeal held that the paid trustees could not even rely upon the general clause.
(a) a clause relieving one of the trustees of any responsibility or duty in relation to a particular class of beneficiaries.
o Valid or Invalid
Answer: Valid
In Hayim v Citibank NA [1987] 1 AC 720, Privy Council, a testator made two wills, one dealing primarily with his American property, another with property outside of America (this latter was called the "Hong Kong" will). The first defendant was executor and trustee of the American will, the second defendant was executor and trustee of the Hong Kong will. The plaintiffs directed the second defendant to sell a house in Hong Kong, where the testator's elderly brother and sister were living. The brother and sister were not entitled under either will to remain in the house and a sale of the house would have been for the benefit of the beneficiaries of the American will. Nevertheless, the first defendant directed the second defendant not to sell the house. When the house was eventually sold it had fallen in value, causing a loss to the beneficiaries of the American will.
It was held, on the question whether the second defendant was liable for delaying the sale of the house, that there had been no breach of trust, because the second defendant owed no duty to the beneficiaries of the American will. On a proper construction of the trust, the second defendant was actually obliged to act on the instructions of the first defendant. As regards the liability of the first defendant, clause 10 of the American will expressly relieved the first defendant of any "responsibility or duty" to the "American" beneficiaries with respect to the house.
(b) a clause providing that the trustees shall not be liable for errors, omissions, or neglect of diligence.
o Valid or Invalid
Answer: Valid
Such a clause is valid (see the recent Court of Appeal decision in Armitage v Nurse).
Armitage v Nurse and Others [1998] Ch 241 Court of Appeal
By a settlement made on 11 October 1984 the plaintiff, who was then aged 17, became entitled in remainder to settled agricultural land of which her mother was tenant for life. Her portion was to be held on certain trusts until she reached the age of 40. Clause 15 of the settlement provided that no trustee should be liable for any loss or damage to the plaintiff's fund or the income thereof at any time or from any cause unless it was caused by his own actual fraud. On the trial of preliminary issues in an action for breach of trust brought by the plaintiff against the trustees, the judge held that clause 15 of the settlement could operate to absolve the trustees from liability for breaches which were not the result of dishonesty on their part and that the plaintiff's claims in respect of breaches of trust allegedly committed before 15 June 1987 were not barred by section 21 of the Limitation Act 1980 (see post, p260D-E). He awarded the trustees 80 percent of their costs, but directed that, since the trustees were defending themselves and had taken points which cost money and in respect of which they were unsuccessful, they should not be at liberty to reimburse themselves from the trust fund for the remaining 20 percent.
On appeal by the plaintiff from the judge's decision that the trustees were absolved from liability by clause 15 and cross-appeal by the trustees from his order for costs:-
Held, dismissing the appeal, (1) that, since it was open to contracting parties to exclude liability for ordinary or even gross negligence, such an exclusion was also open to the parties to a settlement; that, by referring to "actual" fraud, clause 15 of the settlement excluded constructive fraud or equitable fraud and was apt to exclude liability for breach of trust in the absence of a dishonest intention; that, although trustees might deliberately commit a breach of trust by consciously acting beyond their powers, their conduct was not fraudulent if they did so in good faith and in the honest belief that they were acting in the interest of the beneficiaries; that a clause excluding the liability of a trustee for equitable fraud or unconscionable behaviour was not so repugnant to the trust or contrary to public policy as to be liable to be set aside at the suit of a beneficiary; and that, accordingly, since without amendment the pleadings could not support a plea of fraud, clause 15 of the settlement operated to absolve the trustees from liability for the alleged breaches so long as they had not acted dishonestly; but that the plaintiff would be allowed to examine the trust documents and investigate the trustees' management in order to re-amend her statement of claim (see post, pp 250G, 251B-C, 253D-F, 254A-E, 259G, 263G-264B).
(c) a clause purporting to excuse the trustees from all liability apart from that which arise from their own actual fraud.
o Valid or Invalid
Answer: Valid
Such a clause was considered in the recent case of Armitage v Nurse, where it was held to be valid, however it may not be effective to exonerate behaviour amounting to a positive breach of duty:
In Armitage v Nurse [1997] 2 All ER 705 a clause in a trust instrument purported to excuse the trustees from all liability apart from that which might arise from their own actual fraud. Millett LJ held that the clause was effective to exclude liability no matter how indolent, imprudent, lacking in diligence, negligent or wilful the trustees may have been, so long as they had not acted dishonestly. It was held that the clause was not void for repugnancy or contrary to public policy. In the instant case the beneficiaries did not allege dishonesty, therefore the trustees were not liable for any breach of trust. Millett LJ accepted that there was an irreducible core of obligations owed by trustees to beneficiaries and enforceable by them, namely, obligations of honesty and good faith, but his lordship did not accept that those core obligations include duties of skill, care, prudence and diligence. In Bristol and West v Mothew [1997] 1 Ch 1 at 17 (see summary) his lordship drew a similar distinction between breach of fiduciary duty (i.e. breach of the fiduciary duties of loyalty, honesty and good faith) and the obligation to use proper skill and care in the discharge of his duties.
The meaning of dishonesty was considered in Walker v Stones Independent, July 27, 2000, CA. The judge at first instance had held ((2000) 1 W.T.L.R. 79) that the deliberate commission of a breach of trust was dishonest only where the trustee committing that breach acted in the knowledge that it was contrary to the interests of the beneficiary or was recklessly indifferent thereto. A trustee's conduct in breach of trust could not be categorised as dishonest where he acted in a genuine, if misguided, belief that his actions were for the benefit of the beneficiary. The Court of Appeal disagreed. Allowing the appeal, it was held that an individual could act dishonestly, in the ordinary sense of the word, even where they genuinely believed their actions to be morally justified.
8.5.2. Limitation Act
The Limitation Act 1980 lays down time limits within which plaintiffs must initiate proceedings against defendants. The time limits vary according to the type of action that is being brought. For example, actions for breach of contract must generally be brought within six years of the breach of contract and personal injury claims must generally be brought within three years of the injury.
According to section 21(3) of the Act "an action by a beneficiary to recover trust property or in respect of any breach of trust...shall not be brought after the expiration of six years from the date on which the right of action accrued".
The right of action may accrue to different beneficiaries at different times. Consider a typical trust under which A has a life interest and B will take in remainder. A's interest has vested in possession, but B's interest is currently vested in interest only. B's interest will not vest in possession until A's death. If the trustees commit a breach of trust during the currency of A's life interest (that is, during A's life) A will have six years within which to bring an action for breach of trust. However, time does not begin to run against B until B's interest falls into possession on A's death.
Test question
Laura, an adult beneficiary, has a life interest under a trust of which Richard is remainderman. Eleven years ago the trustees of the settlement placed the trust fund in unauthorised investments. Laura died four years ago, having never got around to suing the trustees for their breach.
Can Richard still sue the trustees? ü Yes No
Answer: YES
Even though the breach of trust occurred eleven years ago, Roger has only been able to sue for the last four years. He is therefore still able to bring an action against the trustees, so long as he does so within two years.
Where someone wishes to bring an action claiming an entitlement to the personal estate of a deceased person, they have twelve years within which to do so. Time begins to run from the date on which their entitlement to the estate accrued.
Where the entitlement to the personal estate comprises a legacy, an action for interest, which has accumulated on the legacy, must be brought within six years from the date that the interest became due. (A legacy is a gift of money under a will)
If the person to whom a right of action has accrued was under a disability on the date when the right accrued, they may bring their action within six years from the date that they ceased to be under the disability (section 28 Limitation Act 1980). This applies even if they cease to be under the disability by reason of their death in that case their personal representatives may bring the action on behalf of their estate.
Infants and persons of unsound mind are treated as being under a disability for the purposes of the Act.
Test question
Laura, an adult beneficiary, has a life interest under a trust of which Richard is remainderman. Sixteen years ago the trustees of the settlement placed the trust fund in unauthorised investments. Laura died nine years ago, having never got around to suing the trustees for their breach.
Can Richard, aged 20, sue the trustees today? ü Yes No
Answer: YES
Even though the breach of trust occurred sixteen years ago, and Richard's interest vested in possession seven years ago, he has only been absolutely entitled and able to sue for the last two years, before then he had been an infant. He is therefore still able to bring an action against the trustees, so long as he does so within four years.
If any fact relevant to the right of action against the trustee has been deliberately concealed by the trustee the period of limitation will not begin to run until the plaintiff becomes aware of the concealment (section 32(1)Limitation Act 1980).
In Thorne v Heard [1895] AC 495 the defendants were first mortgagees of a property. The plaintiffs were second mortgagees of the property. The property was sold and the solicitor employed by the first mortgagee paid off their mortgage from the proceeds of sale of the property. The solicitor should also have accounted to the second mortgagee. Instead, he kept that part of the proceeds of sale to himself but kept paying off the second mortgage in his dual capacity as solicitor to the mortgagor. The second mortgagee had a right of action against the first mortgagee because their agent (the solicitor) had failed to hand over the proceeds of sale, but this right of action had been concealed by the solicitor's actions. Because of the solicitor's continued repayments of the second mortgage the second mortgagee had no reason to think that anything was amiss. By the time they realised the true state of affairs they were too late to sue, successfully, the first mortgagee. They could not rely upon s.32 in order to achieve an extension of time because their right of action had been concealed by the solicitor, and not by the defendant.
Test Question
In which of the following cases does the Limitation Act 1980 have no application?
(a) where the trustee has acted fraudulently
o Applies ü Does Not
(b) where the trustee still holds trust property
o Applies ü Does Not
(c) charitable trusts
o Applies ü Does Not
(d) where the defendant is subject to a mere fiduciary duty to account
o ü Applies Does Not
(e) where the defendant is a mere fiduciary accused of deliberate and dishonest under-accounting.
o ü Applies Does Not
Answer (a) Does Not
Section 21(1)(a) provides that no period of limitation prescribed by the Act shall apply in an action brought by a beneficiary "in respect of any fraud or fraudulent breach of trust to which the trustee was a part or privy"
Answer (b) Does Not
Section 21(1)(b) states that no period of limitation under the Act applies to actions "to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee and converted to his use". In Wassell v Leggatt [1896] 1 Ch 554 a husband who held his wife's property as a trustee was unable to use the Limitation Act as a defence to her action due to his continuing breach of trust in failing to account to her for property that was still in his hands. As Romer J said, "He was her trustee at first, and never ceased to be her trustee". The trust property in that case comprised a legacy which the husband knew belonged to his wife. Re Howlett was a case in which a father occupied a house rent-free, knowing that the house belonged to his son under a trust of which the father was trustee. After the father's death the son was able to sue his father's estate for unpaid rent on the basis that the father had held "notional" property belonging to the trust right up until his death, and therefore the son's claim was not time-barred under the Limitation Act 1980.
See, also, Nelson v Rye (1996).
Answer (c) Does Not
Section 21(1)(a) provides that no period of limitation prescribed by the Act shall apply in an action brought by a beneficiary "in respect of any fraud or fraudulent breach of trust to which the trustee was a part or privy"
Answer (d) Apply
Although a trustee who is still holding trust property cannot claim the time-bar defence under the Limitation Act 1980, the time limit of 6 years would be a defence where the defendant is subject to a mere fiduciary duty to account (Paragon Finance plc v D B Thakerar & Co (a firm) [1999] 1 All ER 400, Court of Appeal per Millett LJ, as he then was). The exercise on the next page (The Limitation Act 1980 7 of 7) is designed to help distinguish trustees which are subject to the usual six year period from 'trustees' and fiduciaries who are not.
Answer (d) Apply
According to Knox v Gye (1872) 5 App Cas 656, 674 where equity exercises a concurrent jurisdiction (giving the same or corresponding relief) as the common law the exercise of such equitable jurisdiction will be time-barred by analogy to the time-bar under the Act in relation to the comparable common law jurisdiction. Thus in Coulthard v Disco Mix Club Ltd [1999] 2 All ER 457 an equitable claim based on breaches of fiduciary duty by way of deliberate and dishonest under-accounting, arising from the same facts as a common law fraud, were held to be subject to the Limitation Act "by analogy".
Test Question
We have observed that the usual six year limitation period in relation to breaches of trust is a defence that is denied to a trustee who is still in possession of trust property.
The relevant statutory provision is the Limitation Act 1980 s21(1)(b) which provides that the general time limit for actions in respect of trust property will not apply to an action by a beneficiary under a trust "to recover from the trustee property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use".
Which of the following defendants would be a trustee in that sense?
(a) A defendant who is entitled to pay receipts into his own account, mix them with his own money, use them for his own cash flow, deduct his own commission, and account for the balance to the plaintiff only at the end of the year.
(b) A defendant who is "liable as a constructive trustee" for knowing receipt of trust property.
(c) A defendant who retired from the trust ten years ago, but is still in possession of some trust property which he misappropriated before he retired.
Answer: C
This is the classic instance of a trustee who falls within s23(1)(b). Because the trustee is still in possession of the trust property, the trustee is not permitted to raise the usual six year limitation period in his defence.
8.5.3. Laches
The doctrine of laches bars an action by reason of the 'staleness' of the beneficiary's claim. However, it is a defence that can only be resorted to in situations where the act does not apply either expressly or by analogy. According to Lindley LJ in Re Sharpe [1892] 1 Ch 154, "A defence based on the staleness of demand renders it necessary to consider the time which has elapsed and the balance of justice or injustice in affording or refusing relief". As well as seeking justice between the parties, the courts are also conscious of the public interest in seeing an end to litigation.
Bearing in mind the above, in which of the following situations do you think the defence of laches might successfully be raised by a trustee/fiduciary?
The modern approach to the doctrine of laches does not entail slavish adherence to formulae derived from earlier cases. Each case is decided on its facts applying a broad approach directed to ascertaining whether, in all the circumstances it would be unconscionable for a party to be permitted to exercise his beneficial right (see Frawley v Neill [2000] C.P.Rep. 20, Court of Appeal) Although, as well as seeking justice between the parties, the courts are also conscious of the public interest in seeing an end to litigation.
(a) a manager in a fiduciary position to his musician client is sued for outstanding royalties by the client
(b) a trustee is sued for making an unauthorised investment, the investment proving worthless
Answer: A
This was the situation in Nelson v Rye [1996] 2 All ER 186. The plaintiff musician sued his manager for 10 years worth of past royalties. One of the defendants defences was that the contractual limitation period (6 years) should apply, another defence was that the delay in bringing the action barred the action in equity under the doctrine of laches.
It was held that the manager was a constructive trustee of the outstanding royalties, and therefore no statutory limitation period would apply (see s21(1)(b) Limitation Act 1980).
However, because the case was not covered by the Limitation Act, the doctrine of laches would apply. Applying that doctrine, the musician was restricted to claiming only the most recent five years worth of royalties. The application of the doctrine of laches depends upon a combination of delay, prejudice and the balance of justice between the parties. In the present case the musician had wilfully failed to involve himself in his own financial affairs and this neglect was held to restrict the extent to which he ought to be able to recover the outstanding royalties.
8.5.4. Consent/ Acquiescience
It might help to bear in mind the following dictum of Wilberforce J in Re Pauling's ST [1963] 3 All ER 1:
"The court has to consider all the circumstances in which the concurrence of the cestui que trust was given with a view to seeing whether it is fair and equitable that, having given his concurrence, he should afterwards turn around and sue the trustees: that, subject to this, it is not necessary that he should know that what he is concurring in is a breach of trust, provided that he fully understands what he is concurring in, and that it is not necessary that he should himself have directly benefited by the breach of trust"
8.6. Relief from Liability
8.6.1. S. 61 LPA 1925
Read and consider section 61 of the Trustee Act 1925 (P), which of the following must the trustee prove in order to obtain relief from liability under this section?
1. that the trustee acted prudently
2. that the trustee acted reasonably
3. that the trustee acted honestly
4. that it would be fair to grant the trustee relief
5. that the trustee was not paid
6. that the trustee was not professionally qualified
Answer: 2, 3, & 4.
So long as it appears that the trustee has acted honestly, reasonably and ought fairly to be excused, whether or not the trustee will be granted relief lies in the discretion of the court.
Prof A M Kenny, in her article, "The Reasonable Trustee", has argued that s61 introduces a tort-like concept of reasonableness into the law of trusts by the back door. The usual standard applied to trustees is, of course, that of prudence not reasonableness.
In Marsden v Regan [1954] 1 WLR 423 the plaintiff successfully argued that the defendant should not be relieved of liability under s61 because to do so would be to treat the plaintiff less favourably than other persons with claims against the defendant. The defendant had paid off all the trade-creditors of a trust-owned business, but had failed to pay rent to the plaintiff, the person who owned the premises from which the business had been conducted.
8.6.2. Indemnity
A trustee who is liable to the beneficiaries for a breach of trust may claim an indemnity from a co-trustee, if that co-trustee:
a) is a solicitor-trustee whose controlling influence over the other trustees resulted in the breach; or
b) committed the breach fraudulently in circumstances where the trustee claiming the indemnity acted honestly, albeit in breach of trust; or
c) exclusively benefited from the breach.
An indemnity operates to fully compensate the indemnified trustee for any reparation he or she has already paid out to the beneficiaries.
8.6.3. Impounding
The court has the power to impound a beneficiary's interest under the trust in certain circumstances. That impounding interest can then be used, in whole or in part, to relieve a trustee from his or her liability to the other trustees.
So, for example, if a beneficiary consents to a breach which the trustee proceeds to commit, thereby causing a loss of £1000 the fund. The court can order that the beneficial interest of the consenting beneficiary be impounded in order to indemnify the trustee against the claims of the other beneficiaries. Only if the loss caused by the breach exceeds the value of the impounded interest will the trustee be personally liable to pay the balance.
Impounding can take place under the court's inherent jurisdiction or under s62 of Trustee Act 1925.
Under its inherent jurisdiction the court can impound if the beneficiary:
instigated or requested the breach with the intention of obtaining a personal benefit; or
consented to the breach and actually benefited from it.
Read and consider Section 62 of the Trustee Act 1925. Under which of the following circumstances may the court impound a beneficiary's interest under that section?
(a) where the beneficiary instigated the breach
(b) where the beneficiary requested the breach
(c) where the beneficiary consented in writing to the breach
(d) where the beneficiary acquiesced in the breach
Answer: A, B, & C
Where the beneficiary's consent was given orally, impounding must take place (if at all) under the court's inherent jurisdiction, and not under s62.
Whereas the instigation of, request for or consent to a breach all precede the actual breach, acquiescence post-dates the breach and is no ground for impounding the beneficiary's interest under s62.
8.6.4. Contribution
A trustee who is liable for a breach of trust may recover a contribution from any other person (usually another trustee) who is liable in respect of the same breach.
Trustees are liable, of course, only for their own defaults; they will not be held vicariously liable for breaches committed by their co-trustees. The trustees will, in theory, be jointly and severally liable only for breaches to which they have together been parties. In practice, however, even if one only of the trustees commits a breach of trust, the other trustees will often be liable for failure to prevent that breach (Bahin v Hughes (1886) 31 ChD 390).
If a breach of trust occurs after 1978, The Civil Liability (Contributions) Act 1978 applies. Under this Act the court may apportion liability between trustees who are "jointly and severally liable" for the same breach of trust, according to whatever is "just and equitable". Apportionment is effected by requiring one trustee to make a financial contribution to another trustee in reduction of the latter's liability to the trust.
Suppose that Trustee A, as a result of an honest mistake, makes an improper investment of trust monies without telling Trustee B until after the event, Trustee B having taken a passive role in all the business of the trust. The investment fails, resulting in a significant loss to the fund. What are the consequences?
(a) Trustee A is liable for a breach of trust.
(b) Trustee B is liable for a breach of trust.
(c) Trustee B can claim a contribution from Trustee A.
(d) Trustee B can claim an indemnity from Trustee A.
Answer: A, & B
Both trustees are jointly and severally liable for the breach for both trustees had acted honestly but erroneously. Trustee A committed an active breach. Trustee B committed a passive breach of trust (a breach by omission).
According to Bahin v Hughes the court draws no distinction between the "active" trustee and the "passive" trustee where both have acted honestly. It would probably be otherwise if one party had acted dishonestly, and the other honestly. In such a case the honest party might be able to claim a full indemnity from the dishonest party. An indemnity amounts, in effect, to a 100% contribution!
In a case such as the one we are considering here the court would apply The Civil Liability Contributions Act. Applying that Act, the court might consider it to be "just and equitable" to require the active trustee to make some element of contribution in favour of the passive trustee.
8.6.5. Set-off
"The general rule in all the textbooks, with some reservations, is that where a trustee is liable in respect of distinct breaches of trust, one of which has resulted in a loss and the other in a gain, he is not entitled to set off the gain against the loss, unless they arise in the same transaction".
per Brightman J in Bartlett v Barclay's Bank trust Co Ltd [1980].
The facts of Bartlett were, briefly, that a settlor had settled 99.8 % of the shares in a private company on trust for his wife and issue. The trustee of the settlement was a Barclay's Bank trust corporation, which failed to ensure that the interests of the Bartlett beneficiaries were represented at the board meetings of the private company. At one such meeting the chairman proposed that the company should embark upon two speculative property ventures, one in Guildford, the other in the Old Bailey area of London. The former project fared very well, but the latter fared disastrously.
Suppose that the Guildford project made a profit of £1000 and the Old Bailey project made a loss of £2,750. What level of equitable compensation do you think that the trust corporation should have paid to compensate the beneficiaries?
This is a bit of a trick question. In Bartlett itself the reasoning of Brightman J would tend to have fixed the level of equitable compensation at £1,750 (on our figures). However, his reasoning deserves closer examination.
Brightman J held that the trustee should be able to set off the Guildford profits against the Old Bailey losses, because both had arisen from the same scheme:
"Part of the profit was in fact used to finance the Old Bailey disaster. By sheer luck the gamble paid off handsomely, on capital account. I think it would be unjust to deprive the bank of this element of salvage in the course of assessing the cost of the shipwreck. My order will therefore reflect the bank's right to an appropriate set-off".
Do you agree with this reasoning? Could it not be argued that the breach of trust did not consist of speculative property investments, but in failure to supervise the board, and that therefore this was not really a case of setting off losses against gains resulting from the same breach of trust at all. It may be that the best evidence of loss caused to the investment (the shares) is the net reduction of the capital account on the company's balance sheets. But this evidential inquiry does not involve any true process of set-off.
8.7. Overview
We began this workbook with the following dictum:
"a trust is an office necessary to the concerns between man and man, and which, if faithfully discharged, is attended with no small degree of trouble, and anxiety, it is an act of great kindness in any one to accept it"
- per Lord Hardwicke LC in Knight v Earl of Plymouth (1747) Dick 120, 126; 21 ER 214, 216.
In a note to Part 1 of the recent Law Commission Consultation Paper No 146 on "The Powers and Duties of Trustees", the authors of the report observe that nothing much has changed in the two hundred and fifty years since Lord Hardwicke uttered those words.
It is true to say that trusteeship is an onerous office. Trustees, even those who are unqualified and unpaid and profess no particular skill, are subject to a high standard of care. They are judged against the paradigm of the ordinary prudent man of business. It is no defence to an alleged breach of trust that they acted reasonably in all the circumstances. Indeed, to obtain any relief at all from the full consequences of a breach of trust it is generally necessary to show that they have acted, not only reasonably, but honestly and to show that "they ought fairly to be excused" (s61 Trustee Act 1925). And there's the rub! When will it ever be fair to excuse an imprudent trustee when an innocent beneficiary will almost invariably stand to lose out?
The dilemma is so often that faced by Plowman J in Re Rosenthal [1972] 1 WLR 1273. There he made the following observation:
"The question is where is the loss to fall? Is it to fall on the plaintiff, who really cannot be blamed in any sort of way for the fact that the trustees failed to do what they should have done...?Or is it to fall on the defendants, whose work in some respects has proved of enormous benefit to the estate...?"
In Re Rosenthal, as in so many cases, the loss was held to fall upon the trustees.
Nevertheless, there will probably always be persons prepared to swallow the bitter pill of trusteeship, if not out of a sense of duty or friendship, then at least for appropriate remuneration and subject to clauses which exclude their liability to the bare minimum requirement that the trust be discharged honestly.
In such circumstances it is not an "act of kindness to accept the trust", but a fact of commercial life.
posted by Maverick SM @ 10/12/2005 02:46:00 AM
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