Beneficiaries may bring personal (monetary) claims against the trustee for their breach.
Breach of Duty:
A breach of trust is a breach of the trustees’ duty.
These breaches may be innocent, dishonest / disloyal etc.
Primary vs Secondary Obligations:
Primary obligations are those undertaken by the parties under the agreement.
EG: promise to deliver 3 cows on Wednesday.
EG: duty not to hit you on the head.
Secondary obligations are usually obligations to compensate for not meeting (or breaching) primary obligations. These exist to (at least partially) undo the consequences of the breach.
EG: compensation for losses.
EG: giving up gains (restitution).
Potential Remedies:
Specific performance / injunctions could be used to directly enforce performance of the trust, thus giving effect to the primary obligations.
Historically, trusts law / equity has favoured specific enforcement of primary obligations. Where performance was still possible, equity would compel the defaulting trustee to perform. [1]
Alternatively, the law could simply enforce secondary obligations once a primary obligation has been breached.
Modern law seems to tend towards this direction (see ‘Accounting’ below).
Under this modern approach, the beneficiary can only recover losses they would’ve not suffered but for the trustee’s breach (not for losses the beneficiary would have suffered in any event).
Accounting:
Trustees are under a duty to provide an account of the dealings they make with the trust property so the beneficiaries can ensure they are administering the trust correctly.
Accounting is the process of taking an account of the trust fund and any changes made to it. This is usually done with a balance sheet.
The beneficiary may allege that the trustee has misapplied assets from the trust or failed to safeguard the value of the trust fund.
Falsification (Decrease in Value) and Adoption (Increase in Value):
Falsification deals with cases where the trustee misapplies the trust fund or takes assets out of the trust and is unauthorised to do so. Falsification allows unauthorised transactions to be struck out from the balance sheet. This will then show the difference between what the balance sheet shows and what it should show. The trustee will be ordered to account for the difference.
It has been argued that falsification enforces the trustee’s primary duty by requiring them to reconstitute / restore the trust fund to what it should be, rather than merely a secondary obligation to make good on losses. [2]
Alternatively, if the transaction proves beneficial (it rises in value), the beneficiary can choose to adopt the transaction instead of it being falsified.
Surcharging:
Where there is no misappropriation of the trust but another breach of duty, beneficiaries can surcharge the fund. This compels the trustee to alter the accounts to read as if the breach had not occurred – again, the trustee is liable for any discrepancy.
EG: (negligent) investment solely in one asset, but trust fund would’ve risen more if invested in another way.
It has been argued that, conversely to falsification, surcharging enforces secondary obligations to compensate for losses. This is because breach is not central to the claim.
The law recently seems to depart from the traditional accounting, falsification, adoption and surcharging framework used to enforce primary duties. Instead, the law seems to limit the extent to which claims can be brought to losses caused by the trustees’ breach using the ‘but for’ test.
EG: T holds £1000 on trust for B in a bank account. T makes an unauthorised investment that is unsuccessful, and the bank goes under / collapses. Either way, the money would be lost.
Under falsification, B would be entitled to the £1000. Under the new approach of determining the loss caused, B would get £0.
In Target Holdings v Redferns, M sold property to C for ~£775,000; M and C were attempting to commit mortgage fraud, recording the sale to be worth £2m.
T agreed to mortgage loan ~£1.5m to C. The agreement established that the money loaned by T would be held on bare trust by R (solicitors). R only had the authority to release the money upon receipt of executed conveyances and mortgage creation.
R released the money to another company (P) before this happened. The sale eventually went through, and mortgage executed regardless. C failed to repay and became insolvent. T was only able to recover £500k from the sale of the property due to a fall in the market.
T brought a claim against R for their breach of trust, seeking to falsify the accounts so that R would pay the money. R argued that, since the loss wasn’t caused by the breach (it was due to the fraud, not their mistake), they should not be liable.
The HL, agreeing with R, does not falsify the records. The loss would’ve been the same regardless; only losses caused by breach are recoverable.
Browne-Wilkinson LJ: ‘Although, as will appear, 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.’
Browne-Wilkinson LJ: ‘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. He is not responsible for damage not caused by his wrong or to pay by way of compensation more than the loss suffered from 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 AIB v Mark Redler, S borrowed £1.5m from B in exchange for a mortgage charge over their house. S then borrowed £3.3m (intending to use part of it to pay off / discharge the existing mortgages) from AIB in exchange for a second charge over the house. R (the solicitor) made a mistake and left some money still owing to B, so B refused to release the charge. R transfers the remaining balance of the loan to AIB to S.
When S become bankrupt, B sell the house to recover their debt and AIB sue R for not complying with the terms of the trust (they left an outstanding debt to B) since they cannot rely on the second charge to take priority (they only recover ~£900,000).
The SC follow the Target Holding jurisprudence. R is only liable for the £270k that paid off the remaining mortgage debt to B, not the total losses (~£2.5m) accrued by AIB. Additionally, the court noted that (tort) remoteness principles do not apply in these cases.
Toulson LJ: ‘All agree that 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. Where there has been a breach of duty, the basic purpose of any remedy will be either to put the beneficiary in the same position as if the breach had not occurred or to vest in the beneficiary any profit which the trustee may have made by reason of the breach (and which ought therefore properly to be held on behalf of the beneficiary).’
Toulson LJ: ‘Placing the beneficiary in the same position as he would have been in but for the breach may involve restoring the value of something lost by the breach of making good financial damage caused by the breach. But a monetary award which reflected neither loss caused nor profit gained by the wrongdoer would be penal.’
Defences to Breaches of Trust:
Free and informed consent of all beneficiaries, either before or after the action.
A trustee acting honestly, reasonably and fairly can be excused by a court. [3]
Exclusion clauses (cannot exclude liability for fraudulent / dishonest breaches). [4]
6-year time limit for claims of innocent or negligent breaches. [5]
Joint and Several Liability:
Co-trustees are jointly and severally liable.
The beneficiary can sue either for the whole loss; that trustee can then bring an action for contribution against the co-trustee. [6]
Usually this will be equal liability / contribution since co-trustees must act unanimously.
Resources:
References:
[1] EG: Re Locker’s Settlement Trusts [1977] 1 WLR 1323 [2] Mitchell; Elliott [3] Trustee Act 1925, s61 [4] Armitage v Nurse [1998] Ch 241 (Millett LJ); reaffirmed in Spread Trustee Co Ltd v Hutcheson [2011] UKPC 13 [5] Limitation Act 1980, s21(3) [6] Civil Liability (Contribution) Act 1978, s1
Cases Mentioned:
Target Holdings Ltd v Redferns [1995] UKHL 10
AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] UKSC 58
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