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Remedies for Breach of Trust Against Trustees

Being a trustee is an onerous responsibility and is subject to numerous duties, of both a fiduciary and non-fiduciary nature. Breach of one of these duties is something that a trustee should obviously guard against. This chapter is the first of two to consider a beneficiary’s remedies for breaches of trust. It focuses on the remedies the beneficiary might pursue against the trustee whilst Chapter 13 considers the remedies the beneficiary might use to recover lost trust property and personal remedies against non-trustees.

As you read this chapter, look out for the following key issues:

  • what a breach of trust is, when a trustee is liable, the extent of a trustee’s liability and how the beneficiary must show that he has suffered loss in order to take successful action against a trustee;

  • how a trustee may rely on an exemption clause to exclude his liability for breach of trust; and

  • the defences and mitigating circumstances that a trustee may rely on in an action taken against him for breach of trust.


Breach of Trust

A trustee is subject to a number of duties, of both a fiduciary and non-fiduciary nature.1 A breach of trust will have occurred when ‘the trustees made decisions which they should not have made or failed to make decisions which they should have made’.

In Nestle v National Westminster Bank plc3 Staughton LJ recognised that it may be difficult to prove that either a trustee had made a decision when he should not have done so, or failed to make a decision when he should have done so. The difficulty of proving either event, however, was not a reason to absolve a beneficiary from proving it.


EXPLAINING THE LAW 

Suppose Scott sets up a trust in his will, settling £100,000 on trust for the benefit of Vikas during his life with remainder to Ulrika. He appoints Thomas as his trustee.

An animal lover all his life, Scott sets out in a term of the trust that Thomas must not invest any money into organisations that test medicines on animals.
Whilst administering the trust, Thomas becomes aware that shares in MedicalResearch plc are increasing in value. This is a company that uses animals in medical research. He therefore decides to purchase a large amount for the benefit of the trust.

Suppose after purchasing the shares in MedicalResearch plc, the shares then fall significantly in value. The beneficiaries might decide to take action against Thomas in order to recover their loss.

In purchasing the shares, Thomas prima facie committed a breach of trust. It was a term of the trust that he must not invest in such a company. The beneficiaries may sue him for breach of trust to recover the Loss to the trust fund.


Who is liable for a breach of trust?

If only a sole trustee exists, clearly that trustee must be liable for every breach of trust that he commits. If there are two or more trustees, the general rule remains that only the trustee who has committed the breach of trust will be liable for it. However, all of the trustees may be liable for any breach of trust that occurs, even if it was only committed by one of them, in the following circumstances:

[a]
 if one trustee leaves a matter to a co-trustee without enquiring as to what has happened and a breach of trust occurs. For example, in Hale v Adams,4 trust property was sold and the money received by only one of the trustees. The money was then lost by that trustee. The trustee who did not receive the money made no enquiry of the receiving trustee about what had happened to the sale proceeds. The court held that both trustees were liable for breach of trust. Effectively, both trustees had received trust property when the property was sold and even the ‘innocent’ trustee should be responsible for its loss;

[b]
 if one trustee is aware of a breach of trust by a co-trustee and does nothing to remedy it (Styles v Guy); or

[c]
 if a trustee allows the trust funds to remain in the sole control of a co-trustee. In English v Willats,6 trust property was sold but the sale proceeds were paid only to one of two trustees. The non-receiving trustee was held liable to make good the loss to the trust fund.

A further example of one trustee allowing a co-trustee to manage the trust fund by themselves occurred in Bahin v Hughes.

The facts concerned a trust established in the will of Robert Hughes. He settled £2,000 on trust for the money to be held for the benefit of his wife for her lifetime and afterwards for his children. The trustees were Eliza Hughes, Mr and Mrs James Burden and Mr Edward Edwards.
Eliza managed the trust on a daily basis. She advised the beneficiary and the other trustees that a good investment would be for the money to be lent by way of mortgage over eight houses in Wood Green, Middlesex. It transpired, however, that all of the properties over which the money was lent were leasehold. At that time, the types of investments in which trust funds could be placed were curtailed and the terms of the trust did not allow investment in leasehold properties.

The leasehold houses were not sufficiently valuable to be used as security for the money lent by way of the mortgage and so the trust fund suffered a loss. The beneficiaries brought an action for breach of trust against all of the trustees, on the basis that the trustees should never have invested in an unauthorised investment. Mr Edwards felt that he should not be liable for the loss suffered by the trust, as the decision to invest was taken only by Eliza Hughes. He therefore claimed an indemnity from her for any money he had to pay to the trust fund.

The two questions for the court were (i) was Mr Edwards liable for the breach of trust and (ii) could he claim an indemnity from the acting trustee, Eliza Hughes?

The Court of Appeal held that Mr Edwards was responsible for the breach of trust. The court took the view that the trust was entitled to look to the trustees to repay the loss. As a trustee, Mr Edwards could not be treated any differently from any of the other trustees. As regards the position between the trustees and the beneficiaries, all of the trustees were responsible for the loss.

The position between the trustees themselves was more difficult. The court concluded that Mr Edwards should not be entitled to an indemnity from Eliza Hughes. The court felt that, even though Eliza had made the investment, Mr Edwards was just as much at fault for the loss occasioned to the trust fund as she was. He had done nothing to enquire about the investment, let alone prevent it, until six months after the mortgages had been entered into.


Bahin v Hughes confirms that the courts view who is liable for a breach of trust from the beneficiaries’ standpoint. The beneficiaries are the innocent parties if a breach of trust has occurred. They should be permitted the greatest possible number of opportunities to take action against to restore the trust fund to its pre-breach position. In that regard, the liability of trustees is joint and several: the beneficiaries may sue either all of the trustees or any of them individually for their loss.


With regard to indemnities between trustees, the decision confirms that, prima facie, a trustee is not liable to indemnify another trustee against loss which the first trustee may have caused. That remains the general principle. That is because all trustees are equally responsible for administering the trust. If one mismanages the trust so that loss is caused, it is probable such mismanagement has only occurred because other trustees have allowed it to happen through their inactivity. For a trustee, therefore, inactivity is just as much a risk as taking incorrect positive action.


The issue of a ‘guilty’ trustee indemnifying an innocent trustee for breach of trust that the former has committed has moved on since Bahin v Hughes. Section 1 of the Civil Liability (Contribution) Act 1978 gives a general right to a person who is jointly and severally liable to receive a contribution (as opposed to complete indemnity) from the guilty party. The contri-bution that the guilty party is to
make to the innocent party is to be adjudged on a ‘just and equitable’ basis by the court. The court may decide, however, that such contribution could amount to a ‘complete indemnity’.

EXPLAINING THE LAW 

Suppose that Mr Edwards claimed a contribution from ELiza Hughes towards the compensation he had to pay to the trust fund. If the facts of Bahin v Hughes were repeated nowadays, it wouLd be open to the court to decide that Mr Edwards shouLd receive a contribution from Eliza to represent the breach of trust that she committed. The Act does not alter who the beneficiaries may sue so the beneficiaries would retain the right to sue both Eliza and Mr Edwards jointly or simply one of them.

The court might order Eliza to make a contribution to Mr Edwards for the compensation he has had to pay to the trust fund, on the basis that the investment in the leasehold properties was effectively all Eliza’s doing.

But there is nothing in the Act to compel the court to order that one trustee makes a contribution to the other. Remember that on the facts of Bahin v Hughes, the court decided that Mr Edwards was as guilty of the breach of trust as Eliza Hughes. If that remained the decision of the court, Eliza would not have to contribute to the sum Mr Edwards would have to pay to the trust fund. The 1978 Act merely gives the court more flexibility to apportion the loss between the trustees; it does not compel the court to do so.

A trustee is not always liable for breach of trust …

For a trustee to be liable for breach of trust, it must be shown that the trust fund has suffered loss. A true loss must be shown to have occurred from the actual decisions that the trustee took. It is not enough to demonstrate that the trust fund might possibly have increased more in value had the trustee taken different decisions, as Nestle v National Westminster Bank plc10 demonstrates.

The case concerned a trust established by William Nestle in his will. William died in 1922, but established a trust benefiting his family. The defendant was the trustee. In 1986, the claimant, William’s granddaughter, Edith Nestle, became the beneficiary entitled to the remainder interest under the trust. At that point in time, the trust fund was worth £269,203. The claimant alleged, however, that the trust fund should have been worth over £1 million had the defendant not committed various breaches of trust. She claimed that the trustee had breached the trust by failing to act with proper care and skill. In particular, she alleged that the trustee had failed to keep the investments under review, had misinterpreted its investment powers under the terms of the original trust and the Trustee Investments Act 1961 and had failed to keep an appropriate balance between the capital and income interests. Accordingly, the claimant claimed compensation for the difference between what the fund was actually worth and what she alleged it should have been worth.


The trustee was, of course, subject to the duty originally set out by Lindley LJ in Re Whiteley
to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide.

The trustee was also bound to balance the interests of both the life tenants and the claimant as the remainderman.12 Professional trustees, such as the defendant, were subject to a higher duty of care and skill than a lay trustee, as they charged for their time and skill in administering the trust.

All three Lords Justices in the Court of Appeal did not believe that the trustee had showered itself with glory in the administration of this particular trust. The trustee had misinterpreted its original power of investment in the trust. It believed that it could only invest the trust funds in a limited range of companies but, on a true construction of its powers, it could in fact have invested the funds in any type of company. As the trustee had very wide powers of investment specifically granted to it in the trust instrument, the restrictions on investments introduced by the Trustee Investments Act 1961 did not apply. Overall, Dillon LJ thought it ‘inexcusable’ that the trustee had not sought legal advice over what it could invest in. Staughton LJ put it in these black-and-white terms:

Trustees are not allowed to make mistakes in law; they should take legal advice, and if they are still left in doubt they can apply to the court for a ruling.

Both Lords Justices also thought the bank failed to review the investments regularly.

However, the trustee’s failings were not enough to make the bank liable to pay compensation. The question for the court to decide was:

whether the onus remains on the [claimant] to prove loss for which fair compensation should be paid, or whether it is enough for her to claim compensation for loss of a chance …that she would have been better off if the equities had been properly diversified.

All three members of the Court of Appeal held that the claimant had to prove that she had suffered actual loss. The difficulty was that the claimant could offer no proof that the trust fund had suffered any loss. ‘Loss’ would be occasioned, according to Leggatt LJ, where the trust fund failed to make a gain less than that which would have been made by a prudent businessman investing the trust fund. No evidence could be led which showed that the bank had caused such a loss.

All that the claimant could show was that, with the benefit of hindsight, other investments the bank may have made would have given her (as remainderman) a better return. That was not sufficient. Staughton LJ confirmed that hindsight could not be used against a trustee to show that the trustee could perhaps have produced a greater return for the trust fund than actually occurred, ‘the trustees’ performance must not be judged with hindsight: after the event even a fool is wise, as a poet said nearly 3,000 years ago’.

It also had to be recognised that investment policies naturally changed over a period of time, to deal with issues brought about by wider economic views. Investing in shares, for example, had been seen to be particularly risky in the 1920s and 30s and it was not appropriate to look back and criticise the trustees for their choice of investments with today’s values in mind, where investing in shares is considered to be much less adventurous.

The decision in the case is perhaps best summarised by the words of Leggatt LJ, that ‘[a] breach of duty will not be actionable, and therefore will be immaterial, if it does not cause loss’.

Monetary Remedies Available for Breach of Trust

Background to monetary awards

Traditionally, equity saw no role for itself in awarding damages: that was the function of the common law. Equity’s role was to provide a remedy which would actually enforce equitable obligations themselves. Hence the courts of equity developed their own peculiar remedies, such as decrees of specific performance and injunction. The remedy of specific performance enables a party to compel another party to adhere to the terms of a contract. An injunction usually prevents a party from committing an act.

With these specific remedies in mind, equity’s original preference for a remedy against a trustee who had committed a breach of trust was to order the trustee to restore the actual property to the fund. If the trustee was not able to restore the specific property to the trust fund, the trustee could, instead, pay a monetary sum to the value of the loss the fund suffered. This evolved into a second right of requiring the trustee to pay equitable compensation to the individual beneficiary.

Strict common law issues of causation, foreseeability of loss and remoteness of damage do not readily apply to equitable compensation. All there has to be in equity is, according to Lord Browne-Wilkinson in Target Holdings Ltd v Redferns (A Firm), some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable, viz. the fact that the loss would not have occurred but for the breach.

‘Compensation’: Restoration v equitable compensation

Traditionally, equity made a distinction between the two remedies of restoring the trust property and equitable compensation. The terminology can be confusing. Both remedies are examples of compensation in the broadest sense of making good a party’s loss. ‘Restoration’ refers to equity holding the trustee to account to the trust fund for a loss that he has caused to the trust. The remedy is for the trustee to restore to the trust fund either the property that he has caused to be taken from it, or a monetary payment instead. The trust fund must be restored to its full value as long as the trust subsists. ‘Equitable compensation’ refers to compensation payable by the trustee to a beneficiary instead of to the trust fund and is usually payable after the trust has come to an end.

Key Learning Point

The right to equitable compensation is the right for the beneficiaries to sue the trustee personally for loss that he has caused to the trust fund.

By contrast, restoration of the trust property is a right that the beneficiaries enjoy against the trust property itself. It is said to be a right in rem: a right ‘in the thing itself’.

The liability of the trustee to restore the trust fund and/or pay equitable compensation was discussed by the House of Lords in Target Holdings Ltd v Redferns (A Firm)

The facts concerned a commercial property transaction of two plots of land in Birmingham. Mirage Properties Ltd agreed to sell the plots to Crowngate Developments Ltd. The purchase was not straightforward and went via a series of other companies, with the price increasing in stages at each step in the transaction.

The defendants were the solicitors acting for Crowngate, as well as the claimant (it is entirely usual for the same firm of solicitors to act for both buyer and lender in such a transaction). The claimants were the lenders for the purchase of the land, who were fully aware of all of the companies involved in the property transaction.

The claimant sent the loan money to the defendants in readiness for the purchase of the land to occur. Redferns had the implied authority of the claimant to pay the money across to Crowngate when it purchased the property.

The problem was that Redferns paid the loan money away too early: before the purchase of the land was completed. This was a breach of trust. Redferns admitted this but argued that the claimant did have a mortgage — secured by a legal charge — over the two properties in Birmingham. In this sense, therefore, the claimant had attained what it originally wanted to attain from the transaction: its money had been lent and secured by way of a legal charge.

Crowngate became insolvent and so was unable to repay the loan lent to it by the claimant. As mortgagee, the claimant could — and did — sell the two plots of land, but only for £500,000. It therefore sought to recover its £1.2 million loss from the defendant.

The claimant argued that when Redferns paid out the mortgage money in breach of trust, they were liable to restore the trust fund in the sum of the whole of the money that they paid out. The claimant further argued that the common law principles of causation did not apply and that it made no difference that the claimant had achieved its objective in securing a mortgage over the land.

The actual litigation in the case concerned the claimant’s application for summary judgment against the defendant.

Glossary: Summary judgment

Summary judgment is where judgment is given against a party because it is categorically clear that the party has committed a wrong, such as a breach of contract or breach of trust. There is consequently no need for a full trial to determine the issue.


At first instance, Warner J thought that the claimant had a very good claim for summary judgment for the breach of trust, but nonetheless gave the defendant permission to defend the action on the condition they deposited £1 million in court. The defendant appealed against his refusal to give them unconditional permission to defend the claim.

By a majority, the Court of Appeal dismissed Redferns’ appeal. Giving the leading judgment, Peter Gibson LJ held that, in general, the liability of a trustee for breach of trust was not to pay damages but instead the correct measure of liability was either:

[a]
 to restore the trust fund to the value of what had been lost. This was to be the entire amount of the fund’s loss such that the fund would be reconstituted with the total amount it had in it immediately before the breach of trust occurred; or

[b]
 pay the beneficiary equitable compensation for his loss. The beneficiary was to be returned to the position he was in but for the breach of trust. Thus causation was itself broadly relevant but the common law rules of causation were not relevant.

On the facts, the Court of Appeal held that as money had been paid by a trustee to a third party stranger, there was an immediate loss to the trust fund which could only be remedied by the trustee restoring the same amount to the fund. The court gave judgment to the claimant for £1.49 million less the £500,000 that the claimant had made when it sold the land as mortgagee. Peter Gibson LJ felt that equity could be sufficiently flexible to take into account the amount the claimant had made when it subsequently sold the land, after the breach of trust had occurred.  Redferns appealed to the House of Lords.

Lord Browne-Wilkinson delivered the only substantive opinion of the House of Lords. He stated that the principles underlying the common law’s award of damages and equity’s award of compensation were two-fold and were the same: (i) the defendant’s act must cause the damage and (ii) the claimant had to be put back into the position he would have been in had the damage not been committed. It had to be shown that the defendant was at fault for causing the claimant’s loss. If no loss could be shown, the beneficiary would enjoy no right to recompense
Lord Browne-Wilkinson rejected the first conclusion reached by the majority of the Court of Appeal that, in a case such as this where the commercial purpose of the transaction had come to an end, the whole of the trust fund should be restored if a breach of trust had occurred. When Redferns paid the money, the commercial purpose of the transaction came to an end. From that point on, there was no obligation to force Redferns to reconstitute the entire trust fund. Such an obligation would lead to over-compensation for the beneficiary, for the whole £1.7 million would need to be reconstituted by Redferns, despite the fact that the claimant’s loss was ‘only’ £1.2 million as it had successfully sold the land for £500,000.

The trustee’s liability to restore the trust fund by reconstituting it was only appropriate in the case of a traditional family trust, where the fund was held for multiple beneficiaries (such as to A for life, remainder to B) and they all had to benefit from being compensated. Restoration of the entire loss reflected that all beneficiaries needed to be compensated for the breach of trust. It was inappropriate in a modern, commercial use of the trust where the trust had come to an end and where there was only one beneficiary. Restoration of the trust fund was not the appropriate remedy here.

ANALYSING THE LAW 

Do you think Lord Browne-Wilkinson’s decision in Target Holdings Ltd v Redferns (A Firm) is compelling? Look back to Chapter 2 and the uses to which trusts are put in today’s world. Could restoration of the trust fund not be appropriate in some modern, commercial trusts?

As regards the Court of Appeal’s second argument of paying compensation to a beneficiary, Lord Browne-Wilkinson did not agree that ‘one “stops the clock” at the date the moneys are paid away’ when assessing the measure of compensation. He acknowledged that as soon as a trustee commits a breach of trust causing loss to the trust fund, the beneficiary has a right of action against him. But that did not mean that the measure of equitable compensation due to the beneficiary was also fixed at that point in time. Instead, the amount of compensation was to be measured at the later date of the trial. It was at that later point that an amount could be awarded which would put the estate or beneficiary back into the position they were in before the breach was committed. Lord Browne-Wilkinson quoted with approval from the judgment of McLachlin J in the decision of the Supreme Court of Canada in Canson Enterprises Ltd v Boughton & Co:

The basis of compensation at equity, by contrast, is the restoration of the actual value of the thing Lost through the breach. The foreseeable value of the items is not in issue. As a result, the Losses are to be assessed as at the time of trial, using the full benefit of hindsight.

Taking this into account, at this stage, Redferns were entitled to defend the claim against the claimant. It could not be proven, without a full trial into the issue, that the claimant had actually suffered any loss as a result of Redferns’ actions. The claimant had lent the money and had ultimately secured it by way of a legal charge. However, Lord Browne-Wilkinson ended his opinion by saying obiter that whilst this was the strict result, it was probable at trial that the claimant would be able to show a causal link between Redferns’ breach of trust and the claimant’s loss. If this was the case, then the claimant’s remedy would be equitable compensation of £1.2 million: the loss of £1.7 million less the value of the land of £500,000 which the claimant had recovered when it sold the two plots. Such an amount was the amount of loss at the date of the trial, as opposed to the loss of £1.7 million when the breach of trust occurred.


Summary

‘Compensation’ in the broadest sense in equity consists of two rights that the trust enjoys: the trustee may be liable to account to the trust fund for the loss suffered or, alternatively, may have to pay equitable compensation to the beneficiaries personally.

The trustee’s liability to restore the loss to the trust fund he has caused it was said by Lord Browne-Wilkinson in Target Holdings Ltd v Redferns (A Firm) to be the beneficiary’s ‘only right’ of monetary remedy against a trustee in the case of a traditional trust where the trusts were still subsisting. When a traditional trust comes to an end, the beneficiary is not usually entitled to have the trust fund restored. There is no need, as the beneficiary becomes absolutely entitled to the trust property. As such, he is instead entitled to equitable compensation should the trustee have breached the trust.