Trusts - Head 5

breaches of trustee's obligations

breach of trust

if a trustee fails to meet their obligations or discharge their duties then they are said to be in ‘breach of trust’

3 variants of breach of trust

1. ultra vires breach

2. intra vires breach

3. breach of fiduciary duty

ultra vires breach of trust

trustees who act without having authorisation to do something

• it is a breach of trust to defy the trust deed

• where it is specified that something is not permitted and a trustee does it, clear ultra vires breach.

• when it is not specified in the trust deed, default onto statutory powers

• Profit and honesty unimportant in qualifying breach of trust and arnold is still liable to the beneficiaries

  • though remedies require a loss to ocurr.

ultra vires breach where no specified provision in trust deed?

• TS(S)A 2024, s 15: default ‘all the powers of a natural person beneficially entitled to the property’ (so including sale of heritage)

intra vires breach of trust

Trustee’s performance falls below the standard required by TS(S)A 2024, s 31 [i.e. ordinary prudence or reasonable professional skill]

Simplistically put: acting within powers, but doing it badly!

Must determine what classification of trustee one is to understand the level of responsibility they incur to subsequently evaluate if its intra vires breach

intra vires breach of trust exampl

Anne acts under a trust deed that authorises the trustees to sell or lease heritable property. Anne sells land worth £800,000 for £50,000, and then leases another property for half the market rent.

• Ann has the power to make these transactions, but they are such undervalued transactions that a person of ordinary prudence would not have made them in managing affairs of another [or as a professional of skill] = intra vires breach of trust.

• Hugely undervalued 

• What’s the scale of selling under value?

• Remember trustee will be personally liable in these breaches 

intra vires breach - Rae v Meek (1889) due diligence

• court first set down old standard of performance

• trustees authorised to make investments by the trust deed including buying, stock and other heritable securites

• bought land but did not get a surveyoe to look at building or land and it was become clear land was significantly over-valued

Intra vires breach - Henderson v Henderson’s Trs (1900) due diligence

• investments in shares might have been within the trustees powers, but the nature of those shares as an investment failed the standard of care test

• one has to determine how good an investment is. which is why due diligence is important as it can prevent personal liability.

Breach of fiduciary duty

Must not be auctor in rem suam: no buying or selling trust property for own interest, and no lending or borrowing from the trust funds by trustees: basically no conflicts of interest.

Breach of fiduciary duties - Huntingdon Copper and Sulphur Co v Henderson (1877)

“[T]he principle is that a person who is charged with the duty of attending to the interest of another shall not bring his own interest into competition with his duty.”

breach of fiduciary duties

Elias v Black (1856) 18 D 1225, at 1230 per the Lord President (McNeill).

“But when he comes to make the purchase, having had all these circumstances in his power – whether used or not to the disadvantage of the party is of no consequence – the law looks with jealousy to these things, for it cannot discover whether they have been used prejudicially or not.”

Breach of fiduciary duties

Croskery v Gilmour’s Trs (1890) 17 R 607, at 700 per the Lord President (Inglis).

“The lending of trust money by trustees to one of their own number is unquestionably an illegal proceeding. It is much more than a mere breach of trust in the ordinary sense, because such a breach of trust covers and includes small acts of negligence which may infer very little blame on the part of those concerned in them. But to lend trust money to one of their own number is an absolutely illegal proceeding…”

Breach of fiduciary duties

Wilson v Wilson’s Trs 1939

trustees cannot lend money to the trust: the Lord Ordinary followed English authority on this point, but noted that the point was the same conflict of interest arises due to the dual (potentially conflicting) interest the trustee has as both borrower and lender.

personal liability -

own and County Bank Ltd v Walker (1904) 12 SLT 411, at 412 per Lord Kyllachy.

• “a breach of trust may consist of embezzlement, or it may arise simply from failure to account, or it may consist, as alleged here, of some act or default which amounts only to some irregularity or error of judgment for which, nevertheless, there may be personal liability. But in all such cases, the result is simply to create a liability by the trustee to make good to the trust estate the loss which he has caused”

personal liability TS(S)A 2024

s 36

s 36(1)(a) trustee only has personal liability for any loss to a beneficiary due to trustee’s own acts or omission

OR

s 36(1)(b) Breaches of trust/fiduciary duties by co-trustees if the trustee failed to take reasonable steps to ensure that the co-trustee did not commit the breach

Trusts and Succession (Scotland) Act 2024

S 38

trustees entering into ultra vires onerous contracts with third parties will be personally/privately liable to the third party on the terms of the contract if the third party was in good faith.

co-trustee breach

Millar’s Trs v Polson (1897) 24 R 1038, at 1043 per the Lord President (Robertson).

“It is, of course, disagreeable to take a co-trustee by the throat, but if a man undertakes to act as trustee he must face the necessity of doing disagreeable things when they become necessary in order to keep the estate intact. A trustee is not entitled to purchase a quiet life at the expense of the estate, or to act as good-natured men sometimes do in their own affairs, in letting things slide and losing money rather than create ill-feeling”

TS(S)A 2024 - s 36(1)(a)&(b)

all trustees (or a majority) making or acquiescing in a collective decision which is a breach of trust, then all are potentially personally liable [s 36(1)(a)]

but if one trustee acts in a way that amounts to a breach of trust (e.g. embezzles funds) then others will not be liable unless and until they become or should have become aware of intromissions of fellow trustee AND fail to take action [s 36(1)(b)]

remedies - re-investment

trustees must reinvest funds that have been invested in a manner breaching the trust

remedies - third parties

TS(S)A, s 43: where a trustee in an onerous transaction purports to exercise power under ss 15 [general powers of natural person] or 18 [investment] the validity of the transaction and any title acquired by the non-trustee are not challengeable as at variance with the terms of the trust

• regardless of good or bad faith

Note: the trustee remains personally liable for breach – see also s 38(5)-(6) of 2024 Act

remedies - removal of trustees

TS(S)A 2024, s 7(1) &s.9

• S.7 requires going to court

• S.9 allows to circumvent the court action through this method. 

  • Breach must be sufficiently bad, criminally.

excluding liability clauses - statute

TS(S)A 2024

S 34: completely ineffective with respect to breach of fiduciary duty unless that particular type of fiduciary breach pre-authorised in the deed (i.e. deed specifically states trustee can lend money to the trust)

S 31(4): ineffective to exclude gross negligence by trustee subject to the ‘ordinary prudence’ standard.

excluding liabiltiy clauses history

The truster in the deed can attempt to forgive the trustees in advance for a breach of trust

One reason for this was this was historically the only way someone would agree to being a trustee.

Only a certain degree of effectiveness.

Fiduciary duty must be specified

exclusion clauses - gross negligence

Lutea Trs Ltd v Orbis Trs Guernsey Ltd 1997 SC 255:

• There was a clause which purported to exclude gross negligence on part of the trustees 

• Scottish courts were very clear about this. 

• The trust deed cannot overrule this exclusion 

  • Something irregular in scots law as there is usually a large amount of freedom in creating trusts and other obligations

exclusion clauses - other countries

Other jurisdictions are more sympathetic, and appear to allow the use of effective immunity clauses allowing trustees to escape liability for ‘gross negligence’

good faith mistakes

this does not relieve the trustee of liability but may affect remedies available

TS(S)A 2024 s.32 - defences

 the beneficiary cannot claim against trustee and claim could be assigned to the trustee

TS(S)A 2024 s.33 - defences

if the trustee genuinely believes they had the power to enter the transaction, the court may relieve the liability if it thinks it to be just in the circumstances.

How understandable, impact, work it takes to correct

TS(S)A 2024 s.35 - defences

if the court thinks it fit and just, but also the beneficiaries must have benefited from the breach or received just as good as market value

TS(S)A 2024 s.37 - defences

 good faith distribution errors due to lack of knowledge

e.g instructed to dispers funds to trusters children, trust funds are exhausted and then another child which no one knew existed appears demanding payment, trustee has a very good defence and had no way of knowing about the child.

forgiveness

Callander v Callander (No 2) 1975

“a beneficiary consenting to a breach of trust cannot afterwards challenge it”

forgiveness

De Fazio v De Fazio [2014] CSOH 56, at para 56 per the Lord Ordinary

“if all the beneficiaries consent to trust money being loaned to one of the trustees, then they cannot subsequently claim that the trustee has acted in breach of a duty owed to them.”

TS(S)A 2024, s 17

Except in so far as the trust deed expressly provides otherwise, a trustee has power to take out such insurance as it is reasonable to take out against personal liability arising from the trustee’s actings in carrying out the duties of a trustee.”

S 17(3): insurance premiums ‘is to be paid’ from trust funds