Trusts - Liability of trustees

What should be considered in relation to liability of trustees?

1. breach of trust/fiduciary duty

2. loss caused to Bs

3. are there any defences available to exclude/limit trustee liability

4. can the loss be apportioned if there is more than one T responsible?

What are the two questions to establish liability for breach of trust?

a) Did the trustee(s) act in accordance with their powers?

b) if so, did they comply with their trustee duties?

What are examples of acting outside powers as a trustee?

Making an unauthorised investment.

wrongful distribution

misappropriation of trust property (also a fiduciary breach)

What does acting in breach of duties involve?

Falling below the expected standard of behaviour as a trustee.

e.g.

- not distributing trust property

- failing to consider standard investment criteria/properly consider advice

- failure to comply with duty of care

- failure to properly monitor investments

What is the liability of co-trustees in a breach of trust?

Co-trustees can be jointly and severally liable for breaches.

Are trustees liable for breaches that occurred before their appointment?

No, trustees are not liable for breaches that occurred before their appointment.

- but new trustees should commence proceedings to recover from former trustee upon discovering breach - or risk becoming liable themselves

What is the liability of a trustee after retirement?

A trustee remains liable for breaches committed during their tenure, even after retirement.

Under what conditions can a retired trustee be liable for breaches that occured after they retired?

1. If they retired to facilitate the breach.

2. If, upon retiring, they transferred trust property to new trustees without due regard, causing loss on the transfer

What claims can beneficiaries make for loss?

T has misapplied trust property = recover property itself, or traceable proceeds

not possible/desirable to recover the property = equitable compensation to reflect any loss caused

Are trustees liable for losses in the trust fund?

Trustees are not liable unless they have breached their duties e.g. not liable for prudent investments that lose value

- but may become liable if continue to hold assets with poor performance

How is loss assessed in the event of a breach of trust?

Loss is assessed at the date of trial (not date of breach) by 'taking an account' = determining the expected value of the trust fund compared to actual value

What is the approach where loss is attributable to misapplication of trust funds?

requires the trustees to return the trust fund to the position it would have been in if the misapplication had not occurred ("reconstituting/falsifying") e.g. purchasing shares/property to go back into the trust fund

- if not possible, will need to pay equitable compensation in lieu - to the value that should have been restored

- n.b. if misapplication has resulted in a profitable investment, Bs can affirm

What is the approach where loss is caused by breach of a bare commercial trust?

e.g., where solicitor is holding funds before parties complete on a deal

- there is no obligation to reconstitute the trust fund, as once the commercial transaction is completed, the trust ceases to exist

- but there can be compensation for loss of which the breach can be shown to be a 'but for' cause

Can trustees offset losses from a breach of trust against profits from other investments?

No, trustees cannot offset losses caused by a breach of trust against profits from other investments or transactions.

UNLESS the profits arise from the same transaction/course of dealing (eg 2 investments made in the same thing)

What are some defenses available to trustees against liability for breach of trust?

1. Exemption clauses,

2. Beneficiary instigation/consent/acquiescence,

3. Limitation rules, and

4. Statutory relief under s 61 TA 1925.

What is an exemption clause in the context of trust instruments?

An exemption clause limits or excludes trustee liability for certain breaches, except for fraudulent breaches.

n.b. trustee cannot rely on an exemption clause if they have acted dishonestly

Under what condition can trustees avoid liability for a breach of trust? (consent of Bs)

Trustees can avoid liability if they received fully informed consent from all beneficiaries

- or if all beneficiaries instigate or request the breach

What happens if only some beneficiaries consent/instigate to a breach of trust?

- Trustees may have a partial defence against those beneficiaries who consented.

- and also partial defence if only some Bs instigate or request the breach

What is the defence of acquiescence in trust law?

Acquiescence occurs when beneficiaries affirm a trustee's actions after a breach, indicating consent by words or actions

What does it mean to impound a beneficiary's interest?

- It means using the instigating/requesting beneficiary's share of the trust fund to indemnify a breaching trustee against claims by other beneficiaries.

- the court has discretion to do this under TA

- n.b. no requirement for the instigating/requesting beneficiary to have benefited from the breach

Can you impound a consenting beneficiary's share?

- yes, court has common law discretion to use share of beneficiary who consented to the breach to indemnify the others

- consent does not need to be in writing but consenting B must have benefited from the breach

What is the limitation period for bringing a claim for breach of trust? (when interest has already vested)

The limitation period is 6 years from the breach

When does the limitation period for beneficiaries with future interests begin?

The limitation period for future interests is 6 years starting when the interest vests in possession.

When do the limitation periods not apply for breaches of trust?

- claims for fraudulent breaches

- or proprietary claims against the trustee i.e. claims to retrieve trust property/traceable proceeds

How does the limitation period apply when the trustee is also a beneficiary?

- if trustee as beneficiary has received part of the fund in excess of their entitlement under the fund, if the 6 year period has expired, only the excess can be recovered

- unless the trustee acted dishonestly or unreasonably in making the distribution = could then make claim for full amount

What is the equitable defense of laches?

- a defence for trustees

- Ts must show that B knew about the breach but has delayed their claim, making it unconscionable to assert their interest.

- can be brought by trustees even if still within limitation period

What is the defence under s. 61 TA 1925?

- only to be used if none of the other defences apply

- gives the court discretion to excuse a trustee in circumstances where they 'acted honestly and reasonably, and ought fairly to be excused for the breach of trust'

- can be used for individual trustees, and the others remain liable

What are the three requirements for relief under s 61 TA 1925?

The trustee must show they acted:

1. honestly,

2. reasonably (eg sought legal advice)

3. ought fairly to be excused for the breach.

n.b. not used lightly by the court

Why might lay trustees have a better chance of relief under s 61 TA 1925 than professional trustees?

Lay trustees may find it easier to prove they acted honestly and reasonably, especially if they sought advice.

What does it mean for trustees to be jointly and severally liable?

It means one trustee may compensate the trust fund for the entire loss and seek contribution from co-trustees.

What is the Civil Liability Contribution Act 1978?

An act that allows a claim where two or more parties are liable for the same damage, permitting the court to require a just and equitable contribution from one to the other

n.b. presumption of equal responsibility - unless facts indicate otherwise

What factors can lead to unequal contributions among trustees?

Differing levels of culpability

- particularly if a specific trustee was delegated a function due to their expertise/profession and failed to execute it properly.

What is full indemnity in the context of trustee liability?

A rare court award where one trustee may be fully compensated for losses due to another trustee's breach.

What circumstances MAY lead to a full indemnity being awarded? (still at court's discretion)

- One trustee is morally culpable for the breach (eg they stole trust assets)

- trustee is also a beneficiary

- trustee is acting as solicitor to the trust and the breach is committed based on their advice.

Why was full indemnity awarded in Re Partington (1887)?

A full indemnity was awarded because the solicitor trustee failed to properly inform the widow and made a negligent investment.

What was the ruling in Head v Gould [1898] regarding indemnity?

No indemnity was awarded because the lay trustee actively participated in the breach and the solicitor trustee lacked controlling influence.

Can trustees seek contributions from third parties?

Yes, can seek contributions from those also liable such as professional advisors or those in knowing receipt etc.

Ways to protect trustees from liability from the outset of the trust?

1. ouster clause (express clause in the trust instrument removing a duty a trustee would otherwise have)

2. exemption clause (duty still exists, but protects trustees personal liability in case of breach. n.b. cannot exclude fraudulent breaches of trust)

3. trustee liability insurance (can protect against negligence but not fraudulent breaches of trust)

When will trustees need protecting during administration?

when trustees unsure of their powers or duties

e.g. when trust instrument is difficult to interpret

Protecting trustees during administration - methods

1. legal advice on interpretation

2. seeking court directions

3. applying to HC under s.48 AJA to rely on counsel's opinion

4. surrendering discretion to court

5. obtaining beneficiary consent

Protecting trustees during administration - legal advice on interpretation

trustee may rely on legal advice sought on trust interpretation

but - this does not protect from breach following incorrect advice

Protecting trustees during administration - seeking court directions

safest thing to do

trustees acting in accordance with court directions will not be liable even if there is subsequent claim from a beneficiary

Protecting trustees during administration - applying to HC under s.48 AJA

cheaper alternative to the expenses involved with getting a full court hearing

1. seek written legal opinion (usually from barrister/solicitor with 10+ years experience); and

2. apply to HC for authorisation to rely on that legal opinion

HC will grant an order without hearing arguments unless there is a dispute

Protecting trustees during administration - Surrendering discretion to the court

may be used in cases where trustees are deadlocked/precluded from acting due to a conflict

n.b. this can only be sought in relation to a specific action - trustees cannot simply give up all powers/obligations

Protecting trustees during administration - seeking beneficiary consent

if trustees unsure/know something would be a breach they may seek beneficiary consent

consent must be fully informed from all beneficiaries - if so, full protection is obtained

only an option if all Bs are known, locatable, 18 and of sound mind

may be cheaper than going to court for help

Protection from claims from unidentified or missing beneficiaries when distributing trust fund - options?

1. seeking a Benjamin order

2. publishing a notice under s.27 TA 1925

3. retaining a fund to satisfy any claims

4. paying money into court to satisfy any claims

5. taking out insurance against wrongful distribution

6. seeking an indemnity from known beneficiaries

Protection from claims from unidentified or missing beneficiaries when distributing trust fund - Benjamin order

court order permitting trustees to distribute on basis of a particular assumption

before order - trustees must show that there is no reasonable prospect of knowing true position without disproportionate expense

order relieves trustees from personal liability if assumption is incorrect

n.b.

- disappointed B or creditor can make a claim against the other Bs to whom property was distributed

- useful where existence of a B is known but unable to locate - can presume dead under court order

Protection from claims from unidentified or missing beneficiaries when distributing trust fund - s.27 TA Notice

to prevent liability - trustees may publish notice of intention to distribute to known Bs 2 months after advert

can distribute liability free after 2 month period

notice must be placed in:

1. London Gazette

2. newspaper in area which any land held on trust is located

3. other newspaper appropriate

n.b. - B can still make a claim after 2 months but to recipient of the trust property - not trustees

Protection from claims from unidentified or missing beneficiaries when distributing trust fund - Retained funds

retain a fund and set aside to discharge any liabilities if missing Bs come forward

n.b. means more admin for trustee who may have to hold for a long time

Protection from claims from unidentified or missing beneficiaries when distributing trust fund - Payment into court

gives court legal control over the funds so trustee can retire

n.b. from court's perspective this is a last resort if all realistic options of tracing Bs have expired

Protection from claims from unidentified or missing beneficiaries when distributing trust fund - Missing beneficiary insurance

insurance guards against risk of missing/unknown Bs emerging

trustees still liable but then can claim on insurance policy

n.b. cheaper than seeking Benjamin order

Protection from claims from unidentified or missing beneficiaries when distributing trust fund - Obtaining indemnity from beneficiaries

seek an indemnity from Bs that they promise to reimburse trustees if they re successfully sued by other Bs later

n.b. riskier option than the others but cheaper and avoids admin of retaining funds.

Practical steps after breach of trust has occurred?

1. check trust instrument for exemption

2. consider any defences e.g. reliance on court direction, consent, statutory limitation/relief

3. check for insurance if claim likely to be successful

4. identify whether there are any claims against TPs e.g. financial advisors

5. consider contribution, claims against TPs and co-trustees

Claims against TPs?

- if trustee takes swift action against negligent adviser, may be able to prevent personal claim for breach

- because they will have complied with their duty to take action and recover funds on behalf of the trust

- may bring a separate claim against adviser alongside/following proceedings for breach of trust