Law of Trusts: Trustees (Lecture #4)

The Key Duties of a Trustee

  • duty of care

  • fudiciary duty

Duty of Care: Statutory

  • Trustee Act 2000, s 1

  • a trustee must exercise care and skill as is reasonable in the circumstances, having regard in particular –

  • objective test: a) To any special knowledge or experience that he has or holds himself out as having, and

  • subjective elements: b) If he acts as a 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

Duty of Care: Common Law

  • The statutory duty is supplemented by the Common Law

  • ‘The statutory duty is intended to enact, and not to discredit, the standard of care which was formerly set out in cases such as Speight v Gaunt and Learoyd v Whiteley’ — Gary Watt, Equity & Trusts Law, (8th edn, Oxford University Press,
    2025) 270

Ordinary Prudent Person of Business

  • Speight v Gaunt (1883) 9 App Case 1

  • duty is for trustee to act in the manner an ‘ordinary prudent man of business would take in managing similar affairs of his own.’ (Lord Blackburn)

Strength of Duty

  • Learoyd v Whiteley (1886) 33 Ch D 347
    'The duty of a trustee is not to take such care only as a prudent man would take if he
    had only himself to consider; the duty rather is 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.’ Lindley LJ

Fudiciary Duty

Characteristics of Fudiciary Duty

  • The Trustee – Beneficiary relationship is the fiduciary relationship par
    excellence — Gary Watt, Equity & Trusts Law (8th edn, Oxford University Press, 2025) 261

  • characteristics of a trustee: good faith, trust, loyalty, confidence, acting in best interests of another

  • Bristol and West Building Society v Mothew [1998] Ch 1: Someone who has undertaken to act for or on behalf of another in circumstances
    which rise to a relationship of trust and confidence.

  • The distinguishing obligation of a fiduciary is the obligation of loyalty
    A fiduciary cannot:
    • Act in conflict with the person to whom they owe the duty
    • Profit from their position as fiduciary

  • No profit No Conflict = Bray v Ford [1896] AC 44

Fudiciary Duty: No Profit, No Conflict

No Profit

  • Managing director taking advantage of information received by virtue of position:

  • Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443

  • Trustee using position to make person profit: Boardman v Phipps [1966] 3 All ER 827

No Conflict

  • The fiduciary should not place themselves in a position where their interests are in conflict with that of the person to whom a duty is owed

  • Self-dealing prohibition: e.g. Tito v Waddell (No 2) [1977] Ch 106

Strict Application

  • Keech v Sandford (1726) 2 Eq Ab 741

  • ‘...the rule should be strictly pursued, and not in the least relaxed.’

Breach

  • duty of care: trustee fails to proeprly excercise duty of care —> claim in personam (claim against trutee(s) personally)

  • fudiciary duty: trustee contravenes fudiciary duty —> claim in rem (claim to pursue the trust property)

Claim in Personam

  • Pursue trustee for breach of trust / fiduciary duty
    • Any reason not to pursue?
    • Does trustee have any money?
    • Do beneficiaries want misappropriated asset instead??

Claim in Rem

  • where the beneficiaries seek to reclaim trust property that has been misappropriated

  • First step for making a claim in rem:

  • Beneficiary must show that they have a PROPRIETARY INTEREST (intererst in property ownership) in the property they are pursuing

  • do this by ‘tracing’

Tracing

Common Law Tracing

  • cannot use if misappropriated property is mixed with other property

  • not possible for equitable owners – such as beneficiary of trust

Equitable Tracing

  • can be used for equitable owners

  • can be used if misappropriated property is mixed with other property

  • can be use to trace misappropriated property and profit/increase in value

Requirements for Equitable Tracing

  • fiduciary relationship with person misappropriating the property

  • beneficial interest in the misappropriated property

  • ‘The right to trace is not available to just anyone. The claimant must show that they have an equitable proprietary interest in the property being traced. Clearly, the beneficiary of a trust has such an interest.’ — Joyce Liew Mouawad, Trusts Law – Revise SQE (Fink Publishing, 2021) Chapter 12

Equitable Tracing & Mixed Funds

  • equitable tracing is very useful when misappropriated property is mixed with other property

  • when this mixing occurs we use case law assumptions

Mixed with Trustee’s Own Money: Re Hallett’s Estate (1880) 13 Ch D 696

  • solicitor misappropriated funds and placed into his own account

  • withdrew funds, but a balance remained

  • balance was insufficient to discharge solicitor’s debts AND to repay beneficiaries

  • trustee deemed to have withdrawn his own monies first

  • therefore beneficiaries were entitled to the funds, over the creditors

Ratio Decidendi

  • applies where the trustee mixes misappropriated monies with his own, and subsequently withdraws funds from the mixed account

  • ASSUMPTION: trustee withdrew his funds first

Mixed with Trustee’s Own Money: Re Oatway [1903] 2 Ch 356

  • A solicitor misappropriated trust funds

  • Over time the trust funds had all be dissipated

  • With some trust funds the solicitor had purchased shares which has increased in value.

  • Held: beneficiaries could trace shares and increase in value

Ratio Decidendi

  • Applies where the trustee mixes misappropriated monies with his own, and subsequently removes funds to buy an asset

  • ASSUMPTION: asset belongs to the trust

  • Protects the beneficiary's monies where trustee goes on to dissipate the monies remaining in the account

Claim in Rem: Foskett v McKeown [2001] AC 102

  • ‘Tracing... is merely a process by which a claimant:

  • demonstrates what has happened to his trust property,

  • identifies the proceeds and the people who have handled or received them; and

  • justifies his claim on the basis that the proceeds can properly be regarded as representing his property’ at 128

Limitations of Equitable Tracing

  • equity’s darling

  • inequitable to trace

  • dissipated/destroyed

Equity’s Darling

  • Bona Fide Purchaser for Value Without Notice

  • bona fide = genuine and in good faith

  • purchaser = a buyer as opposed to gift recepient

  • for value = having paid money or money’s worth

  • without notice = without knowledge that property has been misappropiated in breach of trust

Destroyed/Dissipated

  • Cannot use equitable tracing where misappropriated property has been destroyed or dissipated (Borden (UK) Ltd v Scottish Timber [1981] Ch 25)

  • Includes monies spent drinking fine wine, a night out, a holiday, gambling...

  • Includes monies lost paying off an overdraft: 'equitable tracing does not extend to tracing through an overdrawn bank account...’ Bishopsgate Investment Management Ltd v Homan [1995] Ch 211 at 221

Inequitable to Trace

  • Re Diplock [1948] Ch 465

  • Tracing denied because it would be inequitable to allow

  • Charities, who had received 'misappropriated' monies, had already spent the money on building works or payment of debts