Chapter 8: Liability For Breach Of Trust

• Breach of duty


  Standards imposed on the trustee are harsh and designed to deter wrongful conduct and to ease the burden of proving a breach of duty
• Assessing whether a trustee failed to carry out a duty


  1. Was the act one that the trustee was authorised to perform by the trust instrument or by law?

  2. If not, there is a breach of trust regardless of the good faith, skill, and diligence with which the trustee performed the act
• Breach of duty


  • Failure to invest trust funds
  • Failure to take advice on investment or to take account of the standard investment criteria
  • Distributing trust funds to the wrong beneficiary
  • Failure to keep trust property under the trustees' joint control
  • Failure to act impartially between the beneficiaries
• Assessing whether the trustee acted in accordance with the relevant standard of care

  1. In the case of investment choices, did they act with such care and skill as reasonable in all the circumstances, taking into account any expertise they have or profess to have?

  2. In the exercise of other discretions, did they act with the prudence of an ordinary person of business?
• Liability of trustees for loss

  • Beneficiaries may bring a personal claim against the trustees for losses resulting from trustees breach of trust, with interest on their liability from the time of breach
  • The beneficiaries have the burden of proving loss
  • If they cannot prove that a loss resulted from the breach, the trustees will escape liability
• Offsetting losses and gains from multiple breaches of trust

  • Generally, a trustee is not permitted to offset the loss from one breach by the gain that resulted from another breach
  • However, when there is a linked scheme of investment, trustees can offset the losses against the profits which are made from the investments
• Liability of co-trustees


  • A trustee is not vicariously liable for the acts of their co-trustee, and only the trustee responsible for the breach and loss will be liable
  • However, where a breach of trust has been committed by one trustee, it may be that a co-trustee has committed another breach of trust by, for example, failing to supervise the actions of the trustee in breach
• Joint and several liability of trustees

  If more than one trustee is in breach, their liability is joint and several; that is, the beneficiaries may sue any of the trustees for the whole loss, leaving the trustee to recoup some of the liability from the other trustee(s) if they can
• Defences against liability


  • Consent of beneficiaries
  • Limitation period
  • Exclusion clause
  • Relief in court's discretion
• Consent of beneficiaries


  • If a beneficiary of full age and capacity has consented to the action that gave rise to the breach with full knowledge of all material facts, they may not later sue the trustees in relation to that breach
  • If one beneficiary gave consent but others did not, the trustees will be liable for losses caused to those beneficiaries who did not consent
• Limitation period


  • The general limitation period for bringing an action against trustees is six years
  • Exceptions: time does not begin to run against a beneficiary with an interest in remainder until their interest falls into possession, no limitation period if the trustee was party to a fraud, and no limitation period in an action to recover trust property or its proceeds from the hands of a trustee
• Exclusion clause


  • Clauses attempting to relieve a trustee of liability for breach of trust generally are strictly construed but are enforceable where no bad faith, intentional breach, or recklessness is involved
  • Courts have upheld exclusion clauses relieving a trustee from liability for conduct up to and including gross negligence
  • Clauses purporting to absolve the trustee from liability for fraudulent breaches, however, are void
• Measure of liability


  • Trustees in breach are liable to account or pay equitable compensation for their wrongdoing
  • Liability to account is the obligation to pay money into the trust to restore the value of any losses the trust fund suffered due to the trustee's breach
  • Equitable compensation is confined to situations in which the beneficiary is compensated directly by a money payment
• Liability among trustees


  • Where more than one trustee is in breach of trust, their liability to the beneficiaries is joint and several
  • As among the trustees, the court has power to apportion liability as it deems just and equitable in the circumstances, with liability most likely to be apportioned equally
  • The court has the power to indemnify one trustee at the expense of another
• Tracing


  • The right to sue a trustee for breach of trust is a personal claim, but where trust property or its proceeds can be identified in the hands of a trustee, the beneficiaries may make a proprietary claim to the property
  • This claim is advantageous where the trustee is insolvent, and if the value of the trust property or its proceeds has increased
• Exception for asset purchased before fund dissipated

  If the trustee withdraws money from the account to purchase an asset and then dissipates the balance, the beneficiaries may claim a share of the asset or a charge over it
• Subsequent receipts of trustee's own money

  • If the trust money has been dissipated, subsequent payments of the trustee's own money into the account are not treated as replacing the trust money
  • However, if the trustee shows a clear intention to repay the trust money, then their subsequent payments can be treated as replacing the trust money
  • The limit of the beneficiary's claim is the 'lowest intermediate balance' - the balance after the last payment out but before the next payment in
• Lowest intermediate balance


  The balance after the last payment out but before the next payment in. If the lowest intermediate balance is zero, then that is the limit of the beneficiary's claim.
• Assets purchased from mixed funds of two trusts

  The beneficiaries of the two trusts share the asset proportionally.
• Funds of two trusts mixed in bank account - Current account


  The "first in, first out" rule applies. The first money into the account is the first money out.
• Proportionate solution for funds of two trusts mixed in bank account

  If (1) applying the "first-in, first-out" rule is contrary to the express or implied intentions of the claimants, (2) it is impractical to apply the rule, or (3) applying the rule would cause injustice to the parties, courts will displace the rule and divide the money proportionately.
• Funds of two trusts mixed in bank account - Savings account


  The proportionate solution operates as the default rule.
• Transfer to bona fide purchaser

  A third party who acquires the legal title to trust property for value and without notice of the trust takes the property free of the equitable interests of the beneficiaries.
• Innocent volunteer recipient


  A third party who did not pay value for the property, but who nevertheless had no knowledge or suspicion that a breach of trust has occurred. The beneficiaries cannot bring a personal claim in equity against the recipient as the recipient's conscience is not affected.
• Conditions to establish right to trace

  • The property was the subject of a fiduciary relationship
  • The property or its product is identifiable using equitable tracing rules
  • The property is not in the hands of a bona fide purchaser for value without notice
• Knowing recipient


  A third party who received money or property traceable to a breach of trust with knowledge of the breach. They will be treated as if they were a trustee.
• Unconscionability for knowing recipient to retain property

  • Actual knowledge
  • Wilfully closing one's eyes to the obvious
  • Wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make
  • Knowledge of circumstances which would indicate the facts to an honest and reasonable person
  • Knowledge of circumstances which would put an honest and reasonable person on inquiry
• Personal claim against knowing recipient


  A knowing recipient is treated in equity as if they were a constructive trustee, so the recipient will be personally liable to the beneficiaries to make good the loss to the trust fund.
• Proprietary claim against knowing recipient

  Since a knowing recipient is treated as if they were a trustee, the trustee tracing rules will apply to identify trust property or its product in their hands.
• Dishonest accessory


  A third party who has facilitated a breach of trust. They are liable as if they were a trustee if their assistance was 'dis-honest'.
• Dishonesty


  Conscious impropriety or not acting as an honest person would in the circumstances. The dishonest accessory need not have known that they were participating in a breach of trust, merely that the scheme they were facilitating was in some way illegal.
• The basis of the claim against a dishonest accessory is that the accessory facilitated the breach of trust. This is unlikely to have involved the accessory's receiving trust property for their own benefit, so a proprietary claim is not relevant to such cases.