Head 19: Breach of Trust

Question 1

What can breach of trust be divided into?

Answer 1

Breach of trust can be subdivided into:

1. ultra vires acts,
2. breach of fiduciary duty, and
3. careless intra vires acts.

Question 2

Who is responsible for a breach of trust?

Answer 2

The trustees are always responsible, jointly and severally personally liable, also must disgorge personal gains.

Question 3

Who may raise an action for breach of trust?

Answer 3

⁃ Beneficiaries
⁃ Co-trustees who disagree with what the majority have done
⁃ The Lord Advocate - in public trusts
⁃ For charity trusts the overseeing body OSCAR[ Not sure about spelling.]?

Question 4

What happens when there is more than one trustee?

Answer 4

⁃ The Trusts (Scotland) Act 1921, s 3(d) states that “each trustee shall be liable only for his own acts and intromissions and shall not be liable for the acts and intromissions of co-trustees and shall not be liable for omissions.”

⁃ BUT this part about omissions is very misleading because trustees are liable for omissions if they fail to carry out their duties.
⁃ In addition a trustee is jointly and severely liable for any breaches that the trustee is party to or that they’ve acquiesced in later - if you are to avoid liability as a co-trustee you really must have your dissent minuted.
⁃ A trustee is also liable if they fail to monitor the co-trustees - thus appropriate action must be taken if the co-trustees are breaching the trust.

Question 5

What are the principal remedies for a breach of trust?

Answer 5

The principal remedies for breach of trust are

Court: The trustee can then be removed by the court on the petition of the beneficiaries or co-trustees. If there are no trustees then the court can appoint new ones. Former trustees can be sued for the losses of new trustees.

⁃ (a) An action of count, reckoning and payment.
⁃ This is where you suspect either a course of conduct or there is something not quite right but you can’t quite put your finger on it. The court orders production of the accounts which are gone over by forensic accountants and then the courts will make a decision as to whether the trustees owe the beneficiaries or everything is in order.
⁃ (b) Enforcement of trust purposes.
⁃ You can obtain direct orders for the trustees to do various things (e.g. pay the beneficiaries, recover money, pay the creditors etc)
⁃ (c) Damages
⁃ ie payment from the trustee’s private patrimony in respect of loss to the trust patrimony.
⁃ (d) Recovery of trust property from trustee as an individual or third party done.
⁃ E.g. if the trust property has been distributed in error it can be recovered from the person it was distributed to.

⁃ Profits can also be recovered from the trustees that they have made by self-dealing.

Question 6

Why must the trustees make clear who they are distributing trust property to?

Answer 6

It is dangerous for the trustees to distribute trust property unless it is clear who the beneficiaries are and what they are entitled to do so
⁃ So the trustees should read the trust deed very carefully.

Question 7

What can the trustees do if matters are still not clear?

Answer 7

If matters are still not clear then the trustees can apply to the Court of Session before acting for:

⁃ (a) Directions under Court of Session Act 1988, s 6 (mainly administrative matters).
⁃ This procedure is quick and does not require a proof etc.
⁃ Taylor Petr, 2000

⁃ (b) A decision on the effect of the trust deed - Special Case (facts must be agreed)
⁃ This is for more important matters e.g. finding out if rights are vested or valid or not or whether the conditions apply or not.
⁃ In these circumstances the facts must be agreed - on the agreed facts the court will give a decision on the legal issue.

⁃ (c) Having the Accountant of Court supervise investments, the payment of creditors or distribution to beneficiaries, 1921 Act s 17.
⁃ This is pretty uncommon these days but what happens is that the trustees remain in control but they are monitored and supervised by a public official.

Question 8

Taylor Petr, 2000

Answer 8

Trustee was appointed and the documents were so unclear as to whether he’d been properly appointed so an application was made to the Court which then sorted it out.

Question 9

When are the trustees protected by actions by the beneficiary?

Answer 9

The trustees are protected against any action by the beneficiaries if they follow the directions of the court (but it does take quite a lot of time to do so).

Question 10

What distinction should be made between breaches of trust?

Answer 10

Again with breaches of trust it is helpful to draw a distinction between ultra vires breaches, breaches of fiduciary duty and intra vires breaches. Breach of trust can be divided into:
(A) Ultra vires breaches
(B) Intra vires breach
(C) Breach of fiduciary duty

Question 11

What are ultra vires breaches?

Answer 11

⁃ These are actions beyond the trustees powers as set out in the trust deed or the law (there is a list of default powers set out in s 3 and 4 of the Trusts (S) Act 1921[ I think this is the correct Act.]. The trust deed usually adds to the default powers with far wider powers but occasionally they will restrict the powers.This is when they do something outwith their powers such as making unauthorised investment etc.

⁃ As has been covered earlier, ultra vires breaches are legally effective and s 2 of the 1961 Act prevents most of them being challenged by the beneficiaries.
⁃ However the breach of trust action remains against the trustees personally.
⁃ Generally the liability only arises where there has been a loss to the trust patrimony (e.g. if the trust deed says you cannot invest in tobacco shares and the trustees do so regardless and they produce a profit, the beneficiaries will obvious happy rather than annoyed, however in theory the beneficiaries could have the court ordered to such shares sold/such investments disinvested.)

Question 12

What are the defences to a claim of an ultra vires breach?

Answer 12

1. There are very few defences to a claim for damages for an ultra vires act because you ought to know what your powers are and if you don’t you ought to take legal advice or go to court.
   ⁃ *Lamond’s Trs v Croom 1871
2. There is also some statutory protection:
   ⁃ Under s 24 of the Succession (S) Act 1964 the trustees are liable if they didn’t know that a person had become a beneficiary by adoption.[ Look this up - not sure.]
   ⁃ Under s 7 of the Law Reform (MP)(S) Act 1968 the trustees and executors are not liable if they are unaware of beneficiaries who were born outwith marriage.
   ⁃ Under s 31 of the Trusts (S) Act 1921, if a trustee has committed a breach of trust at the instigation or the request of a beneficiary, where the beneficiary was aware that this was outwith the power of the trustees then the trustee is not liable.[ Again look this up because I’m not too clear.]

Question 13

*Lamond’s Trs v Croom 1871

Answer 13

⁃ There was a deceased Scots merchant in China and the trustees didn’t pay the Chinese creditors properly - they misunderstood the nature of some of the securities over the property. They paid the beneficiaries leaving some of the Chinese creditors unpaid. The court held that the trustees were bound to pay the creditors out of their own pockets because they’d paid beneficiaries when they weren’t entitled to do so (a breach of trust).
⁃ However the court did state that trustees are not insurers - that if the true facts are beyond your knowledge or fairly possible discovery but you’ve made all reasonable efforts to discover the truth but got it wrong then the trustees can be excused.

Question 14

What is a breach of fiduciary duty?

Answer 14

⁃ 2) Breach of fiduciary duty (auctor in rem suam)
⁃ This concerns the fiduciary relationship between the trustees and the beneficiaries. This really concerns self dealing and the avoidance of conflicts of interest. The law is very heavy on this type of thing.
⁃ A transaction in breach of fiduciary duty is voidable by the beneficiaries[ This is not protected by s 2 since one of the parties is a co-trustee (see earlier)].
⁃ A trustee in breach of fiduciary duties is liable to any loss to the trust patrimony. And any gain made by the trustee can also be recovered (disgorgement of profits)
⁃ Cherry’s Trs v Patrick 1911

Question 15

Cherry’s Trs v Patrick 1911

Answer 15

⁃ Cherry was a pub owner in Glasgow and Patrick was a wine merchant. He was made one of the trustees and he carried on supplying the pub business which was carried on by the trustees on the best terms he could give. The trustees could not have got the wine at a lower price - they were paying the lowest price they could. Patrick still made a profit, but not very much.
⁃ Patrick and Cherry’s Trustees fell out and the trustees sued Patrick for the profit he had made and they won, because this was a breach of fiduciary duty, even though the trust hadn’t lost money. So Patrick had to disgorge the profits.

Question 16

Is authorisation of breaches of fiduciary duty by the trust deed possible?

Answer 16

Yes
⁃ e.g. where the trustees charge for their services there must be an express clause in the trust deed which permits this otherwise it would be a breach of fiduciary duty. But nb for charity trusts the trustees can agree reasonable remuneration even if the trust deed is silent.

BUT While such authorisation is possible it is often construed very strictly:
⁃ Johnson v MacFarlane 1987

Question 17

Johnson v MacFarlane 1987

Answer 17

⁃ The trustees of a deceased farmer’s estate sold part of the farm to one of the trustees who was a beneficiary. The trust deed authorised the sale of trust property to beneficiaries but the court held that this did not include sale to beneficiaries who were also trustees, so his title was reduced by the other beneficiaries.

Question 18

Can authorisation of breaches of fiduciary duty ever be implied?

Answer 18

Sarris v Clark 1995
⁃ Farmer made his widow trustee and tenant of the farm. In order to make the farm saleable there had to be a negotiated renunciation of the lease between the trustees and the tenant (the widow). Since the widow was one of the trustees this was self-dealing (breach of fiduciary duty). However the court held that this was unavoidable due to the nature of the settlement that had been made - it was implied that the widow had to negotiate with the trustees.

Question 19

Can authorisation be made by the beneficiaries?

Answer 19

Yes
Di Fazio v Di Fazio’s Executors CSOH 26 2014
⁃ This is a very recent case of actor in rem suam where the trustees lent all the trust money to one of the trustees but he was safe because he had the consent of all the beneficiaries.
⁃ [This is a good example of being authorised by the beneficiaries.]

Question 20

What are careless intra vires acts/omissions?

Answer 20

Trustees acting within their powers (but do so badly) and not breaching their fiduciary duties will in general incur no liability.

Question 21

When can a trustee be held liable for careless intra vires acts?

Answer 21

However if a trustees acts or omissions fall below the standard of care expected of trustees then they can be held liable.

Question 22

What is the standard of care required of the trustees?

Answer 22

In *Raes v Meek 1889 here they chose high yield, high risk. They were held personally liable. it was held that the standard of care is the “same degree of diligence that a man of ordinary prudence would exercise in the management of his own affairs.” (an objective standard).

Question 23

What standard of care are charity trustees held to?

Answer 23

Charity trustees are held to a higher standard - they must “act with the care and diligence that is reasonable to expect of a person who is managing the affairs of another person” - Charities and Trustee Investment (S) Act 2005 s 66(1)(b).

Question 24

What is the causation requirement?

Answer 24

There must be also be a chain of causation from what the trustees did or didn’t do to the loss that has occurred. Sometimes this is not possible:
⁃ Millar’s Trs v Polson 1897
⁃ The trustees failed to retrieve a debt due by one of the co-trustees to the estate. It was held that the loss wasn’t there fault because the trustee was insolvent and even if they had used the utmost diligence it wouldn’t have made any difference. So they were exonerated.

Question 25

How can trustees protect themselves from liability?

Answer 25

Often immunity clauses are inserted - these purport to exclude liability for breach of trust and ordinary negligence but the standard view in Scotland is that it gives immunity for carelessly carrying out intra vires acts but not if the trustees actions amount to gross negligence or ultra vires acts.

Question 26

Clarke v Clarke’s Trs 1925

Answer 26

⁃ Trustees held certain shares for many years which steadily declined in value, eventually reaching zero.

• They were held liable to make good the loss.
• Trustees left a large sum of money on deposit at 2% interest for two years when they could have obtained a much better rate elsewhere. They were held liable for the difference despite an immunity clause because the court held that this was gross negligence, as opposed to merely careless.
• So trustees have two types of investment duty:
  (1) not to invest in a way that is outwith their powers, even if it promises to be a good one
  (2) choose wisely between the various possible investments that are within their powers

Question 27

Lutea Trustees v Orbis 1997

Answer 27

⁃ The trustees lent someone a huge sum of money (millions of pounds) on his promise to pay double in two days time. This was a scam and the trustees act amounted to gross negligence, thus the trustees were liable.

Question 28

What are the other two methods of protection for trustees?

Answer 28

1) Section 32 of the 1921 Act
⁃ Under this provision if a trustee is liable but has acted honestly and reasonably and ought fairly to be excused then the court can excuse the trustee wholly or in part.
⁃ This only really covers ultra vires acts where you have taken due care to try and find out the true facts but have nevertheless have acted on the basis of wrong facts.[ For breach of fiduciary duty you haven’t acted honestly and for careless breaches you haven’t acted reasonably - so this provision is useless for these breaches.] But in these circumstances you probably wouldn’t be liable anyway because you’ve acted reasonably. [Thus s 32 really doesn’t have much effect at all.]

2) Insurance
⁃ Professional trustees and charity trustees[ Charity trustees are entitled to obtain insurance at the charity’s expense (s 68A Charities and Trustee Investment (S) Act 2005.] are normally insured.
⁃ Lay-trustees find it impossible to get insured.