Trustees: liability

Question 1

What is the difference between trustee duties and fiduciary duties?

Answer 1

• Trustee duties = to comply with terms of trust and exercise functions in accordance with prescribed standards of care and skill
• Fiduciary duties = to not create conflict between personal interests and duties to the Bs or make unauthorised profit

THIS ELEMENT IS CONCERNED WITH BREACH OF TRUSTEE DUTIES

Question 2

In what 2 ways can Ts commit a breach of trust?

Answer 2

1. Acting outside their powers (e.g. distributing trust property to someone other than B/making unauthorised investment)
2. Failing to act in accordance with their duties (e.g. falling below standard of care expected from them)

Question 3

What 4 issues must be considered when there is a breach of trust?

I.e. Ts have not acted in accordance w their powers/complied with duties

Answer 3

1. Who has breached trust
2. Is there anything that could exclude/limit liability of any Ts
3. What remedy should be awarded
4. If more than one T is liable, how should liability be apportioned between them

Question 4

What breach will be harder to prove than the other?

Answer 4

A T falling below standard expected of them is harder to establishthen a T acting outside their duties - will involve analysis of specific facts e.g. failure to consider standard investment criteria/to comply with DOC/to properly monitor investments

Question 5

How would Ts be expected to monitor shareholding in private company? Difference in holding small number of shares v majority shareholding?

Answer 5

Monitor investments to ensure it produces appropriate amount of income and capital growth

• Hold small number of shares = not much Ts can do beyond reviewing information given to them as shareholders
• Hold majority shareholding = gives Ts power over the company which they are expected to make use of to safeguard investment e.g. appoint director etc.

Question 6

Why is it likely that more than one T will be liable for a breach in different ways? In what manner will they be liable?

Answer 6

• Trusteeship is joint office - so if one T may acted outside their powers, another will have failed to monitor this action of their co-T
• Where multiple Ts have breached, they are joint and severally liable

Question 7

When will a T be liable for a breach of trust that occurred before their appointment?

Answer 7

• Will not be liable for a breach which took place before T was appointed, but if on appointment a T discovers breach of trust occurred, they should commence proceedings to recover from former T
• Failure to do this = liable for own breach

Question 8

Upon retiring, how can Ts ba liable for breaches of trust during their time as T and after they retire?

2 for after they retire

Answer 8

• Will be liable for any breaches they commit during time as a T even after they have retired
• Can be liable for breaches of trust that occur after they retire if a) the T retired to facilitate the breach or b) T parts with trust property in retiring without due regard so loss is suffered when property transferred to new Ts

Question 9

What from the trust instrument can be used to exclude/limit the liability of Ts? What is the limit of this?

Answer 9

An exemption clause! Other than where breach is fraudulent

Question 10

Where there is no exemption clause, how can the T rely on the court for relief?

Answer 10

They can rely on s61 TA - court has discretion to excuse T where they ‘acted honestly and reasonably and ought fairly to be excused for the breach of a trust’

E.g. where Ts have sought/relied on legal advice before taking action

Will not be used lightly! Can be used to excuse some Ts but not others

Question 11

What is the limitation period for bringing a claim of breach? How is this different for Bs with future interests?

Answer 11

• 6 years from the breach for claims by Bs with interests vested in possession
• For Bs with future interests, limitation period only starts to run when their interest vests in possession

Question 12

What 2 things does the limitation period not apply to?

Answer 12

Fraudulent breaches or proprietary claims against T (i.e. claims to recover trust property/traceable proceeds from T)

E.g. 10 years ago T used money from trust fund to purchase house and B only just discovered - does not matter that limitation period has expired, B can make a proprietary claim for trust property rather than a personal one

Question 13

What can be recovered from the T after the normal 6 year period if they have received an unfairly large distribution from the trust? When can the full amount be claimed?

Answer 13

Only the excess - unless T acted dishonestly/unreasonably in making distribution; in which case may be possible to make claim for full amount

Question 14

What can be obtained to protect Ts from liability and what is their effect? How can this be paid and what does this not protect against?

Answer 14

• Indemnity insurance (common for professional Ts) to prevent T personally bearing cost of breach
• Useful to ensure that T does not have to personally compensate creditors of the trust for acts undertaken in their capacity as T (may be required to do if trust fund insufficient to meet liability)

Can usually have insurance premiums paid out of trust fund as expense!

Does not protect against fraudulent breaches

Question 15

What is acquiescence and consent and what is the effect of both on (any) B making a claim?

Answer 15

• Acquiescence = B is passive; knows there is a breach but does not take action
• Consent = positive act of authorisation from B
• In both cases - relevant B is barred from making a claim - but other Bs can still bring one

Must be able to get consent from all Bs e.g. if one B is a minor but the rest are adults, consent from the adults is not enough!

Question 16

What might the court do when a B has actively encouraged a breach?

Answer 16

Use discretion to ‘impound’ the B’s interest under the trust; compensation is paid out of their share where it is ‘just to do so’

Question 17

What remedies are available to Bs in the case of a breach of trust where T misapplies property (and is not possible to recover)?

Depends on the nature and consequences of breach…

Answer 17

• T misapplies trust property = Bs can seek to recover property (or traceable proceeds)
• If not possible/desirable to recover property or if breach has resulted in loss of value of trust fund = Bs may seek compensation (to reflect loss of asset)
• Bs may remove T from office

Question 18

What losses caused by their breach will a T be liable for?

I.e. what must be shown

Answer 18

Only for losses where their breach can be shown to be a ‘but for’ cause

Question 19

On what date is the loss assessed?

Answer 19

The date of trial, not breach

Question 20

How will the loss be assessed/valued in cases of misapplied property, failure to make specified investment, or acted in breach of duty when investing?

Answer 20

• Misapplied property = loss is the value of asset
• Failure to make an investment = profit the fund would have made if invested
• Breach when investing = investments that a hypothetical prudent T would have made

Question 21

Can a T be liable for losses where they have not breached their duty? (see example)

E.g. T makes prudent investment (after considering criteria and obtaining propert advice) and the ivnestment drastically falls in value due to market forces

Answer 21

Trust fund will bear the loss, but T may become liable if they continue to hold investment notwithstanding its poor performance

Would be a breach of duty to review

Question 22

Can a T set off the losses caused by a breach of trust against profits they have made on other investments/transactions?

Answer 22

• Generally no - they are not assessed on average performance
• But it is possible to offset losses against profits when they arise from the same transaction/course of dealing

E.g. Bartlett - Ts had majority shareholding but failed to supervise - company made 2 investments in property: one profitable but other large loss - Ts could offset profit against the loss as they arose from same breach (failure to monitor company’s speculative investments)

Question 23

What does joint and several liability mean for Bs?

Answer 23

They can choose who to sue and recover the full amount from any one of the Ts

Question 24

What might a T do if only they are sued for the full amount of loss to trust fund?

Answer 24

Seek a contribution from co-Ts

Question 25

What court does the discretion have where two or more parties are liable for the same damage?

Under Civil Liability Contribution Act

Answer 25

The court can require one party to make a ‘just and equitable’ contribution to another; meaning contribution may not necessarily be equal between parties

Liability will presumably be equal but can depart on facts

Question 26

What is a full indemnity and what is its effect? What are the conditions for it to be awarded and when is it more common for it to be awarded?

Under Civil Liability Contribution Act

Answer 26

• Where the court recognises that some Ts are more culpable than others
• Effectively exempts T from liability for a breach
• Rare; will only be awarded where indemnifying T has benefitted from breach (inc where they are also a B) where a T is found to be solely responsible for the duty that was breached
• Common to be awarded where there is a disparity of knowledge/experience between Ts (e,g, where one T is a solicitor and other relies upon their advice)

Re Parington - two Ts, one solicitor and another testator’s widow - solicitor took sole responsibility for administration and negligently made an unauthorised investment, failing to inform widow = court awarded full indemnity on basis it was reasonable for widow to have relied on solicitor’s advice

cf Head - lay trustee took active role in breach and solicitor did not have controlling influence = no indemnity

Question 27

What protection can be taken by Ts/PRs from when the trust is first established?

3 things

Answer 27

1. Ouster clause
2. Exemption clause
3. Trustee liability(/indemnity) insurance

for clauses - Ts can be involved in drafting of document

Question 28

What does an ouster clause do? What is its limit?

Answer 28

Entirely removes a duty that would have existed otherwise - cannot remove all T duties (would otherwise be meaningless)

E.g. removal of duties that ordinarily arise where trust holds majority shareholding in company

Question 29

What does an exemption clause do?

And how is it different to an ouster clause?

Answer 29

• Limits/excludes liability for particular sort of breach (bar fraud/dishonesty)
• Cf ouster clause: duty still exists but T protected from personal liability should they breach it

Question 30

What will T liability/indemnity insurance do? What can it not protect and how can it be paid for?

Answer 30

Insures aginast personal liability for breach of trust

• Can protect against negligence but not fraudulent breaches
• Premiums can sometimes be paid out of trust fund expense

Question 31

Will relying on legal advice for interpretation of trust terms protect Ts during administration?

Answer 31

Relying on legal advice does not necessarily prevent Ts from liability for breach - good legal advice will tell Ts to take further steps to protect themsevles…

Question 32

What protection can be taken by Ts/PRs during administration?

Re uncertainty of powers/duties where trust instrument hard to interpret

(Not considering where Bs are unidentified/missing)

Answer 32

1. Seeking out court directions
2. Applying to High Court under s48
3. Surrendering discretion to court
4. Obtaining B’s consent

Question 33

What is the benefit of seeking out court directions?

E.g. about ambiguous wording of trust instrument etc.

Answer 33

Ts who act in accordance with directions will not be liable even if there is a subsequent claim from a B

Safest but is expensive!

Question 34

What does a s48 application enable Ts to do and when is it particularly useful? When can it not be used?

Answer 34

Where there is a question about the construction of terms of will/trust…
* T will seek written opinion from person satisfyin s71 (barrister/solicitor of 10 years) - then will apply to High Court for authorisation to rely on legal opinion
* Useful where no disagreement between Bs and Ts but Ts want clarity

HC will not grant order without hearing argument if there’s a dispute

Question 35

When will Ts surrender discretion to court and what will the court do?

Answer 35

Where there is a dispute between Ts, Ts surrender discretion to court who make a decision for them (rather than simply seeking directions)

Question 36

What must be the case for Ts to surrender to the court?

Answer 36

Is an exceptional course of action: only where Ts are deadlocked in discretion/precluded from acting due to conflict of interest on specific problem that needs addressing

Ts cannot simply give up all powers and leave court to administer

Question 37

When will Ts seek fully informed consent of Bs and only when can this be an option? What is the result of this?

Answer 37

• Will be done where they are unsure of powers/duties or want to do something they know will be a breach of trust/FD
• Only an option if all Bs known, locatable and over 18 (and of sound mind)

Fully informed consent of all Bs = no liability!!

Question 38

What are the limits to obtaining B’s consent?

2

Answer 38

• If T’s withhold important information they cannot rely on consent; must be fully informed
• If consent is only obtained from some Bs; Ts only have a partial defence to breach of trust against claims by those Bs but not others

Question 39

What potential reliefs/defences are available for protecting Ts after a breach has occurred?

Answer 39

1. Beneficiary instigation/consent/acquiescence
2. Statutory limitation rules/defence of laches
3. Stautory relief under s61
4. Civil Liability Contributon Act (see further up)

Bulk of this is mentioned in the opening element (cards near the top)

Question 40

What is a case of instigation and what can be done here to B??

Answer 40

• Where Ts have defence against Bs who instigated/requested breach
• Ts (or court) may be able to impound B’s interest to use some/all of B’s share of trust fund to indemnify T against claim from non-instigating Bs

Partial defence against innocent Bs

Question 41

Must the instigating B have benefitted from the breach to have their interest impounded?

Answer 41

No!

Question 42

Can impounding be used where the B has given consent? What is the difference here between statute and common law?

Answer 42

Yes

• In statute = where B has provided consent in writing (no requirement for benefit)
• In common law = does not require consent in writing (but does require benefit)

Question 43

Will consent also be a partial-defence?

Answer 43

Yes, unless all Bs have consented

Question 44

What is acquiescence?

Answer 44

Refers to how a B may not have consented to breach before it was carried out, but will subsequently affirm the action = gives T a defence of acquiescence against Bs who have indicated after a breach consent to action taken

Question 45

What is the equitable defence of laches and what must T demonstrate to use it?

Answer 45

• Where the limitation period has not expired, T can argue that B has waited too long to bring a claim
• Requires T to demonstrate B knew of breach but has unacceptably delayed claim

Fact-specific

Question 46

What discretion does s61 give the court re giving relief to T and what are the 3 requirements to be shown by T?

If none of previous defences apply

Answer 46

• Gives court discretion to excuse a T where they ought to be excused
• Ts must establish 1) honesty 2) reasonablenes and 3) that they ought to be farily excused

Not used lightly as it can deny (some) Bs a remedy

But will leave other Ts liable!

Question 47

What is the most likely case which s61 will apply to? Can professional Ts rely on it?

Answer 47

Where T has inadvertently acted outside powers - more likely to be successful with lay Ts (esp if they sought advice before taking action)

Harder for professional to show they acted reasonably

Re Evans - individual acted as executor of father’s estate, believed a B (brother) to be dead she sought legal advice and upon that took out missing B insurance - brother was alive and insurance did not cover loss - court agreed appropriate to grant relief under s61

Question 48

When can claims be made against third parties?

Answer 48

Where T took negligent advice from a professional e.g. lawyer/financial adviser

Can prevent personal claim for breach of trust altogether if they identify negligene early and take swift action against adviser

Question 49

What are the 5 practical steps to be taken once a breach of trust has occurred?

Answer 49

1. Check trust instrument for exemption clause
2. Consider whether any of the following provide a full or partial defence: reliance on court directions, instigation/consent/acquiescence, stautory limitation rules/laches, statutory relief under s61
3. Check for relevant insurance if there is likely to be a successful claim
4. Identify whether any potential claims against (negligent) third parties
5. If a T is required to pay equitable compensation, consider the Civil Liability Contribution Act

Question 50

What are the protections available for Ts when distributing?

I.e. missing or unknown Bs

To not be liable if any come forward later with a claim

Answer 50

1. Benjamin orders
2. S27 notice
3. Retaining a fund
4. Payment into court
5. Missing B insurance
6. Obtaining indemnity from Bs

All are considered in Wills so are omitted here - bar retaining a fund

Question 51

How will retained funds work and what is their downside?

Answer 51

• Ts retain a fund setting aside trust assets in order to be able to dischagre liabilities if missing Bs come forward after distribution
• Downside = prolongs administrative duties as may be holding for long time + difficult to quantify interests of known and unknown Bs!