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English trusts law


English trust law is the original and foundational law of trusts in the world, and a unique contribution of English law to the legal system. Trusts are part of the law of property, and arise where one person (a "settlor") gives assets (e.g. some land) to another person (a "trustee") to keep safe or to manage on behalf of another person (a "beneficiary").

History

Main article: History of trusts

"The same thing, then, is just and equitable, and while both are good the equitable is superior. What creates the problem is that the equitable is just, but not the legally just but a correction of legal justice. The reason is that all law is universal but about some things it is not possible to make a universal statement which shall be correct.... And this is the nature of the equitable, a correction of law where it is defective owing to its universality.... the man who chooses and does such acts, and is no stickler for his rights in a bad sense but tends to take less than his share though he has the law oft his side, is equitable, and this state of character is equity".

Aristotle, Nicomachean Ethics (350 BC) Book V, pt 10

The law of trusts developed in the Middle Ages from the time of the crusades under the jurisdiction of the King of England. The "common law" regarded property as an indivisible entity, as it had been under Roman law and the continental version of civil law. Where it seemed "inequitable" (i.e. unfair) to let someone with legal title hold onto it, the King's representative, the Lord Chancellor who established the Courts of Chancery, had the discretion to declare that the real owner "in equity" (i.e. in all fairness) was another person.

Express trust formation

In its essence the word "trust" applies to any situation where one person holds property on behalf of another, and the law recognises obligations to use the property for the other's benefit. The primary situation in which a trust is formed is through the express intentions of a person who "settles" property. In the most common sense, a settlor will give property to someone he trusts (a "trustee") to use it for someone he cares about (a "beneficiary"). The law's basic requirement is that a trust was truly "intended", and that a gift, bailment or agency relationship was not. In addition to requiring certainty about the settlor's intention, the courts suggest the terms of the trust should be sufficiently certain particularly regarding the property and who is to benefit. The courts also have a rule that a trust must ultimately be for people, and not for a purpose, so that if all beneficiaries are in agreement and of full age they may decide how to use the property themselves.[1] The historical trend of construction of trusts is to find a way to enforce them. If, however, the trust is construed as being for a charitable purpose, then public policy is to ensure it is always enforced. Charitable trusts are one of a number of specific trust types, which are regulated by the Charities Act 2006. Very detailed rules also exist for pension trusts, for instance under the Pensions Act 1995, particularly to set out the legal duties of pension trustees, and to require a minimum level of funding.

Certainty

Main articles: Certainty in English law and Three certainties

For a valid trust, the "three certainties" must be present, see Knight v Knight. These are certainty of intention, subject matter and object. To prove certainty of intention, the trust document must establish that the settlor intended to set up a trust, rather than a gift or other mode of transfer (or did not intend to transfer the property). Certainty of subject matter requires that the property which constitutes the trust is specifically ascertainable. Certainty of objects requires that the objects (i.e. the beneficiaries) of the trust can be identified.

  • Hunter v Moss [1994] 1 WLR 452
  • Re Barlow’s Will Trusts [1979] 1 WLR 278
  • McPhail v Doulton [1971] AC 424
  • Re Baden’s Deed Trusts (no 2) [1973] Ch 9
  • Re Tuck’s Settlement Trusts [1978] Ch 49

Formality

Main articles: Formalities in English law and Secret trusts in English law

In Milroy v Lord, Turner LJ stated that:

"...to render a voluntary settlement valid and effectual, the settlor must have done everything which, according to the nature of the property comprised in the settlement, was necessary to be done in order to transfer the property, and render the settlement binding upon himself."

He went on to say that the settlor may constitute an express trust by either transferring the property to the trustee or by a self-declaration of trust. In the latter case, no transfer is needed.

Depending on what type of property is involved, certain formalities need to be satisfied before the property is validly transferred, and the general principle is that equity will not perfect an imperfect gift.[2] Thus, in the case of land, there needs to be a deed and in the case of shares, ss 182-183 of the Companies Act 1985 provide that, in general, a share transfer form must be executed and delivered with the share certificates followed by entry of the name of the new owner in the company books.

There are several formality requirements that have been imposed on express trusts by, inter alia, Wills Act 1837 s 9 and the Law of Property Act 1925 s 53.

Section 9 of the Wills Act 1837 provides that all testamentary trusts must be in writing, signed by the testator or by someone in his presence and by his direction, and be attested by two witnesses. However, secret trusts and now half secret trusts are recognised exceptions to this requirement. A full secret trust occurs when a testator leaves what appears to be an absolute gift in his will, but has communicated to the legatee that she is to hold the property on trust for purposes communicated to her. A half secret trust occurs when a testator leaves property on trust in his will, but communicates the terms of the will to the trustee privately.

The two leading justifications for allowing these exceptions to s 9 are the fraud theory and the modern theoretical approach. The fraud theory was laid down in McCormick v Grogan and is based on the idea that to disregard evidence of an oral testamentary trust and allow the legatee to take the property absolutely would be against the testator's intent and would unjustly enrich the legatee. The modern theoretical approach is based on the analysis that the testator validly declared the trust in his lifetime, and it became constituted by the vesting of the property in the trustee on his death.

The Law of Property Act 1925 s 53(1)(b) states that ‘a declaration of trust respecting any land or any interest therein must be manifested and proved by some writing signed by some person who is able to declare such trust or by his will.’ The declaration itself need not be in writing. The writing required is that of evidence of the declaration and failure to comply with this requirement will render the declaration of trust unenforceable (Leroux v Brown).

Dispositions of equitable interests are void unless they are in writing signed by the person disposing of the interests or by an agent authorised by that person (LPA 1925 s 53(1)(c)). By contrast to s 53(1)(b), the requirement here is that the disposition itself must be in writing. The requirement here also applies to dispositions of equitable interests in both land and personalty, as in Grey v IRC.[3]

As mentioned above, to constitute a trust, there usually needs to be a transfer of trust assets to the trustees and in the course of doing so, there might be certain formalities that have to be complied with. Otherwise, because equity will not perfect an imperfect gift, the trust will not be constituted.

However, since Milroy v Lord, the court have at times appeared to have added the qualification that although legal title to trust property remains vested in the settlor, an attempted transfer by the settlor to the trustee might be effective in equity even though not all the formalities required for a valid transfer have been complied with. This might be the case where the settlor has done everything in his power to divest himself of trust property. In such cases, it is therefore possible for a trust to be constituted even though certain formalities have not been complied with.

An illustration of this principle is seen in Re Rose. Here, the settlor had by voluntary deed transferred shares in a private company to be held on certain trusts. Under the company constitution, however, the directors of the company have the right to refuse to register transfers. Accordingly, they delayed registration by some two months after the deed had been executed. The question faced by the court was when were the shares transferred? Section 182 and s.183 of the Companies Act 1985 would suggest that the shares were only transferred when the directors registered the transfer. However, the court held that the shares were transferred when then the settlor executed the deed and the trust was constituted on that date. This is because the settlor had done everything in his power to divest himself of the shares.

Re Rose was applied subsequently in a number of cases including Mascall v Mascall which concerned the transfer of registered land. More importantly, the Re Rose principle was reviewed in Pennington v Waine. Here the donor intended for her nephew to take up directorship in a private company. To do so, he needed to own shares in the company. Therefore, she executed a share transfer form concerning shares in the company in favour of her nephew. In contravention of the companies act, she had not delivered the share transfer form to her nephew. Neither had he been registered as a shareholder. The donor had sent the forms to her agent, the company auditor, who then told the nephew that he need not take further steps as regards the shares. The nephew then took up directorship of the company. The court held that the shares did not form part of the donor’s estate on her death as there was an equitable assignment of those shares. This was so despite the fact that the donor had not done everything in her power to transfer the shares. The court reached its decision partly on the basis that clearly the donor intended the transfer to have immediate effect and it would have been unconscionable for the donor to retract. Unconscionability would depend on the circumstances in each particular case but in this case, the court felt that it was because the Donor had told the nephew of her intentions and he, in taking up directorship, had acted detrimentally.

Beneficiary principle and associations

  • Morice v Bishop of Durham (1805) 10 Ves 522
  • Re Bowes [1896] 1 Ch 507
  • Re Endacott [1960] Ch 232
  • Re Denley’s Trust Deed [1969] 1 Ch 373

  • Leahy v Attorney-General for New South Wales [1959] AC 457
  • Re Recher’s Will Trusts [1972] Ch 526
  • Re Lipinski’s Will Trusts [1976] Ch 235
  • Re Grant’s Will Trusts [1979] All ER 359
  • Re Bucks Constabulary Widows and Orphans Fund Friendly Society (no 2) [1979] 1 All ER 623

Charitable trusts

  • Charities Act 2011

Pension trusts

Where occupational pensions exist, the employer typically acts as a trustee and creates a board of trustees, or contracts with a trust corporation, to oversee the management of the workforce's pension savings. Following the Goode Report of 1993 on pensions, it has been a requirement that the pension trust members have the right to "codetermine" the pension management by having a vote to elect a minimum of one third of the trustees, or corporation directors, either directly or through their trade union, under the Pensions Act 2004 sections 241-242. Often member nominated trustees are one half of the scheme, and the Secretary of State has the power by regulation, as yet unused, to increase the minimum up to one half.[4] Trustees are charged with the duty to manage the fund in the best interests of the beneficiaries, in a way that reflects their preferences,[5] by investing the savings in company shares, bonds, real estate or other financial products.

Imposed trusts

While express trusts arise primarily because of a conscious plan, courts also impose trusts by the operation of law. The theoretical difference is that an express trust occurs because of a consent based obligation, where a settlor has consented for his property to be handed to someone else, under the stewardship of a trustee. By contrast, the two main types of imposed trusts, known as "resulting" and "constructive" trusts, arise to give a remedy to reverse unjust enrichment or correct a wrong, and sometimes also to complete a consent based obligation. The legal terminology is generally perceived in academic scholarship as being deceptive out of date,[6] though a minority of equity lawyers primarily in Australia defend the historical terminology. Generally, resulting trusts are imposed by courts when a person receives property, but the person who transferred did not have the intention for them to benefit. This is because English law establishes a presumption that people do not desire to give away property unless there is some objective manifestation of consent to do so. Constructive trusts arise in around eight circumstances, all different. But generally, the courts will "construe" a person to hold property for another person, first, to avoid strict operation of rules on formality, second, to reflect a person's contribution to the value of property, and third, to effect a remedy, possibly with a proprietary response.

Resulting trusts

A "resulting" trust is typically recognised when a person has given property to a person without the intention to benefit that person, so the property jumps back to the person it came from.

Constructive trusts

"Constructive" trusts have been recognised by English courts in about eight unrelated circumstances, whenever it is said it would be "unconscionable" that the courts did not recognise properly belonged to the claimant.

  • 1. Specifically enforceable obligations, or agreements relied on, in anticipation: Walsh v Lonsdale
  • 2. Transfers just short of completing formality: Re Rose and Pennington v Waine [2002] 1 WLR 2075
  • 3. An undertaking to use property for another's benefit: Binions v Evans and Bannister v Bannister [1948] 2 All ER 133
  • 5. Recipients of misapplied trust property, unless they have paid in good faith: Miller v Race
  • 6. Payments made by mistake? : Chase Manhattan Bank NA
  • 7. The ill gotten gains of a thief? : Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669
  • 8. Profits made by a trustee on breach of trust? : Boardman v Phipps [1967] 2 AC 46, Attorney‐General for Hong Kong v Reid [1993] AC 713 and Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd

Content

Once a trust has been validly formed, its operation will primarily be guided by the terms of the trust document. While professionally drafted trust instruments will usually contain a full description of how trustees are appointed, how they should manage the property, and their rights and obligations, the law in any case will supply an ever fuller, comprehensive set of rules that apply by default, some codified in the Trustee Act 2000. In most instances, English law follows a laissez-faire philosophy of "freedom of trust". In general, it will be left to the choice of the settlor to follow the law or to draft alternative rules. Where a trust instrument runs out or is silent, the law will fill the gaps. In specific trusts, particularly pensions within the Pensions Act 1995 and investment trusts regulated by the Financial Services and Markets Act 2000, many rules regarding trusts' administration, and the duties of trustees are made mandatory by statute. This usually reflects the view of Parliament that beneficiaries in those cases lack bargaining power and need protection, especially through enhanced disclosure rights. For family trusts, or private unmarketed trusts, the law can usually be contracted around, subject to an irreducible core of trust obligations. The scope of compulsory terms may be subject of debate, but Millett LJ in Armitage v Nurse[7] viewed that every trustee must always act "honestly and in good faith for the benefit of the beneficiaries". Additionally trustees must convey the trust property to beneficiaries if all are of full age and request it, can be required by court to disclose information about the trust, must follow the trust terms and use their discretion only for consistent purposes. They must avoid any transactions with any possibility of a conflict of interest, unless authorised by the trust instrument or the beneficiaries, and they must exercise a minimum level of care, which becomes higher for trustees with professional skills.

Administration

Possibly the most important aspect of good trust management is to have good trustees. In virtually all cases, a settlor will have identified who trustees will be, but even if not or the chosen trustees refuse a court will, in the last resort appoint one under the Public Trustee Act 1906. A court may also replace trustees who are acting detrimentally to the trusts.[8] Once a trust is running, Trusts of Land and Appointment of Trustees Act 1996 section 19 allow beneficiaries of full capacity to determine who the new trustees are, if other replacement procedures are not in the trust document. This is, however, simply an articulation of the general principle from Saunders v Vautier[9] that beneficiaries of full age and sound mind may by consensus dissolve the trust, or do with the property as they wish. According to the Trustee Act 2000 sections 11 and 15, a trustee may not delegate their power to distributive trust property without liability, but they may delegate administrative functions, and the power to manage assets if accompanied with a policy statement. If they do, they can be exempt from negligence claims. For the trust terms, these may be varied in any unforeseen emergency,[10] but only in relation to the trustee's management powers, not a beneficiary's rights. The Variation of Trusts Act 1958 allows courts to vary trust terms, particularly on behalf of minors, people not yet entitled, or with remoter interests under a discretionary trust. For the latter group of people, who may have highly restricted rights, or know very little about a trust terms, the Privy Council affirmed in Schmidt v Rosewood Trust Ltd[11] that courts have an inherent jurisdiction to administer trusts, and this goes especially to a requirement for information about a trust to be disclosed.

Trustees, especially in family trusts, may often be expected to perform their services for free, although more commonly a trust will make provision for some payment. In absence of terms in the trust instrument, the Trustee Act 2000 sections 28-32 stipulate that professional trustees are entitled to a "reasonable remuneration", that all trustees may be reimbursed for expenses from the trust fund, and so may agents, nominees and custodians. The courts have said additionally, in Re Duke of Norfolk’s Settlement Trusts[12] there is a power to pay a trustee more for unforeseen but necessary work. Otherwise, all payments must be authorised explicitly to avoid the strict rule against any possibility of conflicts of interest.

Duty of loyalty

The core duty of a trustee is to pursue the interests of the beneficiaries, or anyone else the trust permits, except the interests of the trustee himself. Put positively, this is described as the "fiduciary duty of loyalty". The term "fiduciary" simply means someone in a position of trust and confidence, and because a trustee is the core example of this, English law has for three centuries consistently reaffirmed that trustees, put negatively, may have no possibility of a conflict of interest. Shortly after the United Kingdom was formed, and its first stock market crash in the South Sea Bubble, the Chancery Court decided Keech v Sandford.[13] Quite distant from the corrupt directors, trustees or politicians that had recently ruined the economy, Keech claimed the profits his trustee, Sandford, had made by buying the lease on a market in Romford, now in East London. While Keech was still an infant, Sandford alleged he had been told by the market landlord that there would be no renewal for a child beneficiary. Only then, alleged Sandford, did he inquire and contract to purchase the lease in his own name. Lord King LC held this was irrelevant, because no matter how honest, the consequences of allowing a relaxed approach to trustee duties would be worse.

The remedy for beneficiaries is restitution of all gains, and theoretically all profits are held on constructive trust for the trust fund.[14] The same rule of seeking approval applies for conflicted transactions known as "self-dealing", where a trustee contracts on the trust's with himself or a related party. While strict at its core, a trustee may at any time simply seek approval of beneficiaries, or the court, before taking an opportunity that the trust could be interested in. The scope of the duty, and authorised transactions of specific types, may also be defined in the trust deed to exclude liability. This is so, according to Millett LJ in Armitage v Nurse[15] up to the point that the trustee still acts "honestly and in good faith for the benefit of the beneficiaries". Lastly, if a trustee has in fact acted honestly, while a court may formally confirm the trustee must give up his profits, the court can award the trustee a generous quantum meruit. In Boardman v Phipps[16] the solicitor, Mr Boardman, and a beneficiary, Tom Phipps, of the Phipps family trust saw an opportunity in one of the trust's investment companies and asked the managing trustee if the company could be bought out and restructured. The trustee said it was out of the question, but without seeking consent from the beneficiaries, Mr Boardman and Tom Phipps invested their own money. They made a profit for themselves, and the trust (which retained its investment) until another beneficiary, John, found out and sued to have the profits back. However, while almost every judge from Wilberforce J in the High Court, to the House of Lords (Lord Upjohn dissenting) agreed that no conflict of interest was allowable, they all approved generous quantum meruit to be deducted from any damages to reflect the effort of the defendants.

While the duty of loyalty, as well as all other duties, will certainly apply to formally appointed trustees, people who assume the responsibility of trustees will also be bound by the same duties. In old French, such a person is called a "trustee de son tort". According to Dubai Aluminium Co Ltd v Salaam[17] to have fiduciary duties it is required that a person has assumed the function of a person in a position of trust and confidence. The assumption of such a position also opens such a fiduciary to claims for breaching a duty of care.

Duty of care

The duty of care owed by trustees and fiduciaries has its partner in the common law of negligence, and was also long recognised by courts of equity. Millett LJ, however, in Bristol and West Building Society v Mothew[18] emphasised that although recognised in equity, and applicable to fiduciaries, the duty of care is not itself a fiduciary duty, like the rule against conflicts of interest. This means that like ordinary negligence actions, the common law requirements for proving causation of loss, and the remedy of compensation rather than restitution of gains, is the appropriate framework. In Mothew this meant that a solicitor (who occupies a fiduciary position, like a trustee) who negligently told a building society that its client had no second mortgage was not liable for the loss in the property's value after the client defaulted. Mr Mothew successfully argued that Bristol & West would have granted the loan in any case, and so his advice did not cause their loss.

A codification of the duty of care is found in the Trustee Act 2000 section 1, as the "care and skill that is reasonable" to expect, regarding any special skills of the trustee. In practice this means that a trustee must be judged by what should be reasonably expected from another person in such a position of responsibility, being mindful not to judge decisions with the benefit of hindsight,[19] and mindful of the inherent risk involved in any property management venture.[20] Long ago, in Morley v Morley[21] Lord Nottingham LC held that if a trustee could not be liable if £40 of the trust fund's gold was robbed, so long as he otherwise performed his duties.[22] Otherwise, in managing trust property, the primary kind of care will relate to a trustee's investment choices. In Learoyd v Whiteley, Lindley LJ elaborated the general prudent person rule, that in investments one must ‘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’.[23] This meant a trustee who invested £5000 in mortgages of a brick field and four houses with a shop, and lost the lot when the businesses went insolvent, was liable for the losses on the brick field, whose value must have known to be bound to depreciate as bricks were taken out. Bartlett v Barclays Bank Trust Co Ltd[24] suggests investments must be actively monitored, particularly by professional trustees. This duty was broken when the Barclays corporate trustee department, where trust assets held 99 per cent of a company's shares, failed to get any information or board representation before a disastrous property speculation.[25] In making investments, TA 2000 section 4 requires that "standard investment criteria" must be observed, essentially along the lines of finance theory about diversification of investments to reduce risk.[26] Section 5 suggests advice be sought on such matters if needed, but otherwise may invest anything that an ordinary property owner would. Additional restrictions, however, may be imposed depending on the how courts view the purpose of the trust, and the scope of a trustee's discretion.

Purposes and discretion

Beyond the essential duty of loyalty and duty of care, the primary task occupying trustees will be to follow the terms of a trust document. Outside the rules set out, and to be followed, trustees will ordinarily have some measure of discretion, and will ordinarily be expected to make choices on the beneficiaries' half in the way they invest, manage, or distribute trust funds. The courts have sought to control the exercise of discretion so it is used only for purposes consistent with the object of the trust settlement. In general it is said that decisions will be overturned if they are irrational, or perverse to the settlor's expectations,[27] but also in two further particular ways. First, the courts have said that in choosing investments, trustees may not disregard the financial implications of the investment choice. In Cowan v Scargill[28] the trustees of pensions represented by Arthur Scargill and the National Union of Mineworkers wished the pension fund to invest more in the troubled UK mining industry, while the trustees appointed by the employer did not. Megarry J held the action would violate a trustee's duty if this action was taken. Drawing a parallel of refusing to invest in South African companies (during Apartheid) he warned that "the best interests of the beneficiaries are normally their best financial interests." Although this was thought in some quarters to preclude ethical investment, it is clear that the terms of a trust deed may explicitly authorise or prohibit certain investments, that if the object of a trust is, for example, Christian charity then a trustee could plainly invest in "Christian" things,[29] (and so by analogy a trade union pension trustee could have refused to invest in apartheid South Africa, which suppressed unions[30]) This modern approach is consistent with the Companies Act 2006 section 172 duty of directors in UK company law to pay regard to all stakeholders, not merely shareholders, in a company's management.

The second primary area where courts have sought to constrain trustee discretion, but recently have retreated, is in the rule that trustees' decisions may be interfered with if irrelevant issues are taken into account, or relevant issues are ignored. There had been suggestions that a decision could be wholly void, which led to a flood of claims where trustees had failed to get advice on taxation of trust transactions and were sometimes successful in having the transaction annulled and escaping payments to the Revenue.[31] However, in the leading case, Pitt v Holt[32] the Court of Appeal reaffirmed that poorly considered decisions may only become voidable (and so cannot be cancelled if a third party, like the Revenue, is affected) and only if mistakes are "fundamental" can a transaction be wholly void (by analogy to Bell v Lever Bros and The Great Peace in contract law). In one appeal, a trustee for her husband's worker compensation got poor advice and was liable for more inheritance tax, and in the second, a trustee for his children got poor advice and was liable for more capital gains tax. Lloyd LJ said both transactions were valid. If a trustee had acted in breach of duty, but within its powers, then a transaction was voidable. However on the facts, the trustees seeking advice had fulfilled their duty (and so the advisers could be liable for negligence instead). The effect is to subsume this line of cases into the test for a duty of care.

Breach and remedies

When trustees fail in their main duties, the law imposes remedies according to the nature of the breach. In general, breaches of rules surrounding performance of the trust's terms can be remedied through an award of specific performance, or compensation. Breaches of the duty of care will trigger a right to compensation. Breaches of the duty to avoid conflicts of interest, and misapplications of property will give rise to a restitutionary claim, to restore the property taken away. In these last two situations, the courts of equity developed further principles of liability that could be applied even when a trustee had gone bankrupt. Some recipients of property that came from a breach of trust, as well as people who had assisted in a breach of trust, might incur liability. Equity recognised not merely a personal, but also a proprietary claim over assets taken in breach of trust, and perhaps also profits made in breach of the duty of loyalty. A proprietary claim meant that the claimant could demand the thing in priority to other creditors of the bankrupt trustee. Alternatively, the courts would follow an asset or trace its value if the trust property was exchanged for some other asset. If trust property had been given to a third party, the trust fund could claim back the property as of right, unless the recipient was a bona fide purchaser. Generally, any recipient of trust property who knew about the breach of trust (or maybe ought to have known) could be made to give back the value, even if they had themselves exchanged the thing for other assets. Lastly, against people who may never have received trust property but had assisted in a breach of trust, and had done so dishonestly, a claim arose to return the property's value.

Remedies against trustees

If a trustee has broken a duty owed to the trust, there are three main remedies. First, specific performance may generally be awarded in cases where the beneficiary merely wishes to compel a trustee to follow the trust's terms, or to prevent an anticipated breach.[33] Second, for losses, beneficiaries may claim compensation. The applicable principles are disputed, given the historical language of requiring a trustee to "account" for things which go wrong. One view suggested that at the very moment a trustee breaches a duty, for instance by making an erroneous investment without considering relevant matters, beneficiaries have a right to see the trust accounts are surcharged, to erase the transpiring loss (and "falsified" to restore to the trust fund unauthorised gains).[34] In Target Holdings Ltd v Redferns[35] the argument was taken to a new level, where a solicitor (a fiduciary, like a trustee) was given £1.5m by Target Holdings Ltd to hold for a loan for some property developers, but released the money before it was meant to (when purchase of the development property was completed). The money did reach the developers, but the venture was a flop, and money lost. Target Holdings Ltd attempted to sue Redferns for the whole sum, but the House of Lords held that the loss was caused by the venture flop, not the solicitor's action outside instructions. It was, however, observed that the common law rules of remoteness would not apply.[36] Similarly in Swindle v Harrison[37] a solicitor, Mr Swindle, could not be sued for the loss of Ms Harrison's second home's value after he gave her negligent and dishonest advice about loans, because she would have taken the loan and made the purchase anyway, and the house value drop was unrelated to his breach of duty.

The third kind of remedy, for unauthorised gains, is restitution. In Murad v Al Saraj[38] the Murad sisters entered a joint venture (creating a fiduciary relation, like for trustees) with Mr Al Saraj to buy a hotel. He deceitfully told them he was investing all his own money, when in fact he set off a debt from the seller and took an undisclosed commission. When sued to give up the profits he made, he submitted that the sisters would have entered the transaction even if they had known what he had done. Arden LJ rejected this argument, affirming that upon such a wrong, it was not open for the fiduciary to argue what might, hypothetically, have happened. A reduction in liability could only come from a determination of the value of skill and effort contributed. This is less generously quantified for dishonest fiduciaries, but generous allowances are typically given, as in Boardman v Phipps for fiduciaries who all along act honestly.[39] Trustees who are found to commit wrongs may also have a defence under the Trustee Act 1925 sections 61-62. This gives courts discretion to relieve liability for people who acted "honestly and reasonably, and ought fairly to be excused". There may also be exclusion clauses in the trust deed, up to the point of removing liability for fraud and open conflicts of interest.[40] Chiefly exclusion clauses will erase liability for breaches of the duty of care, although for professional trustees the ability to do this is constrained by the Unfair Contract Terms Act 1977. If agreements for money management take place through contracts, a professional trustee probably cannot exclude liability for breach of contract under section 3, because given that he would be better placed to take out insurance liability exclusion will probably not be reasonable under section 11. Lastly, the Limitation Act 1980 sections 21-22 prevents claims for innocent or negligent trust breach being pursued six years after the right of action accrues, again with the exception for fraud or property converted by trustees for their own use, where there is no limit.

Tracing

Partly because it may not always be the case that a wrongdoing trustee can be found, or remains solvent, tracing became an important step in restitutionary claims for breach of trust. Tracing means tracking the value of an asset that properly belongs to a trust fund, such as a car, shares, money, or profits made by a trustee through a conflict of interest. If those things are exchanged for other things (i.e. money or assets) then the value residing in the new thing can potentially be claimed by the beneficiaries. For example, in an early case, Taylor v Plumer[41] a dishonest broker, Mr Walsh, was given £22,200 in a banker's draft and was meant to invest in Exchequer Bills (UK government bonds) for Sir Plumer. Instead he bought gold doubloons and was planning a get-away to the Caribbean until he was apprehended at Falmouth. Lord Ellenborough held that the property belonged to Sir Plumer, in whatever form it had become. It may also be that the value of the traced trust money has changed, and possibly risen considerably. In the leading case, Foskett v McKeown[42] an investment manager wrongfully took £20,440, paid the last of five instalments on a life insurance policy, and committed suicide. The insurance company paid out £1,000,000, but because this was the result of the trust money, a proportionate share could be claimed.

When trust assets are mixed up with property of the trustee, or other people, the general approach of the courts is to resolve the issues in favour of the wronged beneficiary. So, for example in Re Hallett's Estate,[43] a solicitor sold £2145 worth of bonds he was meant to hold for his client and put the money in his account. Although money had subsequently been drawn and redeposited in the account, the balance of £3000 was enough to return all the money to his clients. According to Lord Jessel MR, a fiduciary "cannot be heard to say that he took away the trust money when he had a right to take away his own money". Again, in Re Oatway,[44] a trustee who took money and made a deposit with his bank account, and then bought shares which rose in value, was held by Joyce J to have used the beneficiary's money on the shares. This was the most beneficial result possible. When trust assets are mixed up with money from other beneficiaries, the courts have had more difficulty. Originally, by the rule in Clayton's case, it was said that the money taken out of a bank account would be presumed to come from the first person's money that was put in. So in that case it meant that when a banking partnership, before it went insolvent, made payments to one of its depositors Mr Clayton, the payments made discharged the debt of the first partner that died. However, this "first in, first out" principle is essentially disapplied in all but the simplest cases. In Barlow Clowes International Ltd v Vaughan[45] Woolf LJ held that it would not apply if it might be ‘impracticable or result in injustice’, or if it ran contrary to the parties intentions. There, Vaughan was one of a multitude of investors in Barlow Clowes' managed fund portfolios. Their investments had been numerous, of different sizes and over long periods of time, and each new that they had bought into a collective investment scheme. Accordingly, when Barlow Clowes went insolvent, each investor was held to simply share the loss proportionately, or pari passu. A third alternative, said by Leggatt LJ to generally be fairer, is to share losses through a "rolling pari passu" system. Given the complexity of the accounts, it was not applied in Vaughan, but would have seen a proportionate reduction of all account holders' interest at each step of an account's depletion. A significant topic of debate, however, is whether the courts should allow tracing into an asset which has been bought on credit. The weight of authority suggests this is possible, either through subrogation,[46] or on the justification that the assets of a recipient who pays off a debt on a thing are "swollen".[47] In Bishopsgate Investment Management Ltd v Homan,[48] however, the Court of Appeal held that pensioners of the crooked newspaper owner, Robert Maxwell, who had their money stolen, could not have a charge over the money in whose overdrawn accounts their money was deposited. When money was put into an overdrawn account, it was simply exhausted, and even if the money had been later used for the company's purposes, the law must end the tracing exercise.

Liability for receipt

Main articles: Money had and received and Knowing receipt

Although beneficiaries or those owed fiduciary duties will ordinarily wish to sue trustees first for breach of obligations, the trustee may have disappeared, or become insolvent, or perhaps the beneficiaries will desire to have a specific asset returned. In all these situations, the law allows a limited remedy if a person that was passed on trust property is not "equity's darling", the "bona fide purchaser" of the asset. A bona fide purchaser of property, even if received after a breach of trust, has long been held to take free of any claims by prior owners, provided that they have committed no wrong, and they have paid. When the value in assets is traced, this process is technically said to be "genuinely neutral as to the rights" a claimant may have.[49] Only if recipients have committed additional wrongs, through some form of negligence, knowledge or dishonesty, will they liable, with a good claim at the end of the tracing process. However, the law is unsettled on what is needed, and divides between a traditional common law or equity approach, on the one hand, and a more modern unjust enrichment analysis on the other hand. Traditionally, common law used to allow a claim from anybody who had money, but had lost it or had been deprived of it, from a person who had received the money without payment, as of right.[50] This action for "money had and received" was, however, limited to money, and was said to be limited to money in physical form.[51] In equity, an action could be brought for return of any property that could be traced, but the courts said liability was limited to people who in some sense had "knowledge" of a breach of trust. The leading case, Bank of Credit and Commerce International (Overseas) Ltd v Akindele[52] stated that the touchstone of liability is that a defendant acted "unconscionably". In that case, Akindele, a Nigerian businessman, was sued by the liquidators of the disgraced and insolvent bank, BCCI for return of over $6.6m. Akindele received this payment, apparently as he said he knew part of a fixed return deal, when in fact BCCI was engaging in a fraudulent scheme to buy its own shares, and thus inflate its share price. Nourse LJ held that on these facts, Akindele had done nothing "unconscionable" and was not liable to return the money. In other cases, however, it is apparent that the standard has been lower, and set at negligence. In Belmont Finance Corp v Williams Furniture Ltd (No 2)[53] Goff LJ held that if one "ought to know, that it was a breach of trust", liability will follow. Accordingly, different courts have differed on the requisite threshold of liability. Some have thought liability for receipt should be limited to "wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make",[54] while others have favoured a simple negligence standard, when a breach of trust would have been obvious to an honest, reasonable person. The latter view is consistent with an unjust enrichment analysis, favoured by the late Peter Birks and Lord Nicholls in extrajudicial writing.[55] This favours strict liability upon receipt of any property, unless it is paid for. If the recipient is not a bona fide purchaser, they must make restitution of the property to the former owner to avoid unjust enrichment. This was an approach adopted by the House of Lords in Re Diplock.[56] However, unlike Re Diplock the modern unjust enrichment analysis would allow a defence, if the recipient had changed her position, for instance by spending money that would not otherwise have been spent, a defence recognised in Lipkin Gorman v Karpnale.[57] This approach ends by suggesting that even if it is paid for, if the recipient ought to have known, they will be deemed to have committed a wrong and must restore the property to the previous owner anyway.

Dishonest assistance

Liability for breach of trust extends not only to the fiduciary in breach, and potentially to recipients of trust property, but may also reach people who have assisted the breach. The first requirement is that an act was done by a defendant which somehow lent assistance to the wrongdoers. In Brinks Ltd v Abu-Saleh (No 3)[58] Mrs Abu-Saleh drove her husband to Switzerland. She thought this was part of some tax evasion scheme, but did not ask (or was not told, it was accepted). In fact Mr Abu-Saleh was laundering gold bullion, the proceeds of a theft. Rimer J held that she had not "assisted", because by driving she was apparently only making her husband's experience more pleasant, and moreover it was insufficient to have been dishonest about the wrong thing (tax evasion, rather than breach of trust). This latter aspect was said to be erroneous by Lord Hoffmann in the leading case, Barlow Clowes International Ltd v Eurotrust International Ltd.[59] The courts before this had been divided over what, in addition to an act of "assistance" was an appropriate mental element of fault, if any. In Royal Brunei Airlines Sdn Bhd v Tan,[60] the House of Lords had resolved that "dishonesty" was necessary. It was also irrelevant if the trustee was dishonest, if the assistant was. This meant that, Mr Tan, the managing director of a travel booking company, who took booking money it was supposed to hold for Royal Brunei Airlines for his own business was liable to repay all sums personally. By contrast, in Twinsectra Ltd v Yardley[61] it was held that a solicitor, Mr Leech, who paid money to Mr Yardley to buy property, was not dishonest because it was accepted he genuinely thought he could do this. In Barlow Clowes International Ltd v Eurotrust International Ltd[62] the Privy Council clarified that the test for "dishonesty", however, is not subjective as in the criminal law test from R v Ghosh, but objective. If a reasonable person would think an action is dishonest, it is, and the defendant need not appreciate that they have acted dishonestly by the standards of the community. This led the Privy Council to agree that a director of an Isle of Mann company was dishonest, because, even though he did not know for sure, he was found at trial to have suspected that money passing through his hands was from a securities fraud scheme by Barlow Clowes. The result is that, because liability is based on objective fault, more defendants will be caught. If a claimant does bring an action for dishonest assistance, or liability for receipt, Tang Man Sit v Capacious Investments Ltd[63] affirmed the principle that the claimant may not be overcompensated by suing for the same thing twice. So, Capacious Investments Ltd could make a claim against the late Mr Tang Man Sit's personal representative for renting out its properties, and it could ask the court to assess the amounts of both (1) loss of profits, and (2) loss of use and occupation, but then it could only claim one.

Theory

Main article: Theory of trusts

See also

Notes

References

Books
  • JE Martin, Modern Equity (18th edn Thomson Sweet & Maxwell, London 2009)
  • C Mitchell, Hayton and Mitchell's Commentary and Cases on the Law of Trusts and Equitable Remedies (13th edn Sweet & Maxwell 2010)
  • C Mitchell, D Hayton and P Matthews, Underhill and Hayton's Law Relating to Trusts and Trustees (17th edn Butterworths, 2006)
  • G Moffat, Trusts Law: Text and Materials (5th edn Cambridge University Press 2009)
  • C Webb and T Akkouh, Trusts Law (Palgrave 2008)
  • S Worthington, Equity (2nd edn Clarendon 2006)
Articles
  • P Birks, ‘The Content of Fiduciary Obligation’ (2002) 16 Trust Law International 34
  • M Conaglen, ‘The Nature and Function of Fiduciary Loyalty’ (2005) 121 Law Quarterly Review 452
  • EJ Weinrib ‘The Fiduciary Obligation’ (1975) 25(1) University of Toronto Law Journal 1
Reports
  • Law Reform Committee, The Powers and Duties of Trustees (1982) Cmnd 8773

External links

  • List of leading trusts cases on bailii.org
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