Tutor-led Workshop 9a Information

TLWS Outline
In the previous sessions you have seen which powers and duties are imposed on trustees. This
session examines what happens if a trustee breaches his or her obligations and how liability may be
excluded through the use of exemption clauses.

Suggested Reading
Mohamed Ramjohn Unlocking Equity & Trusts Chapter 14

Cases Mentioned
Armitage v Nurse[1998] Ch 241*
Re Lucking’s WT[1968] 1 WLR 866
Target Holdings Ltd v Redferns[1995] UKHL 10
Swindle v Harrison[1997] 4 All ER 705
Fry v Fry(1859) 27 Beav. 144
Wilkins v Hogg(1861) 31 LJ Ch 41
Wight v Olswang(No.2) (1999) 2 ITELR 689
Bogg v Raper(1999) 1 ITELR 267
Walker v Stones[2000] 4 ALL ER 412*
Twinsectra v Yardley[2002] UKHL 12*
Re Pauling[1964] Ch 303
Re Evans[1999] 2 All ER 777

Breach of trust
Should a trustee breach his or her duties towards the beneficiary then it stands to reason that the
beneficiary will have some remedy against them. Duties and their corresponding breaches can be
categorised as being either positive or negative in nature. A negative duty is one in which the trustee
should refrain from doing a particular act in relation to trust property. For example this could be the
duty not to make unauthorised investments. A positive duty is one in which the trustee has to do
something such as to review his or her investments as per the Trustee Act 2000 s.4(2). Failure to
comply with these duties can lead to a breach of trust.

Types of breach of trust was described in Armitage v Nurse [1998] Ch 241. Breaches of trust can be
deliberate or accidental and can involve the misappropriation of trust assets or be the result of
‘merely’ acting outside of their powers. A breach can also occur due to the trustee’s negligence or
incompetence. Strangely, a breach of trust may occur even if it is to the advantage of the
beneficiary.

Liability for loss

If there is breach which causes loss to the trust then the trustee is liable to replace the loss.
However, a trustee is only liable for his or her own breaches i.e. they cannot be held liable for the
failings of another trustee: Re Lucking’s WT [1968] 1 WLR 866. There must also be a causal
connection between the breach and the loss. This was established in Target Holdings Ltd v Redferns
[1995] UKHL 10: ‘There must be some causal connection between the breach of trust and the loss to
the trust estate for which compensation is recoverable, viz. [namely] the fact that the loss would not
have occurred but for the breach’. It also arose in Swindle v Harrison [1997] 4 All ER 705.
Quantifying loss
If the trustee makes unauthorised investments then he or she is liable for the loss incurred. Should
they fail to sell an investment when it would have been prudent to sell and then the investment
loses money they are liable for the difference. This happened in Fry v Fry (1859) 27 Beav. 144.
Likewise, selling an investment without authorisation renders a trustee liable to replace the
particular asset even if it will cost them more to do so e.g. if the price of the asset has increased. The
duty to invest also places on trustees the onus to invest in assets in a reasonable time. If they are
tasked with purchasing a particular investment at a particular time and fail to do so then they are
liable for the purchase of the asset even if it has risen in value.

Defences to breach of duty

It will come as no surprise that several defences exist to shield a trustee from liability. These include
statutory defences, the consent of beneficiaries, reasonableness and most significantly exemption
clauses.

Exemption clauses
If there is no exemption clause in a trust instrument then the trustees remain liable for any losses
incurred. However, an exemption clause limits trustees’ liability. A typical exemption clause reads:

No Trustee shall be liable for any loss or damage which may happen to the Trust Fund...at any time
or from any cause whatsoever unless such loss or damage shall be caused by his own actual fraud.

This protects trustees while weakening the rights of beneficiaries. No professional trustee would
agree to act as such without an exemption clause. This leads to the ironic situation of a professional
trustee, from whom a higher standard of care might be expected, being immune from liability while
a lay trustee is subject to the standards laid down in the Trustee Act 2000.

The old legal position was that exemption clauses would not protect trustees from bad faith,
recklessness or breach of duty: Wilkins v Hogg (1861) 31 LJ Ch 41. However, this changed with the
seminal case of Armitage v Nurse [1998] Ch 241. Here the trust instrument contained an exclusion
clause that read ‘No Trustee shall be liable for any loss or damage which may happen to the Trust
Fund...at any time or from any cause whatsoever unless such loss or damage shall be caused by his
own actual fraud.’ It was held that this was valid and the trustees had excluded their liability. Lord
Millett commented:

There is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable
by them which is fundamental to the concept of a trust... I do not accept… that these core
obligations include the duties of skill and care, prudence and diligence. The duty of the trustees to
perform the trust honestly and in good faith for the beneficiaries is the minimum necessary to give
substance to the trusts

Thus, excepting dishonest behaviour, the old rule on exclusion clauses in Wilkins v Hogg were
abolished and exclusion clauses were hereafter valid: ‘no matter how indolent, imprudent, lacking in
diligence, negligent or wilful he may have been, so long as he has not acted dishonestly’. This poses
the question as to why settlors agree to exclusion clauses. They limit insurance costs for the trusts
which results in lower management fees and in turn increases a beneficiary’s income.
Several other cases have occurred concerning exclusion clauses: Wight v Olswang (No.2) (1999) 2
ITELR 689, Bogg v Raper (1999) 1 ITELR 267, Walker v Stones [2000] 4 ALL ER 412. This latter case
concerned issues of dishonesty and the validity of exclusion clauses. The court held that such clauses
would not apply in instances of fraud. This has been developed in Twinsectra v Yardley [2002] UKHL
12: would the reasonable man see the conduct as dishonest and did the trustee realise that the
reasonable man would see the conduct as dishonest?

Consent of beneficiaries
Beneficiaries can also consent to a breach of trust, an act which will shield the trustee from liability.
Usually the defence requires the consent of all the beneficiaries. The defence is a complete defence
as discussed in Re Pauling [1964] Ch 303: ‘It is clear to us…that if the [trustee] can establish a valid
request or consent by the advanced beneficiary to the advance in question, that is a good defence
on the part of the [trustee] to the beneficiary’s claim, even though it may be plain that the advance
was made in breach of trust.’ Consent can also be grant retrospectively once the beneficiaries
become aware of the breach: Walker v Symonds (1818).

Statutory defences
The Trustee Act 1961 s.61 provides a statutory defence:

If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be
personally liable for any breach of trust…but has acted honestly and reasonably, and ought fairly to
be excused for the breach of trust…then the court may relieve him either wholly or partly from
personal liability for the same.

If the trustee can show he or she acted ‘honestly, reasonably’ and ought to be fairly excused then
the court can exercise its discretion and afford the trustee a defence. This is rarely used but arose in
the case of Re Evans [1999] 2 All ER 777.

Limitation
Limitation can also act as a defence. The Limitation Act 1980 s.21(3) provides:
An action by a beneficiary to recover trust property or in respect of any breach of trust…shall not be
brought after the expiration of six years from the date on which the right of action accrued’.