Breach of Trust

Breach of trust

A trustee may be held personally liable for breach of his duties as trustee and breach of the terms of the trust deed or the will trust.  The breach may happen without fault on the trustee’s part.  It may be due to negligence in investment or non-investment of trust assets.  It may arise from investments in unauthorised assets. The trustee may fail to distribute the assets in accordance with the trust instrument.  He may fail to manage and supervise the trust assets in accordance with his obligations.

A trustee is not liable for breaches which preceded his appointment, unless he should have taken action to investigate and remediate them, at an earlier date.  Where a trustee retires, he remains liable for breaches which occurred while he was trustee.  He may be liable where he retires in order to facilitate a breach of trust by his fellow trustees.

Making Good Losses

Trustees may be obliged to make good the loss sustained to the trust assets, by reason of the  breach of trust.  If he makes an unauthorised profit, he is obliged to disgorge it, even if it did  not cause loss to the trust. The trustee is generally liable for breaches which he has committed or to which he has been party.  He is not automatically or vicariously liable for breaches by his fellow trustees.  If his conduct amounts to wilful default or inactivity, in circumstances in which he ought to have taken action against his fellow trustees, he may be liable for this failure to act.

The trustee must account for unlawful profits to the trust. The equitable duty to account in this case requires disgorgement of assets or property improperly received. It is  dependent on loss on the part of the trust.

The trustee is obliged to make good loss to the trust assets, which have be caused by his  breach of trust. A basic principle is that the trust should restore the trust to the position, in which it would have been, but for the breach.  The loss must have been caused or facilitated by the trustee’s breach. The modern approach is that the loss is measured as at the date of the court-order/judgment.

The loss may be readily measurable where, for example, they have arisen by reason of investment in unauthorised asset.  Where the trustee sells an authorised asset improperly, they may be obliged to account for the proceeds of sale or to repurchase the investment at its then value.  Where trust assets are paid wrongfully, the trustees are obliged to pay the correct amount to the correct payee.

Indemnity and Contribution

Where more that one trustee is liable, each is usually jointly and severally liable.  The trustee may seek contribution from the other trustees in this case, in accordance with the Civil Liability Act where he has paid more than his fair share of the liability.  It may be so, even though the trustees are not to equally blameworthy.  The trustee may be obliged to compensate the trust in full and be left to recover a share from his fellow trustees, if possible.

In some cases, a trustee may be entitled to an indemnity from his fellow trustees.  When one trustee has acted fraudulently, his fellow trustees may be entitled to an indemnity for loss thereby occasioned.  Similarly, if the default relates to one trustee’s area of expertise, the principle may apply.  If one trustee is a dominant trustee, such as a professional trustee, he may be obliged to indemnify his fellow trustees against loss.  This may also apply to active professional trustee, relative to a non-professional inactive trustee.

A trustee may escape liability for breach of trust, if the beneficiary has participated in or consented to it. The court may act on the basis of the beneficiary’s consent, concurrence or connivance.  It need not necessarily be express, provided the beneficiary is of full age and  understands what he is doing. It is not necessary that the beneficiary has benefited from the breach.

The courts had jurisdiction to require a beneficiary who has been involved in a breach of trust to indemnify a trustee, in respect of his liability.  Persons, at whose instance or request, the trustee has committed a breach, he may be liable to reimburse the trustee in respect of the liability which he has incurred.

There is power to impound a beneficiary’s interest under the Trustees Act.  If a beneficiary has instigated, requested or consented in writing to a breach, the court may order that the interest should be impounded, with a view to indemnifying the trustee.  The power will be exercised if the beneficiary was aware that the conduct which he instigated or consented to, constituted a breach of trust.

Relieveing Trustees

A beneficiary of full age and capacity may release a trustee from breach of trust.   The release will be valid, only if the trustee knows the full nature of the breach and its consequences.

The trust instrument may provide that the trustee is absolved from liability absolutely, or more commonly, unless he has acted fraudulently.  Such clauses are likely to be valid, but  they will be strictly interpreted by the court.  They are likely to protect a trustee only if he has acted honestly, in good faith and not recklessly.

The courts act cautiously in giving effect to clauses which absolve the trustee from liability.  It has been suggested that they should be permitted, provided that the settlor has proper and specific independent advice in relation  to its consequences. Different views have been taken in relation to the desirability of such clauses. Some courts take the view that exemption clauses should not be available to exclude liability for negligence, in the case of professional trustees.

The court have focused on the distinction between professional and lay trustees.  There is authority for the view that a paid professional trustee should be able to rely on an exemption clause, in respect of negligence or  acts and omissions, falling short of fraud.

An action for breach of trust is usually subject to a six year time limit.  No limitation period applies to an action against the trustee, where the claim is founded on fraud or fraudulent breach of trust to which the trust was party or to where the claim is to recover trust property or proceeds of trust property retained by the trustee and converted to his own use.