Personal Liability of Trustees
Types of Trustee Liability
Who Can Sue/Be Sued?
If a trustee breaches their duties in a manner which causes loss to the trust or produces unauthorised gains for the trustee, they will be liable.
Trustees are liable for their own breaches, and jointly and severally liable for joint breaches. However, they are not liable for each others’ breaches if they were not a party to it: Bahin v Hughes (1886) LR 31 Ch D 390. Note that a trustee can be party to a breach if they could have prevented it by exercising reasonable care in supervising their co-trustees.
Any beneficiary (vested or otherwise) can sue. Co-trustees can also sue their fellow trustees for breach.
Settlement Trusts: Liability for Loss
If the breach caused the trust fund to suffer loss, the trustee must restore the trust to the position it was in prior to the breach: Nocton v Lord Ashburton [1914] AC 932. There is an exception for bare trusts, discussed below.
There are two methods by which a trustee can restore the trust:
Restitution of the trust: if it is possible to restore the trust to its pre-breach position, the trustee must do so. For example, if the trustee misapplied 50 shares in X Ltd, they must buy back those shares and return them to the trust.
This is so even if that property is now more expensive: Shepherd v Mouls (1845) 4 Hare 500. If the value of the property has gone up, the trustee must make up the difference out of their own pocket.
Compensating the trust: if restoring the trust to the exact same position is not possible, the trustee must pay money into the trust to make up the lost value. They must do this from their own funds.
So, if it is no longer possible to buy 50 shares in X Ltd, the trustee must pay the trust fund the missing value of the shares. This value is calculated at the date of the court’s decision: Re Bell’s Indenture [1980] 1 WLR 1217.
Bare Trusts: Liability for Loss
A bare trust is a trust with only one, absolute-entitled beneficiary. The trustee of a bare trust is not under a duty to restore the trust. Instead, they are directly liable to the beneficiary for any loss: Target Holdings v Redferns [1996] 1 AC 421. This is known as equitable compensation.
The measure of damages for equitable compensation is the amount which would put the beneficiary in the position they would be in had there been no breach: AIB Group v Mark Redler [2014] UKSC 58. This means that if the trust would have incurred the loss anyway, the beneficiary is not entitled to anything.
Since this is equitable compensation rather than common law compensation, a trustee cannot rely on the beneficiary’s contributory negligence or breach to reduce the compensation payable: De Beer v Kanaar [2002] EWHC 688. However, it may be relevant to the extent that it breaks the chain of causation between the breach and the loss: Nationwide Building Society v Various Solicitors [1999] PNLR 606.
Accounting for Unauthorised Profits
If the breach resulted in the trustee obtaining unauthorised profit, the trustee must account for those profits – pay them into the trust fund. It is irrelevant whether the trust suffered any loss. The same is true if, through breach, the trust failed to make a profit or the trustee failed to acquire property for the trust.
If the trustee is no longer in possession of the unauthorised gains, they must account out of their own funds.
Dual Claims
It is possible for a single act or omission to result in both loss and unauthorised gains. However, if these consequences flow from the same action and breach only one remedy is available: to avoid double compensation. If these consequences flor from breaches of two separate duties or two transactions, by contrast, both remedies are available:
Compare the following two examples:
- The trustee sells trust property to themselves at an undervalue. They have caused the trust loss – the trust no longer has the property and its value has not been fully replaced. They have also made unauthorised gains – the property itself. However, both these effects result from the same breach – breach of the self-dealing rule. If the court orders the trustee to both account for the property and pay compensation to the trust, there will be double recovery: the trust will get the property back and a sum of money. So, the beneficiary must choose to either sue for compensation or an account.
- The trustee sells trust property to a third-party in return for a secret bribe. They have caused the trust loss – the trust no longer has the property. They have also made unauthorised gains – the secret bribe. However, there are two separate breaches here: a misapplication of property and a breach of the duty to avoid unauthorised profit. The beneficiary can require the trustee to compensate the trust and account for the secret bribe.
Defences and Relief from Liability
Defences
There are a variety of defences to an action for breach of trust:
Any claim not brought within six years of the date the cause of action accrued is lost unless an exception applies: Limitation Act 1980, s.21(3). Exceptions include cases involving infant or non-competent beneficiaries (s.28) and any action by the Attorney General in relation to a charitable trust: Attorney General v Cocke [1988] Ch 414.
Different limitation periods apply to cases where the trustee has concealed the breach (s.32(1)) or retains possession of trust property or its proceeds (s.21(1)(b)), breaches of the self-dealing and fair-dealing rules (Tito v Waddell (No 2) [1977] Ch 106) and fraudulent breaches (21(1)(a)).
If the breach falls under one of the exceptions to the Limitation Act 1980, the right to sue is still lost if the claimant has delayed in bringing the claim to such an extent that it is unconscionable to allow proceedings to continue: Frawley v Neil [2000] CP Rep 20. This is known as the defence of ‘laches’.
The right to sue can also be lost if the beneficiary consents or acquiesces to the breach. Acquiescence may be implied from a beneficiary’s failure to sue if they are competent adults in full knowledge of the facts and the circumstances make it unconscionable for them to asset their rights: Holder v Holder [1968] Ch 353.
The trust instrument may contain clauses which exclude or limit liability for certain breaches: Armitage v Nurse [1998] Ch 241.
These clauses fall outside of the Unfair Contract Terms Act 1977 or Consumer Rights Act 2015: Re Duke of Norfolk’s Settlement Trusts [1982] Ch 61. However, they cannot exclude fraudulent (dishonest or deceitful) or actively reckless breaches: Armitage; First Subsea v Balltec [2017] EWCA Civ 186. It is unclear whether they can exclude the duty to exercise reasonable care: contrast Millett LJ’s dicta in Armitage with Lord Kerr’s dicta in Spread Trustee v Hutcheson [2011] UKPC 13.
Certain defences from other areas of law do not apply to breach of trust. Contributory negligence is one example. Another is set-off – the trustee cannot reduce their liability by reference to gains made through other breaches of trust: Dimes v Scott (1828) 4 Russ 195.
Indemnity and Contribution
If a trustee is joint and severally liable for a joint breach, it is possible that a beneficiary will sue them alone for the whole loss. If this happens, the trustee has several options:
- The trustee can ask the court to apportion liability between them and the other trustees to the extent they consider it ‘just and equitable’: Civil Liability (Contribution) Act 1978, s.2. They can do the same regarding any third-party liable for knowing receipt of trust property: Charter v City Index (Gawler, Part 20 Defendants) [2008] EWCA Civ 1382.
- If a co-trustee was fraudulent or benefited exclusively from the breach, a trustee can seek an indemnity from that co-trustee: Chillingworth v Chambers [1896] 1 Ch 685.
- If a beneficiary knowingly requested the breach or consented to it in writing, the trustee can ask the court to impound their beneficial interest: Trustee Act 1925, s.62. The trustee can then use that impounded interest relieve their liability to other trustees.
Relief from Liability
The court can, under s.61 of the Trustee Act 1925, grant full or partial relief from liability. This requires the trustee to have acted honestly, reasonably and for the court to think they should fairly be excused. Relevant factors include:
- Whether the trustee was professional or amateur: Santander v RA Legal Solicitors [2014] EWCA Civ 183; Re Evans [1999] 2 All ER 777.
- Whether the trustee was paid or unpaid: Bartlett v Barclays Bank (No 1) [1980] Ch 515.
- If loss was due to a fraudster’s actions: Santander v RA Legal Solicitors [2014] EWCA Civ 183.
- Where the trustee fairly relied on expert advice: Daniel v Tee [2016] EWHC 1538.
