2017/Q3

Ellen settled £3 million in trust, with her daughters Linda and Maggie (Linda and
maggie personal liability--trustees)) as trustees. Under the terms of the trust:

(Terms of the trust)

a) the trustees may distribute the income and capital as they see fit among the
settlor’s children and grandchildren for 50 years and then shall distribute any
remainder assets as they see fit among the children and grandchildren then living;

b) the trustees shall invest the trust assets only within the UK;

c) the trustees shall not be liable for any breach of trust unless it is caused by their
own fraud or gross neglect.

(Administrative duty breach)

With the UK economy struggling, Linda and Maggie decided to invest £250,000 of
trust money in France and £250,000 of trust money in Germany. The French
investments have risen in value to £300,000, but the German investments have
fallen in value to £200,000.

(fiduciary duty since Alex is maggies friend so he is using it for his own benefit so
breached fiduciary duty here one can see dishonesty of maggie so breach of fiduciary
duty))

Maggie’s friend Alex owns a UK business that needed money to continue

operating. Maggie convinced Linda that it would be a good investment, so they
invested £100,000 of trust money in Alex’s business. That investment has fallen in
value to £80,000.

(Linda Maggie investment to florence is breach of dispositive duty because they are
giving benefit to someone else other than trustee)

(Fiduciary duty will be determined from facts when u see

dishonesty or attempt to get personal benefit by trustee for
himself…his relative/friends/for his business etc. )
Ellen asked Linda and Maggie if they could use the trust to help Florence, who is
Ellen’s friend and has always been ‘like a daughter’ to Ellen. Linda and Maggie paid
£10,000 from the trust to Florence.

Vivienne is Ellen’s granddaughter. She is unhappy with the way in which Linda and
Maggie have been performing the trust.

Advise Vivienne.
 Personal liability
(Trustee’s own breach)

Determine personal
liability in question
Personal liability
1.Identify duty

2. See whether there is a breach or not

3. See causation

4. Remedy

5 Possible defence

-exclsusion clause

- s.61 of the trust Act 1925

Third party liability

- Dishonest assistance knowing recipient

Go above in question Identify in question which party has

assisted and which party has received the trust property from
facts
Introduction (EDIT IT AS PER QUESTION)

This question requires discussion on the breach of the trust. It

appears that there was a valid trust created and Linda and
Magy have been appointed as the trustee in favour of the
children and grandchildren(beneficiaries) and one of them is
Vivenne and it further appears from the facts that trutees have
made certain unauthorized investments (by making investment
in france and Germany) and by unauthorized distributions(by
giving money to Alex and Florence). They might have also
breached their fidiciuary duties. In the answer below we will be
discussing each of the issue related breaches and liabilities of
the same separately.

(PERSONAL LIABILITY)

1st issue investment in france

-Identify duty (law)

The first issue with the trustees’ liability with respect to trust is
identification of his duty as trustee. There are three types of
duties on the trustees. First is administrative duty(Knott v
Cottee)(duty to administer trust assets in according with the
terms of trust and make only authorized transactions)

second one is dispositive duties (duty to give benefit of the

trust to the beneficiaries).

Whereas third type of duty is fiduciary duty which include a)

duty to act in good faith, loyalty and dishonesty b) duty to
inform/ disclose information, duty to avoid conflict of interests
and duty to disclose interest in transactions.

Duty Law application

In our case, Trustee has committed the breach of his duty by

investment in France as terms of the trust clearly states that
trustee was allowed to only invest within UK.
-Causation(law)

For successful claim breach of trust duties it is necessary

requirement that there should be casual link between breach
and the loss suffered by the beneficiary (Nestle case)(Miller
Deed case). To establish this casual link we can rely on but for
test established in case of the (Target Holdings case) in which
Lord Wilkinson states that “The defendant is only liable for
losses due to his legal wrong that has caused losses to the
plaintiff”. To prove the causation we will ask but for trustees’
breach no loss would have occurred.

(How to apply causation when there is no loss suffered rather

than benefit is earned)

-Causation application (WHEN NO LOSS SUFFERED)

In our case, we can see that no loss has been suffered by the
trustee as we can see that investment value in France has
increased from 250000 to 300000. So in that case, beneficiary
would have two remedies either he can falsify or rectify. Under
falsify, beneficiaries will see that trustee has invested in
unauthorized way(means beneficiary has not approved for such
transcation) if now if there is any loss then trustee can falsify
the transaction, and trustee will be personal liable and will have
to pay to beneficiary from his own pocket. Under rectification,
the beneficiary can also rectify means he can ask for benefit
that trustee got from investment. In our case it is most likely
that trustee will choose rectify the investment.

In our case we can clearly see from facts that there is no loss
i.e unauthorized investment in france didn’t led to the loss to
the beneficiary, because we can see that investment value in
France has increased from 250000 to 300000 it means trustee
has gained profit rather than bearing some loss. So in that case,
beneficiary would have two remedies either he can falsify or
rectify. Under falsify, beneficiaries will see that trustee has
invested in unauthorized way(means beneficiary has not
approved for such transcation) if now if there is any loss then
trustee can falsify the transaction, and trustee will be personal
liable and will have to pay to beneficiary from his own pocket.

However since there is no loss so trustee will most likely to

rectify rather than surcharge. Under rectification, beneficiary
can ask for benefit that trustee got from investment. In our
case it is most likely that trustee will choose rectify the
investment and will get benefit of (50000 pounds earned by
investment in France) (Target Holding )(Re Chapman)
APPLY DEFENCE IN THE LAST COLLECTIVELY IF INVESTMENT IS
IS MORE THAN TWO PLACES…. means just write duty and
causation not defence

2nd issue Investment in Germany.

Determine personal libaility (conduct by trustees or by third

party from facts)

This time doesnot write laws in detail

-Identify duty(law)

As we have discussed above that there was a duty on trustee to

invest within UK and not outside UK therefore unauthorized
investment in the Germany was a breach. Moreover Trustee
must administer the trust asset and take sufficient care to
maintain it and if he fails to take care then trustee will breach
the duty.
-duty Law application

in this case we can see by investing the unauthorized

investment trustee has breached the administrative duty.

-Causation (law)

For successful claim breach of trust duties it is necessary

requirement that there should be casual link between breach
and the loss suffered by the beneficiary (Nestle case)(Miller
Deed case). To establish this casual link we can rely on but for
test established in case of the (Target Holdings case) in which
Lord Wilkinson states that “The defendant is only liable for
losses due to his legal wrong that has caused losses to the
plaintiff”. To prove the causation we will ask but for trustees’
breach no loss would have occurred. if but for test cannot be
proven i.e if the loss would have occurred regardless of the
negligence of trustee then but for test will fail and trustees will
not be liable for breach

-Causation(application)
 In our case, we can see that loss has been suffered by the
trustee as we can see that investment IN Germany decreased in
its value from 250000m pounds to the 200000m pounds. We
will apply but for test here according to which we will ask but
for trustees’ breach, loss would have occurred, we can argue
that if trustees’ would have obliged with their administrative
duties of not investing in the Germany which is outside the UK
then loss may not have occurred.

Falsification and surcharge(law)

If there is breach of trust duties, beneficiary would have two

remedies either he can falsify or surcharge the transactions.
Under falsification, if the trustee has undertaken an
unauthorized transaction, then breach will be proven when
beneficiary shows that trustee was not authorized for any of
such transaction that he has undertaken which can falsify the
transaction. The beneficiary can also surcharge the transaction
which the trustee has undertaken a transaction negligently i.e
the trustee has failed to take a reasonable care. The breach of
surcharge will be proven if the trustee fell below the standards
of a reasonable trustee. Under the falsification or surcharge
trustee will be personally liable (will have to pay to beneficiary
from his own pocket) as well as proprietarily liable (get the
trust assets back).To prove causation for surcharge it should
also be shown that loss occurred due to the breach of the
trust duty and not due to some other reason.
Falsification and surcharge(application)

In our case, we can see that trustees have taken an

unauthorized transaction by investing in Germany and trustee
was not allowed to invest under the terms of the trust
instrument, so clearly he has breached his duty. For this breach
beneficiary can falsify the transaction according to which
trustees will be proprietarily (Return the 200000 pounds) and
personally liable (pay 500000 pounds from their own pockets)
for the breach. Whereas trustees does not seem to take
sufficient care and trustee seems to be negligent while
investing in the Germany because trustees didn’t inquire how’s
germany economy performing(Nestle V Westminister Bank),
here beneficiary can surcharge the transaction and again
trustee will be proprietarily (return 200000 pounds) as well as
personally liable (pay 50000m pounds from their own pockets).

Assuming that, trustee didn’t take care then in that scenario

causation will be proven.
(REMEDY LAW)

Once the causation is satisfied then it is necessary to determine

that what remedy is available for the beneficiary. According to
the equitable compensation the liability on the trustee is to
restore the trust assets (Caffrey v Darby). Once a breach has
been committed the trustees become liable to place trust
estate in the same position as it would have been in if no
breach had been committed. Considerations of causation,
foreseeability and remoteness do not readily feature in this
question. “The basic rule is that a trustee in breach of trust
must restore or pay to the trust estate either the assets which
have been loss or compensation for such loss the common law
rules of remoteness and causation do not apply” says Lord
Wilkinson in his judgement of Target Holdings case.

(REMEDY APPLICATION)

In our case, we can see that beneficiary has suffered loss due to
unauthorized transaction i.e the beneficiary has suffered loss
due to the investment outside UK so in that case beneficiary
can falsify the investment/transaction. Moreover Beneficiary
can also argue that if the trustee had taken sufficient care when
they was investing in the Germany then they might have
produced much better capital and on basis of this argument
beneficiary can surcharge the investment; according to which
beneficiary can ask for benefits if investment would have made
in a more proper way. This will lead to the personal and
proprietary liability (A failure by the trustee to perform their
duties properly will mean that a trustee is in breach of trust and
will be required to perform their duties set in the trust) .
according to which trustee will have to put the trust in the
position had the breach would not have caused which means
trustee will have to reverse the transaction, if it is not possible
then trustee will have to pay from his own pocket. In our case
we can see that trustee will reverse the transaction of the
200000 pounds back from German investment which will also
fulfill its proprietary obligation but trustee will also have to pay
50000 from his own pocket (personal liability)(Target Hokding)
(Re Champan) along with this trustee may also be required to
pay the profits which they would have made if they would have
taken sufficient care.

CO TRUSTEES (LAW)(SEE WHETHER THERE R CO TRUSTEES IN

UR CASE OR NOT)

As there are more than one trustees, trustees are under duty to
act jointly so if the breach has occurred each trustee is equally
liable for the breach. If a successful claim is brought against one
trustees then he has right of the contribution against his co-
trustees. The trustees will may equal amount but under s.2 Civil
Liability Act 1978 the court has the discretion to decide
individual liability upon every trustee.
CO TRUSTEES (APPLICATION)

In our case the trustees are most likely to be held equally liable
since the fact that Pradip and Stella agreed to the investment
proposal by Alvaro, but court has the discretion to decide
otherwise. Moreover given the fact that P and S are coporate
lawyers so the situation seems very similar to the (Re
Partington) as Alvaro must have relied on their advice due to
the their professional background so it is likely that court may
use its discretion to inflict more liability Pradip and Stella.

DEFENCE

(exclusion LAW).
 While the trustee have personal liability of paying the 50000
pounds but personal liability can be excused or excluded in
certain circumstances. A) Where the breach was done with the
consent of the beneficiary who must be of the sound mind and
full age (Nail v Punter) trustees will also be required to prove
that trust ws obtained without any influence from them to the
beneficiary (Re Pauling ). B) Exclusion clause C) Where courts
excused the personal liability of the trustee s.61 of Trust Act
1925.

Through exclusion trustee can escape liability for any breach

unless it was done for the fraud/gross neglect. It would be
worthy to note here that exclusion clause will only exclude
personal liability of the trustee and will never protect him from
the proprietary liability

(DONT WRITE IN THIS EXAM)

Can the trustees’s liability to act honestly and in the best interst
of the beneficiary ever be exlcusded ? Fidicuary duty NO

Fidicuary duties can never be excluded

( EXLUCISON CLAUSE APPLICATION)

In our case, there is no fraud/ gross neglect as trustee invested

in a good faith so exclsusion clause seems valid
(DONT WRITE IN THIS EXAM)

--Then see Will this exclusion clause will be effective to

exclsude personal liability of the trustee ? see if there is any
intentional breach?

( EXLUCISON CLAUSE law continue.,)

As long as there is no fraud or gross neglect exclusion and there

is no intentional breach then clause will exclude personal
liability of the trustee but not his proprietary liability as trustee
is bound to act in good faith, honestly and in the best interest
of beneficiary.

( EXLUCISON CLAUSE application.,)

In our case, there is a exemption clause in part c which says

that trustee can be excluded from liability as long as he is not
acting fraudly or gross negligently. It can be argued that trustee
act negligently but he acted in good faith because from facts
we know that UK’s economy was struggling so we can argue
that it was economically more reasonable to invest outside UK
rather than inside UK as it would have been risky to invest in UK
so it clearly manifests good intent of the trustee hence he can
rely on the exemption clause and on successful claim trustee
may exclude his personal liability of (50000 pounds).
S61 (LAW)

If under a situation court argue that there was intentional

breach and trustee fails to rely on exemption clause then
trustee can rely on the s.61 Trust Act 1925 and request courts
to exercise their power to exclude his personal liability. Under
s.61 Trust Act 1925 court can exclude personal liability of the
trustee if trustee proves that he acted honestly and reasonably.
To prove that the trustee had acted honestly, it should be
proven that trustee was not dishonest, rather than affirming
that he was honest as it is a negative test. To prove that trustee
acted reasonableness of the trustee, the test here is objective
test. According to which, it would be asked whether trustee
complied with standard of the care of the reasonable trustee,
such conduct is not requires the trustee to be on the standard
of the perfection(TSB Bank v Markandan)(Nationwide Building
Society). Lord Morritt Lj states that “The section 61 only
requires a trustee to act reasonably but that does not mean
that the trustee should comply with practice best”. The second
element that court will see under s.61 is whether trustee ought
fairly to be excused or not and if court is convinced that it
would be fair to exclude the trustee from his personal liability
then his liability can be excluded under s.61.

S61 (APPLICATION)

In our case, trustee can argue that his act of investment in

Germany was honest and reasonable action given the fact that
UK’s economy was struggling during the period when he was
investing so it was more reasonable for any businessmen to
invest outside UK rather than inside UK. Furthermore, it would
be very inequitable of the beneficiary that he is asking for
losses from trustee when he has taken benefits from the
French investment of the trustee and yet beneficiary is trying to
hold trustee for the personal liability also , so it would be very
inequitable(unfair) for the trustee to pay both ways when
beneficiary has already been placed on its earlier position as he
has gotten 200000 pounds from proprietary liability of the
German Investment and 300000 from investment in France. So
on this argument court may be satisfied that trustee had acted
honestly and reasonably and it would be fair to exclude the
personal liability of the trustee on the basis of exclusion .

PERSONAL LIABILITY (THE END)

(Fidicuary duty)
Fiduciary duty will be determined from facts when u see
dishonesty or attempt to get personal benefit by trustee for
himself…his relative/friends/for his business etc.

(SEE IN ANSWER WHERE TRUSTEE ACTED FOR HIS BENEFIT TO

DETERMINE FIDICUARY DUTY)

3rd Investment in Alex’s Business 36

Write facts from question to show FIDUCIARY duty

Maggie’s friend Alex owns a UK business that needed money to

continue operating. Maggie convinced Linda that it would be a
good investment, so they invested £100,000 of trust money in
Alex’s business. That investment has fallen in value to £80,000.

FIDUCIARY duty (law)

Along with the trust duties the trustee also has the fidicuary
duties which includes the duty to avoid of the interest. Conflict
of interest means a situation where there is a conflict of
beneficiaries interest with that of trustees’ personal interest or
if there is possibility of the such conflict. As fidicuary, trustee is
required to avoid situation where his interests and beneficiaries
interests actually or potentially conflicts (IDC v Cooley)(COOKES
V Deekes)42.

-No causation is required for fiduciary

Remedy(law)

Remedy for breach of the fidicuary duty is liability to account in

equity. This liability is a personal liability and is fault based, not
loss based. To prove this breach, no casual link is required to be
proven(Target Holding).

Remedy(application)

In the present case the beneficiary will require trustee to

account for 200000 pounds for breach of the fidicuary duties.

Defence

Exclusion clause can not be applied to exempt fiduciary duty

Exlcusion clause (law)
Further the question arises whether Linda and Maggie can rely
on the exclusion clause for the breach of this fidicuary
duties( Disscuss and apply armitage v nurse)47.

4th issue investment in Florence’s business.

(Dispositive duty)

1. Identify duty (dispositive duty I.e giving benefit to someone

else by giving money/investment to someone other than
trustee

(other than duty answer will follow same pattern as of

administrative duty)

2. See causation

3. Remedy

4 Possible defence

-exclsusion clause

- s.61 of the trust Act 1925

Write facts from question to show dispositive duty

Ellen asked Linda and Maggie if they could use the trust to help
Florence, who is Ellen’s friend and has always been ‘like a
daughter’ to Ellen. Linda and Maggie paid £10,000 from the
trust to Florence. Here we can see that trustees have given
benefit to the Florence who is not a beneficiary.
Dispositive duty (law)

Under dispositive duty trustee must give benefit of the trust to

the beneficiaries, if trustee is giving benefit to anyone else
other than beneficiary than he will breach the trust.

Dispositive duty (application)

Trustee has done an unauthorized transaction therefore has

has breached the his trust duty.

Causation(law)

To Prove trustee duties we need but for test, according to this

there has to be some casual link between loss suffered by the
beneficiary due to the negligence of the trustee, if but for test
can not be proven i.e the loss would have occurred regardless
of the negligence of trustee then but for test will fail and
trustee will not be liable for breach (Target Holding)(Re
Chapman).

Causation(appication)

In our case, that trustee is being negligent because the terms of

trust are pretty clear and he needs to only give benefit of the
trust to the beneficiary. Once the trust has been set the
consent of the settlor Ellen does not matter, trustee is bound to
follow the terms of the trust but trustee is failed to do so that is
why it can be argued that causation would be proven.

Remedy(law)

Trustee can falsify the transaction and trustee will be personal

liable( It is personal liability of the beneficiary that he invested
in an unauthorized investment)

Remedy(application)

In our case trustee will be required to bring back the money

from Florence to put the beneficiary in old position by reversing
the transaction or if trustee can not bring the trust assets back
to its original position then trustees’ will have to pay to
beneficiary from his own pocket(10000 pounds).
Defence (exlcusion clause law)

As long as there is no fraud or gross neglect exclusion clause

will exclude personal liability of the trustee but not his
proprietary liability and trustee is bound to act in good faith,
honestly and in the best interest of beneficiary.

Defence (exlcusion clause application)

In our case, there is a exemption clause in part c which says

that trustee can be excluded from liability as long as he is not
acting fraudly or gross negligently. It can be argued that
although trustee didn’t act gross negligently so he can rely on
the exclusion clause but it is bound to fail because trustee is
also required to act in the best interest of the beneficiary. In
our case, by doing an unauthorized transaction trustee do not
seem to act in the interest of the beneficiary at all so argument
of exclusion clause is less likely to stand.

S61 law

If under a situation court argue that there was intentional

breach and trustee fails to rely on exemption clause then
trustee can rely on the s.61 Trust Act 1925 and request courts
to exercise their power to exclude his personal liability. Under
s.61 Trust Act 1925 court can exclude personal liability of the
trustee if he had acted honestly and reasonably and if court is
convinced that it would fair to exclude the trustee.

S61 application

We can argue that trustee might have invested honestly but it

was unreasonable to give benefit to the someone who is not
part of the trust so this s.61 is also less likely to exclude
personal liability of the trustee.

Third party liabiliyy

Dishonest assistane
knowing reciepient
Third party liability (DISHONEST ASSISTANCE)

John’s liability

Facts from question showing dishonesty

John is neither a trustee(No breach of trust-part 1) nor a

recipient(Means we cant trace or follow PART-2), in our case
but rather a third party, since john is not trustee not recieved
any trusts assets there will be no breach of trust duty and
properitarily liability on him.

Dishonest assistance (law)

But we can argue on the personal liability(Breach of trust part3)

of the John on the basis of the dishonest assistance. Dishonesty
is seen as objectively(if reasonable person consider John’s act
as dishonesty then it is a dishonesty) (Royal Brunei v Tan). Lord
Nicholls held that liability of a stranger does not depend on the
his own state of mind hence negating subjective test. In
(Twinsectra) Lord Hutton said that a stranger will not be
dishonest unless his conduct had been dishonest by the
ordinary standards of reasonable. (Abacha) clarified that the
test for dishonesty is predominately objective.
Dishonest assistance (application)

in our case John don’t seems reasonably dishonest while

investing in the Mandiabolo company, because he didn’t know
about the prohibition in the trust deed, while he must have
given advice on his own successful experience as an investment
broker, because facts clearly states that John was successful in
his business endeavors so most likely John can not be held
personally liable for the investment in the Mandiabolo
company.

But in comes to investment in the New Age Studios we can

argue that John knew that the investment was risky and he
already had promised Marrie to arrange investors for her
company so we can argue that it was unreasonable for John to
advice Harry for investment in the Marrie’s company without
even telling him risks attached to the investments. Hence the
courts can impose personal liability on the John and the
amount would be determined by the courts.

Third party liability (Knowing recipient)

Marie’s liability

Facts from question showing dishonesty

Marie is not trustee (So no BOT). She is recipient but trust

assets have been lostI(NO following or tracing) so she can not
be liable for proprietarily liability. But we can argue on her
personal liability on the basis of the knowing recipient, this
happens when a third party knows that a trustee has breached
his duty and yet third party receives the trust assets so he will
be knowing recipient.

Knowing recipient (law)

Knowledge is essential element to prove knowing recipient

Peter Gibson J proposed five categories. However this has been
changed and the new test for dishonesty comes from BCCI.
To determine whether person is knowing recipient there is
unconscionbility test(BCCI v Akindele) which says that it would
be unconcibiousble to deny the equitable rights to the victim.

Knowing recipient (application)

In our case , we can see that Marie is not knowing recipient as

she does know that trustee has breached his duty and she has
received this money without any knowledge of the assets being
subject to the trust, beneficiary may sue the Marie under
unconsioucbilityy test and but beneficiary is less likely to make
a successful claim because he would fail unconsicousble test as
it would not be unconscibious to deny him rights. In a case
where beneficiary make successful claim then Marie’s primary
duty would be to restore assets back to its original stage.