UNIT 7

DUTIES, LIABILITIES AND DEFENCES OF TRUSTEES GENERAL CHARACTERISTICS OF A

CONSTRUCTIVE TRUST:
(a) It arises by operation of law irrespective of the express or implied intention of the
parties;
(b) Its underlying principle is that where a person holds property in circumstances in
which equity and good conscience demand it should be held or enjoyed by another, he
will be compelled to hold that property on trust for that other;
(c) It is excluded from the formal requirements of s. 53(1)(b) and s. 53(1)(c) of the Law
of Property Act 1925 by operation of s. 53(2); and
(d) The duties and liabilities of a constructive trustee are not necessarily the same as an
express trustee - for example, duties of investment may not apply.

To provide a definition of a constructive trust is not possible. However, the courts have in
numerous cases tried to explain when such a trust will arise. Here are some examples.

“English law provides no clear and all-embracing definition of a constructive trust. Its
boundaries have been left perhaps deliberately vague, so as not to restrict the court by
technicalities in deciding what the justice of a particular case may demand.”
Carl Zeiss Stiftung v Herbert Smith & Co [1969] 2 Ch 276 per Davies LJ

“A constructive trust arises by operation of law wherever the circumstances are such that it
would be unconscionable for the owner of property (usually but not necessarily the legal
estate) to assert his own beneficial interest in the property and deny the beneficial interests
of another.”
Banner Homes Group v Luff Developments Ltd [2000] 2 All ER 117 per Chadwick LJ

INTRODUCTION

When someone becomes a trustee, however this may arise they immediately become
subject to trustee duties e.g. to protect the trust property, to take care and exercise skill in
the investment of trust funds (if appropriate), to distribute the trust property in accordance
with the terms of the trust etc.

However, trustees are also in what is known as a fiduciary relationship with the
beneficiaries. As a result, trustees also becomes subject to a wide range of duties subsumed
under the broad title ‘fiduciary duties’. Fiduciaries are not allowed to make a profit and
must not put themselves in a position where their own interests and those of their principal
conflict.

In this Unit we will be looking at both trustee duties and fiduciary duties; breach of those
duties, the consequences of the breach and the possible defences.

DUTIES OF TRUSTEES

‘It is the duty of trustees to protect the trust funds entrusted to their care, and to distribute
those funds themselves…according to the terms of the trust instrument…If they neglect that
duty and part with the property without due regard to it, they remain liable…for the
consequences properly traceable to that neglect.’
Per Kekewich J in Head v Gould [1898] 2 Ch 250, 67 LJ Ch 480, 14 TLR 444

These duties manifest themselves in various ways.

For example a trustee must not
 Leave matters in the hands of co-trustee without enquiry
 Stand by whilst a breach of trust is committed
 Allow funds to remain in sole control of one trustee
 Fail to act on becoming aware of breach of trust

LIABILITY FOR BREACH OF TRUST

Liability for breach of a trustee duty is strict. It is not based on ‘fault’. Unless a trustee can
establish a defence, a trustee will be personally liable for his breach of trust. He may also be
liable, in an appropriate case, for a proprietary remedy by way of a constructive trust.

Strict liability for own acts

A trustee is strictly liable for any breach of trust that he commits, even though he acts bona
fide, e.g.
Eaves v Hickson (1861) 30 Beav 136
Re Diplock [1948] Ch 465, [1948] 2 All ER 318 (CA)
Ministry of Health v Simpson [1951] AC 251, [1950] 2 All ER 1137, 66(2) TLR 1015 (HL)
though the court may grant him relief in some circumstances

Liability for acts of co-trustees

A trustee is answerable only for his own acts, neglects or defaults, and not for those of any
other trustee, nor for any other loss unless the same happens through his own wilful
default - s30 TA 1925.(N.B. s 23 TA 2000)
However, it is a default for a trustee to fail to supervise the actions of a co-trustee, or to
stand by while his co-trustee commits a breach of trust
Bahin v Hughes (1886) 31 Ch D 390, 55 LJ Ch 472, 2 TLR 276

A trustee is normally not liable for breaches taking place before his appointment or after his
retirement
Head v Gould [1898] 2 Ch 250, 67 LJ Ch 480, 14 TLR 444

Joint and several liability

If two or more trustees are liable for a breach their duty, their liability to a beneficiary is
joint and several. This means that the beneficiary can take action against one, some or all of
the defaulting trustees.

Contribution
Traditionally where trustees were jointly liable, as between themselves they would share
that liability equally.
Bahin v Hughes (1886) 31 Ch D 390, 55 LJ Ch 472, 2 TLR 276
Now the contribution between trustees is that which the court considers just and equitable.
Civil Liability (Contribution) Act 1978, ss.2, 6(1)

Impounding
If one of the defaulting trustees is also a beneficiary, his beneficial interest is used as far as
possible to cover the loss to the trust (i.e. before he can claim any contribution from any
other trustees who are jointly liable.)

Liability for agents

In Unit 3 we considered trustees powers of delegation of their administrative functions and
their liability for their agent.

Causation and measure of liability

Causation
There must be causation, i.e. the loss must have occurred because of the breach; but a
trustee is not liable for losses which would, in any event, have occurred even if there had
been no breach.
e.g. if the breach consists of wrongfully paying away trust money the trustee will normally
be liable to replace that amount of money (though the beneficiary must give credit for any
moneys recovered from the third party) - but the trustee will not be liable if, using hindsight
and common sense, his breach did not cause the loss
Target Holdings Ltd v Redferns [1995] 3 WLR 352, [1995] 3 All ER 785 (HL) (noted (1996) 112
LQR 27)
If there is causation:

Loss caused to the trust by breach of trust

The trustee must restore to the trust estate either the assets lost by reason of the breach, or
pay the trust sufficient to make up such loss
The amount of loss is calculated at the date of judgment
Also potential liability to pay equitable compensation
Swindle v Harrison [1997] 4All ER 705

Set-off of profits and losses

A trustee cannot set off a profit to the trust on one breach against a loss to the trust on
another breach
Dimes v Scott (1828) 4 Russ 195, [1824-34] All ER Rep 653
unless the losses and gains arose out of the same transaction or the same course of conduct
Bartlett v Barclays Bank Trust Co. Ltd (No.1) [1980] Ch 515, [1980] 2 WLR 430, [1980] 1 All
ER 139

DEFENCES OF TRUSTEES

Exemption clauses
Trustees have a fundamental duty to act in good faith. Trustee exemptions clauses are not
contrary to public policy at least if what they exempt the trustee from is not liability for
actual fraud, i.e. with an appropriately drafted clause they can exempt themselves from
anything short of outright dishonesty
Armitage v Nurse [1998] Ch 241, [1997] 2 All ER 705, [1997] 3 WLR 1046 (CA) (noted [1998]
CLJ 33)

Limitation of actions
The 6-year rule
Actions by beneficiaries to recover trust property, or in respect of breach of trust, are
statute-barred 6 years after the right of action accrued – s 21(3) Limitation Act 1980
Extending the 6-year period:
The 6 years does not begin to run against a remainderman until his interest falls into
possession – s 21(3) Limitation Act 1980
Armitage v Nurse
If a breach of trust is concealed time does not begin to run until the claimant has discovered
the concealment – s 32(1) Limitation Act 1980
If the claim relates to the personal estate of a deceased person, the limitation period is 12
years – s 22(1)(a) Limitation Act 1980

Doctrine of laches
In cases where the Limitation Act 1980 does not apply, the equitable doctrine of laches may
bar an action. There is no precise period - the court asks whether it would be in practical
terms unjust to give a remedy.
The factors the court looks at are:
 Whether a substantial time has gone by,
 The claimant's conduct and
 The extent to which the defendant has been prejudiced by the delay
Nelson v Rye [1996] 2 All ER 186, [1996] 1 WLR 1378, [1996] FSR 313

Consent of beneficiary.
A beneficiary who is sui juris and with full knowledge consents to (or requests) a breach of
trust, cannot claim against the trustee
Re Pauling's ST [1964] Ch 303, [1963] 3 All ER 857, [1963] 3 WLR 742 (CA)
The consent of other beneficiaries does not prevent an action by a beneficiary who did not
consent.
Contribution and indemnity from co-trustees
A trustee who has had to pay compensation to beneficiaries may be able to claim
contribution from his co-trustees and in an appropriate case this may involve an element of
indemnity for him.

Indemnity from beneficiary

Where a trustee commits a breach of trust at the instigation or request or with the consent
of a beneficiary, the court may impound all or part of the beneficiary's interest by way of
indemnity. The court has an inherent jurisdiction, and also power under s.62 TA 1925

Relief by the court

If it appears to the court that a trustee
 has acted honestly and
 reasonably, and
 ought fairly to be excused for a breach of trust or for omitting to obtain the
directions of the court
then the court may relieve him wholly or partly – S 61 TA 1925
Younger v Saner [2001] All ER (D) 247 (Dec)
The court may take account of factors such as the nature and size of the estate, any advice
taken or received, etc.
The fact that trustees have acted on legal advice does not necessarily mean that they will be
excused under s.61 TA 1925
Evans v Westcombe The Times, 10 March 1999
A paid trustee will find it harder to get relief than an unpaid trustee
Re Pauling's ST

FIDUCIARY DUTIES

A Fiduciary
“A fiduciary is someone who has undertaken to act for or on behalf of another in a
particular manner in circumstances which give rise to a relationship of trust and confidence.
The distinguishing obligation of a fiduciary is the obligation of loyalty.”
(per Millett LJ, Bristol and West Building Soc. v Mothew [1998] Ch 1

Fiduciary duties
‘It is an inflexible rule of equity that a person in a fiduciary position…is not, unless otherwise
provided…entitled to make a profit; he is not allowed to put himself in a position where his
interests and duty conflict.’
Per Lord Herschell in Bray v Ford
‘Breach of fiduciary obligation ... connotes disloyalty or infidelity. Mere incompetence is not
enough. A servant who loyally does his incompetent best for his master is not unfaithful
and not guilty of a breach of fiduciary duty’
(per Millett LJ, Bristol and West Building Soc. v Mothew)

LIABILITIES OF FIDUCIARIES/TRUSTEES
The duties of fiduciaries/trustees manifest themselves in various rules. We will consider the
following examples.
Remuneration
 The rule
A trustee must act unpaid.
The exceptions are:
o A trustee is entitled to reimburse himself from the trust property for expenses
reasonably incurred - TA 1925, s.30(2)
o Under the rule in Cradock v Piper (1850) a solicitor-trustee may charge for
litigation work done for the trust
o Remuneration for a trustee may be authorised by a charging clause in the trust
instrument
o Remuneration may be authorised by contract with all the beneficiaries, if they
are sui juris and together entitled to all of the trust property
o Remuneration of professional trustees who are now dealt with under s.28
Trustee Act 2000
o The court has an inherent jurisdiction to authorise payment (or additional
payment) to trustees, or other fiduciaries, for past and/or for future services
The court will only exercise its inherent jurisdiction in exceptional
circumstances. Examples are where the amount of work expected from the
trustee has increased unexpectedly and/or the trustee's work has brought
substantial benefit to the beneficiaries
Re Duke of Norfolk's ST [1982] Ch 61
Foster v Spencer [1996] 2 All ER 672

Remuneration may be granted even if the trustee has committed a breach of

fiduciary duty.
 Boardman v Phipps [1967] 2 AC 46
O'Sullivan v Management Agency & Music Ltd [1985] QB 428
However, the House of Lords refused such a claim by a company director who
acted bona fide, but in a situation where his duty to the company could conflict
with his personal interest.
Guinness v Saunders [1990] 2 AC 663
 Remedy

o The trustee is under a personal duty to account for the amount of the
remuneration (plus interest)
o He holds the remuneration on constructive trust, i.e. the trust applies not only to
the remuneration but also to any traceable property representing the
remuneration and any profit made.
o Potentially liable to pay equitable compensation
Swindle v Harrison [1997] 4All ER 705

The rule in Keech v Sandford

 The rule
A trustee cannot enter into a transaction on his own behalf which he should have done on the
principal’s behalf.
o Leases
A trustee cannot renew for his own benefit a lease formerly held by him in his capacity as
trustee
Keech v Sandford (1726) Sel Cas temp. King 61
Hooper v Gorvin [2000] All ER (D) 2165
o Reversions
The rule extends to prevent the trustee keeping the benefit if he purchases the reversion on
the lease which he held as a fiduciary
Protheroe v Protheroe [1968] 1 All ER 1111
Hooper v Gorvin [2000] All ER (D) 2165
o Fiduciary duty
The rule does not apply to those not in a fiduciary position
Re Biss [1903] 2 Ch 40
 Remedy
Where a trustee is liable under the rule in Keech v Sandford he holds the lease/reversion on
constructive trust for the beneficiaries of his trust.

Secret commissions or bribes

 The rule
A trustee who receives a bribe or secret commission by virtue of his position commits a breach
of fiduciary duty
  Remedies

o The trustee is under a personal duty to account for the amount of the bribe
(plus interest);
o He will hold the bribe on constructive trust, i.e. the trust applies not only to the
bribe but also to any traceable property representing the bribe and any profit
made.
Lister v Stubbs
A-G for Hong Kong v Reid [1994] 1 AC 324
Sinclair Investments (UK) Ltd v Versailles Finance Ltd (In Administration) [2010]
EWHC 1614
FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45
o Potentially liable to pay equitable compensation

Swindle v Harrison [1997] 4All ER 705

Trustees and director's fees

 The rule
A trustee must not use trust shares to vote themselves directorships of the company in which
the trust owns shares.
 Remedy
If trustees use trust shares to vote themselves directorships of the company in which the trust
owns shares, they have to account to the trust for any directors' fees they receive.
Re Macadam [1946] Ch 73, [1945] 2 All ER 664, 115 LJ Ch 14, 62 TLR 48
Potentially liable to pay equitable compensation
Swindle v Harrison [1997] 4All ER 705
However, if the trustee did not become director through use of the trust shares he may keep
the remuneration
Re Dover Coalfield Extension Ltd [1908] 1 Ch 65, [1904-7] All ER Rep 161, 77 LJ Ch 94, 24 TLR
52 (CA)
Re Gee [1948] Ch 284, [1948] 1 All ER 498, [1948] LJR 1400
 Authorising trustees to keep remuneration
Trustees can retain the directors’ fees if properly authorised by
o the terms of the settlement
o the beneficiaries or
o the court
See also s 28 TA 2000.

Knowledge or opportunity as trust property

 The rule
A trustee must not make a profit from the use of confidential information, knowledge or
economic opportunity he gained by virtue of his position. It is a breach of fiduciary duty even if
he acted bona fide, and it is not necessary to show that the beneficiary suffered any loss
Reading v A-G [1951] 1 All ER 617 (CA)
Williams v Barton [1927] 2 Ch 9
Industrial Developments Consultants v Cooley [1972] 1 WLR 443
Boardman v Phipps [1967] 2 AC 46
 Remedies

o The trustee is under a personal duty to account for the amount of the profit (plus
interest)
o He holds the profit on constructive trust, i.e. the trust applies not only to the profit
but also to any traceable property representing the bribe and any profit made.
o Potentially liable to pay equitable compensation
Swindle v Harrison [1997] 4All ER 705
o The fiduciary may be granted remuneration under the court's inherent jurisdiction
Boardman v Phipps

Purchase by trustee of trust property - ‘self-dealing'

 The rule
A purchase of trust property by the trustee is voidable by the beneficiary, however fair the
price paid. It does not matter whether or not the trustee made a profit
Wright v Morgan [1926] AC 788, [1926] All ER Rep 201 (PC)
The rule can apply even if the trustee has retired before the purchase, at any rate if he retires
in order to facilitate the purchase
The rule may also apply where the sale is to a third party, e.g. to the trustee’s relative, or in
any other situation if there is a possibility that T might obtain a benefit indirectly
Re Thompson's Settlement [1986] Ch 99
 Remedies
The beneficiary can, within a reasonable time, have the sale set aside and the property
reconveyed - plus any income it may have earned in the meantime (the trustee would recover
his purchase price), or
o can insist on the property being resold on the open market; or
o if the trustee has made a profit on resale, the profit could be recovered from the
trustee (with interest);
o the beneficiary can avoid a sale against a subsequent purchaser, if that purchaser
took with notice
Aberdeen Town Council v Aberdeen University (1877) 2 AC 544 (HL)

 Defences
o Possibly (but there is some doubt) a trustee who has not taken any real part in the
administration of the trust may be able to buy from the other trustees
Holder v Holder [1968] Ch 352, [1968] 2 WLR 237
o The trust instrument can authorise a trustee to buy trust property
o A beneficiary who is sui juris can waive his rights against the trustee in relation to a
purchase of trust property (so long as the transaction is fair to the beneficiary)
 o The court may grant a trustee leave to purchase

Purchase by trustee of the beneficiary's equitable interest - ‘fair-dealing’

 The rule
A trustee may purchase a beneficiary’s equitable interest but only if he can show that the sale
was for full value and at arm's length and there was full disclosure to the beneficiary
Thomson v Eastwood (1877) 2 App Cas 215 (HL)
 Remedy
A purchase in contravention of this rule is voidable by the beneficiary
Limitation Act 1980
NB Limitation Act 1980 does not apply to claims against a trustee for breach of fiduciary duty
rather than breach of trust
Nelson v Rye [1996] 2 All ER 186