Breach of Trust

Part I - Trustee Duties & Breach - the Basics

A. Duties of the Trustee

There are two types of duties on the trustee:

Trust Duties
(a) The administrative duties (duty to administer the trust assets)

(b) The dispositive duties (duty to give the benefit of the trust assets to the beneficiaries)

Fiduciary Duties

(a) Duty to act in good faith, loyalty, honesty

(b) Duty to inform/ disclose material information

(c) Duty to avoid conflict of interest

(d) Duty to disclose interest in a transaction

If there is a breach of trust duties, the beneficiary has a right to bring action against the trustee. The
beneficiary will bring either of the actions:

(a) Falsification - Falsifying the Trust Account

Trustee has undertaken an unauthorized transaction. Breach will be proven if the trustee has
undertaken a transaction which was not authorized.

(b) Surcharge - Surcharging the Trust Account

Trustee has undertaken a transaction negligently, i.e. the trustee has failed to take reasonable
care. Breach will be proven if it can be shown that the trustee fell below the standards of a
reasonable person.

Upon falsification or surcharge, the trustee can be held liable, proprietarily as well as personally.

(c) Liability to account in equity/ equitable compensation - Breach of Fiduciary duties

This liability of the trustee in this situation in personal liability and at the court's discretion.

Proprietary Liability

Get the trust asset back (without digging into one's own pocket)

Personal Liability

Get the trust asset back (by digging into one's own pocket)

B. Causation
 In order to impose liability on the trustee, causation is mandatory. [This is only for breach of trust
duties].

Causal link is not required to be proven in case of breach of fiduciary duties.

Cases:
Re Chapman
Target Holdings v. Redferns

C. Joint & Several Liability of Co-Trustees

If there are more than one trustee, the liability for BOT will only be on the trustee who have
committed breach.
If more than trustee has breached the trust, then all of them will be jointly and severally liable.

[4 guards example]

D. Excuse/Exemption of Trustee's Liability

(i) Consent of Beneficiary

[personal + proprietary liability can be excused]

[Consent must be of beneficiaries (who must all be of legal age and sound mind)
unanimously]

(ii) s.61 of Trustee Act 1925

[only personal liability can be excused]
[Discretion of the court, only where the trustee has acted honestly and reasonably and
ought fairly to be excused]
[Courts have rarely used this discretion]

(iii) trustee exemption clause

[only personal liability can be excused]

[exemption clause cannot be used for exemption of liability for breach of core fiduciary
duties (honesty, good faith and best interest) - Armitage v Nurse - Millett LJ- 'irreducible
core set of trust obligations']

[Exemption clause can be used where trustee commits intentional breach, but only as a
one-off case]

Part II - Following & Tracing (Proprietary Liability of Third Parties)

3rd Party Trustee k ilawa

Following

Beneficiary can establish a right against a 3rd Party by following the trust asset in the hands of the 3P.

Following is possible as long as the 3P is not a BFP.

Bona fide purchaser means a person who innocently purchases the trust asset for full value without
notice of the breach.

Example:

Trustee gifts the trust asset to Person X.

Can beneficiary claim the asset from Person X through following? Yes. X is not BFP

Trustee sells the trust asset to Person X below market value.

Can beneficiary claim the asset from Person X through following? Yes. X is not BFP

Trustee sells the trust asset to Person X at market value (X has no knowledge (Subjective)/
notice(objective) of the breach).

Can beneficiary claim the asset from Person X through following? No. X is a BFP

Tracing

If the trust asset reaches the hands of a BFP, then the Beneficiary can have a proprietary claim by way
of tracing the equitable interest in the traceable sale proceeds of the trust asset.

Tracing at Common Law

Conditions:
(a) Traceable proceeds must be segregated. If traceable proceeds are mixed, then tracing at common
law will not be possible

Tracing at Equity

Conditions:

(a) Traceable proceeds can be mixed

(b) Only possible in the hands of the fiduciary (in this case, the original trustee)

Mixing in one asset

- One single or identified asset purchased using the trust fund.

- Beneficiary can claim part ownership of the asset (Foskett v. McKeown)

Mixing in multiple assets

- Beneficiary can put a claim over any asset purchased from the mixed pool of funds. However, if
the pool of funds reaches a minimum point and is replenished from non-trust funds, then the
beneficiary can only make a claim over subsequent purchases upto the intermediary balance
reached.

Backward Tracing

- Asset already purchased. Trust funds used to pay off the credit of the seller. This is backward
tracing. UK law does not allow Backward Tracing. Indirectly recognized, but not officially
recognized.

Subrogation

- Trustee uses the Trust Funds to pay off a personal debt. The beneficiary will be considered to be
stepping into the shoes of the previous creditor, i.e. whatever rights the creditor had against the
trustee, the same rights will now be available to the beneficiary against the trustee. (Boscawen
v. Bajwa)

Part III - 3P Personal Liability

3P will personally be held liable where:

(a) There was dishonest assistance

Or
(b) There was knowing receipt

Dishonest Assistance

Multiple cases, where the test has changed.

Knowing Receipt

Multiple cases, where the test has changed.

Finally, the courts have created the unconscionability test.

The law on DA + KR has been clarified in Samba Bank (2021) case.