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by • September 18, 2012 • TrustsComments (0)1219

Defences To Claims For Breach Of Trust

NOTE: This article was published in September 2012 and reflects the law as it stands on the date of publication and not at any later date.

Beneficiaries’ consent or acquiescence

It will be a defence to a claim for breach of trust that the claimant beneficiary has consented to, or concurred in, the breach. However, there are a number of conditions:

(1)  The beneficiary must have been of full age and capacity.

(2)  The beneficiary must have freely given consent and be free of undue influence (Re Pauling’s Settlement Trusts [1964] Ch 303).

(3)  The beneficiary must have give an informed consent. He must have had full knowledge of the facts, and known what he was doing and the legal effect thereof. However, if, having given his concurrence, he should subsequently turn round and sue the trustees, it is not necessary that he should know that what he is concurring or acquiescing in is a breach of trust, provided that he fully understood what he is concurring in (Re Pauling’s Settlement Trusts [1961] 3 All ER 713, at 730). The court has to consider all the circumstances in which the concurrence of the beneficiary was given with a view to seeing whether it is fair and equitable that he should be entitled to proceed with the claim. The trustees must put the beneficiary fully in the picture and not withhold crucial information.

(4)  It is not necessary that the consenting beneficiary has benefited from the breach of trust, although that may be significant (Fletcher v Collis [1905] 2 Ch 24).

Section 61 of the Trustee Act 1925

The section provides:

If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust… but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the direction of the court in the matter in which he committed such breach, the court may relieve him either wholly or in part from personal liability for the same.

The trustee must show that he acted both honestly and reasonably. Usually, on an application under s. 61, there is no issue as to honesty. The more pertinent issue will be one of reasonableness. If the nature of the breach is a failure to act in accordance with the reasonable standard of care to be expected of trustees, it will be well nigh-impossible to satisfy this test (see Bartlett v Barclays Bank Trust Co Ltd (No 2) [1980] Ch 515).

However, the section is of greater relevance in respect of technical breaches of trust, e.g. where the trustees have exceeded their administrative powers, or where there has been a distribution to the wrong beneficiary, on a reasonable misinterpretation of the trust instrument or of the law.

It will be more difficult for a paid trustee to satisfy the test of reasonableness. The fact that a lay trustee has acted on legal advice may be significant, but not conclusive.

An example of a case where relief was given is Re Evans [1999] 2 All ER 777. The defendant had distributed her mother’s intestate estate to herself on the assumption that her brother, from whom she had not heard for 30 years, was dead. She sought legal advice, and had purchased a missing-beneficiary policy covering about half of the capital value of the estate (which proved insufficient to meet her brother’s claim when he reappeared four years later). The court held that she was entitled to partial relief. The estate was relatively small; she was a lay person; she had acted on the advice of her solicitors; and some provision had been made for her brother’s potential claims.

The court retains a residual discretion to determine whether to grant relief. Even if the trustee has acted honestly and reasonably, the court must still consider whether the trustee should fairly be excused having regard to all the circumstances. In general, however, a trustee who has acted honestly and reasonably should be excused from liability.

The trustee may be relieved “wholly or in part”. In Re Evans the defendant’s liability was limited to the amount which could be met from a sale of a house forming part of the estate, which was still at her disposal.

 

Exemption clauses

Modern trust deeds invariably include wide exemption clauses excluding or restricting liability except in cases of loss or damage caused by the trustee’s own actual fraud. Exemption clauses are valid and effective to exclude liability for ordinary and gross negligence. However, they cannot exclude liability for fraud on the basis that there is an irreducible core obligation binding on trustees to act honestly and in good faith (Armitage v Nurse [1998] Ch 241; Spread Trustee Company Ltd v Hutcheson [2012] 1 All ER 251).

A trustee, relying upon such an exemption clause, will, therefore, only be liable if he acted fraudulently. This will often make it very difficult for beneficiaries to pursue trustees for compensation even for the grossest breaches of trust.

 

(a)  Recklessness

However, there are some concessions made by the courts to beneficiaries so as to overcome the fraud hurdle.

Firstly, fraud can include “recklessness”. A trustee can be liable in fraud if he intends to pursue a particular course of action, either knowing that he is committing a breach of duty, or recklessly careless whether it is a breach of duty or not (Armitage v Nurse [1998] Ch 241, at 251D-E; 252 E-F). Reckless indifference might encompass wilfully shutting one’s eyes to obvious facts or wilfully and recklessly failing to make such enquiries as an honest and reasonable man might make (Baden v Societe Generale [1993] 1 WLR 509, at 575-6).

In Re Clapham [2006] WTLR 203 a trustee made a payment to a person who was not a beneficiary. The question was whether she had could rely upon an exemption clause excluding liability for fraud. It was accepted that fraud could include “recklessness”, i.e. a lack of any positive belief on the part of the trustee that what she did was right, and not caring whether or not it was wrongful. The judge accepted that the defendant trustee had positively believed that she was acting correctly in making the payment.

If, for instance, a trustee distributes trust property to a non-beneficiary, he will not be liable if he did so in good faith, even if greater care might have revealed that his belief that he was acting properly was not well founded. However, if the trustee received legal advice casting doubt on the beneficiary’s entitlement and the trustee ignores that advice, he is at risk of liability on the grounds that he has acted recklessly.

 

(b)  Objective standard

Even in the case of a breach of trust which is not committed deliberately, an objective standard of honesty may be applied. It may be sufficient if the trustee’s conduct is contrary to the normally acceptable standards of honest conduct (Barlow Clowes International Ltd v Eurotrust International Ltd [2005] WTLR 1453, at paras. [14]-[15]). In Barnes v Tomlinson [2007] WTLR 377 the following propositions were accepted as reflecting the law (at para. [78]):

(i)             it is for the court to determine what are the normally acceptable standards of honest conduct; and

(ii)           the fact that a defendant genuinely believes that he has not fallen below the normally acceptable standards of honest conduct is irrelevant.

However, the better view seems to be that the test of dishonesty combines subjective and objective elements. In Twinsectra v Yardley [2002] 2 AC 164 the view was expressed that the court should not simply consider what an honest trustee would have done, but rather the test was whether or not the trustee realised that an honest trustee would have considered his actions to have been dishonest.

 

Therefore, a subjective element has since been layered onto the test of dishonesty with the effect that a trustee will be able to rely on an exemption clause if he can demonstrate that he did not consider his actions to have been dishonest, provided that he held that belief reasonably.

 

(c)  Solicitor-trustees

In the case of a solicitor-trustee, it is not a sufficient defence that the trustee subjectively believes that he was acting honestly. The trustee may be held to have acted dishonestly if he deliberately commits a breach of trust, e.g. by benefiting non-beneficiaries, even in the belief that he was acting honestly, if that belief is so unreasonable that, by any objective standard, no reasonable solicitor-trustee could have thought that what he did or agreed to do was for the benefit of the beneficiaries (Walker v Stones [2001] QB 902, at 939 B-E; 941 C-D).

 

(d)  Insertion of exemption clause by solicitor/trustee

 

There is some authority that a professional trustee should not be entitled to rely upon an exemption clause where the trustee (or a person associated with the trustee) has drafted the trust deed and inserted the clause, exculpating the trustee from the consequences of negligence, without drawing the clause to the settlor’s attention.

The issue of enforceability, in these circumstances, was explored by the Court of Appeal in Bogg v Raper (1998/99) 1 ITELR 267 where a solicitor and an accountant (who became trustees of the Will of a testator) were responsible for the inclusion of a clause in the Will, exempting the trustees from liability for negligence.

A claim was made against the trustees in respect of a negligent breach of trust.  It was argued that the trustees were in a fiduciary position precluding them from benefiting from the trust; the exemption clause was for their benefit; and that the trustees were, therefore, obliged to establish that the testator had received full and independent advice concerning the effect of the clause, failing which they could not rely upon it.

This argument was rejected by the Court of Appeal on the basis that:

 

  1. The exemption clause did not confer a benefit on those responsible for advising the testator in the preparation of his Will, but merely defined the extent of the potential liabilities of the trustees and executors.

 

  1. The clause applied to all the trustees and executors and not only to those parties who assisted in drawing up the will.

 

  1. In any event, a solicitor could derive a benefit under a Will which he had prepared and, since the Will had been admitted to probate, it was presumed that the testator knew and approved of its contents.

 

  1. A solicitor was under a duty to explain the usual terms under which trustees and executors would be appointed and was entitled to inform the testator that he himself would insist on a wide exemption clause and would not accept office without one. That situation did not give rise to a conflict of interests requiring the testator to be separately represented and it was not a matter for suspicion that a solicitor should include a standard exemption clause when drafting a Will for a client even in contemplation of his own appointment as executor or trustee.

 

However, Millett L.J. accepted that an exemption clause could not be relied upon if it was included by the draftsman “without calling the settlor’s attention to it and knowing that the settlor did not realise its effect”  (para. [53]). Where, on the other hand, there is no reason to think that the testator did not know and approve of the inclusion of the clause, the trustee may rely upon the clause.

In Bogg v Raper the exemption clause does not seem to have been brought to the testator’s attention. However, the trust was contained in a Will. The Will had been admitted to probate. The testator was, therefore, presumed to know and approve of its contents. This seems to have been the basis for the Court’s conclusion that the testator did realise the effect of the clause.

There is no such presumption of knowledge and approval in the case of a lifetime settlement. Logically, it should follow that, in the case of a lifetime settlement, a trustee, who wishes to take advantage of an exemption clause, for which the trustee was responsible, should have advised the settlor of its effect.

There is, therefore, a danger that a trustee cannot rely upon an exemption clause which has been introduced by a draftsman, with whom the trustee is associated, unless reasonable steps had been taken to ensure that the settlor was aware of the meaning and effect of the clause. If there is no evidence that such steps were taken, the trustee is at risk.

However, in Baker v JE Clark & Co (Transport) UK Ltd [2006] EWCA Civ 464 the Court of Appeal considered an argument that a pension trustee could not rely upon an exemption clause because the trustee had not brought the clause to the attention of the beneficiaries when they contributed to the pension fund (in effect as settlors).

The Court of Appeal accepted the conclusion of the Judge at first instance that the clause merely defined the ambit of the liability under which the trustees were prepared to act. That willingness to act on those terms was not dependant on any assent on the part of the beneficiaries or any knowledge on their behalf as to what the trust deed provided.

 

However, one factor in reaching this conclusion was that the potential beneficiaries of a group scheme of this kind would be a shifting class whom it might be difficult to identify. The trustees could not be expected to make a copy of the trust deed available to any beneficiary who asked for it.

 

The position might be different in the case of a private trust, where there is only one settlor. Also the passage in Bogg v Raper, imposing a requirement that the settlor be made aware of an exemption clause, was not referred to by the Court of Appeal in Baker v Clark.

 

The law is, therefore, in an unsatisfactory state. It is not clear whether a solicitor-trustee can rely upon an exemption clause, inserted into a trust deed by his firm, where the solicitor fails to make the settlor aware of the clause.

 

(e)           Limitation

 

(1)           6-year period

The general rule is that a 6-year limitation period applies to claims for breach of trust (s. 21(3) Limitation Act 1980).

Trustees include express trustees, personal representatives, and trustees holding on implied or constructive trusts. In the case of a beneficiary with only a future interest in the trust property, time will only begin to run from the date when the interest falls in (s. 21(3)). A person interested under a discretionary trust or a power of appointment does not have an interest until the trustees exercise their discretion or appoint property.

 

(2)           No limitation period

No period of limitation applies to an action by a beneficiary under a trust, being an action:

(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or

(b) to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use (s. 21(1) Limitation Act 1980).

Fraud, for these purposes, means actual dishonesty (Armitage v Nurse [1998] Ch 241, at 260). However, dishonesty can include a reckless disregard for the interests of the beneficiaries.

No limitation period will apply in the case of a claim to recover trust property or its proceeds in the possession of the trustee, or previously received by the trustee and converted to his use. The trustee’s retention or conversion must, however, have amounted to a wrongful application in his own favour. There is no requirement to prove fraud.

Even where no limitation period applies, e.g. because the claim is one of fraud, there may be a defence of laches (Re Loftus [2006] EWCA Civ 1124). There will be laches if there has been unreasonable delay on the part of the claimant in pursuing the claim; the trustee’s position has been prejudiced by that delay; and where it would be unjust to allow the claim to proceed (Nelson v Rye [1996] 2 All ER 186).

 

Postponement of limitation period

The limitation period will be postponed in the case of fraud, deliberate concealment or mistake (Limitation Act 1980, s. 32).

The period of limitation runs from the date that the claimant discovers the fraud, concealment or mistake, or could with reasonable diligence have discovered it.

This provision may have great importance where the beneficiaries were initially unaware of the breach (e.g. because the trustees have not told them), and the primary limitation period of 6 years has passed. The latent damage provisions in s. 14A of the Limitation Act do not apply. There is no extended limitation period of 3 years from the date of knowledge of the breach.

However, the beneficiaries may be able to extend the limitation period if, for instance, there has been “deliberate concealment”. In Cave v Robinson Jarvis & Rolf (a firm) [2002] UKHL 18, [2002] 2 All ER 641, [2002] 2 WLR 1107, Lord Millett said:

section 32 deprives a defendant of a limitation defence in two situations: (i) where he takes active steps to conceal his own breach of duty after he has become aware of it; and (ii) where he is guilty of deliberate wrongdoing and conceals or fails to disclose it in circumstances where it is unlikely to be discovered for some time. But it does not deprive a defendant of a limitation defence where he is charged with negligence if, being unaware of his error or that he has failed to take proper care, there has been nothing for him to disclose.

The test is whether there has been some conscious concealment:

 

The defendant must have considered whether to inform the claimant of the fact and decided not to. I would go further and accept that the fact which he decides not to disclose either must be one which it was his duty to disclose, or must at least be one which he would ordinarily have disclosed in the normal course of his relationship with the claimant, but in the case of which he consciously decided to depart from what he would normally have done and to keep quiet about it. (per Park J, Williams v Fanshaw Porter& Hazelhurst (a firm) [2004] EWCA Civ 157,at para 14(iv)).

 

There is no duty on trustees to advise beneficiaries that there has been a breach of trust. However, it would deprive the “deliberate concealment” exception of any force if a trustee could plead limitation, where the trustee has consciously decided not to inform beneficiaries of a breach of trust. The trustee should not be able to claim that he was under no duty to advise the beneficiaries of the breach and, therefore, that there is no deliberate concealment.

It will be difficult to rely upon “mistake”. Mistake has to be a fundamental ingredient of the cause of action (Test Claimants in the FII Group Litigation v Revenue and Customs Comrs [2010] EWCA Civ 103). Even a claim that trustees have mistakenly paid money to a non-beneficiary is not founded on mistake.

 

(f)             Contributory negligence

Historically, it has been the case that the trustee cannot claim that one or more of the beneficiaries were contributory negligent in relation to the breach of trust. However, it may be possible to establish that the beneficiaries’ actions caused the loss, or some part of it, and not the breach of trust.

 

(g)           Breach of co-trustee

Trustees are not liable for the acts or defaults of their co-trustees. However, a trustee has an obligation to take action to protect the beneficiaries in the event that he becomes aware of a breach of trust by another trustee.

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