Breach of Trust and Remedies

A breach of trust occurs where a trustee fails to comply with his duties, laid out expressly in the trust instrument or under the general law.

Breach of trust indicates a failure to meet the duty of care by the trustees. The standard of care expected from trustees is an objective standard of the ordinary prudent man of business. It is important to note that higher standard is expected of professional trustees.

Trustee’s Liability

Liability for breach of trust is compensatory. It is aimed at recompensing the beneficiary for his or her loss which arose as a consequence of a breach of trust. The award may be a personal remedy available against the trustee as an individual or a proprietary remedy against specific assets.

Personal Liability

  • The trustee will have to compensate the beneficiary for his or her loss out of Trustees own funds. Such awards may carry interest, again, to recompense for lost income.
  • May take the form of an award of compensatory damages which is payable by the trustee.
  • May take the form of an account of profits which have been made by the defaulting trustee who has breached the trust.
  • However, where a breach of trust on behalf of a trustee resulted in no loss, then there is no liability on the trustees.
  • As between trustees – the rule is – that all trustees are equally liable regardless of whose fault it is, which makes, a passive trustee, generally be as liable as an active trustee.

Remedies for Breach of Trust

  • The choice of remedy lies with the claimant/ beneficiaries.
  • Often, personal and proprietary remedies are available, although it is not permissible to recover twice.
  • If a trustee makes an unauthorised profit, he is held accountable for that profit.
  • The beneficiaries are also entitled to recover interests as well.
  • Likewise, if a trustee’s conduct constitutes both a breach of fiduciary duty and a breach of trust, it is necessary to determine whether the potential remedies for breach of trust and fiduciary duty are cumulative, i.e., the beneficiary can recover compensation for the loss and an account of profits or whether the remedies are alternative and the beneficiaries have to elect which remedy.

Proprietary Remedies

  • Proprietary remedies allow the beneficiary to identify trust property which may have been taken by the trustee or others and allow them to recover it.
  • If that property has been turned into something else, such as where assets have been sold and converted into money with a possible conversion back into further assets, the beneficiaries may be able to trace the property and recover the exchange assets.

Relief from any liability

Following are the situations where a trustee is unlikely to be held responsible for the breach of trust and loss suffered by the beneficiaries. A trustee may be relieved from liability by:

By lapse of time

  • Which is Under the Limitation Act 1980, Section 21 (1), no time limit in cases of fraud or fraudulent breach of trust or to recover from the trustee trust property or the proceeds of trust property.
  • In cases of non-fraudulent breach of trust, the limitation is 6 years from the date of the breach.
  • However, if a claimant’s beneficiary is under a disability, for example, infancy or mental impairment, the 6-year period does not start to run until the disability ends.

Exemption Clauses

  • The trustee may escape liability if there is an express provision in the trust instrument dealing with the issue of liability and exempts a trustee from any liability
  • A typical trustee exemption clause will exclude liability for loss from any cause except fraud.

Acted Honestly

  • Where a trustee has acted honestly, reasonably, and fairly, but not carelessly such trustee will be excused for the breach of trust. He may also be relieved from any liability for omitting to obtain the directions of the court in the matter in which he committed such breach, the court may relieve him/her either wholly or partly from personal liability for the breach.
  • Courts will examine each case on its merits.
  • Courts are more reluctant to relieve professional trustees from liability such as Accountants, Solicitors, Banks etc.

Consent by Beneficiary

  • If beneficiary consents to a breach of trust, then he/she cannot sue the trustee and there is no relief for the beneficiary.
  • The beneficiary can also consent after the breach and in effect, his/her later consent will also release the trustee from liability.
  • However, the consenting beneficiary must be of full age (over 18 years), of sound mind, must consent freely without any undue influence and must also hold full knowledge of the facts.

Bankruptcy of Trustee

  • A bankrupt trustee is free from liabilities (Only where the loss involved is not land, for example, cash, credit cards etc); however, beneficiaries will join the line of creditors to obtain any personal award.
  • Bankruptcy does not prevent proprietary remedy.
  • Where property (land) is appropriated by a trustee, this can be traced and regained or if liquidated then the money or exchange assets are awarded to the beneficiary.
  • Such exchange assets do not form part of trustee personal property even if bankrupt which means that trustee is not free from liability.

Liabilities of Third Parties

Beneficiaries may have remedies against various third parties (i.e. not the trustee) who are somehow involved in a breach of trust.

  • The most straightforward case of third-party liability for breach of trust arises when a person, though not formally appointed, takes it upon himself to act as a trustee. Such a person is liable for any breach of trust he commits just as would be a properly appointed trustee.
  • Liability as a third part extends to those who participate in the fraudulent conduct of the trustee.
  • Liability will be imposed as against third parties who, first, dishonestly assist in a breach of trust or, secondly, receive trust property in breach of trust.

Example

Camron, a friend of the trustee, pretended to be Camron or acting as a trustee managed to sell the trust property or acquired trust property. Cameron will be liable for the breach of trust.

Proprietary Liabilities of Third Parties

  • If the trustee transfers trust rights in breach of trust to a third party who is not a legitimate purchaser then the beneficiaries may simply call on that person to return the trust property or their traceable proceeds.
  • This is the proprietary liability of third parties – beneficiaries enforce their rights in specific property held by third parties.
  • The court will require the third party to transfer the right to the beneficiaries in certain cases, but more usually to their trustee.

Personal Liabilities of Third Parties

Third parties will sometimes be personally liable, i.e. liable to pay money from their own pockets, to make up the loss to the trust fund caused by a breach of trust.

They will be required to do so in two cases:

  • where they have dishonestly assisted in the breach of trust by the trustee and/or
  • In certain cases where they have received trust rights dissipated in breach of trust

Dishonest Assistance by the third party

  • A stranger or third party to a trust can also be held liable for assisting in a breach of trust.
  • This so even if he/she has never received trust property.
  • Where the third-party assists, in a dishonest manner, in the misapplication of trust property, he may be held personally liable to restore the trust fund or to compensate the beneficiary for the loss caused to the trust fund.

Knowing Recipient and knowing Dealing’s Liability

  • This is the personal liability of third parties for having received or dealt with trust rights or their traceable substitutes which they received in breach of trust.
  • Third party will only be held liable if they had some degree of knowledge that they received the trust property in breach of trust (‘knowing receipt’), or the following receipt acquired some degree of knowledge that the rights were trusted rights and dealt with them as their own anyway instead of returning them to the trust ( ‘knowing dealing’).
  • As in the case of ‘knowing assistance’, knowing Dealers and Recipients are liable to restore the loss caused to the trust.
  • Personal liability to account on the basis of knowing receipt of trust property applies to strangers to the trust who receive trust property or its traceable proceeds in the knowledge that the property has been misapplied or transferred in breach of trust.
  • It is a pre-condition of liability that there has been a breach of trust. Accordingly, where the property is transferred to a stranger in an authorised manner or within the terms of the trust there can be no liability for knowing receipt.
  • It is for the claimant (beneficiaries/ Trustees) to demonstrate, therefore, that the defendant received trust property and, that he knew of some breach of trust or fiduciary duty.

Disclaimer

While every effort has been made to ensure the accuracy of the information provided in this article, it does not constitute legal advice and cannot be relied upon as such. Each legal case and issue may have unique facts and circumstances, as a result legalally does not accept any responsibility for liabilities arising as a result of reliance upon the information provided. For further help and guidance, you can always rely on and seek advice from our experienced lawyers.

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