TRUSTS LAW: THE INVESTMENT OF TRUSTS (TERM 2 WEEKS 1 &2)

Overview:

 Sources of trustees’ duties when investing trust fund  (1) Trust instrument itself, (2) TA
2000 terms to extent not excluded by Trust Instrument, (3) Case Law, used to interpret (1) &
(2)

 TA 2000  sets out statutory code relating to investment of trust funds & delegation of
trustees’ duties to agents, custodians, nominees

 Particular significance  duty to act with skill & care, act reasonably, take proper advice,
observe standard investment criteria that one must both invest suitably & in an
appropriately diversified manner.

 Brief summary of trustee’s general duties of investment  (a) act prudently & safely , (b) act
fairly between beneficiaries – Nestle v NatWest Bank and do what is best for them – Cowan v
Scargill.

 Law on breach of trust concerned with negative duties on trustees to refrain from making
unauthorized personal profits – Boardman v Phipps & from committing breaches of trust
more generally – Target Holdings v Redferns

 TA 2000 creates positive obligations needing trustees to act in particular way.

 Case Law considered to provide a gloss to those statutory principles as well as creating
obligations for trustees more generally.

 Meaning of best interests? Financial interests 

 Non financial considerations must NOT be taken into account when deciding what to invest
in. except in exceptional circumstances where all actual OR potential beneficiaries are adults
with strict moral views on particular matters.

Points to Note:

TA 2000 s3 – General Power of Investment – general power 

Some duty imposed on trustee either by statue or by case law
Principle of general law of trust that liabilities of trustees may be excluded for all breaches of trust
(Armitage v Nurse) , which do not amount to dishonesty (Walker v Stones)

Trustees just need to consider how to deal with trust property:

 Money – how to invest for benefit of beneficiaries

 Land and Buildings remted out to tenants to secure income stream for beneficiaries via
collection of rent
 Or take other necessary steps  enforce beneficiary’s rights on land, insure land (?)

Life Tenant Remainder beneficiary situation  E.g. Life tenant to have income of trust and
beneficiaries in remainder  whose interest is in capital of fund….

Trustee cannot just focus on short term investment income generation for life tenant, detriment to
remainder beneficiaries who are going to be LEFT.

Trustees’ duties with relation to investment:

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E.g. Trustee has duty to ensure trust property not harmed.

Duty  active obligations imposed on trustee to consider beneficiaries best interests and consider
MOST APPROPRIATE WAY of maximizing utility or value of property.

Property – investment capital => obligations of trustees to make more profitable investments (Cowan
v Scargill) commensurate with type of trust in question, (Nestle v NatWest Bank)

Use of Trust as Investment Vehicles/ Investment Schemes:

Q: Why are we focusing so much on INVESTMENTS in the trusts topic?

A: Shed light on.

1) Duties of Trustees
2) Rights of Beneficiaries to control trustees & recover any loss in the event that trustees
breach their duties, and the rights of beneficiaries.

Discussion made with reference to TA 2000.

Introduction to Trustee Act 2000:

 Principles governing trusts investment: Modernize powers of trustees when making

investment decisions and reorient obligations around standard of “reasonableness” instead
of prudence ….

 We just need trustees to invest reasonably. The current legal standard is not cautiousness,
not prudence.  TA 2000 s1

 Why is there such a shift in standard of care for trustees? Because, TA 2000 wants to liberate
trustees from overriding objective to be prudent in their investment activities to exclusion of
all else and permit trustees to go and take appropriate risks – whatever level of risk
reasonable in context of their trust!

 Rationale was to illustrate perception of general trusts law not sufficient to protect
beneficiaries from misfeasance of trustees & purpose of TA 2000 was to protect beneficiaries
from misfeasance of trustees (CRF to Term 2 Week 1 chapter  the practical effect VS
theoretical purpose)

 The Settlor has freedom to create whatever arrangements they wish w/o interference of
mandatory, legal rules that might prohibit certain forms of action.
 (TA 2000 Sch 1 Para 7)

 TA 2000’s role is also to supply trust provisions when there is a gap in the trusts instruments
(But please note trusts instrument can also displace provisions included in TA 2000)

 How exactly trustee invests => Depends on the NATURE OF TRUST.

 NOTE  Nature of fiduciary duties on trustees is strict. So, this means beneficiaries CAN SUE
the trustees for breach of trust.

 The trustees can be specialists in the sort of investments that the trust intends to make.

How to handle Investment of Trusts PQ:

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(1) Look through sources of rules relating to trustee’s investment duties and consider whether any
issues arise under each sources of law 1 by 1….
(2) LOOK AT SOMETHING IN TRUST INSTRUMENT CAN AFFECT. DOES THE TRUST PROVISION
CONTAIN ANYTHING ABOUT INVESTMENT OF TRUST? IF YES, HAS TRUSTEE BROKEN THEM
SUCH THAT THERE HAS BEEN A BREACH OF TRUST?
(3) IF INSTRUMENT SILENT ON INVESTMENT, LOOK AT TRUSTEE ACT 2000 TO TELL YOU WHAT
TRUSTEES’ DUTIES ARE. CONSIDERE TA 2000 PROVISIONS. IF TA 2000 OBLIGATIONS HAVE BEEN
BREACHED, THERE IS A BREACH OF TRUST.
(4) FIRST LOOK AT GENERAL DUTY, STANDARD INVESTMENT CRITERIA (TA 2000 s4), THEN
SUITABILITY, DIVERSIFICATION, THEN PROPER ADVICE….
(5) CONSIDER THE CASE LAW PRINCIPLES AS AIDS TO INTERPRETATION OF TA 2000. ANY BREACH
OF CASE LAW OBLIGATIONS WILL CONSTITUTE AS A BREACH OF TRUST.
(6) ARGUE WHETHER YOU THINK THERE IS A BREACH OF DUTY OR NOT.

(7) AFTER CONSIDERING IF THERE IS A BREACH OF TRUST UNDER TRUSTS INSTRUMENT, TA 2000
OR CASE LAW, NEXT CONSIDER WHETHER OR NOT TRUSTEES HAVE BREACHED ANY OT THESE
OBLIGATIONS SUCH THAT THEY CAN BE LIABLE FOR BREACH OF TRUST.WHAT’S THE SCOPE OF
LIABILITY FOR BREACH OF TRUSY?

*when looking at specific cases, you see HOW THEY HELP YOU INTERPRET THINGS.

General Power of Investment in Trustee Act 2000:

(A) Scope of General Power of Investment

 Trustee “may make any kind of investment that he could make if he were absolutely entitled
to the assets of the trust”. – TA 2000 s3(1)
 Trustee not constrained as to Investments which can be made by trust in general terms.
 Trust instrument may impose restrictions on trustees’ powers to make investments &
financial regulation in effect preclude certain types of investment by persons who are
considered to be insufficiently expert to make them (FSMA 2000 Part 1)
 There are restrictions on powers of trustees to make investments in land UNLESS by way
loans secured on land (e.g. mortgages) – TA 2000 s3(3)
 General Power of Investment is both in addition to anything set out in trust instrument but
also capable of being excluded by any such trust instrument – TA 2000 s6(1)
 Trustee presumed to be free to make any suitable investments in absence of any express
provision that prohibits trustee from doing so – TA 2000 s7(3)

3 General power of investment.

(1)Subject to the provisions of this Part, a trustee may make any kind of investment that he could
make if he were absolutely entitled to the assets of the trust.

(2)In this Act the power under subsection (1) is called “the general power of investment”.

(3)The general power of investment does not permit a trustee to make investments in land other than
in loans secured on land (but see also section 8).

(4)A person invests in a loan secured on land if he has rights under any contract under which—

(a)one person provides another with credit, and

(b)the obligation of the borrower to repay is secured on land.

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(5)“Credit” includes any cash loan or other financial accommodation.

(6)“Cash” includes money in any form.

6 Restriction or exclusion of this Part etc.

(1)The general power of investment is—

(a)in addition to powers conferred on trustees otherwise than by this Act, but

(b)subject to any restriction or exclusion imposed by the trust instrument or by any enactment or any
provision of subordinate legislation.

7 Existing trusts.

(1)This Part applies in relation to trusts whether created before or after its commencement.

(2)No provision relating to the powers of a trustee contained in a trust instrument made before 3rd
August 1961 is to be treated (for the purposes of section 6(1)(b)) as restricting or excluding the
general power of investment.

(3)A provision contained in a trust instrument made before the commencement of this Part which—

(a)has effect under section 3(2) of the M1Trustee Investments Act 1961 as a power to invest under
that Act, or

(b)confers power to invest under that Act,

is to be treated as conferring the general power of investment on a trustee.

(B) The Meaning of “Investment”

 Not defined in for TA 2000 s3 purposes.

 Meaning of “Investment” in general law  transformed from simply a consideration of

income yield (Re Wragg, Re Somerset) into broader notion of enhancement of capital value
in parallel with increase in income (Cowan v Scargill, Harries v Church Commissioners) & also
desirability of diversity of investment risk by means of portfolio strategies.

The Trustees’ Standard of Care when Making Investments - Trustee Act 2000:

 This “duty of care” is relative to the CONTEXT in which trustee is acting. Courts NOT limited
to matters set out in Para(1)(a) and (1)(b) when deciding extent of trustee’s liabilities.

 Where trustee has or holds herself out as having any particular “special knowledge or
experience”, then trustee’s duty of care will be inferred in light og those factors – TA 2000
s1(1)(a)

 Trustee pretends to have experience she doesn’t have? Then the law will hold her to the
standard in which she pretended she had.

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  Duties of trustees are performed “in the course of a business or profession”, then the duty
of care is applied in context of any special knowledge or experience which such a
professional could be expected to have. – TA s1(1)(b)

 Possible meanings of “reasonable care” in this context. TA 2000 requires trustees to act
reasonably so standard of care is whatever is “reasonable” in the context.

 Precise phrasing of s1(1) TA 2000 is important as it requires that a trustee “exercise such
care and skill as is reasonable in the circumstances” => What this means is trustee must
first exercise skill and care, then exercise skill and care reasonably , and lastlu do so in a
way that is appropriate for circumstances.

 RATIONALE FOR PHRASING IN TA 2000 s1  IF REQUIREMENT WAS FOR ABSOLUTE

CAUTION, THEN IF TRUSTEE TOOK ANY HAZARDOUS RISK AT ALL SHE WILL BE LIABLE FOR
BREACH OF TRUST IF A LOSS RESULTED. BUT IF TRUSTEE PERMITTED TO ACT REASONABLY
THEN SHE MAY BE EXCUSED LIABILITY FOR BREACH OF TRUST IF THE RISK SHE TOOK WAS
REASONABLE IN CIRCUMSTANCES. => this extreme example illustrates a point. What law
wants to do is to achieve some kind of BALANCE.

 Practical reality – difficulty comes in, in relation to non-professional trustees! (The MOST
difficult) Courts reluctant to hold trustees to account if they have acted as other trustees
would have acted in circumstances, EVEN IF it resulted in poor investment return for
beneficiaries – Nestle v NatWest

 In relation to inexpert trustees, it will be difficult to adduce evidence of what other trustees
would have done in same context because such information would not be so readily
available as it would be in relation to professional investment managers. => it’s just the
context!

1 The duty of care.

(1)Whenever the duty under this subsection applies to a trustee, he must exercise such care and skill
as is reasonable in the circumstances, having regard in particular—

(a)to any special knowledge or experience that he has or holds himself out as having, and

(b)if he acts as trustee in the course of a business or profession, to any special knowledge or
experience that it is reasonable to expect of a person acting in the course of that kind of business or
profession.

(2)In this Act the duty under subsection (1) is called “the duty of care”.

Process of Making Investment Decisions:

Overview:-

 Statutory duty of care  applies in relation to general power of investment OR obligations to

review fund’s investments. (TA 2000 Schedule 1 Para 1(b))
 Q: What are the statutory principles governing mechanism by which trustees make
investment decisions?!
 Trustees’ liability for any malfeasance OR loss occasioned through their investment decisions
will fall to be assessed in accordance with duty of care & with principles of breach of trust
under general law of trust!

Standard Investment Criteria:

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  When trustees exercise investment powers, be it making new investments OR considering
existing investments (TA 2000 s4(2)), they must take regard the STANDARD INVESTMENT
CRITERIA “SIC” (TA 2000 s4(1))
 SIC has 2 principles 1. Need to make “suitable” investments & 2. Need to maintain diverse
portfolio of investments to spread the fund’s investment risk, spread investments across a
portfolio.

4 Standard investment criteria.

(1)In exercising any power of investment, whether arising under this Part or otherwise, a trustee must
have regard to the standard investment criteria.

(2)A trustee must from time to time review the investments of the trus t and consider whether,
having regard to the standard investment criteria, they should be varied .

(3)The standard investment criteria, in relation to a trust, are—

(a)the suitability to the trust of investments of the same kind as any particular investment proposed to
be made or retained and of that particular investment as an investment of that kind, and

(b)the need for diversification of investments of the trust, in so far as is appropriate to the
circumstances of the trust.

(1) Suitability of Trust’s Investments

Trustee will be liable for breach of trust when an unsuitable investment was made which caused LOSS
to the trust – Target Holdings v Redferns

Whether trustee was making an investment would be dealing in a suitable manner or not is going to
depend on the very nature of the trust.

(2) Diversification of trust’s portfolio of Investments

 Portfolio theory says invest in a variety of markets instead of 1 only so in event when one
market fails, at least investor is PROTECTED from risk of any individual market as gains in
other markets will outweigh losses in one market.

 Diversification means acquiring shares in a number of companies from different markters. It

also requires investment in a number of different kinds of investment – bonds, securities,
derivatives, foreign exchange, commodities, shares. Again, same logic, when one type of
investment risk materialize, at least investor is PROTECTED.

 Modern portfolio theory – to insulate trust against fall in any individual market or investment
 Nestle v NatWest Bank (2000)

 Amount of diversification needed is dependent on nature of trust, size of trust.

 Sometimes, settlor could have made trust for a specific purpose. However, he couldn't have
envisioned changes in future such that his specific purpose for trust not valid anymore..
Trustee might have excuse to commit technical breach of trust to better protect trust fund!!!
=> Then trustee should ideally seek Variation under Variation of Trusts Act 1958 OR s57
Trustee Act 1925

E.g. 1  Trust needing trustee to hold single house on trust for occupation of named beneficiary
doesn't require that trustees make a range of investments, rather trustees are IMPLIEDLY precluded
from making range of investment.

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E.g.2  If trust instrument specifys that some investment types cannot be made and trustees went to
invest in prohibited types => BREACH OF TRUST.

E.g. 3  Trust with small amount of capital cannot buy huge number of investments.

33 Protective trusts.

(1)Where any income, including an annuity or other periodical income payment, is directed to be held
on protective trusts for the benefit of any person (in this section called “the principal beneficiary”) for
the period of his life or for any less period, then, during that period (in this section called the “trust
period”) the said income shall, without prejudice to any prior interest, be held on the following trusts,
namely:—

(i)Upon trust for the principal beneficiary during the trust period or until he, whether before or after
the termination of any prior interest, does or attempts to do or suffers any act or thing, or until any
event happens, other than an advance under any statutory or express power, whereby, if the said
income were payable during the trust period to the principal beneficiary absolutely during that
period, he would be deprived of the right to receive the same or any part thereof, in any of which
cases, as well as on the termination of the trust period, whichever first happens, this trust of the said
income shall fail or determine;

(ii)If the trust aforesaid fails or determines during the subsistence of the trust period, then, during the
residue of that period, the said income shall be held upon trust for the application thereof for the
maintenance or support, or otherwise for the benefit, of all or any one or more exclusively of the
other or others of the following persons (that is to say)—

(a)the principal beneficiary and his or her [F1spouse or civil partner], if any, and his or her children or
more remote issue, if any; or

(b)if there is no [F2spouse or civil partner] or issue of the principal beneficiary in existence, the
principal beneficiary and the persons who would, if he were actually dead, be entitled to the trust
property or the income thereof or to the annuity fund, if any, or arrears of the annuity, as the case
may be;

as the trustees in their absolute discretion, without being liable to account for the exercise of such
discretion, think fit.

(2)This section does not apply to trusts coming into operation before the commencement of this Act,
and has effect subject to any variation of the implied trusts aforesaid contained in the instrument
creating the trust.

(3)Nothing in this section operates to validate any trust which would, if contained in the instrument
creating the trust, be liable to be set aside.

[F3(4)In relation to the dispositions mentioned in section 19(1) of the Family Law Reform Act 1987,
this section shall have effect as if any reference (however expressed) to any relationship between two
persons were construed in accordance with section 1 of that Act.]

Obligation to take professional advice:

 Trustees must seek proper advice before making any investment that they propose to make
on behalf of the trust. – TA 2000 s5(1)

 Trustees are obligated to go seek out professional advice on investments to be made before
trustees exercise their investment powers.

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  Proper advice is advice from somebody that trustee reasonably believes is qualified to give
such advice => qualified to give it by that person’s ability in and practical experience of
financial and other matters relating to the proposed investment- TA 2000 s5(4).

 E.g. Professional in the field in which investment Is to be made will surely constitute proper
advice if professional was consulted on ordinary business terms & paid on ordinary manner.
 When considering whether to vary investments trust has made, trustees MUST take qualified
investment advice, UNLESS it appears reasonable to the trustees in circumstances to
dispense with such advice – TA s5(3)

 When and from whom advice should be sought from all depends on the CONTEXT of the
particular issue in question!
 Investment powers  In what manner should they be exercised? This is for trustees to
consider. There is no statutory obligation for trustees to follow advice, which they receive =>
meaning it is open to them to follow whichever path they consider to be appropriate.

 To illustrate: Trustees may seek advice from different professionals before making up their
own minds as to which course of action to take as most appropriate for trust.

 Different stockbrokers might have different views on how to invest the cash and where to.
Trustees need to go and measure this against trustees’ considerations  e.g. Conserve trust
capital for infant beneficiaries VS Taking up high risks by quickly making profits for trust => In
this example, trustees probably will take up advice of the less aggressive stockbroker.

 However, trustee cannot reject advice on investment simply because trustees just merely
disagrees (Cowan v Scargill)

 Nothing in statute to stop trustee from seeking advice from multiple professionals or to take
advice from 1 source as to range of different investment decisions that could be taken before
selecting strategy which most appeals to them in fiduciary responsibilities context.

Investment in LAND:

 Trustees empowered to acquire freehold and leasehold for any purpose (apply to settled
land after 1996)

 Acquisition of land can be for purposes of investment OR for occupation of a beneficiary, BUT
also provides it may be made for “any other reason” – TA 2000 s8(1))

 Trustee has ABSOLUTE powers of “absolute owner in relation to the land”

8 Power to acquire freehold and leasehold land.

(1)A trustee may acquire freehold or leasehold land in the United Kingdom—
(a)as an investment,
(b)for occupation by a beneficiary, or
(c)for any other reason.
(2)“Freehold or leasehold land” means—
(a)in relation to England and Wales, a legal estate in land,
(b)in relation to Scotland—
(i)the estate or interest of the proprietor of the dominium utile or, in the case of land not held on
feudal tenure, the estate or interest of the owner, or
(ii)a tenancy, and
(c)in relation to Northern Ireland, a legal estate in land, including land held under a fee farm grant.

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(3)For the purpose of exercising his functions as a trustee, a trustee who acquires land under this
section has all the powers of an absolute owner in relation to the land.

Case Law on Trustees’ Duties in Investment of Trusts:

 Duty to make best available return => most optimum return for trust
 General duty of investment can be framed like this  (1) Act prudently (Learoyd v Whiteley),
(2) Act fairly between beneficiaries (Barlett v Barclays Bank), (3) Do the best for beneficiaries
financially (Cowan v Scargill)
 Inherent tension between making best possible return & being careful due to the RISK
element involved…. Hard balancing act to make investment profit while avoiding further loss

Q: Can trustees relegate duty to earn highest available return behind other considerations in
operation of trust? – ***Cowan v Scargill: Mineworkers case  Trustees of pension fund for mine
workers  split between British coal and trade union.

Q: Can we bring moral elements into play? A: The duty of trustees to invest = regardless of ethics

Investment to be made in oil industry for mine works  oil production activity itself against mine coal
production => not good for mine workers? Because of competition?

Cowan v Scargill:

Facts: D was 1 of trustees of miners’ pension fund & President of National Union of Mineworkers.
Board of trustees divided between executives of Trade Union and Coal Board. Most profitable
investments identified were companies working in Oil and South Africa. D refused to make such
investmnts as it was ethically wrong for fund to invest in apartheid South Africa and contrary to
Mineworker Beneficiaries’ interests to invest in industry that competed with coal (all benefiiaries
worked or had worked before)

HELD (VC Megarry): WHEN PURPOSE OF TRUST IS TO PROVIDE FINANCIAL BEENFITS FOR
BENEFICARIES, THE BEST INTERESTS OF BENEFICIARIES ARE THEIR BEST FINANCIAL INTERESTS =>
DUTY OF TRUSTEES TO ACT IN BEST INTERESTS OF BENEFICIARIES IS TO GENERATE BEST AVAILABLE
RETURN ON TRUST FUND REGARDLESS OF OTHER CONSIDERATIONS. SCOPE OF DUTY OF
INVESTMENT  “THE PROSPECTS FOR YIELD OF INCOME AND CAPITAL APPRECIATION” MUST BE
CONSIDERED WHEN JUDGING RETURN FROM THE INVESTMENT.

You shouldn't bring in moral considerations  FINANCIAL INTEREST OF BENEFICIARIES IS KEY!

VC Megarry  cautious approach? Pensioner withdrawing pension from pension fund no longer
current mine workers so no need to care if investment was made in mining community or not…

*** Exception is when the beneficaries sui juris have very strict views on moral matters (i.e. alcohol
consumption, abortion…)

Next Q  What if the trust provision expressly excluded South Africa? Would that provision be
enforceable?

Explaining the shift / development regarding standard of care of trustee:

 Old authority Learoy says trustee must only act as business person of ordinary prudence and
avoid ALL investments of an overtly risky nature.

 Critique of Learoy’s approach  ALL INVESTMENTS INVOLVE RISK. Trustee can invest in less
risky markets but still not entirely free of risks. For e.g. Deposit bank accounts =.> What if
bank goes into insolvency one day? We’ll be in huge trouble!

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  Barlett v Barclays Bank modified Learoy by saying there’s a distinction between prudent
degree of risk and smth amounting to a hazard.

 Prudence in the modern context?? Investment managers expected to MAGAE RISKS to

prevent looses by not taking too much risk AND ALSO earn profits by taking suitable risks!!!!

Duty to act fairly between beneficiaries:

 Think about family settlement  life tenant, remainder beneficiary thing… => Income
generation VS protection of capital
 Trustee must act fairly between different classes of beneficiaries  Nestle v NatWest Bank
 Trustees were entitled to invest in a way which would NOT simply generate high levels of
income BUT which would also maintain fund’s capital  Nestle v NatWest Bank. In Nestle v
NatWest Bank, trustees could show they way they acted, their careful investment strategy
was one that was adopted by most professional trustees when dealing with family trust with
view to maintaining capital value of fund for future generations and avoidance of risk as far
possible.
 Under Nestle v NatWest Bank, trustees are permitted to make reference to precise issue
which faced trustee in context of his own trust obligations & did not simply require trustees
live up to an objective standard of proper performance.
 Whatever it is, the trustees must make justifiable & reasoned decisions in the trust!

Management of risk through portfolio investment strategies:Nestle v NatWest Bank 

 Beneficiaries alleged trustees that managed family trust fund between 1922 to 1986 failed to
generate sufficient profits and that if properly invested, high rate of return could be gained
even if it had risen in line of cost of living … I.e. Argument by C was that the trustees had
FAILED TO DO BETTER => Which is NOT the same as default committed by trustees.

 D argued and managed to prove that its management of trust fund has generated broadly
similar return on capital for its clients as other banks investing large family trusts had
generated theirs so D bank did nothing less than what was expected of them.

 But it was found D could have generated much higher rate of return if it realized that fund
was not subject to estate duty (meaning capital need not be maintained in a way that it was)
& if it had realized it should have switched a number of investments into gilts (i.e.
government linked index securities)

 HELD: NO DEFAULT BY D. IF C COULD PROVE MISFEASANCE IN MANAGEMENT OF TRUST,

THEN LIABILITY WOULD HAVE BEEN EASIER TO DEMONSTRATE. ALL THAT HAPPENED HERE
WAS D ACTED LESS PROFITABLY WHICH DID NOT CAUSE MUCH APART FROM FAILURE TO
GENERATE A LARGER RETURN. D DID NOT ACT WRONGLY IN A MANNER THAT CAUSED
LOSS.

 Beneficiaries argued in Nestle that trustees’ overtly cautious manner caused much reduced
return on their capital than average market investment would have realized. But this
argument did not work.

 D could rely on standard market practice – not activities of opinion of any one trustee =>
So, D NOT LIABLE for breach of trust on basis that they had acted as other trustees in same
position would have acted!!!

Breach of Trust & Investment

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  Leading case of Target Holdings v Redferns identified 3 categories of liability  (1) Liability
to replace the trust fund, (2) Liability to replace a cash equivalent to value of trust fund, (3)
Liability to provide equitable compensation to beneficiaries
 More complex Q: Whether pass has been suffered at all => For e.g. If investment has been
made in unauthorized investments when authorized investments might have realized a
larger profit OR where another investment strategy altogether might have realized greater
profit.
 Out-of-pocket loss OR Loss of opportunity?

Investment in unauthorized investments Where unauthorized investments made a profit

Q: What if trustee invests in something that
outside scope of his authority?
Q: Is trustee required to replace trusts fund? Or
can simply repay cash equivalent of the sale?
A: Re Massingberd (investment of financial
securities case)  trustees SHOULD replace
stock sold in breach of trust. Not just provide
mere cash equivalent.
Logic – General right of beneficiary in property
held in trust, not just an interest in amount of
value that is dependent on market value of
securities at any particular time.
Deeper debate: Is this area of law (Breach of
trust) concerned with rights in specific property
OR rights just in relation to given value attaching
to different property from time to time => Shows
you how seriously the law protects beneficiary’s
rights!
BUT a lesser profit than unauthorized
investments
Q: What about the value of unauthorized
investments that must be replaced by authorized
investments, esp in circumstances where
unauthorized investments generated a profit but
arguably a lesser profit than authorized
investments would have done?
A1: Trustee’s duty to restore trust to value it
contained before the breach of trust in which
case acquisition of an unauthorized investment
that made smaller profit than might have been
made by an authorized investment would not
disclose any loss!!
A2: Trustee accountable to trust for DIFFERENCE
between profit actually made from unauthorized
investments and profit which would have been
made by authorized investments on basis that
trust lost the opportunity to larger profit. =>
Fund difference between those 2 amounts!
NOTE: Practical difficulty? Nobody can ever
pinpoint any particular investment that will
generate higher rate of return because we
wouldn’t know => Investment is ALL about
SPECULATION!

According to Nestle v NatWest  Trustee can

defend and justify her own decision by looking at
standard market practice  show her
investment strategy similar to material aspects
with rest of investment market investing funds of
a similar fund!

Brief Recap  Validity of Exclusion clauses under Case Law :

-Role of exclusion clauses  - Armitage v Nurse

-It is NOT NEGLIGENT to fail to act where no alternative course of conduyct to continuance to present
arrangement is proved to have been available to person who has power to act!
-All depends on what the trust terms are  AH Pg 412 => Circs precluded trustees from suffering
liability because here was no other course of action open to them  Trust’s objective of speculating
on property market was simply speculation which failed. Result of intractability of trust terms &
requirement those terms be sufficiently rigid to attract approval of fund’s regulators, so speculation

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can’t be undone! – Galmerrow v NatWest Bank => the trustees said they cannot amend their
investment powers!

-RMB : TA 2000 provisions can be expressly OR implied displaced by trust instrument (LINK: Term 2
Wek 2 topic)

-Duty of care not expressed by TA 2000 to be general duty. Act procides duty will apply in limited
circumstances – TA 2000 s2

-Statutory duty of care applies TA 2000 Sch 1 Para 1, in relation to trustee exercising general power of
investment under TA 2000 or any other power of investment “however conferred”,

-Duty of care applies when trustees are carrying out obligations under TA 2000 in relation to
exercising OR reviewing powers of Investment (TA 2000 s4 and s5), land acquisition (Sch 1 Para 2 TA
2000), cover use of appropriate advice and levels of care in selecting land, contracting for its purchase
and insuring it (sch 1 para 5 TA 2000) . Applies to general terms in relation to agents, custodians and
nominees appointments (Sch 1 Para 3 TA 2000)

Selection & Management of Particular Types of Investments

Duty in general terms:

 Extent of trustee’s obligation to intervene in investments held by trust – Barlett v Barclay’s

Bank

Facts: Despite near total shareholding , trustees failed to be forewarned about disastrouys
property speculation made by company in which trustees had invested.

Qns : 1. Scope of trustee’s duties, 2. Breach of duty caused loss suffered by fraud, 3. Extent
to which trustee bank liable to make good that loss.

HELD: STANDARD OF OBSERVATION & CONTROL IN RELATION TO INVESTMENTS “SAME

CARE AS ORDIUNARY PRUDENT MAN OF BUSINESS WOULD EXTEND TOWARDS HIS OWN
AFFAIRS.

Next issue: Whatabout investment for benefit of other people for whom he felt morally
bound to provide?

Trustee’s obligation is to treat beneficiaries ad though they were effectively dependent

children for whom trustee would be required to provide. Trustee allowed to take risk but
not expose beneficiries to any hazardous risks within investment policy scope!

*AH Pg 414 – Practical situation: Trustee access to some control of company – expected to procure
some control in return for significant investment. BUT trustee holding only small investment in large
public company, then trustee wouldn’t have such control (unless large pension fund), so trustee
cannot exert such control too!

When trust property includes:

(1) Controlling interest in company  Well trustee need not be on company’s board if there
was sufficient flow of information from company in accordance with SIZE of shareholding!

(2) Mortgage  S8 TA 1925 gives guidance for trustee to follow so if trustee follows guidance
she will NOT BE LIABLE if security later proves insufficient in line with the following – (1)
Trustee must invest on basis of report prepared by able and independent surveyor or
valuer as to value of property (s8(1)(a), (2) amount of loan must not exceed 2/3 value

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 stated in report (s8(1)(b)) and report expressly advises loan in which case trustee entitled
to presume advice given is correct!

(3) If only aspect of non -compliance within s8 is amount loaned, s9 TA 1925 still offers some
protection in that trustee will ONLY be liable for difference between amount in fact lent and
amount which should have been lent. Trustee MUST LIMIT investments to those authoised
either by trusts instrument OR statue.

Week 4 seminar

1. May Rears is a keen environmentalist. She would like to set up a will trust with strict controls upon
how the fund may be invested by the trustees after her death. She is especially keen that her land
should remain unsold in the possession of the trustees and that it should only be used for the planting
of orchards and for no other commercial purpose , except that she is content that the land should be
mortgaged up to one-half of its value in order to finance the starting up of an orchard business . May
has an extensive portfolio of shares in the top 100 public limited companies listed on the London
Stock Exchange. She has personally selected the portfolio to ensure that her investment is only in
companies with a sound environmental policy and ‘green’ track-record. She would like to ensure that
the portfolio is adequately supervised after her death and that the trustees will personally manage
the investments. She accepts that day-to-day management by the trustees is a potentially onerous
task and is willing that they should be fairly remunerated from the fund. She is also keen that they
should be held liable for negligent mistakes if these result in financial loss to the fund.

Advise May concerning the extent to which the general law is suitable to satisfy her wishes and
explain to her how any shortcomings in the general law might be solved by express provision in the
trust instrument. (Summer exam 2012)

Investment, Risk-taking & Dishonesty

Imprudence is NOT DISHONESTY

RBA v TAN (case involving DA):

 All investment involves risks.
 Imprudence is NOT DISHONESTY.
 Although imprudence may be carried recklessly to lengths which will call into question the
honesty of person who made decision, esp when transaction serves to benefit trustee
instead of the trust

What this means…..

 Investment advisor (X) employed by trust could be liable for “dishonesty” if she advises trust
to take risk that is considered by court to have been a RECKLESS RISK.

 If X advises Trustee to take a risk that is objectively too great then X will be deemed
dishonest in giving that advice!!!

 Let's say X gets to personally benefit from that transaction (commission or whatever)  The
likelihood of dishonest increases….

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  E.g. Stock broker sells his own securities to client.

 X faces great responsibility and liability  Basis of liability is that 3rd party “takes risk that
clearly unauthorised transaction will not cause loss….. If risk materialises and causes loss,
those who knowingly took risk will be accountable accordingly.”

 The issue is whether the LEVEL OF RISK ASSUMED IS IN BREACH OF TRUST, not ascertain
whether investment is in breach of trust that is decisive on the matter.

 Need a CAUSAL LINK that the unauthorised transaction will cause LOSS!

Investment & Unconscionable Receipt of Property by Investment Advisors

 An investment advisor needs to act in client’s best interests – Honestly, Fairly, Professionally

 There is a need to take reasonable steps.

 Investment advisor (like a trustee) maintain accounts for customers so advisor will organise $
$$ it holds to customer’s accounts in various investments.

 Advisor receives trust property => LIABLE FOR KR!

 Must prove (1),(2) OR (3) – Under Re Montagu’s Settlement (CRF Term 2 Week 5 Notes on KR
topic)

 Commercial Context => There are regulatory norms.

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