Denning Law School

Huzaifa Muqadam
Law of Equity & Trusts

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 the 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)
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Huzaifa Muqadam
Law of Equity & Trusts

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 all 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’]
Denning Law School
Huzaifa Muqadam
Law of Equity & Trusts

[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:
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Huzaifa Muqadam
Law of Equity & Trusts

(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 amount of minimum
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.

Denning Law School
Huzaifa Muqadam
Law of Equity & Trusts

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

Denning Law School
Huzaifa Muqadam
Law of Equity & Trusts

Answer Structure

4. John was a security guard employed by Dooley Jewellers. Meg paid £50,000 to John and,
in exchange, he allowed her to steal diamonds from Dooley Jewellers’ secure storeroom late
one night. Meg tied John up and knocked him out to help him hide his involvement in the
theft.

Dooley Jewellers paid £25,000 to John as a reward for his bravery in trying to stop the theft.
He used that money, plus the £50,000 he received from Meg, to open an investment account
for his daughter Noreen. Meg sold some of the stolen diamonds for £1 million, which she
used to buy a house in London for her father Eugene.

Meg vanished without a trace. John became ill and confessed his involvement in the theft just
before he died. Dooley Jewellers seeks your legal advice. It wants to claim Noreen’s
investment account and Eugene’s house.

Advise Dooley Jewellers.

2011/ 6

Harry was the sole trustee of a trust for Sally. The trust deed provided that the trust rights could not be
invested in any company that made or sold genetically modified organisms or foods. It further provided
that the trustees would not be liable for any breach of trust unless they were guilty of ‘gross neglect or
dishonesty’.

Harry relied heavily on the investment advice of John, who has been his friend since college and has become
a successful investment broker. His advice has been good and the trust investments have performed well as
a result. Those investments include 10,000 shares in Mondiablo, a company specialising in genetically
modified food crops. Harry did not know what Mondiablo did and John did not know about the prohibition
in the trust deed. Harry bought the shares five years ago for £100,000. They were worth £200,000 two years
ago, but Mondiablo is now insolvent and the shares are worthless.

Last year, John advised Harry to invest in New Age Dance Studios, a company owned by John’s mistress,
Marie. Harry did not know about John’s relationship with Marie. Harry used £250,000 of trust money to
purchase shares in the company from Marie for the trust. John knew it was a risky investment, but had
promised Marie he would find investors for her business. The company is now insolvent and the shares are
worthless.

Advise Sally of any claims she may have against Harry, John, and Marie.

Beneficiary: Sally
Trustee: Harry
Duties: Not invest in GMO
Exclusion: No Pers. Liability, unless gross neglect or dishonesty
Actions: Investment in Mondiablo / Investment in Marie’s business

3P: John (assistant) + Marie (recipient)

Denning Law School
Huzaifa Muqadam
Law of Equity & Trusts

Facts + Issues

Harry’s Liability

Duty/ Breach: Law (admin+dispositive+fiduciary) + Apply (admin. Duties)

Causation: Causal Link (law) + application

Remedies: Proprietary + personal

Exemption: Exclusion clause  Law on exclusion clause + Apply

Conclusion  if exclusion clause is applicable, no personal liability. If exclusion clause is not applicable,
then personal liability.

John’s Liability

Explain: John is not a trustee, but rather a 3P [Hence, not a question on BOT -I]. He is not even a recipient.
There will be no proprietary liability on John [Hence, not a question on BOT -II].

John’s personal liability can be on the basis of DA.

Was he dishonest when advising about investment in Mondiablo?

Law: dishonesty is seen objectively (Royal Brunei Airlines v. Tan)
Apply: No, there is no dishonesty.

Was he dishonest when advising about investment in Marie’s company?

Law: dishonesty is seen objectively (Royal Brunei Airlines v. Tan)
Apply: Yes, there was dishonesty. Hence, the courts can impose personal liability on John. The amount will
be determined by the courts.

Marie’s Liability

Marie is not a trustee, but rather a 3P [Hence, not a question on BOT -I]. She is a recipient. However, there
will be no proprietary liability on Marie [Hence, not a question on BOT -II].

Can there be personal liability on Marie as a Recipient?

Knowing Receipt
Law: Old law (Re Montagu’s) + Latest Law (Unconscionability test coming from BCCI v. Akindele)
Apply: Unconscionability is broad and discretionary for the courts, with no clear guidelines. Had the law
been based upon knowledge, then there would be no liability.

Final Conclusion: No liability for Marie, personal liability for John for advising to invest in Maries’ Co.
and no liability on Harry.