Beneficiary Rights and Remedies for Breach

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Contents

Required Reading

Textbook Chapter 17 (17.16-17.20) and Chapter 20.

Gartside v Inland Revenue Commissioners [1968] AC 553 (Lord Wilberforce at 613E – 618D)

Hartigan Nominees v Rydge (1992) 29 NSWLR 405 (Mahoney JA)

Saunders v Vautier (1841) 4 Beav 115; 49 ER 282

Beneficiary's Right to Information from the Trustee

[1]This information has already been covered under Trustee Duties. See "Duty to give information to beneficiaries" which covers beneficiary entitlements and access to other information, including letters of wishes.

Introduction to defences and remedies

[2]A breach of trust occurs whenever the trustee fails to perform one their duties or obligations. The consequences that attend a breach of trust will depend on the nature of the breach. A breach does not automatically mean that the trustee must compensate the trust, in the sense that breach of a common law obligation exposes the defendant to liability for damages:

a) The breach may be of a minor or merely technical nature, or may not call for relief in monetary terms.
b) No matter how poorly the trustee has performed their obligations, if they have not been dishonest they may be protected by a valid exculpation given by the trust instrument, statutory provisions or the general law.

Remember that equitable remedies are discretionary.

Exculpation in the trust instrument

[3]Most, but not all, liability for breach of trust can be excluded by specific provisions in the trust instrument. The trustee bears the burden of establishing that the loss in question is covered by any exemption clause. Any ambiguities are resolved against the interests of the party seeking to rely on the clause.

Wight v Olswang[4]

Facts: Professional trustees decided to sell a parcel of shares held by the trust in stages, this earned a lower return than if they had all been sold at the outset. When the beneficiaries sought compensation for breach of trust the trustees attempted to rely on exemption clauses contained in the trust instrument which were ambiguous as to whether paid could claim the benefit.
Issue: Ambiguous exemption clauses.
Held: While exemption clauses should be fairly construed, they should not be construed broadly. On the construction the trustees were not protected.

It is frequently argued that exemption clauses are over-generous to trustees and prejudicial to the interests of beneficiaries. This concern is magnified where professional trustees who are paid for their services attempt to rely on such clauses.

Armitage v Nurse[5]

Facts: A beneficiary sued in relation to breaches causing loss to the trust fund. Clause 15 of the trust instrument exempted the trustees from liability for any loss or damage to the income or capital of the fund unless it was caused by their own fraud.
Issue: Should professional trustees be able to rely on extensive exemption clauses?
Held: Allowing a trust instrument to exclude or restrict a trustee’s liability was not contrary to public policy but it would be contrary to public policy to exclude it for actual fraud or dishonesty.
  • Although the protection given by an exemption clause can be extensive, it is not absolute. Loss-causing breaches that are dishonest or committed in bad faith will still attract liability.
  • Millet LJ indicated that a trustee acts dishonestly if he acts in a way he does not honestly believe is in the beneficiary’s interests, or acts with the intention of benefiting himself or others who are not objects of the trust.

In the later decision of Walker v Stones, the Court of Appeal appeared to take a slightly less extreme view than in Armitage:

Walker v Stones[6]

Facts: The beneficiaries in a trust fund set up by their father complained that professional trustees had invested, in breach of trust, with the primary intention of benefiting their father who was not an object of the trust. An exemption clause excluded liability for anything other than “wilful fraud or dishonesty” of the trustee.
Issue: Should professional trustees be able to rely on extensive exemption clauses?
Held: It was dishonest for a trustee to deliberately commit a breach of trust which no reasonable trustee could have thought to be in the interests of the beneficiaries. The decision applies an objective test of dishonesty.

A matter for concern is the protection that exemption clauses give trustees from liability for negligence, particularly where a trust is managed by a professional trustee. It can be argued that exemption clauses remove incentives for trustees to act in the best interests of the beneficiaries.

Statutory exculpation

Wilful default

[7]Legislation in all Australian jurisdictions provides that trustee who employs an agent, is generally speaking, not liable for the agent’s default, and is only liable for his own wilful default.

  • Wilful default provisions also protect a trustee from liability for the actions of a co-trustee.
    • The trustee will not be protected is the co-trustee’s breach is causally linked to the to the trustee’s own breach e.g. if the trustee improperly delegated authority to a co-trustee.
  • Authority seems to favour the view that wilful default includes negligence and therefore a trustee who is careless in appointing or supervising an agent will not obtain the protection of the section.

Dalrymple v Melville[8]

Facts: The defendant trustee allowed a co-trustee control of the property. The co-trustee misappropriated trust funds and the defendant trustee was sued for breach.
Issue: Liability for the actions of a co-trustee.
Held: The defendant trustee understood what was required of an ordinary prudent business man; his failure to act in accordance with the standard amounted to wilful default.

The general statutory defence

[9]Courts have statutory power to relieve trustees from liability where the trustee has been honest, reasonable and ought fairly be excused the breach of trust and failure to obtain the court’s directions prior to the breach. The trustee may be excused wholly or in part. All Australian jurisdictions have a version of the excuse provision.

  • Honest and reasonable sets a high threshold for excusing trustees from liability.
  • Courts commonly refuse to excuse trustee behaviour that has been negligent on the basis that it cannot have been reasonable.
  • A trustee who is in breach of the fiduciary profits rule will usually not have acted honestly. In Reader v Fried[10] a conflict of duty and interest was dishonest and disqualified a trustee from relief.
  • Even if the trustee can establish that their actions were honest and reasonable, the excuse is not automatic. Due to the requirement that the trustee ought fairly be excused, they will not be excused if it would be unfair to blameless beneficiaries.
  • The provision also allows the court to excuse the trustee’s failure to obtain the directions of the Court in the matter in which he committed a breach. This is a reminder that the best protection from liability comes from approaching the court for directions in cases of doubt.

Re Umpherstone[11]

Facts: A will established two charitable trusts for the award of scholarships. In breach of trust the trustees mixed the funds of the two trusts and failed to make any appointments for about forty years. The trustees were unsure what to do – there was no question of dishonesty; the mixing of funds was sensible although wrong; there was no loss to the corpus of the fund; and no one had been disadvantaged by the failure to make appointments (except perhaps those unidentifiable persons who might otherwise have received a distribution from the charities.
Issue: “Ought fairly to be excused” requirement.
Held: Excuse was granted because there was no dishonesty or loss.

It is unclear whether trustees who have acted on poor legal advice ought fairly be excused. Cases on this issue turn on their own facts.

Marsden v Regan[12]

Facts: A trustee administering a small estate took legal advice on the discharge of debts due to the estate. Loss was caused by the release of some debts.
Issue: Trustee reliance on poor legal advice.
Held: The court held that the trustee ought fairly to be excused the breach, having taken and relied upon legal advice.

Re Evans[13]

Facts: The trustee and her long lost brother were residuary beneficiaries of an estate. Acting on legal advice, she took out a missing beneficiary insurance policy when she wound out the estate. The brother returned and was paid by the insurer but the trustee had failed to arrange insurance to cover interest payable on her brother’s share.
Issue: Trustee reliance on poor legal advice.
Held: She was excused the breach of trust in respect of having paid out his share and allow the cost of the insurance policy as a trust expense but was not forgiven the breach in respect of the interest due on the capital despite the fact that she had acted on legal advice.

Equitable defences

[14]The general position is that a trustee will not be liable when a sui juris beneficiary consents to the breach of trust, acquiesces in the breach or later releases the trustee from its obligations. The onus of proof lies on a trustee to establish such a defence.

Consent

[15]A beneficiary can validly consent to a breach of trust where a trustee has made full disclosure of the circumstances of the breach and of the legal consequences of committing it.

Spellson v George[16]

Facts: A beneficiary found himself in a difficult position with his overbearing and wealthy father-in-law. The son-in-law was the object of a family trust. The assets of that trust were transferred to a second family trust in breach of trust. It was claimed that the son-in-law had consented to the breach because the father-in-law had sent him a memo outlining the proposed scheme of re-arrangement, and he had later been given a copy of accountant’s advice. However, he was not given notice of the trustee’s meetings at which the rearrangement was to take place and was unsure whether the scheme would even proceed.
Issue: Beneficiary’s consent to trustee’s breach.
Held: Young AJA held that the beneficiary’s disentitling conduct could occur prior to the breach, simultaneously with it or afterwards but it was not sufficient to show that the beneficiary had knowledge of a pending breach and did not protest about it.
  • A clearer act of consent is required.
  • Handley JA held that the trustee had to know of the consent prior to the breach.
  • Affirming Spellson v George, in Byrnes v Kendle[17] it was held that unwillingness to insist that the trustee recover lost sums is not consent to the trustee’s inaction.

Acquiescence and release

[18]To establish acquiescence to a breach it is necessary to show that:

a) The beneficiary had full knowledge of the breach of trust
b) By the beneficiary’s actions or inactions must be taken to have accepted the breach. Inaction is referred to as “standing by”.

Re Kerr[19]

Facts: The trustees of a sheep farming property included the amount of remuneration they were charging the trust in the trust accounts provided to the beneficiaries. Although they were being overpaid considering the work they were doing, the beneficiaries had full notice of the amounts received and had not raised any objections for nearly five years.
Issue: Acquiescence by conduct.
Held: The trustees were not liable to replay the amounts that they had received because the conduct of the beneficiaries amounted to acquiescence to the payments.

Release following a breach is in a sense more formal than acquiescence because it requires the trustee to show that the beneficiary “deliberately and advisedly, with full knowledge of all the circumstances, and of his own rights and claims against the trustee... freely and without pressure or undue influence of any description” released the trustee from the trust obligation.

Release can be given orally, by conduct or by writing.

Remedies in the context of breach of trust

[20]Any remedy granted by the court is intended to achieve due administration of the trust. There is no right to a remedy as there is at common law, the court will use discretion and often makes the orders necessary to make the trust effective.

Monetary remedies for breach of trust

Unauthorised profits

[21]As a fiduciary, a trustee cannot make an unauthorised profit from their position. Such a profit will be completely stripped from the trustee, subject only to such allowances as the court sees fit. Profit stripping can be achieved via an account of profits or by an order for a constructive trust where the trustee’s profit has been to acquire property.

Prohibited breaches

[22]If the trustee cannot account to the beneficiaries because the trust fund has been misapplied, the trustee is strictly liable to restore the trust fund in full. The remuneration is calculated by the ‘but for’ test - what would the value of the trust fund have been “but for” the trustee’s breach?

Repayment is usually referred to in equity as “equitable compensation” rather than “damages”.

Negligence in performance

[23]The trustee’s liability in the situation of negligent performance causing loss to the trust fund is similar to that of reinstating the fund for a breach. Assessing the quantum of compensation in the same way however (by applying the “but for” test) raises issues.

  • Questions of causation and remoteness are irrelevant where the trust funds have been misapplied but the same cannot be said for when they have been negligently applied.
    • The kernel of the arguments against the adoption of tort principles is the concern that if a trustee is only required to act carefully, he will not be demonstrating the loyalty required of a fiduciary.
    • However, disloyalty and poor performance are different things.
  • It is probably sufficient that breaches of a duty of care be remedies by reference to what a reasonable trustee would have achieved. Concepts like remoteness and foreseeability will therefore be relevant in calculating the quantum.
    • The trust fund will then be restored to the state in which it would have been, had the trustee been acting carefully. This may not mean restored in full like the “but for” test.

Compensation for breach of conflicts rule

[24]A trustee’s conflict of duty and interest may result in loss to the trust fund and constitutes a breach of fiduciary duty.

  • There must be a common-sense causal link between the breach of the conflicts rule and the beneficiary’s loss.
  • Losses sufficiently linked to the breach are then assessed on a but for basis.

Target Holdings Ltd v Redferns[25]

Facts: (See textbook page 352 for full facts involving a complicated purchase and a mortgage scam). Redferns acted as solicitor for the purchaser and for Target (who was to finance the purchase and take security of the land). They knew about the series of (sham) contracts which forced up the purchase of the land but did not inform Target, which was a breach of the conflicts rule. A fraudulent valuation falsely showed that the land was worth the purchase price. The purchasers absconded with the balance of the purchase moneys and did not repay the loan. When Target enforced the security there was a significant shortfall caused by the fraudulent evaluation and a fall in the real estate market.
Issue: Causal link between loss and conflict of interest.
Held: The House of Lord’s held that Redferns would not be liable to compensate Target if it proved that Target’s loss was not caused by Redferns’ breach but by the purchaser’s fraud and the fall in the property market. There would therefore be no causal link because Target would have been duped by the purchaser and lost its money anyway.
Alternatively, if the evidence showed that the fraudulent transaction could only have gone ahead as a result of Redfern’s conflict of interest, causation would be established and Redferns would be liable to compensate Target for the full amount.

Statutory provisions

[26]A raft of legislation was introduced across every Australian jurisdiction at the beginning of the century, with the aim of limiting recovery against wrongdoers only to the losses that were actually caused by the wrongdoer. These statutes replace the principle of joint and several liability with proportionate liability.

  • Proportionate liability limits each defendant’s damages to the losses caused by their own acts.
  • It is unclear whether claims for compensation for breach of trusts are covered by the legislation as there are sound reasons not to cover them.

Non-monetary remedies for breach of trust

[27]Breach of trust can occur without the trust suffering a loss. Such a breach calls for a non-compensatory remedy.

  • Injunctions can be obtained against a trustee to prevent a breach of trust occurring in the first place (Fox v Fox).[28]
  • The court exercises an inherent jurisdiction to remove a trustee when it is in the best interests of the beneficiaries, therefore, breach of trust will not automatically lead to the removal of the trustee.
    • Bankruptcy or insolvency does not automatically result in removal at general law but does under superannuation legislation.
    • Trustees have been removed for breaches such as denying the existence of the trust, failing to act impartially between beneficiaries, failing to maintain accounts, failing to understand the trustee’s duties and obligations and being in unauthorised positions of conflict of interest.
  • Rescission is available to set aside contracts entered into by trustees in breach of the self-dealing rule, at the suit of the beneficiary. This is rarely denied unless a good faith purchaser has obtained the interest from the trustee.

Standing to sue

[29]Charitable trusts (which have no individual objects or beneficiaries) must be enforced by the Attorney-General.

Private express trusts can be enforced by a beneficiary, a co-trustee or a subsequent trustee.

In Young v Murphy[30] it was held that new trustees were able to sue the trustees they had replaced and that it was not necessary for the beneficiaries to be joined as parties.

References

  1. Textbook Chapter 17 (17.16-17.20).
  2. Textbook, pp 339.
  3. Textbook, pp 339-42.
  4. [1999] EWCA Civ 1309.
  5. [1997] 2 All ER 705.
  6. [2001] 2 WLR 623.
  7. Textbook, pp 343-4.
  8. (1932) 32 SRNSW 596.
  9. Textbook, pp 344-6.
  10. [2001] VSC 495.
  11. (deceased) (1990) 53 SASR 293.
  12. [1954] 1 WLR 423.
  13. [1999] 2 All ER 777.
  14. Textbook, pp 346-8.
  15. Textbook, pp 347.
  16. (1992) 26 NSWLR 666.
  17. (2011) 243 CLR 253 [25].
  18. Textbook, pp 347-8.
  19. (1904) 24 NZLR 1.
  20. Textbook, pp 348-9.
  21. Textbook, pp 349.
  22. Textbook, pp 349-50.
  23. Textbook, pp 351.
  24. Textbook, pp 352-3.
  25. [1996] 1 AC 421.
  26. Textbook, pp 353.
  27. Textbook, pp 353-5.
  28. (1870) LR 11 Eq 142.
  29. Textbook, pp 355.
  30. [1996] 1 VR 279.
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