Breach of Trust
1. The Nature of the Beneficiaries' Interests
Before analyzing the breach, define what the beneficiaries actually own. This determines
who has "standing" to sue and what they have lost.
Vested in Possession: The beneficiary has an immediate right to the
income/property (e.g., "To A for life").
Vested in Remainder: The right is certain but for the future (e.g., "To B after A
dies").
Contingent Interest: The right depends on an event that may not happen (e.g.,
"To C if she reaches 21").
Relevant Case: Saunders v Vautier (1841) (if all beneficiaries are of age and
have vested interests, they can terminate the trust).
2. Co-Ownership and Types of Breach
If there are multiple trustees, identify the relationship.
Primary Breach: The trustee who actually committed the act (e.g., stole the
money).
Secondary Breach: The "passive" trustee who allowed the breach to happen.
Liability: Trustees are jointly and severally liable. A beneficiary can sue one
or all of them for the full amount.
Statute: s.31 Trustee Act 2000 (Liability for acts of co-trustees).
Case: Townley v Sherborne (1633) (A trustee is not liable for a co-trustee's
breach unless they were also negligent).
In evaluating co-trusteeship, the law distinguishes between a primary breach—the
active misappropriation of assets—and a secondary breach, where a "passive"
trustee’s omission facilitates the loss. While trustees are jointly and severally liable,
ensuring beneficiaries may pursue any individual for the full quantum of the loss, this
liability is not strictly vicarious. Under s 31 of the Trustee Act 2000, and the
foundational principle established in Townley v Sherborne (1633), a trustee is
shielded from liability for a co-trustee's actions unless their own negligence or willful
default contributed to the breach. Thus, the conceptual crux of liability rests upon a
failure of individual fiduciary oversight rather than mere association, balancing robust
beneficiary protection with the equitable protection of the non-active trustee.
3. Breach of the Duty of Care (Investment/Management)
When a trustee loses money through bad investments, you must check both common law
and statute.
A. The Statutory Duty of Care (SDOC)
Statute: s.1 Trustee Act 2000. Trustees must exercise such care and skill as is
"reasonable in the circumstances."
Standard of Care: A higher standard applies to professional trustees
(solicitors/banks) than to lay trustees (s.1(1)(b)).
Standard Investment Criteria (SIC): Under s.4 TA 2000, trustees must
consider:
1. Suitability of the investment.
2. The need for diversification.
Duty to Obtain Advice: Under s.5 TA 2000, trustees must obtain and consider
proper advice before investing.
, Ethical Investments: Trustees must prioritize financial return. They can only
make ethical choices if it doesn't hurt the fund's performance or if the trust deed
permits it (Cowan v Scargill [1985]; Harries v Church Commissioners
[1992]).
B. Common Law Duty of Care
Standard: The "prudent man of business" acting for those for whom he feels
"morally bound to provide" (Learoyd v Whiteley [1887]).
Liability for investment losses is primarily governed by the statutory duty of care
under s 1 of the Trustee Act 2000, which mandates a standard of "care and skill as is
reasonable in the circumstances." This standard is bifurcated; s 1(1)(b) imposes a
higher, professional benchmark on solicitors or corporate trustees compared to
laypersons. To satisfy this duty, trustees must adhere to the Standard Investment
Criteria (s 4)—emphasizing suitability and diversification—and, pursuant to s 5, must
generally obtain "proper advice." While the common law "prudent man of business"
standard from Learoyd v Whiteley [1887] persists, it is largely superseded by these
statutory requirements. Conceptually, trustees must maintain strict financial neutrality;
as seen in Cowan v Scargill [1985] and Harries v Church Commissioners [1992],
ethical considerations remain subordinate to the maximization of financial return unless
specifically authorized by the trust deed.
4. Breach of Fiduciary Duty (Loyalty)
Fiduciary duties are about honesty and conflict of interest, not just competence.
Self-Dealing Rule: A trustee cannot buy trust property. Such a sale is voidable
at the beneficiary's option (Tito v Waddell (No 2) [1977]).
Fair-Dealing Rule: If a trustee buys a beneficiary’s interest, it can be set aside
unless the trustee can prove they gave full disclosure and paid a fair price.
No Profit Rule: A trustee must not profit from their position (e.g., keeping
commissions or bribes).
Cases: Keech v Sandford (1726); Boardman v Phipps [1967] (strict liability for
unauthorized profits).
The fiduciary relationship is anchored in the "no-conflict" and "no-profit" rules, prioritizing
absolute loyalty over mere competence. Under the self-dealing rule, any purchase of
trust property by a trustee is voidable at the beneficiary's instance, regardless of the
transaction's fairness (Tito v Waddell (No 2) [1977]). In contrast, the fair-dealing
rule permits the purchase of a beneficiary’s equitable interest, provided the trustee
discharges the heavy evidentiary burden of proving full disclosure and a fair price.
Central to this regime is the principle of strict liability for unauthorized gains; as
established in Keech v Sandford (1726) and reaffirmed in Boardman v Phipps
[1967], a trustee must account for any profit derived from their position, even where
they acted in good faith or benefitted the trust. This rigorous standard serves a
prophylactic function, deterring even the temptation of disloyalty by ensuring that the
fiduciary remains a disinterested steward of the trust assets.
5. Powers of Advancement
Has the trustee given money out early?
Statute: s.32 Trustee Act 1925 (as amended by Inheritance and Trustees'
Powers Act 2014).
Power: Trustees can advance up to the full value of a beneficiary's share for
their "advancement or benefit."
, Case: Pilkington v IRC [1964] (Advancement can be for any use that improves the
beneficiary’s situation, including tax planning).
The power of advancement allows trustees to apply capital for the prospective benefit of
a beneficiary prior to their interest falling into possession. Historically restricted, this
power is now governed by s 32 of the Trustee Act 1925, as significantly expanded by
the Inheritance and Trustees' Powers Act 2014, which permits trustees to advance
up to the full value of a beneficiary’s presumptive share. The judicial interpretation of
"advancement or benefit" is notably broad; as established in Pilkington v IRC [1964],
the term encompasses any application of funds that improves the beneficiary's material
circumstances, including sophisticated arrangements for tax planning. This evolution
reflects a shift in trust law toward greater administrative flexibility, empowering trustees
to respond dynamically to a beneficiary's financial needs provided the advancement is
made in good faith and for a legitimate beneficial purpose.
6. Remedies and Causation
Once a breach is found, you must calculate the loss.
A. Personal Remedies
The trustee must pay back the "but for" loss (Target Holdings v Redferns
[1995]).
Causal Link: There must be a close causal link between the breach and the
loss (AIB Group (UK) plc v Mark Redler & Co Solicitors [2014]). If the loss
would have happened anyway, the trustee may not be liable.
B. Proprietary Remedies (Tracing)
If the trustee is insolvent (bankrupt), a personal claim is useless. You must "trace" the
money into assets.
Clean Substitutions: If they bought a car with trust money, the car belongs to
the trust (Re Hallett’s Estate (1880)).
Mixed Funds: * The "Honest Trustee" Rule: The trustee is deemed to spend
their own money first (Re Hallett).
o The "Beneficiary’s Option": Beneficiaries can claim a proportionate
share of an appreciating asset (Foskett v McKeown [2001]).
Remedies for breach of trust are contingent upon a rigorous application of equitable
compensation and proprietary tracing. Under the "but for" test established in Target
Holdings v Redferns [1995] and refined in AIB Group (UK) plc v Mark Redler & Co
Solicitors [2014], personal liability is limited to losses factually caused by the breach,
excluding deficits that would have materialized notwithstanding the trustee’s default.
Where insolvency renders personal remedies illusory, beneficiaries may invoke
proprietary claims via tracing. While Re Hallett’s Estate (1880) provides a rebuttable
presumption that a trustee dissipates their own funds first in a mixed account, modern
equity prioritizes beneficiary choice. As per Foskett v McKeown [2001], beneficiaries
may elect for a proportionate share of an appreciating asset rather than a mere lien,
reflecting a sophisticated shift toward vindicating property rights over purely
compensatory models.
7. Defenses for Trustees
s.61 Trustee Act 1925: The court can excuse a trustee if they acted "honestly
and reasonably" and "ought fairly to be excused."
, Exemption Clauses: The trust deed might protect the trustee from everything
except fraud or "gross negligence" (Armitage v Nurse [1998]).
Trustee liability is subject to a nuanced defensive framework that balances fiduciary
accountability with the practicalities of trust administration. Under s 61 of the Trustee
Act 1925, the court retains a broad statutory discretion to relieve a trustee from liability,
provided they demonstrate they acted "honestly and reasonably" and, in view of all
circumstances, "ought fairly to be excused." This judicial mercy is complemented by
the autonomy of the settlor to include exemption clauses within the trust instrument.
As established in the seminal case of Armitage v Nurse [1998], such clauses can
validly exclude liability for even "gross negligence," provided they do not attempt to oust
the "irreducible core" of the trust—namely, the duty to act honestly and in good faith.
Conceptually, this legal landscape suggests that while the law maintains a high standard
for fiduciaries, it provides a safety net for the bona fide trustee, ensuring that the office
remains attractive to potential appointees despite its inherent risks.
Summary Checklist for a Problem Answer:
1. Identify the parties: Who are the trustees (Primary vs Secondary)? Who are the
beneficiaries (Vested vs Contingent)?
2. Is it a management breach? (Bad investment, no advice, no diversification?
Use s.1, 4, 5 TA 2000 and Cowan v Scargill).
3. Is it a fiduciary breach? (Conflict of interest? Use Boardman v Phipps).
4. Was there an advancement? (Check s.32 TA 1925).
5. Causation: Did the breach cause the loss? (Use AIB Group).
6. Remedy: Personal (sue the person) or Proprietary (trace the asset if they are
insolvent)?
Proprietary Remedies (Against the Property)
A proprietary remedy is a claim against specific property. Instead of saying "you owe
me money," the beneficiary says "that specific item/money belongs to the trust."
A. The Constructive Trust
The Rule: When a fiduciary (trustee) receives a bribe or secret commission, they
are deemed to hold that asset on constructive trust for the beneficiaries from
the moment they receive it.
Key Cases: * FHR European Ventures v Cedar Capital: Confirmed that secret
commissions are trust property.
o AG for Hong Kong v Reid: If the trustee uses a bribe to buy an asset (e.g., a
house) and that house increases in value, the beneficiaries own the
house and keep the profit.
B. Why Proprietary Remedies "Beat" Creditors (Insolvency)
This is the most critical part of your problem question. If the trustee goes bankrupt, their
"General Creditors" (the bank, credit card companies, etc.) are all fighting over the
trustee's remaining assets.
The "Priority" Rule: Under Barclays Bank v Quistclose and Twinsectra v Yardley,
if money is held on trust, it is not part of the trustee’s personal estate.
Consequence: The beneficiaries can "reach into" the trustee's bankruptcy and
pull out the trust property (or the assets bought with it) before the creditors get a
single penny.
1. The Nature of the Beneficiaries' Interests
Before analyzing the breach, define what the beneficiaries actually own. This determines
who has "standing" to sue and what they have lost.
Vested in Possession: The beneficiary has an immediate right to the
income/property (e.g., "To A for life").
Vested in Remainder: The right is certain but for the future (e.g., "To B after A
dies").
Contingent Interest: The right depends on an event that may not happen (e.g.,
"To C if she reaches 21").
Relevant Case: Saunders v Vautier (1841) (if all beneficiaries are of age and
have vested interests, they can terminate the trust).
2. Co-Ownership and Types of Breach
If there are multiple trustees, identify the relationship.
Primary Breach: The trustee who actually committed the act (e.g., stole the
money).
Secondary Breach: The "passive" trustee who allowed the breach to happen.
Liability: Trustees are jointly and severally liable. A beneficiary can sue one
or all of them for the full amount.
Statute: s.31 Trustee Act 2000 (Liability for acts of co-trustees).
Case: Townley v Sherborne (1633) (A trustee is not liable for a co-trustee's
breach unless they were also negligent).
In evaluating co-trusteeship, the law distinguishes between a primary breach—the
active misappropriation of assets—and a secondary breach, where a "passive"
trustee’s omission facilitates the loss. While trustees are jointly and severally liable,
ensuring beneficiaries may pursue any individual for the full quantum of the loss, this
liability is not strictly vicarious. Under s 31 of the Trustee Act 2000, and the
foundational principle established in Townley v Sherborne (1633), a trustee is
shielded from liability for a co-trustee's actions unless their own negligence or willful
default contributed to the breach. Thus, the conceptual crux of liability rests upon a
failure of individual fiduciary oversight rather than mere association, balancing robust
beneficiary protection with the equitable protection of the non-active trustee.
3. Breach of the Duty of Care (Investment/Management)
When a trustee loses money through bad investments, you must check both common law
and statute.
A. The Statutory Duty of Care (SDOC)
Statute: s.1 Trustee Act 2000. Trustees must exercise such care and skill as is
"reasonable in the circumstances."
Standard of Care: A higher standard applies to professional trustees
(solicitors/banks) than to lay trustees (s.1(1)(b)).
Standard Investment Criteria (SIC): Under s.4 TA 2000, trustees must
consider:
1. Suitability of the investment.
2. The need for diversification.
Duty to Obtain Advice: Under s.5 TA 2000, trustees must obtain and consider
proper advice before investing.
, Ethical Investments: Trustees must prioritize financial return. They can only
make ethical choices if it doesn't hurt the fund's performance or if the trust deed
permits it (Cowan v Scargill [1985]; Harries v Church Commissioners
[1992]).
B. Common Law Duty of Care
Standard: The "prudent man of business" acting for those for whom he feels
"morally bound to provide" (Learoyd v Whiteley [1887]).
Liability for investment losses is primarily governed by the statutory duty of care
under s 1 of the Trustee Act 2000, which mandates a standard of "care and skill as is
reasonable in the circumstances." This standard is bifurcated; s 1(1)(b) imposes a
higher, professional benchmark on solicitors or corporate trustees compared to
laypersons. To satisfy this duty, trustees must adhere to the Standard Investment
Criteria (s 4)—emphasizing suitability and diversification—and, pursuant to s 5, must
generally obtain "proper advice." While the common law "prudent man of business"
standard from Learoyd v Whiteley [1887] persists, it is largely superseded by these
statutory requirements. Conceptually, trustees must maintain strict financial neutrality;
as seen in Cowan v Scargill [1985] and Harries v Church Commissioners [1992],
ethical considerations remain subordinate to the maximization of financial return unless
specifically authorized by the trust deed.
4. Breach of Fiduciary Duty (Loyalty)
Fiduciary duties are about honesty and conflict of interest, not just competence.
Self-Dealing Rule: A trustee cannot buy trust property. Such a sale is voidable
at the beneficiary's option (Tito v Waddell (No 2) [1977]).
Fair-Dealing Rule: If a trustee buys a beneficiary’s interest, it can be set aside
unless the trustee can prove they gave full disclosure and paid a fair price.
No Profit Rule: A trustee must not profit from their position (e.g., keeping
commissions or bribes).
Cases: Keech v Sandford (1726); Boardman v Phipps [1967] (strict liability for
unauthorized profits).
The fiduciary relationship is anchored in the "no-conflict" and "no-profit" rules, prioritizing
absolute loyalty over mere competence. Under the self-dealing rule, any purchase of
trust property by a trustee is voidable at the beneficiary's instance, regardless of the
transaction's fairness (Tito v Waddell (No 2) [1977]). In contrast, the fair-dealing
rule permits the purchase of a beneficiary’s equitable interest, provided the trustee
discharges the heavy evidentiary burden of proving full disclosure and a fair price.
Central to this regime is the principle of strict liability for unauthorized gains; as
established in Keech v Sandford (1726) and reaffirmed in Boardman v Phipps
[1967], a trustee must account for any profit derived from their position, even where
they acted in good faith or benefitted the trust. This rigorous standard serves a
prophylactic function, deterring even the temptation of disloyalty by ensuring that the
fiduciary remains a disinterested steward of the trust assets.
5. Powers of Advancement
Has the trustee given money out early?
Statute: s.32 Trustee Act 1925 (as amended by Inheritance and Trustees'
Powers Act 2014).
Power: Trustees can advance up to the full value of a beneficiary's share for
their "advancement or benefit."
, Case: Pilkington v IRC [1964] (Advancement can be for any use that improves the
beneficiary’s situation, including tax planning).
The power of advancement allows trustees to apply capital for the prospective benefit of
a beneficiary prior to their interest falling into possession. Historically restricted, this
power is now governed by s 32 of the Trustee Act 1925, as significantly expanded by
the Inheritance and Trustees' Powers Act 2014, which permits trustees to advance
up to the full value of a beneficiary’s presumptive share. The judicial interpretation of
"advancement or benefit" is notably broad; as established in Pilkington v IRC [1964],
the term encompasses any application of funds that improves the beneficiary's material
circumstances, including sophisticated arrangements for tax planning. This evolution
reflects a shift in trust law toward greater administrative flexibility, empowering trustees
to respond dynamically to a beneficiary's financial needs provided the advancement is
made in good faith and for a legitimate beneficial purpose.
6. Remedies and Causation
Once a breach is found, you must calculate the loss.
A. Personal Remedies
The trustee must pay back the "but for" loss (Target Holdings v Redferns
[1995]).
Causal Link: There must be a close causal link between the breach and the
loss (AIB Group (UK) plc v Mark Redler & Co Solicitors [2014]). If the loss
would have happened anyway, the trustee may not be liable.
B. Proprietary Remedies (Tracing)
If the trustee is insolvent (bankrupt), a personal claim is useless. You must "trace" the
money into assets.
Clean Substitutions: If they bought a car with trust money, the car belongs to
the trust (Re Hallett’s Estate (1880)).
Mixed Funds: * The "Honest Trustee" Rule: The trustee is deemed to spend
their own money first (Re Hallett).
o The "Beneficiary’s Option": Beneficiaries can claim a proportionate
share of an appreciating asset (Foskett v McKeown [2001]).
Remedies for breach of trust are contingent upon a rigorous application of equitable
compensation and proprietary tracing. Under the "but for" test established in Target
Holdings v Redferns [1995] and refined in AIB Group (UK) plc v Mark Redler & Co
Solicitors [2014], personal liability is limited to losses factually caused by the breach,
excluding deficits that would have materialized notwithstanding the trustee’s default.
Where insolvency renders personal remedies illusory, beneficiaries may invoke
proprietary claims via tracing. While Re Hallett’s Estate (1880) provides a rebuttable
presumption that a trustee dissipates their own funds first in a mixed account, modern
equity prioritizes beneficiary choice. As per Foskett v McKeown [2001], beneficiaries
may elect for a proportionate share of an appreciating asset rather than a mere lien,
reflecting a sophisticated shift toward vindicating property rights over purely
compensatory models.
7. Defenses for Trustees
s.61 Trustee Act 1925: The court can excuse a trustee if they acted "honestly
and reasonably" and "ought fairly to be excused."
, Exemption Clauses: The trust deed might protect the trustee from everything
except fraud or "gross negligence" (Armitage v Nurse [1998]).
Trustee liability is subject to a nuanced defensive framework that balances fiduciary
accountability with the practicalities of trust administration. Under s 61 of the Trustee
Act 1925, the court retains a broad statutory discretion to relieve a trustee from liability,
provided they demonstrate they acted "honestly and reasonably" and, in view of all
circumstances, "ought fairly to be excused." This judicial mercy is complemented by
the autonomy of the settlor to include exemption clauses within the trust instrument.
As established in the seminal case of Armitage v Nurse [1998], such clauses can
validly exclude liability for even "gross negligence," provided they do not attempt to oust
the "irreducible core" of the trust—namely, the duty to act honestly and in good faith.
Conceptually, this legal landscape suggests that while the law maintains a high standard
for fiduciaries, it provides a safety net for the bona fide trustee, ensuring that the office
remains attractive to potential appointees despite its inherent risks.
Summary Checklist for a Problem Answer:
1. Identify the parties: Who are the trustees (Primary vs Secondary)? Who are the
beneficiaries (Vested vs Contingent)?
2. Is it a management breach? (Bad investment, no advice, no diversification?
Use s.1, 4, 5 TA 2000 and Cowan v Scargill).
3. Is it a fiduciary breach? (Conflict of interest? Use Boardman v Phipps).
4. Was there an advancement? (Check s.32 TA 1925).
5. Causation: Did the breach cause the loss? (Use AIB Group).
6. Remedy: Personal (sue the person) or Proprietary (trace the asset if they are
insolvent)?
Proprietary Remedies (Against the Property)
A proprietary remedy is a claim against specific property. Instead of saying "you owe
me money," the beneficiary says "that specific item/money belongs to the trust."
A. The Constructive Trust
The Rule: When a fiduciary (trustee) receives a bribe or secret commission, they
are deemed to hold that asset on constructive trust for the beneficiaries from
the moment they receive it.
Key Cases: * FHR European Ventures v Cedar Capital: Confirmed that secret
commissions are trust property.
o AG for Hong Kong v Reid: If the trustee uses a bribe to buy an asset (e.g., a
house) and that house increases in value, the beneficiaries own the
house and keep the profit.
B. Why Proprietary Remedies "Beat" Creditors (Insolvency)
This is the most critical part of your problem question. If the trustee goes bankrupt, their
"General Creditors" (the bank, credit card companies, etc.) are all fighting over the
trustee's remaining assets.
The "Priority" Rule: Under Barclays Bank v Quistclose and Twinsectra v Yardley,
if money is held on trust, it is not part of the trustee’s personal estate.
Consequence: The beneficiaries can "reach into" the trustee's bankruptcy and
pull out the trust property (or the assets bought with it) before the creditors get a
single penny.
