Beach of Trust and Fiduciary Duty

A Trustee commits a Breach of Trust if the Trustee violates any duty which the Trustee owes as a Trustee to the beneficiaries {Tito v Waddell (No.2) [1997] Ch 106 at 247-8;[1977] 3 All ER 129; [1977] 2 WLR 496 per Megarry VC}.

Megarry VC noted two definitions:

(1) “every omission or violation by a trustee of a duty which equity lays on him…is a breach of trust“, and

(2) “a trustee commits a breach of trust if he violates any duty which he owes as trustee to the beneficiaries“.

A Trustee is guilty of fraud if the Trustee knowingly commits an act amounting to a breach of trust from the nature of which the trustee must be taken to have known that the act was contrary to law. “Fraud” in this context means equitable fraud, rather than its narrower common law meaning.

An innocent trustee is not liable for the fraud of a co-trustee {Buckland v Ibbotson (1902) 28 VLR 688}, but if a trustee becomes aware that another trustee has been guilty of fraud or a fraudulent breach of trust and conceals it, he or she would become party or privy to the fraud.

Breaches of Trust can include, but are not limited to the following:

– a trustee investing carelessly {Re Somerset; Somerset v Earl Poulett [1894] 1 Ch 231 (CA)}

– a trustee investing on insufficient security {Re Bowden; Andrew v Cooper (189) 45 Ch D 444}

– failing to realise assets as directed {Hicks v Trustees, Executors & Agency Co Ltd (1901) 27 VLR 389 (FC)}

– failing to collect a debt due to the trust {Partridge v Equity Trustees Executors & Agency Co Ltd (1947) 75 CLR 149}

– Paying sums exceeding those allowed in the trust instrument or by law to the beneficiaries {Re Sharp; Rickett v Rickett [1906] 1 Ch 793}

– improperly parting with money in the trust fund {Re Oliver; Theobald v Oliver [1927] 2 CH 323}

– failing to exercise proper supervision of co-trustees or agents {Buckland v Ibbotson (1902) 28 VLR 688; Re Fountaine; Fountaine v Lord Amherst [1909] 2 Ch 382 (CA)}

– failing to keep accounts {Moore v Flavelle; Re Flavell [1969] 1 NSWR 361}

Where a fiduciary (a Trustee) enters into a transaction with the person to whom he owes a fiduciary duty (ie a Beneficiary of the Trust), and the fiduciary is unable to prove that the transaction was has been entered into with the “fully informed consent” of the beneficiary of the fiduciary Duty, the transaction is voidable at the instance of the beneficiary, not withstanding that the beneficiary would have so consented even if the fiduciary had made a full disclosure of the relevant facts {Maquire v Makaronis [1997] HCA 23; (1997) 188 CLR 449 at  467-468 and at 472 (per Brennan CJ, Gaudron, McHugh and Gummow JJ).

In order to capacitate the beneficiary to give a consent the fiduciary must make a full disclosure of the relevant facts to the beneficiary. Even where the fiduciary is able to prove that the beneficiary would have entered into the transaction if a full disclosure of the relevant facts had been made to him, the beneficiary is still entitled to rescind the transaction merely because such disclosure had not in fact been made.

In the leading case of Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15, the High Court of Australia applied the “but for” test to a breach by trustees of their strict duty to comply with the terms of the trust, the trustees having disbursed trust monies to a third party in breach of the terms of the trust. There the High Court applied the “but for test with “undiminished cogency” observing:

“The beneficiary submits that it would not have suffered the loss of $500,000 but for  the breaches of trust by the trustees. These submissions should be accepted”.

The High Court in Youyang also stated:

“There must be a real question whether the unique foundation and goals of equity, which has the institution of the trust at its heart, warrant any assimilation even in this limited way with the measure of compensatory damages in tort and contract. It may be thought strange to decide that the precept of trustees are to be kept by courts of equity up to their duty has an application limited to the observance by trustees of some only of their duties to beneficiaries in dealing with trust funds”

The High Court’s view is then that the “but for” test should be applied in respect of loss suffered by the person to whom the fiduciary duty was breached, irrespective of whether the duty breached was the strict duty to comply with the terms of the trust, or the duty of honesty, or the duty of care.

In the matter of causation in the tort of negligence, the plaintiff must prove that he would not have suffered the injury “but for” he conduct of the defendant and there was no novus actus interveniens (a new intervening act) and, finally, that it was reasonably foreseeable that the defendant’s conduct would have lead to the plaintiff’s injury {March v E & MH Stramare Pty Ltd [1991] HCA 12}.

By comparison, in the case of equitable compensation for the loss in relation to the breach of duty by a fiduciary (Trustee), only the “but for” test need to be satisfied by the plaintiff to establish the defendant’s liability { Caffery v Darby (1801) 6 Ves Jun 488 [31 ER 1159] Re Dawson (decd) [1966] 2 NSWR 211; O’Halloran v RT Thomas & Family Pty Ltd (1998) 45  NSWLR 262; Beach Petroleum NL V Kennedy (1999) 48 NSWLR 1; Hill v Rose [1990] VR 129}.

Street J sated in Re Dawson (dec) [1966] 2 NSWR 211 at 215:

“the trustee is liable to place the trust estate in the same position as it would have been if no breach had been committed. Considerations of causation, foreseeability and remoteness do not readily enter into the matter.”

In Jaffray v Marshall [1994] 1 All ER 143 {relying on Guerin v R [1984] 2 SCR 335} the judge summed up the position of the date of valuation for a Breach of Trust as follows (at 153):

“The underlying point of the authorities seems to be that the breach of trust has deprived the party who ought to have the assets throughout the relevant period of the opportunity of realising them at any point he chose.”

Based on this common ground, therefore, what is required to show dishonesty in the case of a professional trustee is:

In Fattal & Ors v Walbrook Trustees (Jersey) Ltd & Ors [2010] EWHC 2767 (Ch) the Court found what is required to show dishonesty in the case of a professional trustee is:

i) A deliberate breach of trust;

ii) Committed by a professional trustee:
Who knows that the deliberate breach is contrary to the interests of the beneficiaries; or
Who is recklessly indifferent whether the deliberate breach is contrary to their interests or not; or
Whose belief that the deliberate breach is not contrary to the interests of the beneficiaries is so unreasonable that, by any objective standard, no reasonable professional trustee could have thought that what he did or agreed to do was for the benefit of the beneficiaries.

 

That leads on to the next question: what is the test for dishonesty in the case of a trustee exoneration clause such as this? I start with Armitage v Nurse. Millett LJ said that:

“By consciously acting beyond their powers (as, for example, by making an investment which they know to be unauthorised) the trustees may deliberately commit a breach of trust; but if they do so in good faith and in the honest belief that they are acting in the interest of the beneficiaries their conduct is not fraudulent. So a deliberate breach of trust is not necessarily fraudulent. … It is the duty of a trustee to manage the trust property and deal with it in the interests of the beneficiaries. If he acts in a way which he does not honestly believe is in their interests then he is acting dishonestly. It does not matter whether he stands or thinks he stands to gain personally from his actions. A trustee who acts with the intention of benefiting persons who are not the objects of the trust is not the less dishonest because he does not intend to benefit himself.”

Other reading:

A Comparative Evaluation of Developments in Equitable Relief for Breach of Fiduciary Duty and Breach of Trust” [2006] QUTLawJJl 7; (2006) 6(1) Queensland University of Technology Law and Justice Journal 118

 

 

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