Millett: equity’s place in the law of commerce
- It is tempting but wrong to assume that a trustee is under a primary obligation to perform the trust and a secondary obligation to pay equitable compensation if he doesn’t.
- Equity says under the terms of the original trust you will owe an obligation or produce the current market value as a way of carrying on performing your duty.
- If you can’t produce original property = produce money as a substitute instead. This idea fundamental but the HoL failed to grasp this concept in two major cases and cocked up.
Claim a beneficiary brings depends on the breach breached by trustee; either substitutive performance claims or reparation claim.
Armitage v Nurse, a breach may be:
- Deliberate or inadvertent
- Actual misappropriation or misapplication of trust property,
- Dealing outside of trustee powers
- Failure to carry out positive obligations
- Injurious or even beneficial to beneficiaries.
- Can be committed fraudulently or in good faith
b) Substitutive performance claims
Beneficiaries don’t have to assert anything wrong has been done.
- Claim is brought when trustee has entered into some kind of transaction that isn’t authorized under the terms of the trust.
- Beneficiaries not relying on the fact that trustee has breached or done anything wrong (don’t have to show this) but relies on their PRE-EXISITING right to that property.
- g. if trustee sold a painting to a bona fide purchaser without notices that belongs to the beneficiaries, beneficiaries can ask the courts to order trustee to pay them a sum of money as a form of performing the trustee duty to produce property= substitutive performance.
- Equity doesn’t say this is a breach of duty that has caused loss INSTEAD= says trustee under continuing obligation, its only possible to do things authorized in the trust. What would the trust look like if the trustee hadn’t done that.
- The trustee is under subsisting duty to produce whatever property they’ve given away or lost.
Trust accounts and trustee accountability
- Under a duty to account to beneficiary for what they do with the trust property=
- Physical aspect of drawing up records of accounts
- Every time there’s a transaction within the trust= this has to be recorded on the accounts and trustee has to produce evidence that matches the accounts. Every time there’s a distribution of trust property = has to be recorded. Beneficiaries can ask for these records any time, entitled to the info.
- Falsifying account= courts draw a red line across entries in trustee accounts which are unauthorized. Trustee has to match the falsified account, make sure accounts match reality, so they might use own money to account for ‘breach’.
- Reparative claims= beneficiaries surcharge accounts with an amount of the trustees liability to compensate for the loss caused by the breach of duty. Surcharge because a record put into the account of missing income/properties.
- Physical aspect of drawing up records of accounts
- Trustees make negligent investment, beneficiaries ask what loss has been caused by that breach and see how much they have to pay
- Makes no difference whether assets lost through innocent accident or b’s negligence/dishonesty
- About conveyancing transaction which lending/building society agrees to lend money to someone who wants to buy some property. Borrower and purchaser agree with lender to execute mortgage over property to secure repayment of the loan.
- Usually solicitor in between such dealings who receives the money from the lender, then releases the money to borrower when they execute mortgage over the property in favour of lender above other lenders. Solicitor shouldn’t release these funds UNTIL they have documents of title from borrower to execute valid charge over the property.
TARGET HOLDINGS V REDFERNS 1996
- Facts: Target lender, Redferns solicitor. T transfers money to R and says hold that money on trust until you get the charging documents from the vendor, after that release the money to the vendor and borrower can have the money. When T transfers money to R they accompany the transfer with a set of instructions which created a kind of Quistclose trust. = T saying the money is subject to a power, if vendor gives you the document you can make the payment, if not you’re unauthorized. When R pays the money to vendor, they’re not complying with the terms of the trust. Vendor does transfer everything squared off in the end everyone gets what they expected
- Issue: turns out transaction was part of a scam, vendor and purchaser of property are shell companies controlled by criminal. Property had been flipped through sale companies to make it look more valuable than it was= con on target. Property not that valuable. Borrower and vendor go insolvent= no point suing them, criminals can’t be traced = sue Redfern.
- General rule= trustee who makes an unauthorized disposal of trust funds= under continuing duty to produce the actual property or money.
- Bare trust= in this case a one off trust sitting in the middle of a contractual transaction
- Ask= did the trustee breach of duty cause the loss which the beneficiary is complaining about? On the facts not possible to give, case decided on a but for basis.
Important to note:
- Case was pleaded as a SUBSTITUITVE CLAIM, but Lord Browne-Wilkinson treats the claim as a REPARATIVE CLAIM. These two aren’t the same. Conceptually incoherent and confused thing to do. Basically saying in a case where there’s a substitutive claim, in a case which involves a contractual transaction with a bare trust in the middle of it= we will treat it as a reparation claim. Bare trust only liable for losses caused by the breach and not losses that would’ve happened anyways.
- The scope of this exception created by BW is unclear. No guidance in the case as to what the limits are beyond a solicitor relationship being involved like the facts.
- Policy reason: HoL acknowledged it was one reason they reach this decision= there are lots of conveyancing transactions which happen in which solicitors are asked to hold money until certain things have been done. If you fix a substitutive claim on solicitors= increasing risk for solicitors to do this kind of work.
Millet: Equity’s place in the law of commerce
- The courts could’ve got the result without confusing the law in this way and taking a large hammer to trustee liability
- Two ways R could discharge the liability would be to produce the value money OR produce substitute for the term which is acceptable to the terms of the trust. Those document should be traceable substitute for the money because the trust says; either you have the money or the documents. They didn’t get the documents on time but they DID get them. So no more breach at this point surely.
AIB messes things up further
AIB v Mark Redler 2013
- Scenario: re-mortgaging transaction i.e. someone owes some property which they’d already charged to a bank to secure payment of a loan which the bank has made to them but they decide to refinance. Borrower uses new dollop of money to pay off their current mortgage, use extra money to do whatever they want and repay the new mortgage instead.
- Facts: AIB second lender, agreed to give borrower money on the condition they get first charge over Barclays. Solicitor MR told by AIB here is the borrowers money that we are going to lend to him, give some of it to Barclays (current first charge mortgagee) pay off the TWO mortgages that exist with them, and once you’ve done that you can give the borrower the rest of the money and get them to set up a new mortgage in our favour.
Solicitor pays enough money to Barclays for ONE of the mortgages but not the other and gives the borrower the rest of the money. Because of this mistake on the part of a solicitor there’s still a mortgage over the property which is in favour of Barclays which is the first in favour on the property register and not AIB.
Borrower defaults on the loan to AIB and Barclays, between them the two banks get an order of the sale of the property as the first mortgagee Barclays gets 30g, the rest goes to AIB. The value of the property had gone down in the meantime due to property market slump. AIB unhappy sues Mr saying what youd did was unauthorized we only authorized you to pay the borrower on the basis that BOTH mortgages under Barclays were paid off = you’re liable to us.
- CoA: DON’T FOLLOW TARGET and say instead we ask what loss was caused by breach of duty and the loss is 30grand because the rest of the loss wasn’t caused by breach of duty but a collapse in the property market.
- Mitchell: this decision is wrong. But we can distinguish the decision from Target because in AIB the transaction was never completed = we should make Mr liable for the whole of the money.
- Supreme court refuses this criticism and uses the same analysis as in Target and they say whatever to the criticism of the decision and their analytical incoherence.
- Lord Reed: (a Scotsman… they don’t have trust law in Scotland.) he says this is really like a tort case and shows trust law is converging with common law and the same laws should be answered in the same way
- PUSHING FUSIONIST IDEA. Problem= claims under substitutive category and common law cases aren’t The closest thing in common law is a claim in debt. THEY’RE NOT THE SAME THING!
- SAME PROBLEM REMAINS= WHAT IS THE SCOPE OF THIS PRINCIPLE NOW AFFIRMED IN AIB WHEN WILL A TRANSACTION COUNT AS HAVING A BARE TRUST WITHIN A TRANSACTION.
C) Reparation claims
- Depends on the assertion that trustee has committed a wrong, the damage is calculated as to the loss suffered including= loss of chance to avoid a detriment or make a gain.
- Beneficiaries have to prove factually using ‘but for’ test that the trustee factually caused loss.
Bartlett v Barclays Bank 1980
- If the trustees holds as a part of trust fund some shares and they fail to adequately monitor director activities= beneficiaries can sue when it has a knock on effect on them for compensatory award.
- Brightman LJ: compensatory award here isn’t readily distinguishable expect with the aid of a powerful judicial telescope
Bristol v Mothew 1998
- Millet LJ: where there’s a fiduciary duty of care that’s breached= we remedy that in the same way as we do at common law.
Re Mulligan 1998
- Facts: Mulligan farmer in NZ left property and some investment on a trust, the terms were the property was held for his widow for life and the remainder for his nephew. Trustees were the widow and some local solicitors. Widow Mrs mulligan a battleaxe and didn’t listen to sound advice on investing the shares.
- = breach of trustee duty because it’s a duty when investing funds to strike a balance between the life tenant and the remainder.
- From time to time solicitors go to her and tell her that’s in breach of trust sends them away with fly in their ear. After 30 years partners give up. She dies nephew sues solicitors for breach of trust.
- Cautionary tale= solicitors owed duty of care to strike balance and they didn’t do it so they were liable to pay.
Conceptual structure= trustee owed duty, they breach it, this causes loss= look at how much loss was caused using but for approach to calculate amount trustee has to pay.
Substitutive claims don’t rest on a breach of duty but the existing trustee duty.
- Is what the beneficiaries complaining about authorized or unauthorized?
- Unauthorized= substitutive claim. If what’s done is authorized in the terms of the trust but breaches another duty= you can’t bring a substitutive performance claim because the trustee has acted in an authorized way.
- But breached another duty
- Substitutive performance claims have an absolute quality= it isn’t possible for the trustee to argue that their liability should be reduced to reflect the fact that the beneficiaries would’ve suffered loss anyways
- REPAPRATION CLAIMS ARE SUBJECT TO PRINCIPLES OF REMOTENESS, MITIGATING CIRCUMSTANCES ETC.
Ultraframe (UK) Ltd v Fielding  WTLR 835 
- Taking of an account is the process by which a beneficiary requires a trustee to justify his stewardship of trust property. The tee must show what he’s done with the property. If the beneficiary is dissatisfied in any way that the tee has dealt with the property he may surcharge or falsify the account
- Surcharge= when the beneficiary alleges that the tee hasn’t obtained for the benefit of the trust all that he might have done, if he had exercised due care and diligence. If the allegation is proved, then the account is taken as if the trustee had received, for the benefit of the trust, what he would’ve received if he’d exercised due care and diligence
- Falsifies= when the beneficiary alleges that the trustee has applied trust property in a way that he shouldn’t have done e.g. an unauthorized investment. If the allegation is proved, then the account will be taken as if the expenditure hadn’t been made, and as if the unauthorized investment hadn’t formed part of the assets of the trust.
- If the unauthorized investment has gained value the beneficiary may choose to not falsify the account, in which case the asset will remain a trust asset and the expenditure on it will be allowed in taking the account.
- EXAMPLES OF SUBSTITUTIVE PERFORMANCE AND REPARATION CLAIMS
- Making an unauthorised investment and negligently investing
- Knott v cottee- trustees are liable for the money improperly invested but they are entitled to claim a credit for the sale of proceeds of the property when it is sold
- Improper retention of unauthorised investments
- Where the trustee retains an unauthorised investment which depreciates in value, they’re liable for the difference between the price obtainable on sale at the proper time and the proceeds of sale of the unauthorized investment when eventually sold.
- Fry v fry- trustees had been negligent in not selling the house for so long
- Re Chapman- a trustee isn’t liable for a loss arising through the retention of an authorised investment unless he was guilty of wilful default.
- Improper realisation of proper investments
- It is clearly a breach of trust if a tee sells an unauthorized investment for the purpose of investing in an unauthorized investment or for the purpose of paying the proceeds to the life tenant in breach of trust
- Non-investment of trust funds
- Trust funds in trade
- Trustee Act 1925, s 61
- Gives the courts the power to excuse trustee from liability for breaches of duty where the court considers that the trustee has acted honestly and reasonably.
- This section has been pleaded in some of these solicitor conveyancing cases and in one or two cases it’s been successful but the basic problem is that where the firm has released the money too early the court will never say that was a reasonable thing to do
- Beneficiaries have consented to trustee’s action, all the beneficiaries have to agree and they have to be given enough information to give an accurate picture of what they’re being asked to consent to.
Holder v Holder  Ch 353
- Exemption Clauses
- There are two different kinds
- A clause which excludes duties – basically a clause which say the trustees just don’t owe this duty at all. O what’s effectively happening is that although general law sets down default duties, it’s possible for settlor to create tailor made duties
- There are two different kinds
* Armitage v Nurse  Ch 521
- Millet-There’s an irreducible core of duties which you can’t exclude in particular it isn’t possible to draft a trust document which says that the trustee owes no duty to act in a good faith way towards the beneficiaries or comply with the terms of the If you do that you haven’t created a trust but just created a gift because beneficiaries have no enforceable rights worth having
- The second way is to exclude liability– say yes trustee has breached them but they won’t liable or you can reduce/cap the liability. E.g. you can look at Armitage and Citibank
If a trustee can prove that the settlor knew of and approved a clause in the trust instrument exempting the trustees from liability for a breach of trust upon a fair non-restrictive construction of the clause, then they will escape liability for breach unless it was a dishonest breach of trust
Why would a settlor reduce liability?
- They could be a trustee as well
- An intelligent person would say no to being a trustee 😀 professional people are going to say that, they often insist on these clauses, so the settlors have to hope the people are a good at what they do
Citibank NA v Hayim  AC 730
- A clause may oust any duty in the first place so that there can be no breach of duty
Bogg v Raper (1998) 1 ITELR 267
- Solicitor who drafted the clauses and was the prospective trustee didn’t have to prove that he had advised to get independent legal advice about the trust document they had drafted
Law Commission Trustee Exemption Clauses (Law Com No 301, 2006) part 7
- Criticisms- often when people go to the solicitors and ask to draft a will and the solicitors say yes but we are putting in a clause, and then it turns out that it exempts them from liability for breach of duty without explaining to settlor
- So law commission says that wherever a firm of solicitors has drafted a trust document of which they are the trustees themselves, there should be a rule where they have to jump through hoops to make it clear that the settlor understands the clauses. Everyone up for the idea except solicitors but there’s only a self-regulation scheme which incurs no sanctions if they do!