13. Breach of trust: the personal liability of trustees

The powers enjoyed by trustees are incidents of their legal ownership of the trust property, whereas their duties are incidents of their personal office. The beneficiary of any trust, even if it is a discretionary trust, has locus standi (which means ‘a place to stand’, used to describe a claimant’s right to be heard in a court of law) to bring an action against trustees for breach of trust. Common law concepts such as causation are increasingly being introduced to limit trustees’ liability for breaches of bare trusts in commercial contexts. This chapter examines the nature and potential extent of trustees’ liability for breach of their duties, along with the remedies that are available against trustees when they breach their trust. It also looks at defences that may be available to trustees in breach and, in the absence of defences, whether trustees may be relieved of personal liability.

8. Constructive trusts and informal trusts of land

Constructive trusts differ from express trusts in many ways. Whereas an express trust gives effect to an owner’s intention to transfer a beneficial interest in his property, a constructive trust may be imposed directly contrary to the owner’s intentions. Another distinction between an express trust and a constructive trust is that the former is unenforceable unless it is evidenced in writing, whereas the latter is created and operates without formality. However, express and constructive trusts, by their very nature as trusts, have a number of similar features, the most fundamental being the presence of ascertainable property, in which a beneficiary has a proprietary interest for which the trustee is personally liable to account. This chapter examines the nature, operation, and variety of constructive trusts, and also considers one special category of constructive trusts: informal trusts of land. In addition, it discusses commonwealth jurisdictions and proprietary estoppel.

1. Foundations

This chapter focuses on the historical and conceptual foundations of trusts and equity, first examining the history of the relationship between law and equity, including the historical origins of the trust. It then explains the idea of equity and how it is intertwined with the common law, and compares the trust with concepts such as gifts and contracts. The chapter shows that the trust arose in response to equity’s special concern to ensure that legal rights are not used in bad conscience, but later developed into a sophisticated institution governed by established rules. It looks at the reform of the Court of Chancery and considers trust property, equitable rights under a trust, separation of legal and equitable title, and the paradox of property and obligation.

16. Equitable maxims, doctrines, and remedies

In general, the leading court cases on equitable doctrines and remedies are very old. The fact that they still have the power to determine modern cases proves that equity is inherently adaptable. Originally developed by the old Court of Chancery in constructive competition with the common law courts, equity is now applied (since the Judicature Acts 1873–1875) by the unified Supreme Court of England and Wales. In addition, equity, as a dimension of law, has retained its special function of restraining or restricting the exercise of legal rights and powers in certain cases. This chapter considers particular principles (including maxims), doctrines (including conversion, satisfaction, performance, and election), and remedies that have been developed over time to help predict the way in which equity will operate in various types of cases.

15. The equitable personal liability of strangers to the trust

Even if a trust beneficiary successfully traces misappropriated trust property, he will only be entitled to a proprietary remedy against a stranger, who retains possession or control of the trust property. The beneficiary’s proprietary claim will fail if the stranger received the trust property, but has not retained it. However, the beneficiary (or the trustee) may be able to bring a claim against the stranger personally if the receipt was wrongful. This chapter analyses the circumstances in which a stranger may be personally liable in equity for analogous wrongs. After providing an overview of who strangers are, it examines a number of policy considerations and practical measures designed to give strangers some degree of protection. The chapter also looks at trusteeship de son tort, personal liability in equity for receipt, and equitable liability for assistance in a breach of trust.

14. Tracing and recovering trust property

There are situations where trust property passes into the hands of a third party ‘stranger’—a person other than a trustee or beneficiary of the trust. Personal and proprietary remedies against strangers are particularly valuable where the claimant cannot be satisfied with actions against the original trustee. The claimant has to make choices not only in relation to the final remedy, but also when required to ‘elect’ between evidential alternatives. The tracing process, which supplies the evidence that a stranger has received trust property, may require the claimant to make such a choice. This chapter deals with tracing and ‘remedies’, focusing on how a claimant, typically a beneficiary of the trust, is able to trace trust property into the hands of a stranger and recover it by means of a proprietary remedy.

10. The fiduciary duty

The fiduciary duty is the defining duty of trusteeship and consists of several overlapping obligations intended to promote loyalty or faithfulness. As part of his fiduciary duty, the trustee should avoid conflict with the interests of the trust and not to make an unauthorised unauthorized profit from the trust property, or from his position of trust. The fiduciary duty may also apply to a person who is not a trustee, in which case he is said to be a fiduciary. This chapter examines the principal obligations of trusteeship and the implications of breach of those obligations for trustees, beneficiaries, and third parties. It first discusses the strict rule of exemplary fiduciary propriety before turning to the duty of good faith. The chapter also looks at fiduciary relationships and fiduciary duties, the fiduciary duty to avoid conflicts of interest, the fiduciary duty to account for unauthorised unauthorized profits, and trustee remuneration.

9. Flexibility of benefit

According to the so-called ‘rule in Saunders v. Vautier’, the beneficiaries of an expressly created private trust may terminate the trust if they are in unanimous agreement and are all competent adults, and are, between them, absolutely entitled to the trust property. This chapter examines the issue of ‘flexibility of benefit’, the extent to which beneficiaries may be able to take benefits under a trust despite limitations on their beneficial ownership, as well as the extent to which limitations on their beneficial ownership may be varied or entirely removed. It shows that under the Trustee Act 1925, trustees have a discretionary power—known as ‘the power of maintenance’—to apply income for the benefit of infant beneficiaries and a similar discretionary power, termed ‘the power of advancement’, to apply capital for the benefit of a beneficiary (infant or adult) out of his/her anticipated entitlement to the trust fund.

7. Charity: trust creation and public policy II

This chapter explores how the creation of trusts is influenced by special considerations of public policy, focusing on charity that is beneficial to the public as opposed to illegality. Charity will render a purpose trust valid that the law of trusts would otherwise consider to be void. In contrast, illegality will sometimes render an interest or transaction void or unenforceable that the law of trusts and gifts would generally consider to be valid. After considering the creation of charitable trusts, the chapter also discusses charitable purposes and the public benefit as well as the administration of charitable trusts, before concluding by analysing their variation in accordance with the ‘cy-près’ doctrine.

6. Formality, perpetuity, and illegality: trust creation and public policy I

Trust property apparently belongs to the person who is not the true owner despite having all the forms and powers of ownership. Thus, a trust creates an illusion of ownership that may prejudice trade creditors when the trustee becomes insolvent and deceive the state’s tax collection agencies. However, there are a number of safeguards designed to prevent the undesirable creation and operation of trusts. For example, the disposition of equitable interests under trusts must be made in writing and the creation of trusts of land must be evidenced in writing. This chapter discusses the ways in which the creation of trusts is influenced by special considerations of public policy, focusing on formality, perpetuity, and illegality. It also considers rules against perpetuities—the rule against remoteness of vesting, the rule against inalienability of capital, and the rule against accumulation of income—and finally, looks at the Perpetuities and Accumulations Act 2009.