Trustees are jointly and severally liable for breach of trust to their beneficiaries where that breach has led to a loss to the trust fund.
Common allegations of breach of trust include where a trustee:
- Distributes trust assets to a beneficiary who is not entitled to them under the terms of the trust document.
- Invests the trust fund in a way not permitted by his express or statutory powers of investment.
- Breaches a fiduciary duty such as the duty not to profit from the trust.
- Breaches the common law or statutory duty of care, for example by exercising a power of investment without exercising such skill and care as is reasonable in the circumstances.
The defences available
A trustee who has committed a breach of trust could be protected from a breach of trust claim by an exemption clause in the trust deed. However, even if there is an exemption clause, trustees still have a minimum duty to perform the trusts honestly and in good faith for the benefit of the beneficiaries. An exemption clause cannot excuse a trustee who either knows that his act or omission is contrary to the beneficiaries' interests or is recklessly indifferent to the beneficiaries' interests.
If a trustee is not protected by an exemption clause, he/she could escape liability if the claim is time-barred. It has long been established law that, in general, wrongdoers ought not to be subjected to the threat of legal proceedings for an indeterminate period after the occurrence of the events to which they relate. The Limitation Act 1980 sets out limitation periods which specify a time limit within which legal proceedings of a particular kind must be brought.
Limitation serves as a defence to a claim and must be pleaded as such. Once a limitation defence is raised, however, it is for the claimant to show that its claim is not statute-barred.
With regards to breach of trust claims, the starting point is six years from the date on which the right of action accrued, i.e. the date of the breach (not the date of the loss): section 21(3) of the Limitation Act 1980. It is worth noting that the six year period will not run against a beneficiary whose entitlement is contingent upon attaining a certain age or upon the occurrence of a future event, until the interest has vested (Armitage v Nurse 1998).
The six year time limit is, however, subject to section 21(1) of the Limitation Act 1980 which provides that there is no limitation period in respect of any fraud or fraudulent breach of trust, or to recover trust property that the trustee has taken for himself. Fraud for these purposes means actual dishonesty (Armitage v Nurse 1998) but also includes a reckless disregard for the interests of the beneficiaries.
Even where no limitation period applies e.g. because the claim is one of fraud as set out above, the trustee still may have a defence of laches.
Under the equitable doctrine of laches, if there is unreasonable delay on the part of claimant in pursuing the claim and the trustee's position has been prejudiced by that delay, the Courts may not (in the judge's discretion) permit the claim to proceed.
Consent of Beneficiaries
It is also a defence to a claim for breach of trust if the claimant beneficiary consented to or concurred with the breach. However, there are a number of conditions:
- The beneficiary must have been at full age and capacity
- The beneficiary must have freely given consent and be free of undue influence
- The beneficiary must have given an informed consent
- It is not necessary that the consenting beneficiary has benefitted from the breach of trust, although that may be significant (Fletcher - v - Collis 1905).
Statutory relief under the Trustee Act 1925
- Section 61 of the Trustee Act 1925
If it appears to the court that a trustee is or may be liable for breach of trust, but has "acted honestly and reasonably and ought fairly be excused" for the breach of trust then the court may relieve him either wholly or partly from personal liability for the same.
The statutory relief under this provision is, however, completely at the court's discretion. The onus is on the trustee to show he acted honestly and reasonably and he ought fairly to be excused. In order to show reasonableness, a trustee will in general need to demonstrate that he or she treated the trust property in a way that an ordinary man of business would deal with their own property.
The relief is also only given when the trustee has been found to be in breach in court and the court then has to consider exercising its discretion. Even if the trustee has acted in an honest and reasonable way the court may not exercise its discretion, particularly if the trustee is a professional and has been paid for his services (R E Hawlings Settlement Trust 1964). As a result, private individuals acting as unpaid trustees are generally more likely to find themselves excused under this provision, but whether the discretion will be exercised ultimately turns on the facts of each case.
It is important to note that the section will not apply if the trustee has been negligent. In practice this means that a trustee cannot be found to have acted reasonably if he failed to obtain the level of skilled advice necessary for the size of the trust.
- Section 62 of the Trustee Act 1925
Where a trustee commits a breach of trust at the request in writing of the beneficiary the court has discretion to use the beneficiary's interest in the trust to indemnify the trustee who has committed a breach. Under section 62 it is not necessary to show that the beneficiary actually benefitted from the breach.