BREACH OF TRUST
Where a trustee fails in his duties and that causes a loss, a beficiary may claim in breach of trust.
In Armitage v Nurse  it was said that “breaches of trust are of many different kinds” → so a breach of trust can be beneficial to the beneficiaries. For example, if a trustee invests in something he shouldn’t have invested in and that investment makes a greater profit, technically that is a breach of trust but a court will not give a remedy
Target Holdings v Redferns  said although court will ensure the trust is duly adminsitered, this doesn’t mean they will always give a remedy where there is a breach
In Target Holdings Ltd v Redferns  the House of Lords held the breach did not cause a loss, so the claim failed
In Nestle v National Westminster Bank  the claimant was unable to prove a loss, so the claim failed
In AIB Group (UK) v Mark Redler & Co Solicitors , the Supreme Court applied Target Holdings and applied the ‘but for’ test
The primary duty of the trustee is to account to the beneficiary. The beneficiary may then require a trustee to restore any property disposed of in breach of trust, set aside a transaction (falsify account), or to compensate for any loss caused by a transaction in breach of trust (surcharge account)
- Falsifying an account = don’t accept the accounts
- Surcharge account = compensate for loss caused by breach
There is power to order the payment of compound interest: it was on this point that the case of Westdeutsche Landesbank was brought.
RECONSTITUTION OF THE TRUST FUND
In Target Holdings Ltd v Redferns , the Plaintiff had sought an order to have the trust fund – i.e. the whole £1.7m held by Redferns on bare trust in their client account – restored.
- Lord Browne-Wilkinson held this remedy wasn’t available to beneficiaries absolutely entitled to the trust fund: the remedy was available where it was the only means of ensuring that all beneficiaries’ interests were protected. In this case, the appropriate remedy was equitable compensation.
- So, the remedy was refused: to have granted it would have given Target Holding a substantial windfall, unjustified by the circumstances of the case → So the courts will not allow beneficiaries to recover more than they deserve, and certainly not more than they lost
ACCOUNTING FOR SECRET PROFITS
Secret profits are profits not consented to by the beneficiaries
In Regal (Hastings) v Gulliver , directors of a cinema company took advantage of a commercial opportunity in their own right instead of for the company. Lord Russell said if a fiduciary makes a profit by use of their position they are liable to account for it
In Boardman v Phipps , a solicitor had to account for profits he had made as he was in a fiduciary position, despite acting in good faith and making the beneficiaries money
As a general rule, the trustees cannot set off any amount gained by another transaction against the loss to the trust property: Bartlett v Barclays Bank 
- If a trustee invests in one set of unauthorized transactions that makes a loss and another that makes a gain, they cannot off set each other
- In this case, trustees were majority shareholders in company and didn’t keep eye on it. The company made speculative property developments. One made a small profit and the other made a huge loss. The court held there was no set-off so they and were liable for the loss caused
- However in that case, Brightman LJ did allow the profit made by one land transaction to be set off against a large loss on another (so he bent the rules a little)
RIGHT OF ADOPTION
If the trustees have made an unauthorised investment, which makes more money than the authorised investment would have made, the beneficiary has no cause of action: see Nestle v National Westminster Bank  → they can only require trustees to reinvest
If the unauthorised investment loses money, the beneficiary (if sui juris) may elect to keep the investment (adopt it) and require the trustees to make good the loss. If they do not adopt it, the trustees must sell the investments, invest in an authorised manner and make good the loss
RIGHT OF ELECTION
Right of election: the beneficiary must decide whether to require the trustee to restore the trust property or to provide equitable compensation.
Tang Man Sit v Capacious Investments Ltd : a wronged beneficiary will often have alternative and inconsistent remedies e.g. (1) an account of the profits made by the defendant in breach of his fidudciary obligations and (2) damages for loss suffered for the breach. Faced with this scenario, a claimant must choose, or elect, between them and must make this choice before the judgment is given by the court (Lord Nicholls)
FALSIFICATION AND SURCHARGE
The trustees’ duty is to demonstrate their stewardship and management of the trust, by providing an account. On receipt, the beneficiaries have the option of accepting the account; if there has been a breach of trust, they can falsify the account or surcharge the account.
Falsifying account means the beneficiary does not accept the account and requires the trustees to put the trust property into a state which is consistent with them having properly managed the trust property. If necessary, they are required to use their own money to bring this about by, for example, replacing trust property
Surcharging account means trustees have to compensate for loss caused by the breach.
This way of considering remedies for breach of trust has undergone something of a revival: see AIB Group (UK) v Mark Redler & Co Solicitors 
JOINT & SEVERAL LIABILITY
It is presumed trustees act jointly, meaning they have joint and several liability: a beneficiary can sue any one of the Trustees and recover fully (Townley v Sherbourne 1620)
Bahin v Hughes (1886): Hughes was an active trustee and Edwards was not. Despite this, due to the joint and several liability of the trustees, “all the trustees were in the wrong, and everyone equally liable” to indemnify the beneficiaries including Edwards
- Also, see the Civil Liability (Contribution) Act 1978: the court has discretion to allocate liability on a just and equitable basis.
However, where one trustee has acted fraudulently, or appropriated the trust property for his own use, the other trustees will not be liable.
Chillingworth v Chambers : where 1 of the trustees is also a beneficiary of the trust, that trustee has to indemnify other trustees to extent of his own beneficial interest.
A trustee cannot plead ignorance or that they were not playing an active role as a trustee
However, a non-active trustee may have a defence if they can show they never accepted position of trustee → In re Clout and Frewer’s Contract 
A trustee may escape liability for breaches which took place before appointment. However, there may be a breach if new trustee allowed breaches to continue. Following retirement or resignation, liability continues (even post mortem against estate)
A retiring trustee can gain an indemnity from other trustees.
As seen, trustees who together commit a breach of trust are jointly and severally liable. However, a trustee may be entitled to receive a full indemnity from liability for his breach by his fellow trustees e.g. where one trustee has acted fraudulently, the others are entitled to receive a full indemnity from liability for his breach (this was the example given by Cotton J in Bahin v Hughes 1886)
However, the courts now have power to allocate liability by the Civil Liability (Contribution) Act 1978 or relieve one or all of the trustees of liability s.61 Trustee Act 1925.
Trustee Act 1925 s.61: “If it appears to the court that a trustee is or may be personally liable for any breach of trust, but has acted honestly and reasonably, and ought fairly to be excused for the breach, then court may relieve him either wholly or partly from liability.”
Limitation Act 1980 sets a limit of 6yrs for breach of trust (s.21(3)), from the time the property vests in the beneficiary or the breach occurs; or, for minors, the time they reach 18.
There is no limitation for fraud or fraudulent breach of trust
The court has a discretion to extend this period, particularly where the delay in bringing an action is caused by the trustee: e.g., if they refuse to provide info or mislead the beneficiaries
A beneficiary who consents knowingly to a breach cannot sue (except minors, incapacitated individuals, and those subject to undue influence). It is not necessary that the beneficiary knew that it was in breach; nor that he should personally benefit. The beneficiary can acquiesce or agree to release the trustee from liability.
EXEMPTION IN THE TRUST INSTRUMENT
In Armitage v Nurse  Lord Millett said trustees do have an irreducible core of obligation from which they cannot be exempted from, but competence is not required → you can be incompetent without being in breach, because you will not be in breach of the fiduciary duty of good faith
In Spread Trustee Co Ltd v Hutcheson , the Privy Council observed that Armitage v Nurse correctly stated the law of England, as well as the customary law of Guernsey
Law Commission → “Any paid trustee who causes a settlor to include a clause in a trust instrument which has the effect of excluding or limiting liability for negligence must before the creation of the trust take such steps as are reasonable to ensure that the settlor is aware of the meaning and effect of the clause.” (Law Com 301 para 6.65)
- The rule has been adopted by STEP (The Society of Trust and Estate Practitioners) and the Government is ‘urging’ the regulatory bodies to adopt it (Hansard, 14/9/2010).
⇒ The contributory negligence of the beneficiary does not afford a defence to the trustee: Lloyds TSB Bank plc v Markandan and Uddin