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What is a Breach of Trust?

What is a Breach of Trust?

A trustee has a duty of utmost good faith with their main duty being to hold onto trust property and look after it for the ultimate benefit of the beneficiaries, as set out in the trust deed. But what if a trustee doesn’t adhere to the trust deed?  What happens then? Read on to learn more about breaches of trust.

‘Breach of Trust’ Examples

If a trustee were to do something outside of their powers, this is called a ‘breach of trust’; examples of which include:

  • appointing capital to someone that is neither a named beneficiary nor a potential beneficiary within the class of discretionary beneficiaries
  • investing the trust fund in a manner that is not allowed
  • personally profiting from the trust property

Legal action can be taken against the Trustees

In these circumstances, a beneficiary can take legal action against the trustees. If a court agrees, then they can:

  • issue an injunction preventing the trustee from taking that course of action
  • order the trustee to make restitution by making a payment to the beneficiary or
  • order the return of any trust property that was wrongly transferred
What if a trustee doesn’t adhere to the trust deed? What happens then? Read on to learn more about breaches of trust. Click To Tweet

 

Trustee Exemption Clauses

Having said this, trustee exemption clauses are often used which exonerate trustees for non-fraudulent accidental breaches of trust.  These are clauses that can exclude or restrict a trustee’s liability for a breach of trust either by excluding liability or by modifying the trustee’s powers and duties.

It is thought understandable that a settlor may wish to include an exemption clause so as not to deter trustees from taking on the role, however, it can be seen that these clauses might actually prejudice beneficiaries.  For example, if a clause is in place, a trustee could seek reimbursement from the trust if a successful claim was brought against them, which would essentially mean a reduction in trust capital for those beneficiaries bringing about the claim.

The leading decision in English trust law concerning exemption clauses is Armitage v Nurse (1997); the Court of Appeal held that a clause excluding a trustee’s personal liability in all situations, including loss caused by the trustee’s own gross negligence, except in cases of the trustee’s own dishonesty (fraud) would be valid.  This means that the trustee would not be held liable for breach of trust, even if they had caused loss to the beneficiaries through their own gross negligent breach of trust.

Safeguards introduced

The Law Commission published a consultation on the law on breach of trust in light of the growing using of trustee exemption clauses – this was back in 2003 – since then, the recommendations have been accepted to maintain the use of these clauses but with certain safeguards:

  • Exoneration clauses may still be included in trusts
  • Trustees must take reasonable steps to ensure the settlor is aware of the meaning and effect of the clause
  • A breach of the rule (not adopted by legislation but by practice-based approach by professional bodies) will leave the trustee open to disciplinary measures by the relevant governing body (a court should have the power to disapply exclusion clauses in some cases).

The Solicitors Regulation Authority (SRA) and the Institute of Chartered Accountants for England and Wales (ICAEW) have adopted some of these recommendations in their codes of conduct for their relevant professionals.

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