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SQE – Equity and Trust – Identifying a Breach of Trust
Introduction
Before a trustee can be held liable and before any remedy can be awarded, the court must first identify whether a breach of trust has occurred. The existence of a breach is the foundation of any claim against a trustee. Without a breach, there can be no liability and therefore no need to consider issues such as causation, remoteness, equitable compensation, tracing, or proprietary remedies.
A breach of trust occurs whenever a trustee fails to comply with the obligations imposed by the trust instrument, statute, or general principles of equity. Broadly speaking, breaches of trust fall into two categories. First, a trustee may do something that they are not authorised to do. Secondly, a trustee may fail to do something that they are under a duty to perform.
Acts That a Trustee Ought Not to Do
The first category of breach occurs where a trustee performs an act that exceeds their authority. Trustees derive their powers from the trust instrument and from legislation. If they act outside those powers, they commit a breach of trust.
This type of breach is often described as an ultra vires act because it falls outside the trustee’s lawful authority.
A trustee may exceed their powers by making unauthorised investments, disposing of trust property improperly, exercising powers for improper purposes, or entering into transactions prohibited by the trust deed.
Breach of Statutory Powers
Trustees are frequently granted powers by statute. If they exercise those powers beyond the limits established by legislation, they may become personally liable.
For example, section 8 of the Trustee Act 2000 gives trustees a broad power to acquire freehold or leasehold land. However, if trustees use trust money to purchase property in circumstances not authorised by statute or contrary to the trust’s purposes, they may commit a breach of trust.
The fact that trustees believed they were acting in the trust’s best interests will not necessarily excuse the breach.
Example – Acting Beyond Statutory Powers
Suppose a trust was established to provide income for a beneficiary through conservative investments.
The trustees decide to use the trust fund to purchase speculative overseas real estate that falls outside the powers granted by the trust instrument and is inconsistent with the trust’s investment objectives.
Even if the trustees genuinely believe that the investment will generate substantial profits, they may be liable because they have acted beyond their authorised powers.
Breach of the Trust Instrument
Trustees must also comply with the specific provisions contained in the trust deed.
Many trust instruments impose restrictions on how trust property may be managed. These restrictions are legally binding and must be followed.
A trustee who ignores those restrictions commits a breach of trust regardless of whether the transaction ultimately benefits the trust.
Example – Acting Contrary to the Trust Deed
Assume a trust deed expressly prohibits investment in oil and gas companies for ethical reasons.
The trustees nevertheless invest £1 million of trust funds in a multinational oil corporation because they believe the shares will increase in value.
Even if the investment proves profitable, the trustees have acted outside the powers granted by the trust deed and have therefore committed a breach of trust.
Innocent Breaches of Trust
Not all breaches involve dishonesty or bad faith. A trustee may commit a breach entirely innocently while genuinely attempting to administer the trust correctly.
Equity distinguishes between the existence of a breach and the trustee’s state of mind. Liability may arise even where the trustee acted honestly and reasonably.
Re Diplock [1941] Ch 253
An important example is Re Diplock.
The executors of a deceased person’s estate distributed approximately £250,000 among numerous charitable institutions. They believed that the relevant clause in the will was valid and authorised the distribution.
However, the clause directed the executors to distribute the residue of the estate among “charitable or benevolent objects.” Because the purposes were not exclusively charitable, the gift was void.
As a result, the executors had distributed property to the wrong recipients and committed a breach of trust despite acting honestly and in good faith.
The decision was subsequently affirmed by the House of Lords in Chichester Diocesan Fund and Board of Finance (Incorporated) v Simpson [1944] AC 341.
Failures to Perform Trustee Duties
The second major category of breach occurs where trustees fail to do something that they are legally required to do.
Trustees owe numerous duties arising under the trust instrument, statute, and equitable principles. Failure to perform those duties may result in liability.
Unlike the first category, these breaches involve omissions rather than positive acts.
Failure to Distribute Trust Property
One common example is a failure to distribute trust property when distribution is required.
If trustees unreasonably delay the distribution of trust assets after a beneficiary becomes entitled to them, they may be liable for breach of trust.
The beneficiaries may seek equitable compensation for losses resulting from the delay.
Failure to Manage Investments Properly
Trustees also owe duties concerning investment management.
They must exercise reasonable care, diversify investments where appropriate, and periodically review the trust portfolio.
A failure to maintain a balanced and suitable portfolio may constitute a breach of trust, particularly where losses result from excessive concentration of investments or a failure to review changing market conditions.
Example – Failure to Review Investments
Suppose trustees invest the entire trust fund in a single company and then fail to review the investment for ten years.
During that period, the company experiences financial difficulties and eventually collapses.
The trustees may be liable for breach of trust because they failed to exercise the degree of care and supervision required of prudent trustees.
Consent and Condonation by Beneficiaries
A trustee will not always be liable for conduct that would otherwise constitute a breach of trust.
Beneficiaries who possess full legal capacity may consent to, authorise, or subsequently approve a breach of trust.
Where valid consent is given, the trustee will generally be protected from liability because the beneficiaries have agreed to the conduct in question.
This principle recognises that beneficiaries are entitled to determine how their interests should be managed.
Requirements for Valid Consent
For consent to be effective, several conditions must be satisfied.
The beneficiaries must have full legal capacity, meaning they must be adults and possess the necessary mental capacity.
The beneficiaries must also act freely and voluntarily.
Furthermore, they must possess full knowledge of all material facts surrounding the proposed transaction.
If any of these requirements are absent, the consent may be ineffective.
Circumstances Where Consent Will Not Protect the Trustee
Consent will not excuse a breach where it has been obtained through inequitable conduct.
Examples include:
Example – Valid Consent
Suppose all adult beneficiaries of a trust agree that trustees may retain a high-risk investment that would otherwise be inconsistent with the trust’s investment strategy.
The trustees fully explain the risks and provide complete information.
If the investment subsequently performs poorly, the beneficiaries may be unable to sue because they knowingly consented to the transaction.
Example – Invalid Consent
Suppose trustees persuade beneficiaries to approve a speculative investment by falsely stating that independent financial advisers have guaranteed success.
The beneficiaries rely on that representation and consent to the investment.
Because the consent was obtained through misrepresentation, it will not protect the trustees from liability if losses occur.
Relationship with Trustee Liability
Identifying a breach is only the first stage in establishing trustee liability.
Once a breach has been identified, the court must then consider:
Comprehensive Case Study
Facts
A trust deed prohibits investments in fossil fuel companies and requires trustees to maintain a diversified investment portfolio.
The trustees invest 80% of the trust fund in a single oil company because they believe oil prices will rise significantly.
The beneficiaries are not informed.
Two years later, the company’s share price collapses and the trust loses £3 million.
Analysis
The trustees have committed two separate breaches of trust.
First, they acted outside the powers granted by the trust deed by investing in a prohibited industry.
Secondly, they failed to maintain a diversified investment portfolio and therefore breached their investment duties.
The beneficiaries did not consent to the transaction and therefore cannot be said to have authorised the conduct.
Outcome
The trustees are likely to be liable for breach of trust and may be required to pay equitable compensation to restore the trust fund.
Conclusion
Identifying a breach of trust is the essential first step in any claim against a trustee. A breach may arise either because a trustee performs an unauthorised act or because the trustee fails to perform a required duty. Cases such as Re Diplock demonstrate that liability may arise even where trustees act honestly and in good faith. However, beneficiaries who possess full capacity may authorise or condone conduct that would otherwise constitute a breach, provided that their consent is fully informed and free from improper influence. Once a breach has been established, the court may then proceed to consider causation, loss, available defences, and the appropriate equitable remedies.
References
Re Diplock [1941] Ch 253.
Chichester Diocesan Fund and Board of Finance (Incorporated) v Simpson [1944] AC 341.
Trustee Act 2000, ss 1–8.
Boardman v Phipps [1967] 2 AC 46.
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, Oxford University Press 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, Oxford University Press 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
Introduction
Before a trustee can be held liable and before any remedy can be awarded, the court must first identify whether a breach of trust has occurred. The existence of a breach is the foundation of any claim against a trustee. Without a breach, there can be no liability and therefore no need to consider issues such as causation, remoteness, equitable compensation, tracing, or proprietary remedies.
A breach of trust occurs whenever a trustee fails to comply with the obligations imposed by the trust instrument, statute, or general principles of equity. Broadly speaking, breaches of trust fall into two categories. First, a trustee may do something that they are not authorised to do. Secondly, a trustee may fail to do something that they are under a duty to perform.
Acts That a Trustee Ought Not to Do
The first category of breach occurs where a trustee performs an act that exceeds their authority. Trustees derive their powers from the trust instrument and from legislation. If they act outside those powers, they commit a breach of trust.
This type of breach is often described as an ultra vires act because it falls outside the trustee’s lawful authority.
A trustee may exceed their powers by making unauthorised investments, disposing of trust property improperly, exercising powers for improper purposes, or entering into transactions prohibited by the trust deed.
Breach of Statutory Powers
Trustees are frequently granted powers by statute. If they exercise those powers beyond the limits established by legislation, they may become personally liable.
For example, section 8 of the Trustee Act 2000 gives trustees a broad power to acquire freehold or leasehold land. However, if trustees use trust money to purchase property in circumstances not authorised by statute or contrary to the trust’s purposes, they may commit a breach of trust.
The fact that trustees believed they were acting in the trust’s best interests will not necessarily excuse the breach.
Example – Acting Beyond Statutory Powers
Suppose a trust was established to provide income for a beneficiary through conservative investments.
The trustees decide to use the trust fund to purchase speculative overseas real estate that falls outside the powers granted by the trust instrument and is inconsistent with the trust’s investment objectives.
Even if the trustees genuinely believe that the investment will generate substantial profits, they may be liable because they have acted beyond their authorised powers.
Breach of the Trust Instrument
Trustees must also comply with the specific provisions contained in the trust deed.
Many trust instruments impose restrictions on how trust property may be managed. These restrictions are legally binding and must be followed.
A trustee who ignores those restrictions commits a breach of trust regardless of whether the transaction ultimately benefits the trust.
Example – Acting Contrary to the Trust Deed
Assume a trust deed expressly prohibits investment in oil and gas companies for ethical reasons.
The trustees nevertheless invest £1 million of trust funds in a multinational oil corporation because they believe the shares will increase in value.
Even if the investment proves profitable, the trustees have acted outside the powers granted by the trust deed and have therefore committed a breach of trust.
Innocent Breaches of Trust
Not all breaches involve dishonesty or bad faith. A trustee may commit a breach entirely innocently while genuinely attempting to administer the trust correctly.
Equity distinguishes between the existence of a breach and the trustee’s state of mind. Liability may arise even where the trustee acted honestly and reasonably.
Re Diplock [1941] Ch 253
An important example is Re Diplock.
The executors of a deceased person’s estate distributed approximately £250,000 among numerous charitable institutions. They believed that the relevant clause in the will was valid and authorised the distribution.
However, the clause directed the executors to distribute the residue of the estate among “charitable or benevolent objects.” Because the purposes were not exclusively charitable, the gift was void.
As a result, the executors had distributed property to the wrong recipients and committed a breach of trust despite acting honestly and in good faith.
The decision was subsequently affirmed by the House of Lords in Chichester Diocesan Fund and Board of Finance (Incorporated) v Simpson [1944] AC 341.
Failures to Perform Trustee Duties
The second major category of breach occurs where trustees fail to do something that they are legally required to do.
Trustees owe numerous duties arising under the trust instrument, statute, and equitable principles. Failure to perform those duties may result in liability.
Unlike the first category, these breaches involve omissions rather than positive acts.
Failure to Distribute Trust Property
One common example is a failure to distribute trust property when distribution is required.
If trustees unreasonably delay the distribution of trust assets after a beneficiary becomes entitled to them, they may be liable for breach of trust.
The beneficiaries may seek equitable compensation for losses resulting from the delay.
Failure to Manage Investments Properly
Trustees also owe duties concerning investment management.
They must exercise reasonable care, diversify investments where appropriate, and periodically review the trust portfolio.
A failure to maintain a balanced and suitable portfolio may constitute a breach of trust, particularly where losses result from excessive concentration of investments or a failure to review changing market conditions.
Example – Failure to Review Investments
Suppose trustees invest the entire trust fund in a single company and then fail to review the investment for ten years.
During that period, the company experiences financial difficulties and eventually collapses.
The trustees may be liable for breach of trust because they failed to exercise the degree of care and supervision required of prudent trustees.
Consent and Condonation by Beneficiaries
A trustee will not always be liable for conduct that would otherwise constitute a breach of trust.
Beneficiaries who possess full legal capacity may consent to, authorise, or subsequently approve a breach of trust.
Where valid consent is given, the trustee will generally be protected from liability because the beneficiaries have agreed to the conduct in question.
This principle recognises that beneficiaries are entitled to determine how their interests should be managed.
Requirements for Valid Consent
For consent to be effective, several conditions must be satisfied.
The beneficiaries must have full legal capacity, meaning they must be adults and possess the necessary mental capacity.
The beneficiaries must also act freely and voluntarily.
Furthermore, they must possess full knowledge of all material facts surrounding the proposed transaction.
If any of these requirements are absent, the consent may be ineffective.
Circumstances Where Consent Will Not Protect the Trustee
Consent will not excuse a breach where it has been obtained through inequitable conduct.
Examples include:
- fraud;
- misrepresentation;
- undue influence;
- concealment of material facts;
- abuse of a fiduciary position.
Example – Valid Consent
Suppose all adult beneficiaries of a trust agree that trustees may retain a high-risk investment that would otherwise be inconsistent with the trust’s investment strategy.
The trustees fully explain the risks and provide complete information.
If the investment subsequently performs poorly, the beneficiaries may be unable to sue because they knowingly consented to the transaction.
Example – Invalid Consent
Suppose trustees persuade beneficiaries to approve a speculative investment by falsely stating that independent financial advisers have guaranteed success.
The beneficiaries rely on that representation and consent to the investment.
Because the consent was obtained through misrepresentation, it will not protect the trustees from liability if losses occur.
Relationship with Trustee Liability
Identifying a breach is only the first stage in establishing trustee liability.
Once a breach has been identified, the court must then consider:
- Whether the breach caused loss to the trust;
- Whether the trustee obtained an unauthorised profit;
- Whether any defences apply;
- The appropriate remedy.
Comprehensive Case Study
Facts
A trust deed prohibits investments in fossil fuel companies and requires trustees to maintain a diversified investment portfolio.
The trustees invest 80% of the trust fund in a single oil company because they believe oil prices will rise significantly.
The beneficiaries are not informed.
Two years later, the company’s share price collapses and the trust loses £3 million.
Analysis
The trustees have committed two separate breaches of trust.
First, they acted outside the powers granted by the trust deed by investing in a prohibited industry.
Secondly, they failed to maintain a diversified investment portfolio and therefore breached their investment duties.
The beneficiaries did not consent to the transaction and therefore cannot be said to have authorised the conduct.
Outcome
The trustees are likely to be liable for breach of trust and may be required to pay equitable compensation to restore the trust fund.
Conclusion
Identifying a breach of trust is the essential first step in any claim against a trustee. A breach may arise either because a trustee performs an unauthorised act or because the trustee fails to perform a required duty. Cases such as Re Diplock demonstrate that liability may arise even where trustees act honestly and in good faith. However, beneficiaries who possess full capacity may authorise or condone conduct that would otherwise constitute a breach, provided that their consent is fully informed and free from improper influence. Once a breach has been established, the court may then proceed to consider causation, loss, available defences, and the appropriate equitable remedies.
References
Re Diplock [1941] Ch 253.
Chichester Diocesan Fund and Board of Finance (Incorporated) v Simpson [1944] AC 341.
Trustee Act 2000, ss 1–8.
Boardman v Phipps [1967] 2 AC 46.
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, Oxford University Press 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, Oxford University Press 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
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