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SQE – Equity and Trust – Liability for the Acts of a Co-Trustee
Introduction
Trusts are frequently administered by more than one trustee. The appointment of multiple trustees provides additional safeguards for beneficiaries because important decisions can be discussed collectively and trust property is less vulnerable to misuse by a single individual. However, where one trustee commits a breach of trust, an important question arises: to what extent are the other trustees liable?
The general principle is that trustees are not automatically liable for the wrongdoing of their co-trustees. Each trustee is ordinarily responsible only for their own conduct. Nevertheless, equity imposes a duty upon trustees to participate actively in the administration of the trust and to supervise the actions of their fellow trustees. Consequently, a trustee who remains passive or fails to intervene when a breach could have been prevented may become personally liable alongside the trustee who committed the wrongdoing.
The General Rule
The starting point is that trustees are not vicariously liable for the acts of their co-trustees. Unlike employers who may be liable for the acts of their employees, trustees are generally liable only for breaches that they themselves commit.
This principle reflects the fact that each trustee is individually responsible for performing their fiduciary obligations and exercising independent judgment when administering the trust.
However, the rule is subject to an important qualification. A trustee cannot avoid liability by remaining inactive or deliberately ignoring the conduct of a co-trustee.
The Duty to Participate in Trust Administration
Trustees have a duty to participate actively in the management of the trust. Decisions affecting the trust should generally be taken unanimously, and each trustee is expected to monitor the conduct of the others.
A trustee who simply leaves matters entirely to a co-trustee risks becoming liable if a breach of trust occurs that could reasonably have been prevented.
This principle was recognised in Luke v South Kensington Hotel Co (1879), where the court emphasised the importance of trustees acting together and participating in trust administration.
Bahin v Hughes (1886)
The leading authority on passive trustee liability is Bahin v Hughes (1886) 31 Ch D 390.
In this case, one trustee made an improper investment of trust funds. The other trustee was aware of the proposed investment but took no action to prevent it. The investment subsequently resulted in significant losses to the trust.
The court held that the passive trustee was liable alongside the active trustee because he had knowledge of the proposed transaction and was in a position to prevent the breach. His failure to intervene amounted to a breach of his own fiduciary duties.
The case demonstrates that equity will not protect what is often described as a “sleeping trustee”. Trustees must remain vigilant and actively protect the interests of beneficiaries.
Example of Passive Trustee Liability
Suppose Daniel and Sarah are co-trustees of a family trust worth £5 million. Daniel proposes investing £2 million of trust funds in a highly speculative cryptocurrency scheme that clearly falls outside the trust’s investment policy.
Sarah is aware of Daniel’s intention but decides not to become involved and allows him to proceed.
The investment collapses and the trust loses £2 million.
Although Sarah did not personally make the investment decision, she may nevertheless be liable because she failed to take reasonable steps to prevent Daniel’s breach of trust. Her passivity contributed to the loss suffered by the trust.
Joint and Several Liability
Where two or more trustees are found liable for a breach of trust, their liability is generally joint and several.
This means that each trustee is legally responsible for the entire loss suffered by the trust. The beneficiaries may choose to pursue one trustee, several trustees, or all trustees together.
The beneficiaries are not required to divide their claim equally between the trustees.
Example of Joint and Several Liability
Suppose three trustees jointly cause a loss of £600,000 to a trust.
The beneficiaries may choose to sue only one trustee and recover the entire £600,000 from that individual.
The trustee who pays may then seek contribution from the other trustees, but that is a separate matter between the trustees themselves.
This rule provides significant protection for beneficiaries because it increases the likelihood that the trust will recover its losses.
The Civil Liability (Contribution) Act 1978
The potentially harsh consequences of joint and several liability have been moderated by the Civil Liability (Contribution) Act 1978.
Section 2(1) allows the court to apportion liability between trustees according to what is just and equitable in the circumstances, taking account of each trustee’s responsibility for the loss.
Consequently, trustees who are only minimally involved in a breach may be required to contribute less than those who played a central role.
Example of Contribution
Assume Daniel and Sarah are co-trustees.
Daniel deliberately misappropriates £500,000 from the trust.
Sarah becomes liable because she negligently failed to supervise him.
The beneficiaries recover the full £500,000 from Sarah because Daniel has become insolvent.
Sarah may subsequently seek contribution from Daniel under the Civil Liability (Contribution) Act 1978.
The court may decide that Daniel should bear the majority of the liability because he was primarily responsible for the breach.
Indemnities Between Co-Trustees
In certain situations, one trustee may be entitled to an indemnity from another trustee.
An indemnity is a right to recover compensation from a co-trustee who bears primary responsibility for the loss.
The courts recognise several circumstances where indemnities may be appropriate.
Fraudulent Conduct by a Co-Trustee
Where one trustee has acted fraudulently, that trustee may be required to indemnify the innocent trustees.
This principle was recognised in Re Smith [1896] 2 Ch 590.
The rationale is that a fraudulent trustee should not be permitted to shift the consequences of their wrongdoing onto honest co-trustees.
Example
Suppose Daniel secretly steals £1 million from the trust while Sarah performs her duties honestly and responsibly.
If Sarah is required to compensate the beneficiaries, she may seek an indemnity from Daniel because his fraudulent conduct was the primary cause of the loss.
Trustees with Specialist Knowledge
An indemnity may also arise where one trustee possesses specialist expertise and assumes responsibility for a particular aspect of trust administration.
This principle was recognised in Head v Gould [1898] 2 Ch 250.
The court may require the more experienced trustee to bear a greater share of responsibility where the loss resulted from matters within their area of expertise.
Example
Suppose one trustee is an experienced investment adviser while another is a family friend with no financial expertise.
If losses arise from negligent investment decisions made by the professional trustee, the court may require that trustee to indemnify the lay trustee to a greater extent.
Trustee Who Is Also a Beneficiary
An indemnity may also be available where a trustee is simultaneously a beneficiary of the trust.
In such circumstances, the trustee-beneficiary may be required to indemnify the other trustees to the extent of their beneficial interest in the trust.
This prevents a trustee-beneficiary from unfairly benefiting from their own breach while shifting liability onto other trustees.
Liability After Retirement
When a trustee retires properly, liability for future breaches of trust generally comes to an end.
The retiring trustee remains liable for breaches committed during their period of office unless an indemnity has been obtained from the continuing trustees.
Once retirement is effective, responsibility for future administration normally passes to the remaining trustees.
Exceptions to the General Rule
A retiring trustee may continue to be liable in exceptional circumstances.
The first exception arises where the trustee retires specifically to facilitate a breach of trust. In Wright v Morgan [1926] AC 788, the Privy Council recognised that retirement cannot be used as a mechanism for avoiding responsibility while knowingly enabling misconduct.
The second exception arises where the trustee retires knowing that the trust is in serious danger. In Head v Gould [1898] 2 Ch 250, the court recognised that a trustee who abandons the trust while aware of imminent risks may continue to bear responsibility for resulting losses.
Example of Continued Liability After Retirement
Suppose Sarah retires as trustee knowing that Daniel intends to transfer trust assets to an offshore account in breach of trust.
Rather than preventing the transaction or alerting beneficiaries, she simply retires and takes no further action.
Daniel subsequently misappropriates £2 million.
Sarah may remain liable because her retirement effectively facilitated the breach and she knowingly left the trust in jeopardy.
Relationship with Equitable Remedies
Where co-trustees are liable, beneficiaries may seek a range of remedies including equitable compensation, restoration of trust property, tracing, constructive trusts, equitable liens, and interest on sums improperly administered.
The existence of multiple trustees does not affect the beneficiaries’ right to recover losses. The beneficiaries remain entitled to pursue whichever trustee or trustees are most capable of satisfying the judgment.
Conclusion
The law governing liability for the acts of co-trustees reflects equity’s insistence that trustees actively participate in the administration of trusts. Although trustees are not generally vicariously liable for the wrongdoing of their co-trustees, they may become liable where they fail to supervise, intervene, or prevent breaches that could reasonably have been avoided. Cases such as Bahin v Hughes demonstrate that equity will not tolerate passive or sleeping trustees. Where multiple trustees are liable, the principles of joint and several liability ensure that beneficiaries are fully protected, while the Civil Liability (Contribution) Act 1978 and equitable indemnities provide mechanisms for achieving fairness between trustees themselves.
References
Luke v South Kensington Hotel Co (1879) LR 11 Ch D 121.
Bahin v Hughes (1886) 31 Ch D 390.
Re Smith [1896] 2 Ch 590.
Head v Gould [1898] 2 Ch 250.
Wright v Morgan [1926] AC 788 (PC).
Civil Liability (Contribution) Act 1978, s 2(1).
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
Trusts are frequently administered by more than one trustee. The appointment of multiple trustees provides additional safeguards for beneficiaries because important decisions can be discussed collectively and trust property is less vulnerable to misuse by a single individual. However, where one trustee commits a breach of trust, an important question arises: to what extent are the other trustees liable?
The general principle is that trustees are not automatically liable for the wrongdoing of their co-trustees. Each trustee is ordinarily responsible only for their own conduct. Nevertheless, equity imposes a duty upon trustees to participate actively in the administration of the trust and to supervise the actions of their fellow trustees. Consequently, a trustee who remains passive or fails to intervene when a breach could have been prevented may become personally liable alongside the trustee who committed the wrongdoing.
The General Rule
The starting point is that trustees are not vicariously liable for the acts of their co-trustees. Unlike employers who may be liable for the acts of their employees, trustees are generally liable only for breaches that they themselves commit.
This principle reflects the fact that each trustee is individually responsible for performing their fiduciary obligations and exercising independent judgment when administering the trust.
However, the rule is subject to an important qualification. A trustee cannot avoid liability by remaining inactive or deliberately ignoring the conduct of a co-trustee.
The Duty to Participate in Trust Administration
Trustees have a duty to participate actively in the management of the trust. Decisions affecting the trust should generally be taken unanimously, and each trustee is expected to monitor the conduct of the others.
A trustee who simply leaves matters entirely to a co-trustee risks becoming liable if a breach of trust occurs that could reasonably have been prevented.
This principle was recognised in Luke v South Kensington Hotel Co (1879), where the court emphasised the importance of trustees acting together and participating in trust administration.
Bahin v Hughes (1886)
The leading authority on passive trustee liability is Bahin v Hughes (1886) 31 Ch D 390.
In this case, one trustee made an improper investment of trust funds. The other trustee was aware of the proposed investment but took no action to prevent it. The investment subsequently resulted in significant losses to the trust.
The court held that the passive trustee was liable alongside the active trustee because he had knowledge of the proposed transaction and was in a position to prevent the breach. His failure to intervene amounted to a breach of his own fiduciary duties.
The case demonstrates that equity will not protect what is often described as a “sleeping trustee”. Trustees must remain vigilant and actively protect the interests of beneficiaries.
Example of Passive Trustee Liability
Suppose Daniel and Sarah are co-trustees of a family trust worth £5 million. Daniel proposes investing £2 million of trust funds in a highly speculative cryptocurrency scheme that clearly falls outside the trust’s investment policy.
Sarah is aware of Daniel’s intention but decides not to become involved and allows him to proceed.
The investment collapses and the trust loses £2 million.
Although Sarah did not personally make the investment decision, she may nevertheless be liable because she failed to take reasonable steps to prevent Daniel’s breach of trust. Her passivity contributed to the loss suffered by the trust.
Joint and Several Liability
Where two or more trustees are found liable for a breach of trust, their liability is generally joint and several.
This means that each trustee is legally responsible for the entire loss suffered by the trust. The beneficiaries may choose to pursue one trustee, several trustees, or all trustees together.
The beneficiaries are not required to divide their claim equally between the trustees.
Example of Joint and Several Liability
Suppose three trustees jointly cause a loss of £600,000 to a trust.
The beneficiaries may choose to sue only one trustee and recover the entire £600,000 from that individual.
The trustee who pays may then seek contribution from the other trustees, but that is a separate matter between the trustees themselves.
This rule provides significant protection for beneficiaries because it increases the likelihood that the trust will recover its losses.
The Civil Liability (Contribution) Act 1978
The potentially harsh consequences of joint and several liability have been moderated by the Civil Liability (Contribution) Act 1978.
Section 2(1) allows the court to apportion liability between trustees according to what is just and equitable in the circumstances, taking account of each trustee’s responsibility for the loss.
Consequently, trustees who are only minimally involved in a breach may be required to contribute less than those who played a central role.
Example of Contribution
Assume Daniel and Sarah are co-trustees.
Daniel deliberately misappropriates £500,000 from the trust.
Sarah becomes liable because she negligently failed to supervise him.
The beneficiaries recover the full £500,000 from Sarah because Daniel has become insolvent.
Sarah may subsequently seek contribution from Daniel under the Civil Liability (Contribution) Act 1978.
The court may decide that Daniel should bear the majority of the liability because he was primarily responsible for the breach.
Indemnities Between Co-Trustees
In certain situations, one trustee may be entitled to an indemnity from another trustee.
An indemnity is a right to recover compensation from a co-trustee who bears primary responsibility for the loss.
The courts recognise several circumstances where indemnities may be appropriate.
Fraudulent Conduct by a Co-Trustee
Where one trustee has acted fraudulently, that trustee may be required to indemnify the innocent trustees.
This principle was recognised in Re Smith [1896] 2 Ch 590.
The rationale is that a fraudulent trustee should not be permitted to shift the consequences of their wrongdoing onto honest co-trustees.
Example
Suppose Daniel secretly steals £1 million from the trust while Sarah performs her duties honestly and responsibly.
If Sarah is required to compensate the beneficiaries, she may seek an indemnity from Daniel because his fraudulent conduct was the primary cause of the loss.
Trustees with Specialist Knowledge
An indemnity may also arise where one trustee possesses specialist expertise and assumes responsibility for a particular aspect of trust administration.
This principle was recognised in Head v Gould [1898] 2 Ch 250.
The court may require the more experienced trustee to bear a greater share of responsibility where the loss resulted from matters within their area of expertise.
Example
Suppose one trustee is an experienced investment adviser while another is a family friend with no financial expertise.
If losses arise from negligent investment decisions made by the professional trustee, the court may require that trustee to indemnify the lay trustee to a greater extent.
Trustee Who Is Also a Beneficiary
An indemnity may also be available where a trustee is simultaneously a beneficiary of the trust.
In such circumstances, the trustee-beneficiary may be required to indemnify the other trustees to the extent of their beneficial interest in the trust.
This prevents a trustee-beneficiary from unfairly benefiting from their own breach while shifting liability onto other trustees.
Liability After Retirement
When a trustee retires properly, liability for future breaches of trust generally comes to an end.
The retiring trustee remains liable for breaches committed during their period of office unless an indemnity has been obtained from the continuing trustees.
Once retirement is effective, responsibility for future administration normally passes to the remaining trustees.
Exceptions to the General Rule
A retiring trustee may continue to be liable in exceptional circumstances.
The first exception arises where the trustee retires specifically to facilitate a breach of trust. In Wright v Morgan [1926] AC 788, the Privy Council recognised that retirement cannot be used as a mechanism for avoiding responsibility while knowingly enabling misconduct.
The second exception arises where the trustee retires knowing that the trust is in serious danger. In Head v Gould [1898] 2 Ch 250, the court recognised that a trustee who abandons the trust while aware of imminent risks may continue to bear responsibility for resulting losses.
Example of Continued Liability After Retirement
Suppose Sarah retires as trustee knowing that Daniel intends to transfer trust assets to an offshore account in breach of trust.
Rather than preventing the transaction or alerting beneficiaries, she simply retires and takes no further action.
Daniel subsequently misappropriates £2 million.
Sarah may remain liable because her retirement effectively facilitated the breach and she knowingly left the trust in jeopardy.
Relationship with Equitable Remedies
Where co-trustees are liable, beneficiaries may seek a range of remedies including equitable compensation, restoration of trust property, tracing, constructive trusts, equitable liens, and interest on sums improperly administered.
The existence of multiple trustees does not affect the beneficiaries’ right to recover losses. The beneficiaries remain entitled to pursue whichever trustee or trustees are most capable of satisfying the judgment.
Conclusion
The law governing liability for the acts of co-trustees reflects equity’s insistence that trustees actively participate in the administration of trusts. Although trustees are not generally vicariously liable for the wrongdoing of their co-trustees, they may become liable where they fail to supervise, intervene, or prevent breaches that could reasonably have been avoided. Cases such as Bahin v Hughes demonstrate that equity will not tolerate passive or sleeping trustees. Where multiple trustees are liable, the principles of joint and several liability ensure that beneficiaries are fully protected, while the Civil Liability (Contribution) Act 1978 and equitable indemnities provide mechanisms for achieving fairness between trustees themselves.
References
Luke v South Kensington Hotel Co (1879) LR 11 Ch D 121.
Bahin v Hughes (1886) 31 Ch D 390.
Re Smith [1896] 2 Ch 590.
Head v Gould [1898] 2 Ch 250.
Wright v Morgan [1926] AC 788 (PC).
Civil Liability (Contribution) Act 1978, s 2(1).
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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