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SQE – Equity and Trust – Remoteness of Damage in Breach of Trust Claims
Introduction
Once a trustee has been found to have committed a breach of trust, the court must determine whether the loss suffered by the beneficiaries was caused by that breach and, if so, the extent of the trustee’s liability. This raises the closely related concepts of causation and remoteness of damage.
In many cases, losses may result from a combination of factors, including the actions of trustees, third parties, market fluctuations, economic events, or the conduct of beneficiaries themselves. The question therefore arises whether the trustee must be the sole cause of the loss or whether it is sufficient that the breach contributed to the loss.
Unlike common law claims in negligence, where complex rules of remoteness and foreseeability often apply, equity adopts a different approach when assessing trustee liability. The courts generally focus on whether the loss would have occurred “but for” the trustee’s breach of trust.
The Concept of Remoteness
Remoteness concerns the connection between the trustee’s breach and the loss suffered by the trust. The court must determine whether the loss is sufficiently linked to the breach to justify imposing liability.
In common law negligence, a defendant is generally liable only for losses that are reasonably foreseeable. However, equity has traditionally adopted a stricter approach towards trustees because of the fiduciary nature of the trustee-beneficiary relationship.
The rationale is that trustees voluntarily assume responsibility for managing trust property and should therefore bear a high level of accountability when their misconduct causes loss.
Causation and the “But For” Test
The primary test used in breach of trust cases is the “but for” test.
The court asks:
Would the loss have occurred but for the trustee’s breach of trust?
If the answer is no, the trustee will generally be liable.
This test focuses on factual causation rather than foreseeability.
Consequently, beneficiaries are not usually required to demonstrate that the trustee’s breach was the sole cause of the loss. It is generally sufficient to show that the breach was a cause of the loss.
Target Holdings Ltd v Redferns
The leading authority is Target Holdings Ltd v Redferns [1996] AC 421.
In this case, solicitors acting as trustees released mortgage funds prematurely and thereby acted in breach of trust. The issue was whether they should be liable for all losses suffered by the lender or only those losses actually caused by the breach.
The House of Lords held that equitable compensation should be awarded only for losses flowing from the breach itself. Lord Browne-Wilkinson emphasised that common law rules of remoteness do not apply directly to equitable compensation claims.
Instead, the court focused upon causation and asked whether the claimant’s loss would have occurred but for the trustee’s breach.
The case therefore established that trustee liability depends primarily upon establishing a causal connection between the breach and the loss.
Example of the “But For” Test
Suppose a trustee improperly releases £1 million from a trust account to a property developer before all contractual conditions have been satisfied.
The developer subsequently becomes insolvent and the money is lost.
The court would ask whether the loss would have occurred if the trustee had complied with their duties and retained the money until completion.
If the answer is that the money would have been protected had the trustee acted properly, the trustee will likely be liable for the loss.
The Role of Third Parties
A breach of trust may involve the actions of third parties such as dishonest assistants, knowing recipients, investment advisers, solicitors, or financial institutions.
The involvement of third parties does not necessarily break the chain of causation.
A trustee may still be liable where their breach contributed to the loss, even if another person also played a role.
Equity is primarily concerned with determining whether the trustee’s breach was a factual cause of the loss.
Example Involving Multiple Causes
Suppose trustees negligently invest £2 million in a speculative venture after receiving flawed advice from an investment consultant.
The investment subsequently fails because of both poor advice and an unexpected economic recession.
The trustees may still be liable if the beneficiaries can demonstrate that the loss would not have occurred but for the trustees’ improper investment decision.
The fact that other factors contributed to the loss does not necessarily relieve the trustees of responsibility.
Nestle v National Westminster Bank Plc
An important illustration of the difficulties associated with causation is provided by Nestle v National Westminster Bank Plc [1993] 1 WLR 1260.
The claimant argued that trustees had failed to manage trust investments properly over many years. It was alleged that the trustees misunderstood the scope of their investment powers and adopted an excessively conservative investment strategy.
The claimant argued that, had the trustees invested differently, the trust fund would have achieved significantly greater growth.
The court accepted that the trustees had misunderstood their investment powers. Nevertheless, the claim failed because the claimant could not establish that the trust had actually suffered loss as a result of the breach.
The difficulty lay in proving what would have happened if different investments had been selected. The court could not reliably determine whether alternative shares would have generated better returns than those actually chosen.
The Burden of Proof
Nestle demonstrates that the burden of proof remains on the claimant.
A beneficiary must establish:
Example of Failure to Establish Loss
Suppose trustees fail to invest trust money in technology stocks.
The beneficiaries later argue that had the trustees invested in those companies, the trust would have earned an additional £5 million.
However, the beneficiaries cannot establish which specific shares should have been purchased or whether those shares would actually have increased in value.
In these circumstances, the claim may fail because the alleged loss remains speculative.
Equity’s Approach Compared with Common Law
The equitable approach differs significantly from common law negligence.
At common law, courts frequently ask whether the damage was reasonably foreseeable and whether it is too remote.
In equity, the primary focus is on restoring the trust fund and holding trustees accountable for breaches of duty.
Consequently, once causation is established, equity tends to favour the beneficiaries and may assess compensation with the benefit of hindsight.
Nevertheless, beneficiaries must still prove that the breach actually caused the loss complained of.
Relationship with Equitable Compensation
Remoteness issues frequently arise when courts assess equitable compensation.
The purpose of equitable compensation is to restore the trust fund to the position it would have occupied had the breach not occurred.
The claimant must therefore establish a causal link between the breach and the loss requiring restoration.
Where this link cannot be demonstrated, equitable compensation will not be awarded.
Comprehensive Case Study
Facts
Daniel is trustee of a family trust worth £10 million.
The trust deed permits low-risk investments only.
Daniel improperly invests £4 million in speculative cryptocurrency assets.
At the same time, the global economy enters a severe recession and cryptocurrency markets collapse.
The trust loses £3 million.
The beneficiaries bring proceedings against Daniel.
Analysis
The court first determines whether Daniel breached his duties. Since the trust deed authorised only low-risk investments, the speculative investment constitutes a breach of trust.
The court then considers causation. The beneficiaries must show that the loss would not have occurred but for Daniel’s improper investment decision.
Daniel argues that the recession would have caused losses regardless of his actions.
The court must therefore determine whether the losses resulted from the breach itself or from external market conditions.
If the beneficiaries establish that the trust would have avoided the losses had Daniel complied with the trust deed, he will likely be liable for equitable compensation.
Outcome
Daniel may be required to restore the trust fund by paying compensation equal to the losses attributable to his breach.
Conclusion
The doctrine of remoteness in breach of trust claims differs significantly from its common law counterpart. Equity focuses primarily on causation rather than foreseeability, applying the “but for” test to determine whether a trustee’s breach caused the loss suffered by the trust. Target Holdings confirms that common law remoteness principles do not directly apply to equitable compensation claims, while Nestle demonstrates the practical difficulties beneficiaries may face in proving that a breach caused measurable loss. Ultimately, trustees will be liable where beneficiaries can establish that the loss would not have occurred but for the breach of trust, but claims will fail where the alleged damage remains speculative or cannot be causally connected to the wrongdoing.
References
Target Holdings Ltd v Redferns [1996] AC 421.
Nestle v National Westminster Bank Plc [1993] 1 WLR 1260.
Bartlett v Barclays Bank Trust Co Ltd (No 2) [1980] Ch 515.
Hulbert v Avens [2003] EWHC 76 (Ch).
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
Once a trustee has been found to have committed a breach of trust, the court must determine whether the loss suffered by the beneficiaries was caused by that breach and, if so, the extent of the trustee’s liability. This raises the closely related concepts of causation and remoteness of damage.
In many cases, losses may result from a combination of factors, including the actions of trustees, third parties, market fluctuations, economic events, or the conduct of beneficiaries themselves. The question therefore arises whether the trustee must be the sole cause of the loss or whether it is sufficient that the breach contributed to the loss.
Unlike common law claims in negligence, where complex rules of remoteness and foreseeability often apply, equity adopts a different approach when assessing trustee liability. The courts generally focus on whether the loss would have occurred “but for” the trustee’s breach of trust.
The Concept of Remoteness
Remoteness concerns the connection between the trustee’s breach and the loss suffered by the trust. The court must determine whether the loss is sufficiently linked to the breach to justify imposing liability.
In common law negligence, a defendant is generally liable only for losses that are reasonably foreseeable. However, equity has traditionally adopted a stricter approach towards trustees because of the fiduciary nature of the trustee-beneficiary relationship.
The rationale is that trustees voluntarily assume responsibility for managing trust property and should therefore bear a high level of accountability when their misconduct causes loss.
Causation and the “But For” Test
The primary test used in breach of trust cases is the “but for” test.
The court asks:
Would the loss have occurred but for the trustee’s breach of trust?
If the answer is no, the trustee will generally be liable.
This test focuses on factual causation rather than foreseeability.
Consequently, beneficiaries are not usually required to demonstrate that the trustee’s breach was the sole cause of the loss. It is generally sufficient to show that the breach was a cause of the loss.
Target Holdings Ltd v Redferns
The leading authority is Target Holdings Ltd v Redferns [1996] AC 421.
In this case, solicitors acting as trustees released mortgage funds prematurely and thereby acted in breach of trust. The issue was whether they should be liable for all losses suffered by the lender or only those losses actually caused by the breach.
The House of Lords held that equitable compensation should be awarded only for losses flowing from the breach itself. Lord Browne-Wilkinson emphasised that common law rules of remoteness do not apply directly to equitable compensation claims.
Instead, the court focused upon causation and asked whether the claimant’s loss would have occurred but for the trustee’s breach.
The case therefore established that trustee liability depends primarily upon establishing a causal connection between the breach and the loss.
Example of the “But For” Test
Suppose a trustee improperly releases £1 million from a trust account to a property developer before all contractual conditions have been satisfied.
The developer subsequently becomes insolvent and the money is lost.
The court would ask whether the loss would have occurred if the trustee had complied with their duties and retained the money until completion.
If the answer is that the money would have been protected had the trustee acted properly, the trustee will likely be liable for the loss.
The Role of Third Parties
A breach of trust may involve the actions of third parties such as dishonest assistants, knowing recipients, investment advisers, solicitors, or financial institutions.
The involvement of third parties does not necessarily break the chain of causation.
A trustee may still be liable where their breach contributed to the loss, even if another person also played a role.
Equity is primarily concerned with determining whether the trustee’s breach was a factual cause of the loss.
Example Involving Multiple Causes
Suppose trustees negligently invest £2 million in a speculative venture after receiving flawed advice from an investment consultant.
The investment subsequently fails because of both poor advice and an unexpected economic recession.
The trustees may still be liable if the beneficiaries can demonstrate that the loss would not have occurred but for the trustees’ improper investment decision.
The fact that other factors contributed to the loss does not necessarily relieve the trustees of responsibility.
Nestle v National Westminster Bank Plc
An important illustration of the difficulties associated with causation is provided by Nestle v National Westminster Bank Plc [1993] 1 WLR 1260.
The claimant argued that trustees had failed to manage trust investments properly over many years. It was alleged that the trustees misunderstood the scope of their investment powers and adopted an excessively conservative investment strategy.
The claimant argued that, had the trustees invested differently, the trust fund would have achieved significantly greater growth.
The court accepted that the trustees had misunderstood their investment powers. Nevertheless, the claim failed because the claimant could not establish that the trust had actually suffered loss as a result of the breach.
The difficulty lay in proving what would have happened if different investments had been selected. The court could not reliably determine whether alternative shares would have generated better returns than those actually chosen.
The Burden of Proof
Nestle demonstrates that the burden of proof remains on the claimant.
A beneficiary must establish:
- A breach of trust;
- A resulting loss; and
- A causal connection between the breach and the loss.
Example of Failure to Establish Loss
Suppose trustees fail to invest trust money in technology stocks.
The beneficiaries later argue that had the trustees invested in those companies, the trust would have earned an additional £5 million.
However, the beneficiaries cannot establish which specific shares should have been purchased or whether those shares would actually have increased in value.
In these circumstances, the claim may fail because the alleged loss remains speculative.
Equity’s Approach Compared with Common Law
The equitable approach differs significantly from common law negligence.
At common law, courts frequently ask whether the damage was reasonably foreseeable and whether it is too remote.
In equity, the primary focus is on restoring the trust fund and holding trustees accountable for breaches of duty.
Consequently, once causation is established, equity tends to favour the beneficiaries and may assess compensation with the benefit of hindsight.
Nevertheless, beneficiaries must still prove that the breach actually caused the loss complained of.
Relationship with Equitable Compensation
Remoteness issues frequently arise when courts assess equitable compensation.
The purpose of equitable compensation is to restore the trust fund to the position it would have occupied had the breach not occurred.
The claimant must therefore establish a causal link between the breach and the loss requiring restoration.
Where this link cannot be demonstrated, equitable compensation will not be awarded.
Comprehensive Case Study
Facts
Daniel is trustee of a family trust worth £10 million.
The trust deed permits low-risk investments only.
Daniel improperly invests £4 million in speculative cryptocurrency assets.
At the same time, the global economy enters a severe recession and cryptocurrency markets collapse.
The trust loses £3 million.
The beneficiaries bring proceedings against Daniel.
Analysis
The court first determines whether Daniel breached his duties. Since the trust deed authorised only low-risk investments, the speculative investment constitutes a breach of trust.
The court then considers causation. The beneficiaries must show that the loss would not have occurred but for Daniel’s improper investment decision.
Daniel argues that the recession would have caused losses regardless of his actions.
The court must therefore determine whether the losses resulted from the breach itself or from external market conditions.
If the beneficiaries establish that the trust would have avoided the losses had Daniel complied with the trust deed, he will likely be liable for equitable compensation.
Outcome
Daniel may be required to restore the trust fund by paying compensation equal to the losses attributable to his breach.
Conclusion
The doctrine of remoteness in breach of trust claims differs significantly from its common law counterpart. Equity focuses primarily on causation rather than foreseeability, applying the “but for” test to determine whether a trustee’s breach caused the loss suffered by the trust. Target Holdings confirms that common law remoteness principles do not directly apply to equitable compensation claims, while Nestle demonstrates the practical difficulties beneficiaries may face in proving that a breach caused measurable loss. Ultimately, trustees will be liable where beneficiaries can establish that the loss would not have occurred but for the breach of trust, but claims will fail where the alleged damage remains speculative or cannot be causally connected to the wrongdoing.
References
Target Holdings Ltd v Redferns [1996] AC 421.
Nestle v National Westminster Bank Plc [1993] 1 WLR 1260.
Bartlett v Barclays Bank Trust Co Ltd (No 2) [1980] Ch 515.
Hulbert v Avens [2003] EWHC 76 (Ch).
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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