SQE – Equity and Trust – Exclusion Clauses
Introduction
An exclusion clause in a trust instrument is a clause designed to protect trustees from personal liability when carrying out their duties. These clauses are extremely common in modern trust deeds, especially where professional trustees such as solicitors, accountants, or trust corporations are involved.
The purpose of exclusion clauses is to reduce the risk faced by trustees when administering trusts, particularly given the increasingly complex nature of investment management and fiduciary obligations. However, exclusion clauses remain highly controversial because they may leave beneficiaries without effective remedies even where trustees have acted incompetently or negligently.
The law therefore attempts to balance:

• protection of trustees;
• commercial practicality;
• and protection of beneficiaries.

Meaning of an Exclusion Clause
An exclusion clause is a provision in a trust deed that:
excludes or limits a trustee’s liability for certain breaches of trust.
The clause may protect trustees from liability arising from:

• negligence;
• mistakes;
• poor investment decisions;
• or breaches of duty of care.

However, the courts generally refuse to allow exclusion clauses to protect trustees from:
❌ fraud;
❌ dishonesty;
❌ or deliberate wrongdoing.


Armitage v Nurse
The leading authority is Armitage v Nurse.


Facts
The claimant alleged that trustees failed properly to supervise trust investments, resulting in significant financial losses.
The trust deed contained an exclusion clause protecting trustees from liability except for:
fraud.


Decision
The Court of Appeal upheld the exclusion clause.
The trustees were protected because the claim involved:
✅ negligence,
not fraud.


Millett LJ’s Principle
Millett LJ stated that trustees cannot exclude liability for:
❌ fraud or dishonesty.
However, liability for:
✅ negligence,
including possibly gross negligence,
may be excluded.


Importance of Armitage
The case confirmed that exclusion clauses may validly protect trustees from many forms of breach of trust, provided the trustees have not acted fraudulently or dishonestly.


Trustee’s Core Obligations
Despite exclusion clauses, trustees must still perform the:
✅ irreducible core obligations
of trusteeship.
A trust cannot exist if trustees are completely free from all accountability.


Example
Suppose Daniel is trustee of a family trust.
The trust deed states:
“The trustee shall not be liable for any loss unless caused by fraud.”
Daniel negligently invests:
£2 million
in extremely risky shares without obtaining professional advice.
The investment collapses and only:
£200,000
remains.


Result
Under Armitage v Nurse:
✅ the exclusion clause may protect Daniel,
because the conduct amounts to negligence rather than fraud.


Taylor v Midland Bank Trust Co Ltd (No 2)
The limitation upon exclusion clauses was reinforced in:
Taylor v Midland Bank Trust Co Ltd (No 2).
The court confirmed that exclusion clauses cannot exclude liability for:
❌ fraud;
❌ dishonesty;
❌ or breaches of core fiduciary obligations.


Bogg v Raper
The controversial nature of exclusion clauses appeared clearly in:
Bogg v Raper.


Facts
Trustees mismanaged trust assets so severely that losses reached nearly:
£8 million
within only two years.
The trust deed contained an exemption clause.


Issue
Did the solicitor drafting the trust deed owe duties regarding explanation of the exclusion clause?


Decision
The court held that the solicitor owed a duty to:
✅ explain the effect of the exclusion clause to the settlor.
However:
❌ independent legal advice was not required.
The trustees remained protected by the clause.


Importance of Bogg
The case demonstrates how exclusion clauses may shield trustees even after catastrophic financial losses.
It also confirms that trustees may insist upon exclusion clauses before agreeing to act.


Walker v Stones
A more claimant-friendly approach appeared in:
Walker v Stones.


Principle
The court interpreted dishonesty broadly and objectively.
For solicitor-trustees, it was insufficient merely to claim:
“I honestly believed I acted properly.”
The court considered whether no reasonable solicitor-trustee could honestly have believed the conduct benefited beneficiaries.


Result
The trustee could not rely upon the exclusion clause.


Importance
Walker v Stones reduced the ability of professional trustees to escape liability by claiming subjective honesty.


Barnsley v Noble
In Barnsley v Noble, the court adopted a more lenient approach toward:
✅ non-professional trustees.


Facts
The dispute concerned interpretation of a standard exemption clause in a will trust.


Decision
The Court of Appeal upheld the protection afforded by the clause.


Importance
The decision reflects judicial sympathy toward:

• lay trustees;
• honest trustees;
• and non-professional fiduciaries.

Courts generally recognise that ordinary individuals acting conscientiously should not face harsh personal liability.


Trustee Act 2000
The Trustee Act 2000 did not abolish exclusion clauses.
In fact, Schedule 1 paragraph 7 confirms that the statutory duty of care under section 1 may be excluded where the trust instrument clearly indicates this intention.


Law Commission Debate
The Law Commission considered whether professional trustees should be prohibited from relying upon exclusion clauses.
However, concerns arose that:

• professionals would refuse to act as trustees;
• or trustee services would become prohibitively expensive.

Final Recommendation
The Law Commission ultimately recommended only that professional trustees should:
✅ take reasonable steps to ensure the settlor understands the exclusion clause.
This recommendation appeared in:
Law Commission Report No 301 (2006).


Policy Debate
Exclusion clauses remain controversial because they create tension between:
Protection of Trustees
Trust administration is complex and risky.
Trustees need protection to encourage people to act.


Protection of Beneficiaries
Beneficiaries may suffer severe losses without meaningful remedies if exclusion clauses are interpreted too broadly.


Professional v Lay Trustees
Courts often distinguish between:

• professional trustees;
  and
• ordinary lay trustees.

Professional Trustees
Expected to possess:

• expertise;
• experience;
• and higher standards of care.

Courts scrutinise exclusion clauses more carefully in such cases.


Lay Trustees
Usually treated more sympathetically where they acted honestly and conscientiously.


Practical Protection for Trustees
Prudent trustees commonly seek:

• exclusion clauses;
• indemnity clauses;
• professional advice;
• insurance;
• and retirement before disputes arise.

Relationship With Remedies
Where exclusion clauses operate successfully:
❌ beneficiaries may lose personal remedies against trustees.
However, beneficiaries may still pursue:

• tracing;
• proprietary remedies;
• knowing recipients;
• dishonest assistants;
• or substitute assets,

depending on the circumstances.


Key SQE Principles
Exclusion clauses may validly exclude liability for:
✅ negligence;
✅ breaches of duty of care;
and possibly
✅ gross negligence.
However, they cannot exclude liability for:
❌ fraud;
❌ dishonesty;
❌ or core fiduciary obligations.
Courts apply stricter scrutiny to:
✅ professional trustees.


Conclusion
Exclusion clauses play a central role in modern trust administration by protecting trustees from personal liability arising from negligence and mistakes. While the courts generally permit broad exclusion clauses, they continue to prohibit protection against fraud, dishonesty, and breaches of core fiduciary obligations. The law seeks to balance fairness to beneficiaries with the practical need to encourage competent individuals and professionals to act as trustees. Modern cases demonstrate increasing judicial sensitivity toward the distinction between professional and lay trustees, while continuing debate reflects ongoing tension between trustee protection and beneficiary accountability.
Sources of Reference
Armitage v Nurse [1998] Ch 241 (CA).
Taylor v Midland Bank Trust Co Ltd (No 2) [2002] WTLR 95.
Walker v Stones [2001] QB 902 (CA).
Barnsley v Noble [2016] EWCA Civ 799.
Bogg v Raper (1998) The Times, 22 April.
Trustee Act 2000.
Law Commission, Trustee Exemption Clauses (Law Com No 301, 2006).
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, OUP 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, OUP 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).

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SQE – Equity and Trust – Causation in Breach of Trust Claims
Introduction
Establishing that a trustee has committed a breach of trust does not automatically result in liability. A beneficiary must also demonstrate that the breach caused a loss to the trust fund or enabled the trustee to obtain an unauthorised profit. This requirement is known as causation.
Causation serves as an important limitation on trustee liability because it ensures that trustees are only held responsible for losses that are actually connected to their wrongdoing. If the same loss would have occurred regardless of the breach, then the trustee will generally not be liable to compensate the beneficiaries.
The law of trusts adopts a similar approach to other areas of private law by requiring a causal link between the wrongful act and the loss suffered. However, the principles have developed within equity and are applied in a manner consistent with the objectives of trust law.


The Requirement of a Causal Link
Before equitable compensation can be awarded, the court must be satisfied that there is a sufficient connection between the breach of trust and the loss suffered by the trust.
The court therefore asks whether the trustee’s conduct actually caused the loss complained of by the beneficiary.
If the breach had no impact on the outcome and the loss would have occurred in any event, the trustee will not be liable despite having committed a breach of trust.
This principle reflects the broader equitable objective of restoring the trust fund rather than punishing trustees for technical breaches that have caused no damage.


The “But For” Test
The primary test for causation in breach of trust claims 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 breach caused the loss and liability will generally follow.
If the answer is yes, the trustee’s conduct was not the cause of the loss and compensation will not be awarded.
The “but for” test therefore focuses on factual causation rather than simply identifying wrongdoing.


Target Holdings Ltd v Redferns [1996] AC 421
The leading authority on causation in breach of trust claims is Target Holdings Ltd v Redferns.
The claimant lender agreed to advance approximately £1.5 million to finance the purchase of two properties. The defendants were solicitors acting for both the lender and the purchasers. The lender transferred the mortgage funds to the solicitors before completion of the transaction.
Under the terms of the arrangement, the solicitors were not authorised to release the money until completion. However, they released the funds several days early, thereby committing a breach of trust.
The property transaction subsequently completed as planned. Unfortunately, the purchasers later defaulted on the mortgage. When the lender enforced its security, it discovered that the properties were worth only £775,000 rather than the £2 million previously represented. As a result, the lender suffered a substantial shortfall.
The lender argued that because the solicitors had committed a breach of trust by releasing the money prematurely, they should compensate the lender for the entire loss.


Decision in Target Holdings
The House of Lords rejected the lender’s claim.
Although the solicitors had clearly acted in breach of trust, the court held that the breach did not cause the loss suffered by the lender.
The evidence demonstrated that even if the solicitors had complied with their instructions and released the money only upon completion, the transaction would still have completed in exactly the same way. The lender would still have received inadequate security and would still have suffered the same loss when the borrowers defaulted.
Consequently, the loss would have occurred regardless of the breach.
Applying the “but for” test, the court concluded that the breach was not the cause of the claimant’s loss.


Significance of Target Holdings
Target Holdings established that trustees are liable only for losses that are actually caused by their breach of trust.
The case marked an important shift away from the older view that trustees might be strictly liable for all losses associated with trust property once a breach had occurred.
Instead, equitable compensation became more closely linked to causation and the actual consequences of the trustee’s misconduct.


Example of Successful Causation
Suppose a trustee is instructed not to release £500,000 of trust funds until certain contractual conditions have been satisfied.
Ignoring those instructions, the trustee transfers the money immediately to a purchaser who subsequently disappears with the funds.
Had the trustee retained the money as required, the loss would never have occurred.
Applying the “but for” test, the trustee’s breach clearly caused the loss and equitable compensation would likely be awarded.


Example Where Causation Is Not Established
Suppose a trustee releases trust funds one day earlier than authorised.
However, the transaction completes successfully the following day exactly as intended.
Several years later, an economic recession causes the investment to fail.
The beneficiaries argue that the early release constituted a breach of trust.
Although a breach occurred, the loss resulted from the recession rather than the premature transfer of funds. The loss would have occurred regardless of the breach.
Applying the “but for” test, causation is not established and the trustee is unlikely to be liable for the loss.


AIB Group (UK) Plc v Mark Redler & Co Solicitors [2015] AC 1503
The principles established in Target Holdings were reaffirmed by the Supreme Court in AIB Group (UK) Plc v Mark Redler & Co Solicitors.
The case involved solicitors acting as trustees who incorrectly distributed mortgage funds during a refinancing transaction. The claimant argued that the solicitors should be liable for the entirety of the lender’s losses.
The Supreme Court rejected this argument and emphasised that equitable compensation should reflect only the loss actually caused by the breach.
Lord Toulson stated that, absent fraud, it would be wrong to require a trustee to compensate beneficiaries for losses that would have been suffered even if the trustee had properly performed their duties.
The court therefore confirmed the continuing authority of Target Holdings and the central importance of causation in breach of trust claims.


Causation and Equitable Compensation
The requirement of causation plays a crucial role in determining the amount of equitable compensation.
The objective of equitable compensation is to restore the trust fund to the position it would have occupied had the breach not occurred.
Accordingly, compensation should correspond to the actual loss caused by the trustee’s misconduct rather than losses arising from unrelated events.
This ensures that beneficiaries are fairly compensated without imposing disproportionate liability upon trustees.


Relationship with Remoteness
Although causation and remoteness are closely related concepts, they are distinct.
Causation asks whether the breach caused the loss.
Remoteness asks whether the loss is sufficiently connected to the breach to justify recovery.
Following Target Holdings and AIB Group, the courts have generally focused on causation rather than importing complex common law rules of remoteness into equitable compensation claims.
The key question remains whether the loss would have occurred but for the breach.


Comprehensive Case Study
Facts
Daniel is trustee of a trust worth £5 million.
The trust deed requires him to retain trust funds until all contractual conditions have been satisfied. Instead, Daniel releases £1 million to a purchaser two weeks early.
The purchaser subsequently completes the transaction exactly as anticipated.
Five years later, a collapse in the property market causes the investment to lose £700,000 in value.
The beneficiaries bring a claim against Daniel.
Analysis
Daniel has committed a breach of trust by releasing the money prematurely.
However, the court must determine whether the breach caused the loss.
The evidence shows that the transaction would have completed regardless of whether the funds had been released early or on the correct date. The subsequent loss arose from market conditions rather than the premature transfer.
Applying the “but for” test established in Target Holdings, the beneficiaries cannot demonstrate that the breach caused the loss.
Outcome
Although Daniel committed a breach of trust, he is unlikely to be liable for the £700,000 loss because causation has not been established.


Conclusion
Causation is a fundamental requirement in breach of trust claims. Beneficiaries must demonstrate not only that a breach occurred but also that the breach caused the loss suffered by the trust. The leading decisions in Target Holdings Ltd v Redferns and AIB Group (UK) Plc v Mark Redler & Co Solicitors confirm that the appropriate test is the “but for” test. If the loss would have occurred regardless of the trustee’s breach, liability will not arise. Consequently, modern trust law seeks to ensure that equitable compensation reflects actual loss caused by wrongdoing rather than imposing liability for losses that would have occurred in any event.


References
Target Holdings Ltd v Redferns [1996] AC 421.
AIB Group (UK) Plc v Mark Redler & Co Solicitors [2015] AC 1503.
Nestle v National Westminster Bank Plc [1993] 1 WLR 1260.
Bartlett v Barclays Bank Trust Co Ltd (No 2) [1980] Ch 515.
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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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:

1. A breach of trust;
2. A resulting loss; and
3. A causal connection between the breach and the loss.

Merely proving that a trustee acted improperly is insufficient. The claimant must also demonstrate that the breach caused measurable damage.


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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SQE – Equity and Trust – Liability for the Acts of Agents
Introduction
Trustees are generally expected to administer trusts personally and to exercise their powers and duties in accordance with the trust instrument and their fiduciary obligations. However, modern trust administration often requires specialist expertise in areas such as investment management, accounting, taxation, and property management. As a result, trustees frequently delegate certain functions to professional agents.
The delegation of responsibilities raises an important legal issue: if an agent commits an error or causes loss to the trust fund, who bears responsibility? The answer depends upon the statutory basis of the delegation and whether the trustees have complied with their legal duties when appointing and supervising the agent.


The General Principle
The appointment of an agent does not automatically relieve trustees of their responsibilities. Trustees remain fiduciaries and continue to owe duties to beneficiaries. They must therefore exercise reasonable care when selecting agents, provide appropriate instructions, and supervise the performance of delegated functions.
Whether trustees are personally liable for an agent’s acts depends upon the type of delegation used and the extent to which trustees have complied with their statutory obligations.


Individual Delegation Under Section 25 Trustee Act 1925
Section 25 of the Trustee Act 1925 permits a trustee to delegate powers through a power of attorney. This form of delegation is usually temporary and enables another person to perform trust functions on behalf of the trustee.
A significant feature of section 25 is that it imposes strict liability upon the appointing trustee. Section 25(7) provides that the trustee remains responsible for the acts and defaults of the attorney. Consequently, even where the trustee has acted honestly and carefully in making the appointment, liability may still arise if the attorney causes loss to the trust.
This strict approach explains why section 25 is relatively uncommon in modern trust administration.


Example of Individual Delegation
Suppose Sarah is the trustee of a family trust worth £2 million. Before travelling overseas, she appoints her brother as attorney under section 25. During her absence, the attorney improperly withdraws £300,000 from the trust account and uses the money for personal purposes.
Although Sarah selected her brother carefully and had no reason to suspect wrongdoing, she may nevertheless be personally liable for the loss because section 25(7) imposes strict liability upon the appointing trustee.


Collective Delegation Under the Trustee Act 2000
The Trustee Act 2000 introduced a more flexible and commercially realistic approach to delegation. Section 11 allows trustees collectively to delegate a wide range of administrative and investment functions to professional agents.
This reflects the reality that modern trust administration often requires specialist knowledge that trustees themselves may not possess. Investment managers, solicitors, accountants, and surveyors are therefore commonly appointed to assist trustees in carrying out their duties.
Unlike section 25 of the Trustee Act 1925, delegation under the Trustee Act 2000 does not automatically result in trustee liability if the agent makes a mistake.


Liability Under Section 23 Trustee Act 2000
Section 23 of the Trustee Act 2000 provides that trustees will only be liable for the acts or defaults of an agent where they have failed to comply with their statutory obligations when selecting, instructing, or supervising that agent.
Consequently, trustees are not liable simply because an agent performs poorly or makes an incorrect decision. Liability arises only where the trustees themselves have failed to exercise reasonable care.
This represents a significant departure from the strict liability approach adopted under section 25 of the Trustee Act 1925.


The Statutory Duty of Care
When appointing and supervising agents, trustees must comply with the statutory duty of care contained in section 1 of the Trustee Act 2000.
The duty requires trustees to exercise such care and skill as is reasonable in the circumstances, taking into account any special knowledge or expertise that they possess. Professional trustees are therefore expected to meet a higher standard than ordinary lay trustees.
Reasonable care may require trustees to investigate an agent’s qualifications, experience, professional reputation, and suitability before making an appointment.


The Requirement to Provide a Policy Statement
Section 15 of the Trustee Act 2000 requires trustees to provide agents with a written policy statement.
The policy statement establishes the framework within which the agent is expected to operate. It may specify investment objectives, acceptable levels of risk, ethical considerations, or restrictions on particular transactions.
This requirement ensures that agents understand the trustees’ expectations and act consistently with the interests of the beneficiaries.


The Duty to Keep the Agent Under Review
Trustees must not simply appoint an agent and then ignore their activities. Section 22 of the Trustee Act 2000 requires trustees to keep the agent’s performance under regular review.
This involves monitoring reports, assessing investment performance, reviewing decisions, and determining whether the delegation remains appropriate.
Failure to supervise an agent adequately may expose trustees to personal liability, even where the original appointment was reasonable.


Example of Proper Delegation
Assume that trustees appoint a qualified investment manager to manage a trust portfolio worth £10 million. Before making the appointment, they investigate the manager’s qualifications, issue a detailed policy statement, and regularly review performance reports.
Despite these precautions, the investment manager makes a series of poor investment decisions that result in losses of £1 million.
In these circumstances, the trustees are unlikely to be personally liable. They have complied with their statutory obligations and exercised reasonable care throughout the delegation process. The loss arises from the agent’s mistakes rather than any breach by the trustees.


Example of Trustee Liability
Suppose instead that trustees appoint a friend with no investment experience to manage a trust fund worth £5 million. No due diligence is undertaken, no policy statement is issued, and the trustees fail to monitor the agent’s activities.
The agent subsequently loses £2 million through reckless investments.
In this situation, the trustees are likely to be personally liable because they have failed to comply with their statutory duties under sections 1, 15, and 22 of the Trustee Act 2000.


Indemnities Upon Retirement
When a trustee retires, they may seek an indemnity from the continuing trustees. An indemnity is a promise that the continuing trustees will assume responsibility for certain liabilities that may arise after retirement.
Such indemnities are particularly important where there is concern about future claims relating to the administration of the trust. However, negotiating indemnities can be difficult, especially where there may have been prior breaches of trust or uncertainty regarding potential liability.


Exclusion Clauses and Agent Liability
Trustees may also benefit indirectly from exclusion clauses contained within the trust instrument. Where a trust deed excludes liability for negligence or certain breaches of trust, the clause may protect trustees from liability arising from an agent’s mistakes, provided that the trustees themselves have complied with their statutory duties.
An exclusion clause does not automatically protect trustees from dishonesty, fraud, or breaches of core fiduciary obligations, but it may provide significant protection in relation to ordinary administrative errors.


Relationship with Remedies for Breach of Trust
Where trustees fail to comply with their duties regarding delegation, beneficiaries may pursue a range of remedies. These include equitable compensation, restoration of trust property, tracing, constructive trusts, equitable liens, and interest on sums improperly administered.
Conversely, where trustees have exercised reasonable care and complied with the Trustee Act 2000, they will generally avoid personal liability even if the agent’s conduct causes substantial losses to the trust.


Conclusion
The law governing liability for the acts of agents seeks to balance the practical necessity of delegation with the need to protect beneficiaries. While section 25 of the Trustee Act 1925 imposes strict liability on trustees who delegate through powers of attorney, the Trustee Act 2000 adopts a more flexible approach that focuses on whether trustees have exercised reasonable care. Provided trustees comply with their duties when selecting, instructing, and supervising agents, they will generally not be liable for an agent’s mistakes. Modern trust law therefore recognises the importance of professional delegation while ensuring that trustees remain accountable for the proper administration of trust property.


References
Trustee Act 1925, s 25.
Trustee Act 2000, ss 1, 11, 15, 22 and 23.
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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SQE – Equity and Trust – Assessing the Extent of Trustee Liability
Introduction
Once a trustee has been found liable for a breach of trust, the next question is:
How much must the trustee pay?
The courts assess liability by reference to two principal measures:

1. Loss caused to the trust fund (compensatory liability); and
2. Unauthorised gain made by the trustee (gain-based liability).

The purpose of equity is not merely to compensate beneficiaries but also to ensure that trustees do not profit from wrongdoing. Consequently, equitable liability differs from common law damages because equity places strong emphasis upon fiduciary accountability and the protection of beneficiaries.


The Two Main Measures of Liability
1. Loss to the Trust Fund
The first measure focuses on:
✅ restoring the trust fund.
The court asks:
What position would the trust have been in if the breach had never occurred?
If the trustee’s actions caused loss, the trustee must compensate the trust accordingly.


2. Unauthorised Gain
The second measure focuses on:
✅ stripping profits from the trustee.
The court asks:
What benefit did the trustee obtain through the breach?
The trustee may be ordered to surrender those profits even if the trust itself suffered little or no loss.


Compensatory Liability
Where a breach causes financial loss, the trustee must restore the trust fund.
This principle was applied in:
Bartlett v Barclays Bank Trust Co Ltd (No 2).
The objective is to put the trust in the position it would have occupied had the breach not occurred.


Equity vs Common Law Damages
Although equitable compensation resembles damages, important differences exist.


Common Law
Focuses primarily on:
✅ the claimant’s loss.


Equity
Focuses on:
✅ restoring the trust fund;
✅ protecting beneficiaries;
✅ preventing trustees from benefiting from wrongdoing.
Equity therefore tends to favour beneficiaries where uncertainty exists.


Assessment Date
One of the most important differences is the timing of assessment.


Common Law
Loss is usually assessed at the:
❌ date of breach.


Equity
Loss is generally assessed at the:
✅ date of judgment,
using the full benefit of hindsight.


Target Holdings v Redferns
This principle was considered in:
Target Holdings Ltd v Redferns.
The court recognised that equitable compensation seeks to restore the trust fund rather than simply measure loss at the moment of breach.


Hulbert v Avens
The principle was subsequently applied in:
Hulbert v Avens.


Example 1 – Compensatory Liability
Facts
Daniel is trustee of a trust.
He should have sold trust shares in:
2020
when they were worth:
£500,000.
Instead, he improperly retains them.
By trial in:
2025
the shares are worth:
£150,000.


Loss
£500,000 − £150,000
= £350,000


Remedy
Daniel must compensate the trust:
£350,000.


Fry v Fry
The principle is illustrated by:
Fry v Fry.
A trustee who improperly retained investments was liable for the difference between:

• the value when they should have been sold;
  and
• their value at judgment.

Gain-Based Liability
Sometimes the trustee personally profits from the breach.
In these cases, equity may focus on:
✅ the trustee’s gain rather than the trust’s loss.


Purpose
The objective is to ensure:
fiduciaries must not profit from their position.


Example 2 – Unauthorised Profit
Facts
Daniel uses trust information to purchase land personally.
Purchase price:
£200,000.
Land later worth:
£1.5 million.


Profit
£1.3 million.


Remedy
The court may order:

• an account of profits;
  or
• a constructive trust over the land.

Daniel cannot retain the gain.


Highest Value Rule
Historically, courts sometimes calculated profit liability by reference to:
✅ the highest value achieved before judgment.
This approach appeared in:
Nant-y-glo and Blaina Ironworks Co v Grave.
However, this authority has not been consistently followed.


Election Between Loss and Gain
A crucial rule is that beneficiaries cannot usually recover:
❌ both compensation for loss and the trustee’s profit.
These remedies are generally:
alternative rather than cumulative.


Tang Man Sit v Capacious Investments
The leading authority is:
Tang Man Sit v Capacious Investments Ltd.


Facts
Tang agreed to transfer certain properties to the claimant.
Instead, he rented them out and retained the rental income.


Consequences
His conduct caused:

• loss to the claimant;
  and
• profit to Tang.

Claim
The claimant sought:

• compensation for loss;
  and
• surrender of profits.

Decision
The Privy Council refused.
The claimant had to choose.


Principle
A claimant may elect either:
✅ compensatory relief;
or
✅ gain-based relief.
But generally not both.


Example 3 – Election
Facts
Trust property should have produced:
£300,000
for beneficiaries.
Instead, Daniel generates:
£600,000
personal profit.


Choice
Option A
Compensation:
£300,000


Option B
Account of profits:
£600,000


Sensible Election
The claimant chooses:
✅ £600,000.


Ramzan v Brookwide
The election principle was reaffirmed in:
Ramzan v Brookwide Ltd.
The court described loss-based and gain-based remedies as:
alternative and inconsistent remedies.
The court may treat the claimant as having elected the larger award.


Interest on Trustee Liability
Interest is generally payable.


Honest Trustee
Usually:
✅ simple interest.


Fraudulent Trustee
Usually:
✅ compound interest.


Why?
Fraudulent trustees should not benefit from retaining trust money over time.


Example 4 – Interest
Facts
Daniel misappropriates:
£500,000
for ten years.


Result
The court may order:

• repayment of £500,000;
  plus
• compound interest.

The total liability may significantly exceed the original sum.


Set-Off of Gains Against Losses
A further issue arises where trustees have produced:

• gains in some transactions;
  and
• losses in others.

General Rule
A trustee cannot usually say:
“I lost £500,000 here, but made £500,000 elsewhere.”
The gains and losses remain separate.


Dimes v Scott
The traditional rule appears in:
Dimes v Scott.


Facts
A trustee generated profits through one investment but losses through another.


Decision
The trustee could not offset gains against losses.
Each breach was assessed independently.


Bartlett v Barclays Bank
A more flexible approach emerged in:
Bartlett v Barclays Bank Trust Co Ltd (No 2).


Principle
Set-off may be permitted where:
✅ gain and loss arise from the same transaction;
or
✅ form part of the same wrongful course of conduct.


Example 5 – Same Transaction
Facts
Daniel improperly manages one property development project.
Part A generates:
£200,000 profit.
Part B causes:
£150,000 loss.


Result
The court may permit set-off.
Net gain:
£50,000.


Criticism
The Bartlett approach has been criticised because:
“same transaction”
is difficult to define.
The resulting uncertainty makes outcomes less predictable.


Comprehensive Case Study
Facts
Daniel is trustee of the Carter Family Trust.
He improperly uses:
£1 million
to purchase commercial property.


Outcome 1
Property rises to:
£3 million.


Outcome 2
Daniel earns:
£500,000
rental income.


Outcome 3
Trust would otherwise have earned:
£700,000
through authorised investments.


Beneficiary’s Options
Proprietary Remedy
Constructive trust over property worth:
£3 million.


Account of Profits
Claim:
£500,000 rental income.


Equitable Compensation
Claim:
£700,000 lost investment return.


Election
The beneficiary cannot usually recover all three.
They must choose the most advantageous remedy.
In practice:
✅ the £3 million proprietary claim is likely preferable.


Key SQE Principles
Trustee liability is assessed by reference to:
✅ loss to the trust;
or
✅ gain to the trustee.


Loss-based remedies include:

• equitable compensation;
• restoration of trust property;
• interest.

Gain-based remedies include:

• account of profits;
• constructive trusts;
• proprietary claims.

Generally:
❌ no double recovery.
The claimant must elect between inconsistent remedies.


Conclusion
The assessment of trustee liability reflects equity’s dual objectives of restoring trust property and preventing fiduciaries from profiting from wrongdoing. Where a breach causes loss, trustees must compensate the trust so that it is restored to the position it would have occupied had the breach not occurred. Where trustees obtain unauthorised gains, equity may require those gains to be surrendered through an account of profits or proprietary remedies. Cases such as Bartlett v Barclays Bank, Target Holdings, Tang Man Sit, and Ramzan demonstrate that beneficiaries must generally choose between compensatory and gain-based remedies, with the court seeking to prevent both trustee enrichment and unjust double recovery.
Sources of Reference
Bartlett v Barclays Bank Trust Co Ltd (No 2) [1980] Ch 515.
Target Holdings Ltd v Redferns [1996] AC 421.
Hulbert v Avens [2003] EWHC 76 (Ch).
Fry v Fry (1859) 54 ER 56.
Nant-y-glo and Blaina Ironworks Co v Grave (1878) 12 Ch D 738.
Tang Man Sit v Capacious Investments Ltd [1996] AC 514.
Ramzan v Brookwide Ltd [2011] 2 P & CR 32.
Dimes v Scott (1828) 38 ER 778.

​

SQE – Equity and Trust – Consent of the Beneficiaries as a Defence to Breach of Trust
Introduction
A trustee who commits a breach of trust will normally be personally liable to compensate the beneficiaries for any loss caused to the trust. However, one important defence available to trustees is the consent, acquiescence, or release of the beneficiaries.
The principle is based on fairness. If beneficiaries, knowing all the relevant facts, freely agree to a trustee’s conduct, it would generally be unjust to allow them later to complain about that same conduct and sue the trustee for breach of trust.
This defence may arise:

• before the breach occurs (prior consent);
• during the transaction;
• or after the breach through a release or ratification.

The General Rule
Where beneficiaries:
✅ have full legal capacity;
✅ possess full knowledge of the material facts;
✅ act freely and voluntarily;
then they may:
consent to, approve, release, or ratify a breach of trust.
If these requirements are satisfied, the trustee may be relieved from liability.


Re Pauling’s Settlement Trusts (No 1)
The leading authority is Re Pauling’s Settlement Trusts (No 1).
The case confirms that beneficiaries may consent to or release trustees from liability for breaches of trust.
Importantly, no special formalities are generally required.


Formal Requirements
Unlike some legal transactions, consent does not necessarily have to be:
❌ in writing;
❌ executed by deed;
❌ formally documented.
The court examines:

• the conduct of the beneficiaries;
• surrounding circumstances;
• and available evidence.

The crucial issue is whether genuine and informed consent existed.


Requirement 1 – Full Legal Capacity
A beneficiary must have full legal capacity.
This means the beneficiary must:
✅ be an adult;
✅ possess sufficient mental capacity.


Overton v Banister
In Overton v Banister, the court confirmed that valid consent requires beneficiaries to possess legal capacity.


Example
Suppose a trustee proposes selling trust land below market value.
Two beneficiaries agree.
However:

• one beneficiary is 14 years old;
• another lacks mental capacity.

Result
Their consent is ineffective.
The trustee remains exposed to liability for breach of trust.


Requirement 2 – Full Knowledge
The beneficiaries must possess:
✅ full knowledge of all material facts.
Consent obtained through incomplete disclosure will not protect the trustee.


Example
Daniel is trustee of a family trust.
He asks beneficiaries to approve the sale of trust shares.
Daniel tells them the shares are worth:
£100,000.
In reality they are worth:
£500,000.
The beneficiaries approve the sale.


Result
The consent is invalid.
The beneficiaries were not fully informed.
Daniel remains liable.


Requirement 3 – Free and Voluntary Consent
Consent must be given:
✅ freely;
✅ voluntarily;
✅ without coercion;
✅ without undue influence.


Boardman v Phipps
The importance of informed and voluntary consent was emphasised in:
Boardman v Phipps.
The court stressed that beneficiaries must act independently and with full understanding of the relevant circumstances.


Example
Suppose a trustee tells beneficiaries:
“If you do not approve this transaction, I will stop making distributions from the trust.”
The beneficiaries reluctantly agree.


Result
The consent may be invalid because it was not freely given.


Forms of Beneficiary Approval
Beneficiary approval may take several forms.


Prior Consent
Approval given before the trustee acts.


Example
The beneficiaries approve a risky investment strategy before the investment occurs.
If losses later arise, the trustee may rely upon that consent.


Acquiescence
The beneficiaries know about the breach but do nothing.
Over time, their conduct may amount to acceptance.


Example
The beneficiaries know for several years that trust property has been leased improperly but take no action.
Their prolonged silence may support a defence of acquiescence.


Release
A release occurs after the breach.
The beneficiaries expressly agree not to pursue the trustee.


Example
Daniel improperly distributes:
£100,000
from a trust.
After receiving full disclosure, the beneficiaries sign an agreement releasing him from liability.


Result
The trustee may rely on the release as a complete defence.


Case Scenario 1 – Valid Consent
Facts
Sarah is trustee of the Carter Family Trust.
The trust owns shares worth:
£500,000.
Sarah believes the shares are risky and recommends selling them.
She provides:

• valuation reports;
• financial advice;
• market analysis.

All adult beneficiaries agree in writing.
The shares are sold.
Six months later, the shares double in value.
The beneficiaries regret their decision and sue Sarah.


Solution
Sarah is likely protected.
The beneficiaries:
✅ had capacity;
✅ had full knowledge;
✅ acted voluntarily.
Their informed consent prevents them from complaining later.


Case Scenario 2 – Lack of Full Disclosure
Facts
Daniel wishes to sell trust land.
Actual value:
£1.2 million.
Daniel tells beneficiaries it is worth:
£700,000.
They approve the sale.


Solution
The consent is ineffective.
The beneficiaries lacked full knowledge of the facts.
Daniel may be liable for:

• breach of trust;
• equitable compensation;
• or proprietary remedies.

Case Scenario 3 – Undue Influence
Facts
Emma is trustee and sole source of financial support for beneficiaries.
She pressures beneficiaries into approving a transaction benefiting her personally.
The beneficiaries reluctantly agree.


Solution
The consent is unlikely to be valid.
The approval was not freely given.
Emma remains liable.


Case Scenario 4 – Beneficiary Release After Breach
Facts
A trustee mistakenly distributes:
£300,000
to the wrong beneficiary.
The trustee later explains the error fully and offers corrective measures.
The beneficiaries agree to release the trustee from liability.


Solution
The court will likely uphold the release.
The trustee may be fully protected.


Case Scenario 5 – Minor Beneficiary
Facts
A trust has three beneficiaries:

• Anna (35);
• Michael (40);
• Lucy (16).

All approve a speculative investment.
The investment loses:
£500,000.


Solution
Lucy lacks legal capacity.
Her consent is ineffective.
The trustee may still face liability in respect of Lucy’s beneficial interest.


Relationship With Section 61 Trustee Act 1925
Consent differs from statutory relief under section 61.


Consent Defence
Focuses on:
✅ the conduct of beneficiaries.


Section 61 Relief
Focuses on:
✅ the conduct of the trustee.
A trustee may rely on either defence depending on the circumstances.


Relationship With Exclusion Clauses
Consent also differs from exclusion clauses.


Exclusion Clause
Protection comes from:
✅ the trust instrument.


Consent Defence
Protection comes from:
✅ beneficiary approval.


Practical Importance
Consent is particularly useful where trustees must make:

• difficult investment decisions;
• commercial decisions;
• compromises;
• or distributions involving uncertainty.

Obtaining informed consent can significantly reduce litigation risk.


Key SQE Principles
For valid beneficiary consent, the trustee must show:
✅ full legal capacity;
✅ full knowledge of material facts;
✅ voluntary agreement;
✅ absence of undue influence.
Consent may occur:

• before the breach;
• during the transaction;
• or after the breach through release or ratification.

Conclusion
Consent of the beneficiaries is an important defence to breach of trust because it reflects the equitable principle that informed beneficiaries should be bound by decisions they freely approve. For consent to be effective, beneficiaries must possess legal capacity, full knowledge of the relevant facts, and act voluntarily without undue influence. Cases such as Re Pauling’s Settlement Trusts, Overton v Banister, and Boardman v Phipps demonstrate that courts carefully scrutinise whether consent was truly informed and freely given. Where these requirements are satisfied, trustees may be relieved from liability even though a technical breach of trust has occurred.
Sources of Reference
Re Pauling’s Settlement Trusts (No 1) [1962] 1 WLR 86.
Overton v Banister (1844) 67 ER 479.
Boardman v Phipps [1967] 2 AC 46.
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, OUP 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, OUP 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).

​

SQE – Equity and Trust – Relief Granted by the Court Under Section 61 Trustee Act 1925
Introduction
Trustees who commit a breach of trust are normally personally liable for any loss caused to the trust. However, equity recognises that not every breach results from dishonesty, fraud, or deliberate misconduct. Trustees are often laypersons acting in good faith, faced with difficult decisions in complex circumstances.
To address this, Parliament enacted section 61 of the Trustee Act 1925, which gives courts a discretionary power to relieve trustees from personal liability where fairness requires it.
Section 61 provides an important safeguard for trustees who have acted honestly and reasonably but nevertheless find themselves technically in breach of trust.


Statutory Provision
Section 61 of the Trustee Act 1925 provides that:
the court may relieve a trustee from personal liability wholly or partly if the trustee has acted honestly and reasonably and ought fairly to be excused.
This means that even where a breach of trust has occurred, the court may decide that it would be unjust to impose full liability.


Requirements for Relief
The court generally considers three questions:
1. Did the Trustee Act Honestly?
The trustee must have acted in good faith.
Relief will not be available where the trustee acted:

• fraudulently;
• dishonestly;
• recklessly;
• or for personal gain.

2. Did the Trustee Act Reasonably?
The trustee’s conduct must be objectively reasonable.
The court considers:

• the information available at the time;
• professional advice obtained;
• steps taken to protect beneficiaries;
• and the trustee’s level of experience.

3. Is It Fair to Excuse the Trustee?
Even where honesty and reasonableness are established, the court retains discretion.
The court asks whether:
it would be fair and equitable to excuse the trustee from liability.


Nature of the Relief
The court may grant:
Complete Relief
The trustee bears no personal liability.


Partial Relief
The trustee remains liable for part of the loss only.


No Relief
The trustee remains fully liable.


Re Evans (Deceased), Evans v Westcombe
The leading illustration is Re Evans (Deceased), Evans v Westcombe.


Facts
A woman acted as executor of her father’s estate.
The will directed that the estate should be divided equally between:

• herself;
• and her brother.

However, the brother had been missing for more than:
30 years.
Most people believed him to be dead.


Actions Taken by the Executor
Before distributing the estate, she:

• obtained legal advice;
• purchased an insurance policy;
• ensured the policy covered half of the estate value.

Believing her brother was dead, she distributed the estate to herself.


The Problem
Several years later:
✅ the brother reappeared.
He demanded his half share of the estate.
Unfortunately, the insurance policy did not cover the entire amount owed.


Court Decision
The court held that the executor had technically breached her duties.
However, she had:
✅ acted honestly;
✅ sought professional legal advice;
✅ attempted to protect her brother’s interests through insurance;
✅ acted reasonably throughout.


Result
The court granted:
✅ partial relief under section 61.
She was required to pay only some interest rather than the full amount claimed.


Importance of Re Evans
The case demonstrates that:
a trustee may make a mistake and still obtain relief.
The crucial issue is whether the trustee acted responsibly and conscientiously.


Daniel v Tee
A more recent example is Daniel v Tee.


Facts
The case involved trustees who made poor investment decisions.
The investments performed badly and losses occurred.


Issue
Should trustees be personally liable for the losses?


Court Decision
The court accepted that:

• the trustees acted honestly;
• they relied on professional advice;
• they believed the adviser was competent.

The court recognised that trustees are not investment experts and may reasonably depend on professional guidance.


Result
The court held that:
✅ section 61 relief could apply.


Importance
Daniel v Tee demonstrates that poor investment outcomes do not automatically create trustee liability.
A distinction exists between:

• negligent conduct;
  and
• reasonable decisions that later prove unsuccessful.

Relationship with Trustee Act 2000
Section 61 often operates alongside:
Trustee Act 2000.
The Trustee Act 2000 encourages trustees to seek professional advice under section 5 when dealing with investments.
If trustees:

• obtain proper advice;
• act in accordance with it;
• and honestly believe it to be competent,

courts are more likely to grant relief.


Example 1 – Full Relief
Sarah is trustee of a trust worth:
£2 million.
Before investing, she obtains advice from a qualified investment manager.
The investment unexpectedly collapses due to a global financial crisis.
Loss:
£500,000.


Outcome
Sarah:

• acted honestly;
• sought expert advice;
• acted reasonably.

The court may grant:
✅ full relief under section 61.


Example 2 – Partial Relief
Thomas distributes trust funds based on legal advice.
Later it emerges that the advice was incomplete.
Loss:
£100,000.
The court concludes Thomas should have made further enquiries.


Outcome
The court may grant:
✅ partial relief,
requiring Thomas to contribute only part of the loss.


Example 3 – No Relief
Daniel transfers trust money into his personal account because he believes he will repay it later.
Loss:
£300,000.


Outcome
Although Daniel claims he intended no harm:
❌ he acted improperly;
❌ he acted in conflict with beneficiaries’ interests.
Section 61 relief would almost certainly be refused.


Relationship with Exclusion Clauses
Section 61 differs from exclusion clauses.


Exclusion Clause
Protects trustees because the trust instrument says so.


Section 61 Relief
Protects trustees because the:
✅ court exercises discretion.
The court independently assesses fairness.


Policy Considerations
Section 61 reflects an important policy balance.
Without protection:

• many individuals would refuse to act as trustees;
• trustees might become excessively cautious.

However, beneficiaries also require protection against:

• incompetence;
• negligence;
• and mismanagement.

Section 61 allows courts to strike a fair balance.


Key SQE Principles
To obtain relief under section 61 Trustee Act 1925, trustees must show:
✅ honesty;
✅ reasonableness;
✅ and that they ought fairly to be excused.
Relief may be:

• complete;
• partial;
• or refused entirely.

Seeking professional advice significantly strengthens a trustee’s position.


Conclusion
Section 61 of the Trustee Act 1925 provides an important equitable safeguard for trustees who commit breaches of trust despite acting honestly and reasonably. The provision reflects the courts’ recognition that trustees often face difficult decisions and should not automatically be punished for every mistake. Cases such as Re Evans and Daniel v Tee demonstrate that trustees who seek professional advice, act conscientiously, and genuinely attempt to fulfil their duties may receive complete or partial relief from liability. The provision therefore balances accountability to beneficiaries with fairness toward trustees who act in good faith.
Sources of Reference
Trustee Act 1925, s 61.
Re Evans (Deceased), Evans v Westcombe [1999] 2 All ER 777.
Daniel v Tee [2016] EWHC 1538 (Ch).
Trustee Act 2000.
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, OUP 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, OUP 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).

​

​SQE – Equity and Trust – Limitation Periods and the Doctrine of Laches


Introduction


Even where a beneficiary has a strong claim for breach of trust, tracing, equitable compensation, or recovery of trust property, the claim may fail if it is brought too late. The law therefore imposes time limits within which legal proceedings must be commenced.


In trust law, limitation rules are primarily governed by the Limitation Act 1980, particularly section 21. Alongside the statutory rules, equity has developed the separate doctrine of laches, which prevents claimants from enforcing rights after unreasonable delay where it would be unfair or unconscionable to allow the claim to proceed.


The combined effect of statutory limitation and laches seeks to balance:

• the interests of beneficiaries;

• fairness to trustees and defendants;

• legal certainty;

• and the proper administration of justice.

⸻


General Limitation Rule


The principal provision is section 21(3) of the Limitation Act 1980.


The general rule is that:


actions by beneficiaries for breach of trust must normally be brought within six years from the date on which the cause of action accrued.


The cause of action accrues when the breach occurs and the beneficiary first acquires the right to sue.


⸻


Example


Daniel, a trustee, improperly transfers:


£500,000


from the trust on:


1 January 2020.


The beneficiaries discover the breach immediately.


⸻


Limitation Period


The beneficiaries generally have until:


1 January 2026


to commence proceedings.


⸻


Disability Exception – Section 28


The law recognises that some beneficiaries may be unable to protect their rights.


Section 28 therefore postpones limitation periods where the claimant is under a legal disability.


⸻


Disability Includes

• being under the age of 18;

• lacking mental capacity;

• being of unsound mind.

⸻


Effect


Time does not begin running until the disability ends.


⸻


Example


Lucy is a beneficiary aged:


12 years old.


A trustee commits breach of trust in:


Lucy reaches 18 in:


⸻


Result


The six-year limitation period begins in:


2031,


not 2025.


Lucy therefore generally has until:


2037


to bring proceedings.


⸻


Deliberate Concealment – Section 32


A trustee should not benefit from hiding wrongdoing.


Section 32(1) therefore postpones limitation periods where relevant facts have been deliberately concealed.


⸻


Rule


Time begins running only when:


✅ the beneficiary discovers the concealment;


or


✅ could reasonably have discovered it.


⸻


Example


Daniel secretly transfers:


£800,000


from a trust in 2015.


He falsifies accounts to conceal the transaction.


The beneficiaries discover the fraud in 2028.


⸻


Result


The limitation period begins in:


2028,


not 2015.


⸻


No Limitation Period for Fraud


Section 21(1) creates important exceptions.


No limitation period applies where:

• the trustee acted fraudulently;

• or trust property remains in the trustee’s possession.

⸻


Why?


Equity refuses to allow fraudulent trustees to escape liability merely because time has passed.


⸻


Example


Daniel fraudulently transfers:


£1 million


to his personal investment account in 2010.


The money remains under his control in 2040.


⸻


Result


The beneficiaries may still sue.


There is:


✅ no limitation period.


⸻


Trust Property Still in Trustee’s Possession


The same principle applies where the trustee continues to possess trust property.


⸻


Example


A trustee improperly transfers trust land into his own name.


The property remains registered in the trustee’s ownership for decades.


⸻


Result


The beneficiaries may seek recovery regardless of the passage of time.


⸻


Wassell v Leggatt


The principle that fraud and retained trust property fall outside ordinary limitation periods was recognised in:


Wassell v Leggatt.


⸻


First Subsea v Balltec


The Court of Appeal considered section 21(1)(a) in:


First Subsea Ltd v Balltec Ltd.


The case examined fraudulent transactions and confirmed the continuing importance of the statutory fraud exception.


⸻


Burnden Holdings v Fielding


The Supreme Court clarified section 21(1)(b) in:


Burnden Holdings (UK) Ltd v Fielding.


The Court confirmed that actions involving trust property retained by trustees fall outside ordinary limitation rules.


⸻


The Equitable Doctrine of Laches


Separate from statutory limitation periods is the equitable doctrine of:


laches.


The word derives from old French and refers to:


unreasonable delay combined with neglect.


⸻


Purpose of Laches


The doctrine prevents claimants from:

• sleeping on their rights;

• delaying unnecessarily;

• and then seeking equitable relief when circumstances have significantly changed.

⸻


Re Sharpe


The classic formulation appears in:


Re Sharpe.


The court held that a claimant may be barred where delay renders the claim unconscionable.


⸻


Requirements for Laches


The defendant must generally show:


1. Significant Delay


The claimant delayed bringing proceedings.


⸻


2. Unfairness


The delay has caused prejudice or hardship.


⸻


3. Unconscionability


It would be unjust to permit the claim to proceed.


⸻


Case Scenario 1 – Laches Applies


Facts


Daniel commits fraud in:


The beneficiary discovers the fraud in:


The beneficiary waits until:


2022


to commence proceedings.


During that period:

• witnesses die;

• documents disappear;

• records are lost.

⸻


Solution


The court may apply:


✅ laches.


The delay combined with prejudice to the defendant may make the claim unconscionable.


⸻


Whatley v Lougher


A modern example is:


Whatley v Lougher.


⸻


Facts


The claimant knew about fraudulent conduct but waited:


12 years


before issuing proceedings.


⸻


Decision


The court applied:


✅ laches


and struck out the claim.


⸻


Importance


The case illustrates that knowledge combined with lengthy inaction can be fatal.


⸻


Case Scenario 2 – Laches Does Not Apply


Facts


A beneficiary discovers a breach of trust in:


Proceedings are issued in:


⸻


Solution


There is no substantial delay.


Laches would almost certainly fail.


⸻


Patel v Shah


The modern approach was explained in:


Patel v Shah.


The court adopted a broad unconscionability analysis rather than applying rigid rules.


⸻


Relationship Between Limitation and Laches


This distinction is extremely important.


⸻


Statutory Limitation


Created by legislation.


Applies fixed periods.


⸻


Laches


Created by equity.


Depends upon fairness and unconscionability.


⸻


Can Both Apply?


Usually:


❌ No.


Where Parliament has prescribed a limitation period, the doctrine of laches generally does not apply.


⸻


Re Pauling’s Settlement Trusts (No 1)


In:


Re Pauling’s Settlement Trusts (No 1),


the court confirmed that laches does not override statutory limitation provisions.


⸻


Green v Gaul


The same principle was reinforced in:


Green v Gaul.


⸻


Comprehensive Case Study


Facts


Daniel is trustee of a family trust.


In 2015 he secretly transfers:


£2 million


into a company he controls.


The beneficiaries are:

• Emma (age 35);

• Lucy (age 14).

Daniel falsifies trust accounts.


The fraud is discovered in:


⸻


Analysis


Emma


Because Daniel deliberately concealed the breach:


✅ section 32 applies.


Time begins running in:


⸻


Lucy


Lucy was under a disability.


Section 28 postpones limitation until she reaches:


18 years old.


⸻


Fraud


Daniel acted fraudulently.


Under section 21(1):


✅ no limitation period applies.


⸻


Result


Both beneficiaries may still sue successfully.


⸻


Key SQE Principles


Six-Year Rule


Section 21(3) normally imposes:


✅ six years.


⸻


Disability


Section 28 postpones time where claimants:


✅ are minors or lack capacity.


⸻


Concealment


Section 32 postpones time where facts are:


✅ deliberately concealed.


⸻


Fraud


Section 21(1) removes limitation periods for:


✅ fraudulent trustees.


⸻


Trust Property Retained


No limitation period where:


✅ trust property remains in the trustee’s possession.


⸻


Laches


Requires:


✅ substantial delay;


✅ prejudice;


✅ unconscionability.


⸻


Conclusion


Limitation periods and the doctrine of laches play an important role in balancing the rights of beneficiaries against the need for certainty and fairness in trust administration. While section 21 of the Limitation Act 1980 generally imposes a six-year limitation period for breach of trust claims, important exceptions exist for fraud, retained trust property, concealment, and beneficiaries under disability. Alongside these statutory protections, the equitable doctrine of laches prevents stale claims where delay has rendered proceedings unfair or unconscionable. Together, these rules ensure that trustees remain accountable while protecting defendants from prejudice caused by excessive delay.


Sources of Reference


Limitation Act 1980, ss 21, 28 and 32.


Wassell v Leggatt [1896] 1 Ch 554.


First Subsea Ltd v Balltec Ltd [2017] EWCA Civ 186.


Burnden Holdings (UK) Ltd v Fielding [2018] UKSC 14.


Re Sharpe [1892] 1 Ch 154.


Whatley v Lougher [2020] 4 WLUK 87.


Patel v Shah [2005] EWCA Civ 157.


Re Pauling’s Settlement Trusts (No 1) [1964] Ch 303.


Green v Gaul [2005] 1 WLR 1890.

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:

• fraud;
• misrepresentation;
• undue influence;
• concealment of material facts;
• abuse of a fiduciary position.

In such circumstances, equity will disregard the purported consent and the trustee may remain liable for breach of trust.


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:

1. Whether the breach caused loss to the trust;
2. Whether the trustee obtained an unauthorised profit;
3. Whether any defences apply;
4. The appropriate remedy.

Consequently, identifying the breach serves as the foundation for the wider analysis of trustee liability and equitable remedies.


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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SQE – Equity and Trust – Causation in Breach of Trust Claims
Introduction
Once a breach of trust has been established, the court must determine whether that breach actually caused a loss to the trust fund or enabled the trustee to obtain an unauthorised profit. This requirement is known as causation. A trustee will not automatically be liable simply because a breach of trust has occurred. There must be a sufficient causal connection between the breach and the loss suffered by the beneficiaries. Without such a connection, liability will generally not arise.
The law of trusts therefore requires beneficiaries to demonstrate not only that a trustee acted improperly, but also that the breach caused the loss complained of. This principle ensures that trustees are held responsible only for the consequences of their own wrongdoing and not for losses that would have occurred regardless of the breach.


The “But For” Test
The principal test used to establish causation in breach of trust claims is the “but for” test.
The court asks the following question:
Would the loss have occurred but for the trustee’s breach of trust?
If the answer is no, the trustee’s breach caused the loss and liability will generally follow.
If the answer is yes, the loss would have occurred even if the trustee had performed their duties properly, and therefore the trustee will not be liable for that loss.
This approach is familiar from other areas of private law, particularly tort law, but it has been firmly incorporated into equitable compensation claims involving breaches of trust.


Target Holdings Ltd v Redferns [1996] AC 421
The leading authority on causation in breach of trust cases is Target Holdings Ltd v Redferns.
The claimant company agreed to lend approximately £1.5 million to finance the purchase of two properties. The properties were represented as having a value of approximately £2 million. In reality, however, they were worth only around £775,000, meaning that the lender’s security was substantially inadequate.
The defendants were solicitors who acted for both the lender and the purchasers. The lender transferred the mortgage funds to the solicitors before completion of the transaction. Under the terms of the arrangement, the money was not to be released until completion occurred.
The solicitors nevertheless released the money prematurely, thereby committing a breach of trust.
The property transaction later completed as planned. Subsequently, the purchasers defaulted on the mortgage repayments. When the lender enforced its security and sold the properties, it discovered the true value of the properties and suffered a substantial shortfall.
The lender therefore sued the solicitors for breach of trust and sought compensation equal to the loss suffered.


Decision in Target Holdings
The House of Lords accepted that the solicitors had committed a breach of trust by releasing the funds prematurely. However, the court held that the solicitors were not liable for the lender’s loss.
The crucial issue was causation.
The evidence demonstrated that even if the solicitors had complied with their instructions and released the funds only upon completion, the transaction would still have proceeded exactly as it did. The lender would still have received inadequate security and would still have suffered the same loss when the borrowers defaulted.
Consequently, the breach of trust did not cause the loss.
Applying the “but for” test, the court concluded that the loss would have occurred regardless of the breach. Therefore, although a breach had occurred, there was no causal connection between the breach and the claimant’s loss.


Significance of Target Holdings
Target Holdings established that equitable compensation is not automatically available whenever a trustee commits a breach of trust.
Instead, beneficiaries must demonstrate that the breach actually caused the loss suffered by the trust.
The case rejected the notion that trustees should be liable for every loss associated with trust property simply because a breach occurred at some stage during the transaction.
Rather, equitable compensation should restore losses that flow from the breach itself and not losses that would have arisen in any event.
This approach aligns equitable compensation with principles of causation while preserving the distinctive objectives of trust law.


Example Applying the “But For” Test
Suppose a trustee is instructed not to release £500,000 from a trust account until certain legal documents have been signed.
The trustee ignores the instructions and releases the money immediately. The recipient absconds with the funds and disappears.
Had the trustee waited until the documents were signed, the money would have remained protected and the loss would not have occurred.
Applying the “but for” test, the trustee’s breach clearly caused the loss. The beneficiaries would therefore be entitled to equitable compensation.


Example Where Causation Is Absent
Suppose a trustee releases funds one day earlier than authorised, thereby committing a technical breach of trust.
The transaction subsequently completes successfully exactly as intended. Several years later, an economic downturn causes the investment to fail.
The beneficiaries argue that the trustee should compensate them because a breach of trust occurred.
Although the trustee acted improperly, the loss was caused by market conditions rather than the premature release of funds. The same loss would have occurred even if the trustee had complied fully with their obligations.
Applying the “but for” test, causation is not established and compensation would not be awarded.


AIB Group (UK) Plc v Mark Redler & Co Solicitors [2015] AC 1503
The Supreme Court reaffirmed the principles established in Target Holdings in AIB Group (UK) Plc v Mark Redler & Co Solicitors.
The case involved solicitors acting as trustees who improperly distributed mortgage funds during a refinancing transaction. The claimant argued that the solicitors should be responsible for all losses associated with the transaction.
The Supreme Court rejected this argument and confirmed that equitable compensation must be linked to losses actually caused by the breach.
Lord Toulson stated that, absent fraud, it would be wrong to impose liability for losses that would have been suffered even if the trustee had performed their duties correctly.
He emphasised that it would be a backward step to depart from Lord Browne-Wilkinson’s analysis in Target Holdings.
The decision therefore confirmed that the “but for” test remains the governing principle in modern breach of trust claims.


The Position in Cases Involving Fraud
The courts have indicated that different considerations may arise where fraud is involved.
Fraudulent trustees are treated particularly harshly by equity because of the fundamental fiduciary obligations owed to beneficiaries.
However, even in cases involving dishonesty, the courts still require a connection between the wrongful conduct and the loss claimed. The primary difference is that equitable remedies are often interpreted more strictly against fraudulent trustees.


Relationship with Equitable Compensation
Causation is central to the assessment of 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 court therefore compares:

1. The actual position of the trust after the breach; and
2. The position the trust would have occupied if the trustee had acted properly.

Only losses attributable to the breach are recoverable.
Accordingly, even where a trustee has clearly acted improperly, compensation will not be awarded if the claimant cannot demonstrate that the breach caused the loss.


Comprehensive Case Study
Facts
Daniel acts as trustee of a family trust.
The trust deed requires him to hold £1 million until all conditions of a property transaction have been satisfied. Instead, Daniel releases the funds one week early.
The transaction later completes exactly as anticipated. Two years afterwards, the property market collapses and the investment loses £600,000.
The beneficiaries bring proceedings against Daniel for breach of trust.
Analysis
Daniel clearly committed a breach of trust by releasing the money prematurely.
However, the court must determine whether the breach caused the £600,000 loss.
The evidence shows that the transaction would have completed regardless of the timing of the payment and that the subsequent loss resulted from a downturn in the property market.
Applying the “but for” test established in Target Holdings and reaffirmed in AIB Group, the beneficiaries cannot show that the loss would have been avoided had Daniel complied with his duties.
Outcome
Although Daniel committed a breach of trust, he will not be liable for the £600,000 loss because the breach did not cause the loss suffered by the trust.


Conclusion
Causation is an essential element of trustee liability. Beneficiaries must establish not only that a breach of trust occurred but also that the breach caused the loss for which compensation is sought. The leading decisions in Target Holdings Ltd v Redferns and AIB Group (UK) Plc v Mark Redler & Co Solicitors confirm that the appropriate approach is the “but for” test. A trustee will generally be liable only where the loss would not have occurred but for the breach. Consequently, equitable compensation seeks to restore losses actually caused by the trustee’s misconduct rather than providing recovery for losses that would have arisen regardless of the breach.


References
Target Holdings Ltd v Redferns [1996] AC 421.
AIB Group (UK) Plc v Mark Redler & Co Solicitors [2015] AC 1503.
Nestle v National Westminster Bank Plc [1993] 1 WLR 1260.
Bartlett v Barclays Bank Trust Co Ltd (No 2) [1980] Ch 515.
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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