CASE EXAMPLE

Caffrey v Darby [1801] 6 Ves 488 Trustees, because of their negligence, failed to recover possession of part of the trust assets and later still the assets became lost. The trustees argued that the loss was not attributable to their neglect. The court rejected this argument and decided that once the trustees had committed a breach of trust, they were responsible for compensating the estate in respect of any loss, whether consequential on the breach or not.

JUDGMENT

‘[I]f they have already been guilty of negligence they must be responsible for any loss in any way to that property, for whatever may be the immediate cause, the property would not have been in a situation to sustain that loss if it had not been for their negligence. If the loss had happened by fire, lightning, or any other accident, that would not be an excuse for them if guilty of previous negligence.’ Lord Eldon

The effect of this strict rule is that the liability of the trustees to account for losses suffered by the trust estate is absolute. Accordingly, it may be possible to obtain damages for breach of trust in cases where it is not possible to recover damages at common law in actions for breach of contract and tort.

JUDGMENT

‘The obligation of a trustee who is held liable for breach of trust is fundamentally different from the obligation of a contractual or tortious wrongdoer. The trustee’s obligation is to restore to the trust estate the assets of which he has deprived it.’ Brightman J in Bartlett v Barclays Bank Trust Co Ltd (No 2) [1980] 2 All ER 92

The same sentiments were expressed by Lord Browne-Wilkinson in the House of Lords’ decision in Target Holdings v Redferns [1995] 3 All ER 785:

JUDGMENT

‘[T]he basic rule is that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost … or compensation for such loss … the common law rules of remoteness … and causation do not apply.’

Where the breach occurs in a traditional type of trust (e.g. a family trust for a number of beneficiaries in succession), equity acted in personam and may order the trustee to account for all the funds that have been lost by the trust. This requires the trustee to restore to the trust fund the assets that ought to have been held upon trust, but were wrongly paid away by him. In the absence of specific restitution, the trustee will be required to compensate the trust for the loss it has suffered.

In Target Holdings v Redfern, Lord Browne-Wilkinson laid down the following principle:

JUDGMENT

‘The basic right of a beneficiary is to have the trust duly administered in accordance with the provisions of the trust instrument, if any, and the general law. Thus, in relation to a traditional trust, where the fund is held in trust for a number of beneficiaries having different, usually successive, equitable interests (for example, A for life with remainder to B), the right of each beneficiary is to have the whole fund vested in the trustees so as to be available to satisfy his equitable interest when, and if, it falls into possession. Accordingly, in the case of a breach of such a trust involving the wrongful paying away of trust assets, the liability of the trustee is to restore to the trust fund, often called the trust estate, what ought to have been there. The equitable rules of compensation for breach of trust have been largely developed in relation to such traditional trusts, where the only way in which all the beneficiaries’ rights can be protected, is to restore to the trust fund what ought to be there. In such a case the basic rule is that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach, or compensation for such loss. Courts of equity did not award damages but, acting in personam, ordered the defaulting trustee to restore the trust estate: see Nocton v Ashburton (Lord) [1914] AC 932, pp. 952, 958, per Viscount Haidane LC. Thus, the common law rules of remoteness of damage and causation do not apply. However, there does have to be some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable, viz, the fact that the loss would not have occurred but for the breach: see also In re Miller’s Deed Trusts (1978) 75 LSG 454; Nestlé v National Westminster Bank plc [1993] 1 WLR 1260.’

However, where the trustees hold the property on bare trust for the beneficiary and subsequently commit a breach of trust, the payment of compensation, as opposed to restitution, would be treated as appropriate for the benefit of the beneficiary, the reason being that in this event the trust comes to an end and the beneficiary becomes the sole owner of the property. Lord Browne-Wilkinson in Target Holdings explained the rule thus:

JUDGMENT

‘What if at the time of the action claiming compensation for breach of trust those trusts have come to an end? Take as an example again the trust for A for life with remainder to B. During A’s lifetime B’s only right is to have the trust duly administered and, in the event of a breach, to have the trust fund restored. After A’s death, В becomes absolutely entitled. He, of course, has the right to have the trust assets retained by the trustees until they have fully accounted for them to him. But if the trustees commit a breach of trust, there is no reason for compensating the breach of trust by way of an order for restitution and compensation to the trust fund as opposed to the beneficiary himself. The beneficiary’s right is no longer simply to have the trust duly administered: he is, in equity, the sole owner of the trust estate. Nor, for the same reason, is restitution to the trust fund necessary to protect other beneficiaries. Therefore, although I do not wholly rule out the possibility that even in those circumstances an order to reconstitute the fund may be appropriate, in the ordinary case, where a beneficiary becomes absolutely entitled to the trust fund, the court orders, not restitution to the trust estate, but the payment of compensation directly to the beneficiary. The measure of such compensation is the same, that is, the difference between what the beneficiary has in fact received and the amount he would have received but for the breach of trust.’

In Target Holdings, their Lordships declared that in the case of a trust arising out of a commercial transaction, the basis of compensation is similar to that applied in the case of common-law damages, i.e. that the beneficiary is put into the position he would have been in had the breach not occurred. In such a case the common-law rules of remoteness and causation would apply. In Target Holdings Lord Browne-Wilkinson stated the rule in the following manner:

JUDGMENT

‘Even applying the strict rules so developed in relation to traditional trusts, it seems to me very doubtful whether Target is now entitled to have the trust fund reconstituted. But in my judgment it is in any event wrong to lift wholesale the detailed rules developed in the context of traditional trusts and then seek to apply them to trusts of quite a different kind [such as commercial and financial trusts]. The obligation to reconstitute the trust fund applicable in the case of traditional trusts reflects the fact that no one beneficiary is entitled to the trust property and the need to compensate all beneficiaries for the breach. That rationale has no application to a case such as the present. To impose such an obligation in order to enable the beneficiary solely entitled (that is, the client) to recover from the solicitor more than the client has in fact lost, flies in the face of common sense and is in direct conflict with the basic principles of equitable compensation. In my judgment, once a conveyancing transaction has been completed, the client has no right to have the solicitor’s client account reconstituted as a trust fund.’

CASE EXAMPLE

Target Holdings v Redferns [1995] 3 All ER 785 The claimants, mortgagees, loaned a company £1.525 million, to be secured by way of a mortgage on property which was fraudulently made to appear to be worth £2 million, but in reality was worth only £775,000. The defendants, a firm of solicitors, were not parties to this fraud and acted for the purchasers and the mortgagees. The purchasers became insolvent and the claimants repossessed the property and sold it for £500,000. The claimants sued the firm of solicitors. The firm conceded that it acted in breach of trust by paying out the mortgage funds without authority, but argued that it was not liable to compensate the claimant for the loss suffered because its breach did not cause the loss sustained by the claimant. The firm of solicitors alleged that the claimants’ loss was wholly caused by the fraud of the third parties. The House of Lords decided in favour of the firm of solicitors. The claimant company advanced the same amount of money, obtained the same security and received the same amount on the realisation of that security, with or without the breach of trust committed by the defendant.

‘The case must either be treated as if these investments had not been made, or had been made for his own benefit out of his own monies, and that he had at the same time retained monies of the testator in his hands.’ Romilly MR

Where the trustees, in breach of their duties, fail to dispose of unauthorised investments and improperly retain the assets, they will be liable for the difference between the current value of the assets and the value at the time when they should have been sold.

CASE EXAMPLE

Fry v Fry [1859] 28 LJ Ch 591 A testator, who died March 1834, directed his trustees to sell a house ‘as soon as convenient after [his death] … for the most money that could be normally obtained’. In April 1836 the trustees advertised the house for £1,000. In 1837 they refused an offer of £900. In 1843 a railway was built near the property which caused it to depreciate in value. The property remained unsold in 1856, by which time both the original trustees had died. The court held that their estates were liable for the difference between £900 and the sum receivable for the house when it was eventually sold.

Where the trustees retain an authorised investment they will not be liable for breach of trust unless their conduct falls short of the ordinary prudence required of trustees. This was decided in Re Chapman [1896] 2 Ch 763. Under s 6 of the Trustee Investment Act 1961 (now repealed), the trustees, from time to time, were required to obtain and consider advice on whether the retention of the investment was satisfactory, having regard to the need for diversification and suitability of the investment.

Where the trustees improperly sell authorised investments and reinvest the proceeds in unauthorised investments, they will be liable to replace the authorised investments if these have risen in value, or the proceeds of sale of the authorised investments.

CASE EXAMPLE

Re Massingberd’s Settlement [1890] 63 LT 296 The trustees of a settlement had power to invest in government securities. In 1875 they sold Consols (authorised investments) and reinvested in unauthorised mortgages. The mortgages were called in and the whole of the money invested was recovered. At this time the Consols had risen in value. In an action for an account the court held that the trustees were required to replace the stock sold or its money equivalent. Where the trustees are directed by the settlor to invest in an identified or specific investment (e.g. shares in British Telecom plc) and the trustees fail to acquire the stipulated investments, they will be required to purchase the same at the proper time. If the specified investments have fallen in value, the trustees may be ordered to pay compensation to the trust equivalent to the difference between the value of the investments at the time the investments should have been made, and the value of the investments at the time of the judgment. On the other hand, where the trustees retain a discretion to invest in a specified range of investments and they fail to invest, they are chargeable with the trust fund itself and not with the amount of one or other of the investments which might have been purchased. In Shepherd v Mouls (1845) 4 Hare 500, it was decided that there is no one specific investment which may be used to measure the loss suffered by the trust. Where the trustees in breach of trust make a profit on one transaction and a loss on another they are not allowed to set off the loss against the profit, unless the profit and loss are treated as part of one transaction.

CASE EXAMPLE

Bartlett v Barclays Bank Trust Co (No 2) [1980] Ch 515 The trust estate consisted of a majority shareholding in a property company and the trustees were a professional trust company. For a number of years the property company maintained traditional investments and these were sufficient to maintain large dividends. As a result of inflation, the board resolved to restructure the investment portfolio into land developments. The new investments, known as the ‘Old Bailey’ project and the ‘Guildford’ project, were not completely successful and resulted in a loss to the trust. The court found that the new investments were in breach of trust and inter alia the trustees attempted to set off a loss made in the ‘Old Bailey’ project against a gain made in the ‘Guildford’ scheme. The court allowed the set-off as the mixed fortunes originated from the same transaction.

JUDGMENT

‘The general rule as stated in all the textbooks, with some reservations, is that where a trustee is liable in respect of distinct breaches of trust, one of which has resulted in a loss and the other a gain, he is not entitled to set off the gain against the loss unless they arise in the same transaction. The relevant cases are not, however, altogether easy to reconcile. All are centenarians and none is quite like the present. The Guildford development stemmed from exactly the same policy and exemplified the same folly as the Old Bailey project. Part of the profit was in fact used to finance the Old Bailey disaster. By sheer luck the gamble paid off handsomely on capital account. I think it would be unjust to deprive the bank of this element of salvage in the course of assessing the cost of the shipwreck. My order will therefore reflect the bank’s right to an appropriate set-off.’ Brightman J

The principles of restitution which govern the computation of the loss to the trust are concerned with the gross loss suffered by the estate. The tax position of the beneficiaries is irrelevant in the assessment of the loss to the estate. Accordingly, compensation to the trust will not be reduced by an equivalent amount of tax which the beneficiaries would have paid, had the trustees not committed a breach of trust (the principle in British Tax Commission v Gourley [1956] AC 185 is excluded).

JUDGMENT

‘I have reached the conclusion that tax ought not to be taken into account … but I do not feel that the established principles on which equitable relief is granted enable me to apply the Gourley principles to this case.’ Brightman J in Bartlett v Barclays Bank Trust Co Ltd (No 2) (1980)

The two dissenting Law Lords in Westdeutsche, Lords Goff and Woolf, adopted a broader view concerning the award of compound interest. They took the view that since the council had the use of the bank’s money, which it would otherwise have had to borrow at compound interest, it had, to that extent, profited from the use of the bank’s money. Moreover, if the bank had not advanced the money to the council, it would have employed the money in its business. The award of compound interest should be based on the principle of promoting justice or to prevent unjust enrichment. If the defendant has wrongfully profited, or may be presumed to have so profited from having the use of the claimant’s money, justice demands that the sum be repayable with compound interest. This would be the position irrespective of whether the claimant’s action arises in personam or in rem.

CASE EXAMPLE

Westdeutsche Landesbank Girozentrale v Islington Borough Council [1996] 2 All ER 961 The council entered into an interest rate swap agreement with the claimant bank. The nature of this agreement involved an understanding between the two parties, whereby each agrees to pay the other on a specified date or dates, an amount calculated by reference to the interest which would have accrued over a given period, on a notional principal sum. The claimant made an ‘upfront’ payment of £2.5 million to the defendant. The council made four payments totalling £1.35 million to the defendant. The court decided that the arrangement was void. The claimant demanded the return of its funds along with compound interest. The defendant admitted its liability to repay the outstanding fund but resisted the claim for compound interest. The House of Lords, by a majority, decided that it had no jurisdiction to award compound interest for the defendant did not stand in a fiduciary relationship towards the claimant, but awarded simple interest on the principal sum.

JUDGMENT

‘[After referring to the following authorities, Burdick v Garrick (1870) LR 5 Ch App 233, Wallersteiner v Moir (No 2) [1975] QB 373, AG v Alford (1855) De GM & G 843] These authorities establish that, in the absence of fraud, equity only awards compound (as opposed to simple) interest against a defendant who is a trustee or otherwise in a fiduciary position, by way of recouping from such a defendant an improper profit made by him. It is unnecessary to decide whether in such a case compound interest can only be paid where the defendant has used trust moneys in his own trade or (as I tend to think) extends to all cases where a fiduciary has improperly profited from his trust. Unless the local authority owed fiduciary duties to the bank in relation to the upfront payment, compound interest cannot be awarded.’ Lord Browne-Wilkinson

In Sempra Metals Ltd v HM Commissioners of Inland Revenue, the House of Lords considered the scope of the jurisdiction of the courts to award compound interest. The House of Lords decided that the courts have:

■ a common-law jurisdiction to award interest, simple and compound, as damages on claims for non-payment of debts as well as on other claims for breaches of contract and in tort;

■ jurisdiction at common law to award compound interest where the claimant sought a restitutionary remedy for the time value of money paid under a mistake.

The award of interest originated from three sources – statute, equity and the common law.

Section 35(A)(1) of the Senior Courts Act 1981 enacts that ‘in proceedings for the recovery of a debt or damages there may be included in any sum for which judgment is given, simple interest at such rate as the court thinks fit or as rules of court may provide on all or any part of the debt or damages’. There is no consistent view as to the rate of simple interest that is payable on the debt or damages. In recent years, some courts have taken the view that the rate of interest is 1 per cent above the minimum lending rate (see Belmont Finance Corp v Williams Furniture Ltd (No 2) [1980] 1 All ER 393). Other courts have suggested that the appropriate rate is that allowed from time to time on the court’s short-term investment account (see Bartlett v Barclays Bank (No 2) [1980] 2 WLR 448).

In equity, the court has a discretion to award compound interest against trustees and other fiduciaries. The purpose of such an order is not designed to punish the trustees but to require them to ‘disgorge’ the benefit from the unauthorised use of the trust funds or other property. The principle stems from the policy of preventing the trustees (and other fiduciaries) profiting from their breach.

CASE EXAMPLE

Sempra Metals Ltd v HM Commissioners of Inland Revenue [2007] UKHL 34 The claimant company paid advance corporation tax (ACT) on its dividends which were in turn paid to a member of a group of companies. ACT was a form of advance payment of mainstream corporation tax. The claimant company sought group relief on the ACT paid. Section 247 of the Income and Corporation Taxes Act 1988 enabled parent and subsidiary companies jointly to make an election, having the effect of excluding dividends paid by a subsidiary to its parent from the obligation to pay ACT. The Revenue refused its claim on the ground that group relief was available only when the parent company and its subsidiary were resident in the UK. A group income election was not available if the parent company was resident outside the UK. The European Court of Justice rejected the contention put forward by the Revenue on the ground that that provision contravened parent companies’ freedom of establishment, contrary to Art 52 (now Art 43) of the EC Treaty. On a claim by the taxpayer company for compensation in respect of the UK’s breach of Art 52, the judge held that the compensation should be calculated on a compound basis. The Revenue’s appeal was dismissed by the Court of Appeal, which held that ordinary commercial rates on interest would be used. The Revenue appealed. The House of Lords dismissed the appeal (by a three to two majority) on the ground of unjust enrichment by the Revenue. The claimant was entitled to a restitutionary award for the time value of money in terms of compound interest.

‘We live in a world where interest payments for the use of money are calculated on a compound basis. Money is not available commercially on simple interest terms. This is the daily experience of everyone, whether borrowing money on overdrafts or credit cards or mortgages or shopping around for the best rates when depositing savings with banks or building societies. If the law is to achieve a fair and just outcome when assessing financial loss it must recognise and give effect to this reality.’ Lord Nicholls

KEY FACTS

	Measure of liability of trustees
	The measure of the trustees’ liability for breach of trust is restitution based	Bartlett v Barclays Bank (1980); Target Holdings v Redferns (1995); Nationwide BS v Various Solicitors (1999)
	Unauthorised investment	Knott v Coffee (1852)
	Failure to dispose of unauthorised investments	Fry v Fry (1859)
	Trustees improperly sell authorised investments i and invest the proceeds in unauthorised j investments	Re Massingberd (1890)
	In breach of trust the trustees make a profit on one transaction and a loss on another	Bartlett v Barclays Bank (1980)
	■ Tax is not deductible from the damages payable by trustees under the BTC v Gourley (1956) rule	Bartlett v Barclays Bank (1980)
	Interest on damages	Westdeutsche Landesbank v Islington BC (1996); Sempra Metals Ltd v HM Comm of Inland Revenue (2007)

Section 6(1) of the 1978 Act provides:

SECTION

In the recent decision, Charter plc v City Index Ltd [2006] EWHC 2508 (Ch), the High Court considered whether a knowing receipt claim is one to ‘recover compensation or damage’ within the 1978 Act. The court decided that the effect of the authorities concerning a knowing receipt claim involves a disposal of the assets of the claimant in breach of trust or fiduciary duty. In other words, a claim for knowing receipt is parasitic on a claim for breach of trust in the sense that it cannot exist in the absence of the breach of trust from which the receipt originated. Such an unauthorised disposal must give rise to a loss to the trust and a liability on the part of the trustee to make good that which he wrongly took or transferred. Accordingly, the legal basis of liability is a breach of trust within the express terms of s 6(1) of the 1978 Act. The loss to the trust constitutes ‘damage’ in the wide sense of the word. In these circumstances the right of the beneficiary is to recover, on behalf of the trust, compensation in respect of that loss within the 1978 Act. The court concluded that a disposition in breach of trust gives rise to damage, loss or harm to the trust and consequently a liability on the part of both the defaulting trustee and a knowing recipient based on that breach of trust. The effect is that they are required to compensate the trust for that damage, loss or harm by restoring to the trust the equivalent of that loss.

The Act does not apply to an indemnity which is governed entirely by case law. There are three circumstances when a trustee is required to indemnify his co-trustees in respect of their liability to the beneficiaries.

CASE EXAMPLE

Perrins v Bellamy [1899] 1 Ch 797 The trustees of a settlement were erroneously advised by their solicitor that they had a power of sale. They sold the leaseholds comprised in the settlement, thereby diminishing the income of the plaintiff, the tenant for life. The plaintiff brought an action against the trustees for breach of trust. The trustees claimed relief under the predecessor to s 61 of the Trustee Act 1925. The court, in its discretion, granted relief.

JUDGMENT

‘I venture, however, to think that, in general and in the absence of special circumstances, a trustee who has acted reasonably ought to be relieved, and it is not incumbent on the court to consider whether he ought fairly to be excused, unless there is evidence of a special character showing that the provisions of the section ought not to be applied in his favour.’ Kekewich J

But each case is decided on its own facts. A factor which is capable of influencing the court is whether the trustee is an expert, professional trustee or not.

In National Trustee Co of Australia Ltd v General Finance Co [1905] AC 373, the court refused relief to professional trustees who had acted honestly and reasonably and on the advice of a solicitor in committing a breach of trust.

A similar view was echoed by Brightman J in Bartlett v Barclays Bank f 1980): the professional trustee company was refused relief under s 61 of the Trustee Act 1925 because it acted unreasonably in failing to keep abreast or informed of the changes in the activities of the investment company:

JUDGMENT

‘A trust corporation holds itself out in its advertising literature as being above ordinary mortals. With a specialist staff of trained trust officers and managers, with ready access to financial information and professional advice, dealing with and solving trust problems day after day, the trust corporation holds itself out, and rightly, as capable of providing an expertise which it would be unrealistic to expect and unjust to demand from the ordinary prudent man or woman who accepts, probably unpaid and sometimes reluctantly from a sense of family duty, the burden of trusteeship. Just as, under the law of contract, a professional person possessed of a particular skill is liable for breach of contract if he neglects to use the skill and experience which he professes, so I think that a professional corporate trustee is liable for breach of trust if loss is caused to the trust fund, because it neglects to exercise the special care and skill which it professes to have.’

‘The intention of the statute was to give a trustee the benefit of the lapse of time when, although he had done something legally or technically wrong, he had done nothing morally wrong or dishonest, but it was not intended to protect him where, if he pleaded the statute, he would come off with something he ought not to have, i.e. money of the trust received by him and converted to his own use.’

Six-year limitation period

By virtue of s 21(3) of the Limitation Act 1980, the general rule concerning the limitation period for actions for breach of trust is six years from the date on which the cause of action accrued. A cause of action does not accrue in respect of future interests (remainders and reversions) until the interest falls into possession. Thus, a life tenant under a trust is required to bring an action within six years of the breach of trust but a remainderman has up to six years from the death of the life tenant before his cause of action becomes time-barred. In addition, time does not begin to run against a beneficiary suffering from a disability (infancy or mental incapacity) at the time of the breach until the disability ends:

JUDGMENT

‘The rationale of s 21(3) of the Limitation Act 1980 appears to me to be not that a beneficiary with a future interest has not the means of discovery, but that he should not be compelled to litigate (at considerable personal expense) in respect of an injury to an interest which he may never live to enjoy.’ Millett LJ in Armitage v Nurse [1997] 3 WLR 1046

Section 21(3) of the Limitation Act 1980 is drafted by reference to claims brought by beneficiaries. If the trustees bring such a claim the courts will consider, in substance, who are the real litigants. In this respect the real litigants are required to be those who have a real interest in the outcome. Accordingly, trustees who do not have a personal interest may bring claims exclusively on behalf of beneficiaries with a personal interest, albeit in the future, outside the six-year limitation period, see Cattley v Pollard.

CASE EXAMPLE

Cattley v Pollard [2006] EWHC 3130 (Ch) (High Court) A solicitor/trustee misappropriated a substantial amount of assets belonging to the estate of a deceased. New trustees were appointed and brought claims against the fraudulent former trustee. These proceedings were settled. Further proceedings were brought outside the six-year period against the former trustee’s accomplices but on behalf of nine life beneficiaries and 17 residual beneficiaries whose interests were yet to fall into possession. The court decided that the claim was not statute-barred as regards the beneficiaries with future interests.

JUDGMENT

‘I find that s 21(3) applies in the present case, at least by analogy to the present claim brought by the trustees. The claimants as trustees have no personal interest in the outcome. The real litigants – those with a real interest in the outcome – are the beneficiaries. I consider that when s 21(3) refers to an action by beneficiaries, it includes, at least by analogy, actions brought exclusively on their behalf by trustees who do not have any personal interest in the outcome. This approach echoes that followed in St Mary Magdalen, Oxford (President, etc) v A-G (1857) 6 HL Cas 189 and the argument considered by Harman J in A-G v Cocke [1988] 2 All ER 391, [1988] Ch 414. It follows that the last subparagraph of s 21(3) applies to the second proceedings. Time has not begun to run as regards the beneficiaries with a future interest in the estate and the second proceedings are therefore not time-barred.’ Richard Sheldon QC

A trustee, for these purposes, includes a personal representative and no distinction is drawn between express, implied or constructive trustees.

Section 23 of the Limitation Act 1980 enacts that in an action for an account, the same limitation period will apply as is applicable to the claim which is the basis for the account. The purpose of this provision is to restrict the period in which claims may be brought for an account by reference to the underlying nature and substance of the claim. Thus a claim for an account for breach of a simple contract is required to be brought within six years from the date of the breach of contract.

In Paragon Finance Ltd v Thakerar [1999] 1 All ER 400, the Court of Appeal refused to grant leave to amend a claim that was brought more than six years after the cause of action had accrued. In doing so, the court overruled Nelson v Rye [1996] 2 All ER 186.

An action for an account, in the absence of a trust, is based on legal, not equitable, rights. There is therefore no equitable content in such an action. Thus, an action for an account for breach of contract remains a contractual claim and the limitation period at common law applies. Accordingly, in Coulthard v Disco Mix Club [2000] 1 WLR 707, the High Court decided that the six-year limitation period was applicable to an action for an account arising out of a contractual claim.

Exceptions to the six-year rule

Under s 21(1), where a beneficiary brings a claim in respect of any fraud by the trustee or to recover trust property or the proceeds of sale from trust property (i.e. actions in rem (see below)), the fixed limitation periods shall not apply. A transferee from a trustee is in the same position as the trustee, unless he is a bona fide transferee of the legal estate for value without notice. Section 21(1) provides:

SECTION

The reason for this exception is that the possession of the property by a trustee is never by virtue of any right of his own, but is acquired initially for and on behalf of the beneficiaries. The trustee’s ownership or possession is representative of the beneficiary’s interest. The effect is that time does not run in the trustee’s favour and against the beneficiary.

Thus, the relaxation of the limitation period laid down in s 21(1) of the 1980 Act is not restricted to express trustees but extends to those in an analogous position who have abused the trust and confidence reposed in them. In fames v Williams [2000] Ch 1, the Court of Appeal decided that where a beneficiary acted as if he were the sole owner of trust property, he would be treated as a constructive trustee and a claim against him would be exempt from the limitation period.

Where the right of action is based on fraud or has been deliberately concealed by the defendant or where the action is for relief from the consequences of a mistake, time does not begin to run until the claimant discovers the fraud or mistake or ought with reasonable diligence to have discovered it (s 32).

Besides fraud and mistake, there are two limbs to the extension of liability under s 32. The first requires ‘deliberate concealment’ by the defendant in the ordinary sense of these words (s 32(1)). The concealment may take place at any time during what would otherwise have been the running of the period of limitation. In such a case time does not begin to run until the concealment has been discovered or could have been discovered with reasonable diligence, see Sheldon v RHM Outhwaite (Underwriting Agencies) Ltd [1995] 2 All ER 558, per Lord Browne-Wilkinson. The second limb deals with deliberate breach of duty in ‘circumstances in which it is unlikely to be discovered for some time’ (s 32(2)). This has been the subject of authoritative consideration by the House of Lords in Cave v Robinson Jarvis & Rolfe [2002] 2 All ER 641. The House decided that s 32(2) applied to cases where the breach of duty was deliberately committed, in the sense that there was intentional wrongdoing: see Lord Millett. The other ingredient needed to bring s 32(2) into play is that the breach is committed in circumstances where it is unlikely to be discovered ‘for some time’. Although the quoted phrase is imprecise, the better view is that the implicit contrast that it is setting up is one between a breach of duty that would be immediately discovered (e.g. the infliction of a physical injury) and one that would not. Section 32(1) then poses the question: when could the claimant have discovered the concealment with reasonable diligence? On this issue Millett LJ in Paragon Finance stated:

JUDGMENT

‘The question is not whether the Plaintiffs should have discovered the fraud sooner; but whether they could with reasonable diligence have done so. The burden of proof is on them. They must establish that they could not have discovered the fraud without exceptional measures which they could not reasonably have been expected to take. In this context the length of the applicable period of limitation is irrelevant. In the course of argument May LJ observed that reasonable diligence must be measured against some standard, but that the six-year limitation period did not provide the relevant standard. He suggested that the test was how a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency. I respectfully agree.’

In Page v Hewetts Solicitors (2011), the High Court decided on the extent of knowledge, within s 32(1) of the Limitation Act 1980, that is required for the extension of the limitation periods in respect of claims at common law and in equity. In respect of common law claims for damages for breach of contract or negligence, the knowledge required for limitation purposes is knowledge of the gist of the claim for damages. For claims in equity for breaches of fiduciary duties, time began to run when the claimants had the material facts necessary to allege a prima facie case against the defendant.

Page v Hewetts Solicitors [2011] EWHC 2449 The claimants appealed against the decision of the master that their claim was statute-barred. The claimants were beneficiaries under their parents’ will. The defendants were a firm of solicitors retained to advise and act for the claimants. A legal executive employed by the defendants recommended a sale of the estate property at an undervalue (190,000) to a property development company. Unknown to the claimants, the true value of the property was 350,000 and the development company was connected to the legal executive employee. In November 2000 the claimants complained to the Office for the Supervision of Solicitors (OSS) about the conduct of the firm. The OSS replied in December 2002 detailing the employee’s relationship with the property development company and confirming that the employee received a profit from the company. In January 2003 the OSS sent a copy of the agreement between the development company and the employee. In February 2009 the claimants commenced proceedings against the defendants based on a proprietary claim for secret profits, alleging no limitation period was applicable by virtue of s 21(1)(b) of the Limitation Act 1980; alternatively, the defendants had deliberately concealed some of the facts necessary to support the claim. The master dismissed the claim in summary proceedings brought by the defendants. The claimants appealed to the High Court. Held: Dismissing the appeal on the following grounds: 1. The claimants’ cause of action was in reality not a proprietary claim to recover trust property but a personal claim for an account which was subject to the limitation period, see Sinclair v Versailles (2011) (see Chapter 8). 2. The common law claim for damages for breach of trust and/or negligence was statute-barred for the time period started to run from the date that the claimants were aware of the gist of the claim. 3. In respect of the fiduciary claim, time commenced from the date that the claimants became aware of material evidence to support their claim. This was on the date of receipt of the letter from the OSS in January 2003. In the circumstances, this claim was also statute-barred and the extension of the time period in s 32(1) of the Limitation Act 1980 was not applicable.

JUDGMENT

‘As regards the common law claims, in my judgment the Master was correct in holding that the breach of retainer/negligence claim was known to the Claimants by or after 25 November 2000 and that both this claim and the breach of fiduciary duty claim are both statute barred. I agree with the Master… that the Claimants’ letter to the OSS of 25 November 2000 shows that the Claimants knew sufficient facts to start time running in respect of these claims. At least the gist of the claim for damages for causing the Property to be sold at an undervalue appears to have been known to the Claimants by this date.’ Prevezer QC, Deputy Judge of the High Court

Likewise in Cattley v Pollard [2006] EWHC 3130 (Ch) (see earlier), the High Court decided that the limitation period for dishonest assistance claims (‘class 2 actions’) is the normal period of six years from the date of the accrual of the cause of action. These are, in essence, personal, as opposed to proprietary, claims against the defendant.

In Gwembe Valley Development Co Ltd v Koshy [2003] EWCA Civ 1048, the Court of Appeal clarified the law with regard to the limitation periods for claims for an account. In an action for an account based on breaches of fiduciary duties the existence or nonexistence of a limitation period depended on:

‘Now the doctrine of laches in courts of equity is not an arbitrary or technical doctrine. Where it could be practically unjust to give a remedy either because the party has, by his conduct, done that which might fairly be regarded as equivalent to a waiver of it or where by his conduct the neglect he has, though perhaps not waiving that remedy, yet put the other party in a situation in which it would not be reasonable to place him if the remedy were afterwards to be asserted, in either of these cases lapse of time and delay are most material. … Two circumstances [that are] always important in such cases, are, the length of the delay and the nature of the acts done during the interval, which might affect either party and cause a balance of justice or injustice in taking the one course or the other, so far as relates to the remedy.’

A more flexible, modern and broad approach based on unconscionability was advocated by Aldous LJ in Frawley v Neill [2000] CP Reports 20, CA:

JUDGMENT

‘In my view, the more modern approach should not require an inquiry as to whether the circumstances can be fitted within the confines of a preconceived formula derived from earlier cases. The inquiry should require a broad approach, directed to ascertaining whether it would in all the circumstances be unconscionable for a party to be permitted to assert his beneficial right. No doubt the circumstances which gave rise to a particular result in decided cases are relevant to the question whether or not it would be conscionable or unconscionable for the relief to be asserted, but each case has to be decided on its facts applying the broad approach.’

The applicability of the equitable doctrines of laches and acquiescence depend on the facts of each case. Unreasonable delay by the claimant, substantial prejudice and manifest injustice to the defendant are significant factors to be taken into consideration by the court. In order to raise a successful defence, the defendant is required to establish the following three elements:

1. that there has been unreasonable delay in bringing the action by the claimant;

2. that there has been consequent substantial prejudice or detriment to the defendant;

3. that the balance of justice requires the claimant’s cause of action to be withheld.

In Patel v Shah [2005] EWCA Civ 157, the Court of Appeal endorsed the modern ‘broad approach’ to the defence of laches based on the test of unconscionability. The Court decided that the defence would be available to a defendant who could establish that it would be unconscionable for the claimant to assert his right to the property in question.

In Fisher v Brooker and Others, The Times, 12 August 2009, the House of Lords decided that a delay of almost 40 years in claiming a share of the copyright in a musical work was not defeated by the doctrine of laches. The defendants had failed to prove that they had suffered detriment from the claimant’s delay, and in any event had derived a financial benefit which far outweighed any detriment that might have resulted from the delay.

Fisher v Brooker and Others, The Times, 12 August 2009, HL The music for the song, ‘A Whiter Shade of Pale’ was composed in early 1967 by Gary Brooker, the lead singer and pianist of the band Procul Harum. The lyrics were written by the band’s manager, Keith Reid, and recorded as a demonstration tape. On 7 March 1967, Mr Brooker and Mr Reid assigned to Essex Music Ltd all the copyright in the words and music of the song in return for a specified percentage of the royalties and other fees. Shortly thereafter, Mr Fisher joined the band as an organist and composed the organ melody. The song was recorded and released on 12 May 1967 and became an instant success. Mr Fisher left the band in 1969. In 1993 Essex Music Ltd assigned its rights to the song to Onward Music Ltd. In May 2005 the claimant notified the defendants of his claim to a share of the musical copyright in the song. The defendants pleaded, inter alia, laches but could not establish that they had suffered any detriment as a result of the delay. The court upheld the claim and decided that the claimant was a joint owner of the copyright in the song and further, that the defendants’ laches defence would be rejected for they (defendants) enjoyed benefits from the delay which far outweighed any prejudice suffered.

JUDGMENT

‘The argument based on laches faces two problems. The first is that … laches only can bar equitable relief, and a declaration as to the existence of a long-term property right, recognised as such by statute, is not equitable relief. It is arguable that a declaration should be refused on the ground of laches if it was sought solely for the purpose of seeking an injunction or other purely equitable relief. However, as already mentioned, that argument does not apply in this case. Secondly, in order to defeat Mr Fisher’s claims on the ground of laches, the Respondents must demonstrate some acts during the course of the delay period which result in a balance of justice justifying the refusal of the relief to which Mr Fisher would otherwise be entitled … the Respondents are unable to do that. They cannot show any prejudice resulting from the delay, and, even if they could have done so, they have no answer to the judge’s finding at [2006] EWHC 3239 (Ch), para 81, that the benefit they obtained from the delay would outweigh any such prejudice.’ Lord Neuberger