Breach of Trust


Breach of trust


By the end of this chapter you should be able to:

recognise whether a breach of trust has been committed by the trustees

apply the principles concerning the measure of the trustee’s liability

ascertain whether simple or compound interest is payable in addition to damages for breach of trust

determine whether a contribution is obtainable by a trustee

identify whether the trustees are entitled to relief

understand the limitation periods

apply the principles regarding proprietary remedies in tracing the claimant’s assets generally and funds in bank accounts

16.1 Introduction

A trustee is liable for breach of trust if he fails to perform his duties, either by omitting to do any act which he ought to do, or by doing an act which he ought not to do. Such duties may be created by the settlor in the trust instrument (such as the duty to distribute both income and capital) or may be imposed generally in accordance with trust law (e.g. duties of care and impartiality). A breach of trust may range from a fraudulent disposal of trust property to an innocent dereliction of duties by investing trust moneys in unauthorised investments. The beneficiary is required to establish a causal connection between the breach of trust and the loss suffered either directly or indirectly by the trust. Indeed, even if the trust suffers no loss, the beneficiary is entitled to claim any profit occurring to the trustees as a result of a breach.

16.2 Measure of liability

Trustees’ liability for breach of trust is based on the principle of restoring to the trust estate losses connected with trust assets and funds that the trustees wrongfully dealt with in breach of trust. The trust is required to be compensated fully for any loss caused by the trustee’s breach. The extent of this liability is not restricted by common principles governing remoteness of damage in actions in tort or breach of contract. Once a breach has been committed the trustees become liable to place the trust estate in the same position as it would have been in if no breach had been committed. Considerations of causation, foreseeability and remoteness do not readily feature in this question.


image 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.



‘[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.



‘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:


image ‘[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.’

It appears that in equity, although the strict common-law test of foreseeability is not applicable in assessing damages for breach of trust, it is essential that the compensation awarded is linked to the breach of trust. The House of Lords in Target Holdings v Redferns (1995) decided that in assessing compensation for loss arising from a breach of trust, the nature of the breach of duty and whether the trust is a traditional (family trust) or commercial trust is important.

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:



‘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:


image ‘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:



‘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.’


image 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.



‘I reach the conclusion that, on the facts which must currently be assumed, Target has not demonstrated that it is entitled to any compensation for breach of trust. Assuming that moneys would have been forthcoming from some other source to complete the purchase from Mirage if the moneys had not been wrongly provided by Redferns in breach of trust, Target obtained exactly what it would have obtained had no breach occurred, that is, a valid security for the sum advanced. Therefore, on the assumption made, Target has suffered no compensatable loss.’

Lord Browne-Wilkinson

In Templeton Insurance Ltd v Penningtons [2006] All ER (D) 191 (Feb), the High Court decided that a firm of solicitors who received a fund subject to a Quistclose trust (i.e. for a specified purpose) but disposed of a part of the fund for an unauthorised purpose in breach of trust, was liable to compensate the claimant by way of damages. Similarly, in Wise v Jimenez [2013] Lexis citation 84, (considered in Chapter 7) the High Court decided that a claimant who made a Quistclose payment of 500,000 towards a scheme for the development of a golf course in France, but which failed to materialise in breach of trust, was entitled to equitable compensation by way of damages. Since the trust arose out of a commercial transaction the basis of compensation was similar to that applied in the case of common-law damages, i.e. that the beneficiary will be put in the position he would have been had the breach not occurred. In such a case the common-law rules of remoteness and causation would apply in quantifying the damages.

In Nationwide Building Society v Various Solicitors (No 3) [1999] PNLR 52, the High Court applied the principles laid down by Lord Browne-Wilkinson in the Target case (1995) in assessing damages for breach of fiduciary duties. The court decided that the correct approach in such a claim is to put the beneficiary in the position he would have been in if the fiduciary had performed his duty.

The following examples illustrate the principles that are applied by the courts.

Where the trustees make an unauthorised investment they are liable for any loss incurred on the sale of the assets. The position remains the same even if the sale is ordered by the courts and, but for the order of sale within a specified time, the investments would have produced a profit had they been retained for a longer period. The loss is measured by deducting the proceeds of sale of the unauthorised investment (accruing to the trust) from the amount improperly invested.


image Knott v Cottee [1852] 16 Beav 77
A testator, who died in 1844, directed his trustee to invest in government stocks and land in England and Wales. In 1845 and 1846 the executor-trustee invested part of the estate in Exchequer bills which in 1846 were ordered into court and sold at a loss. In 1848, the court declared that the investment was improper. If, however, the investment had been retained, its realisation at the time of the declaration in 1848 would have resulted in a profit. The court held that the trustee was liable to compensate the estate for the difference in value of the assets in 1848 and the sale proceeds in 1846.



‘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.


image 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.



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.


image 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.



‘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).



‘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)

16.2.1 Interest

As a general rule, the court is entitled to award simple interest under s 35A of the Senior Courts Act 1981 (formerly the Supreme Court Act 1981) on monetary sums payable by the trustees. The rate of interest that may be charged is 1 per cent above the banks’ base rate. The court has a discretion to award compound interest against the trustees. The purpose of such an order is not designed to punish the trustees, but to require them to disgorge the benefit of the use of the trust funds. The principle here stems from the policy of preventing the trustees profiting from their breach. The Law Lords, in Westdeutsche Landesbank Girozentrale v Islington Borough Council [1996] 2 All ER 961, considered that the jurisdiction to award compound interest originated exclusively in equity. In the absence of fraud, this jurisdiction is exercised against a defendant who is a trustee or otherwise stands in a fiduciary position, and makes an unauthorised profit or is assumed to have made an unauthorised profit. The majority of the Law Lords decided that, since the defendant did not owe fiduciary duties to the bank in relation to the payments made, compound interest would not be awarded. To award compound interest in the circumstances of this case would be tantamount to the courts usurping the function of Parliament. However, simple interest would be awarded on the balance of the fund remaining outstanding, calculated from the date of the original payment by the bank to the local authority.

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.


image 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.



‘[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.


image 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


image 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)

16.3 Contribution and indemnity between trustees

Trustees are under a duty to act jointly and unanimously. In principle, each trustee has an equal role and standing in the administration of the trust. Accordingly, if a breach of trust has occurred each trustee is equally liable or the trustees are collectively liable to the beneficiary. Thus, the liability of the trustees is joint and several. The innocent beneficiary may sue one or more or all of the trustees.

If a successful action is brought against one trustee he has a right of contribution against his co-trustees, with the effect that each trustee will contribute equally to the damages awarded in favour of the claimant, unless the court decides otherwise. The position today is that the right of contribution is governed by the Civil Liability (Contribution) Act 1978. The court has a discretion concerning the amount of the contribution which may be recoverable from any other person liable in respect of the same damage. The discretion is enacted in s 2 of the 1978 Act, thus:


‘2 … the amount of contribution shall be such as may be found by the court to be just and equitable having regard to the extent of that person’s responsibility for the damage in question.’

Section 6(1) of the 1978 Act provides:


‘A person is liable in respect of any damage … if the person who suffered it … is entitled to recover compensation from him in respect of that damage (whatever the legal basis of his liability, whether tort, breach of contract, breach of trust or otherwise).’

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.

16.3.1 Fraudulent benefit from breach of trust

Where one trustee has fraudulently obtained a benefit from a breach of trust. Such a claim for indemnity failed in Bahin v Hughes (1886) 31 Ch D 390.


image Bahin v Hughes [1886] 31 Ch D 390
A testator bequeathed a legacy of £2,000 to his three daughters, Miss Hughes, Mrs Edwards and Mrs Burden, on specified trusts. Miss Hughes did all the administration of the trust. The trust money was invested in unauthorised investments, resulting in a loss. Miss Hughes and Mrs Burden (in whose name the money was entered) selected the investment and by letter told Mrs Edwards, who failed to give her consent. The trustees were liable to the beneficiaries for breach of trust. Mr Edwards (whose wife had died) claimed that Miss Hughes, as an active trustee, ought to indemnify him against his late wife’s liability. The court decided that the defendants were jointly and severally liable to replace the £2,000 and Mr Edwards had no right of indemnity against Miss Hughes.



‘[W]here one trustee has got the money into his own hands, and made use of it, he will be liable to his co-trustee to give him an indemnity … relief has only been granted against a trustee who has himself got the benefit of the breach of trust, or between whom and his cotrustees there has existed a relation which will justify the court in treating him solely liable for the breach of trust … Miss Hughes was the active trustee and Mrs Edwards did nothing, and in my opinion it would be laying down a wrong rule that where one trustee acts honestly, though erroneously, the other trustee is to be held entitled to an indemnity who by doing nothing neglects his duty more than the acting trustee … In my opinion the money was lost just as much by the default of Mrs Edwards as by the innocent though erroneous action of her co-trustee, Miss Hughes.’

Cotton LJ

16.3.2 Breach committed on advice of a solicitor-trustee

The requirements here, in addition to a breach of trust, are:

1. a co-trustee is a solicitor; and

2. the breach of trust was committed in respect of his advice; and

3. the co-trustees had relied solely on his advice and did not exercise an independent judgment.


image Re Partington [1887] 57 LT 654
Mrs Partington and Mr Allen, a solicitor, were trustees who were liable for a breach of trust. The trust fund was invested in an improper mortgage which resulted in a loss. Mr Allen had assured Mrs Partington that he would find a good investment on behalf of the trust. He failed in his duties to verify statements by the borrower, he failed to give proper instructions to the valuers and he did not give sufficient information to Mrs Partington to enable her to exercise an independent judgment. The court held that Mrs Partington was entitled to claim an indemnity from Mr Allen.


image Head v Gould [1898] 2 Ch 250
The claim for an indemnity against a solicitor-trustee failed because the co-trustee actively encouraged the solicitor-trustee to commit the breach of trust. The mere fact that the cotrustee is a solicitor is insufficient to establish the claim.



‘I do not think that a man is bound to indemnify his co-trustee against any loss merely because he was a solicitor, when that co-trustee was an active participator in the breach of trust complained of, and is not proved to have participated merely in consequence of the advice and control of the solicitor.’

Kekewich J

16.3.3 The rule in Chillingworth v Chambers

The rule in Chillingworth v Chambers [1896] 1 Ch 685 is to the effect that where a trustee is also a beneficiary (whether he receives a benefit or not is immaterial) and participates in the breach of trust, he is required to indemnify his co-trustee to the extent of his beneficial interest. Thus, the trustee/beneficiary’s property is taken first to meet the claim against the trustees. If the loss exceeds the beneficial interest, the trustees will share the surplus loss equally in so far as it exceeds the beneficial interest.


Contribution and indemnity

Contribution Civil Liability (Contribution) Act 1978

Where a trustee has fraudulently obtained a benefit from a breach of trust

Bahin v Hughes (1886)

Where the breach of trust was committed on the advice of a solicitor/trustee

Trustee/beneficiary who instigates a breach indemnifies co-trustee up to the amount of his beneficial interest

Re Partington (1887); Head v Gould (1898) Chillingworth v Chambers (1896)

16.4 Defences to an action for breach of trust

In pursuance of an action against trustees for breach of trust, there are a number of defences which the trustees are entitled to raise. These are as follows.

16.4.1 Knowledge and consent of the beneficiaries

A beneficiary who has freely consented to or concurred in a breach of trust is not entitled to renege on his promise and sue the trustees.

In order to be prevented from bringing an action against the trustees, the beneficiary is required to be of full age and sound mind, with full knowledge of all the relevant facts, and to exercise an independent judgment. The burden of proof of establishing these elements will be on the trustees.



Nail v Punter [1832] 5 Sim 555

The husband of a life tenant under a trust encouraged the trustees to pay him money from the trust fund, in breach of trust. The life tenant commenced proceedings against the trustees but died shortly afterwards. The husband became a beneficiary and continued the action against the trustees for breach of trust. The court held that the action could not succeed because the husband was a party to the breach.

The trustees are required to prove that the consent was not obtained as a result of undue influence. In Re Pauling’s Settlement Trust [1964] Ch 303 (see above), the trustees claimed that the children were not entitled to bring an action because they had consented to the advancements. The court rejected this argument and decided that the consent was not freely obtained from the children because they were under the influence of their parents who benefited from the advancements. The statement of the principle by Wilberforce J (below) was approved by the Court of Appeal.


image ‘The court has to consider all the circumstances in which the concurrence of the beneficiary was given with a view to seeing whether it is fair and equitable that, having given his concurrence, he should afterwards turn around and sue the trustees … subject to this, it is not necessary that he should know that what he is concurring in is a breach of trust, provided that he fully understands what he is concurring in, and … it is not necessary that he should himself have directly benefited by the breach of trust.’

16.4.2 Impounding the interest of a beneficiary

In the above section the beneficiary who concurs or acquiesces in a breach of trust will not be allowed to bring an action against the trustees. But this principle does not prevent other beneficiaries from bringing an action against the trustees. In these circumstances the court has a power to impound the interest of the beneficiary who instigated the breach.

Under the inherent jurisdiction of the court a beneficiary who instigated the breach of trust may be required to indemnify the trustees. The rule was extended in s 62 of the Trustee Act 1925, which declares:


‘62 here a trustee commits a breach of trust at the instigation or request or with the consent in writing of a beneficiary, the court may if it thinks fit make such order as the court seems just for impounding all or any part of the interest of the beneficiary in the trust estate by way of indemnity to the trustee or persons claiming through him.’

It is clear from the section that the court has a discretion which it will not exercise if the beneficiary was not aware of the full facts. Section 62 is applicable irrespective of an intention, on the part of the beneficiary, to receive a personal benefit or not. The beneficiary’s consent is required to be in writing.

16.4.3 Relief under s61 of the Trustee Act 1925

Section 61 of the Trustee Act 1925 provides:


‘61 If it appears to the court that a trustee … is or may be personally liable for any breach of trust … but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach, then the court may relieve him either wholly or partly from personal liability for the same.’

This section re-enacted, with slight modifications, s 3 of the Judicial Trustees Act 1896.

The section provides three main ingredients for granting relief, namely:

(a) the trustee acted honestly; and

(b) the trustee acted reasonably; and

(c) the trustee ought fairly to be excused in respect of the breach and omitting to obtain directions of the court.

These ingredients are cumulative and the trustee has the burden of proof.

The expression ‘honestly’ means that the trustee acted in good faith. This is a question of fact. The word ‘reasonably’ indicates that the trustee acted prudently in that the conduct of the defendant complied with the standard of care required from a reasonable trustee. Such conduct is not required to reach a standard of perfection. If these two criteria are satisfied the court has a discretion to decide whether or not to excuse the trustee. The test in exercising the discretion is to have regard to the interests of both the trustees and the beneficiaries and to decide whether the breach of trust ought to be forgiven in whole or in part. It was stated in Perrins v Bellamy that in the absence of special circumstances, a trustee who has acted honestly and reasonably ought to be relieved.


image 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.



‘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:


image ‘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.’

More recently the Court of Appeal in Lloyds TSB Bank plc v Markandan & Uddin (2012) (considered in Chapter 14) decided that relief under s 61 of the Trustee Act 1925 was dependent on the defendants discharging a burden of proof to show that they had acted honestly and reasonably and ought fairly to be excused. In the circumstances, the defendants failed to discharge this burden, in that they did not act reasonably. The court refused relief on the ground that the defendants did not act reasonably, although they were the innocent victims of a fraud practised by a third party. The Court of Appeal affirmed the decision of the trial judge.



‘I do not believe that the Defendant’s conduct was reasonable in a number of respects. The Defendant paid the money to what Mr Markandan [a senior partner in the defendant’s firm of solicitors] believed was the firm of solicitors acting on behalf of the vendors of the property although it had not received the signed contract, transfer and discharge certificates. The money, less 5,000, was paid back to the Defendant with a request to the Defendant to pay it to a different account. Even though the Defendant’s requests for the necessary documentation had not been complied with, the Defendant paid the money again to the purported solicitors for the vendor. Combined with the failure to establish properly that the firm Deen actually had an office in Holland Park … this conduct cannot be said to be reasonable.’

Mr Roger Wyand QC (trial judge), affirmed by the Court of Appeal in Lloyds TSB Bank plc v Markandan & Uddin [2012] EWCA Civ 65

In Nationwide Building Society v Davisons Solicitors (2012), the Court of Appeal distinguished Markandan and, on similar facts, granted relief under s 61 of the Trustee Act 1925 to the solicitors who were in breach of their duties.


image Nationwide Building Society v Davisons Solicitors [2012] EWCA 1626, (CA)
The appellant firm of solicitors (D) appealed against the decision of the High Court to the effect that it was liable for breach of trust and was not entitled to relief under s 61 of the Trustee Act 1925. On 12 December 2008 the respondent, Nationwide Building Society (N), had offered a mortgage to a residential purchaser. D had been instructed by N and the purchaser to deal with the mortgage and conveyance. D’s instructions by N were subject to the Council of Mortgage Lenders Handbook (CML Handbook) which required D to hold any loan money released to them on trust for N until completion. On 30 January 2009 Rothschild, a firm of solicitors based in Corporation Street, Birmingham, wrote to D from an office in Coventry Rd, Small Heath, declaring that they were acting for the vendors. As required by the CML Handbook, D checked the websites maintained by the Law Society and the Solicitors Regulation Authority to verify the credentials of the solicitor acting for Rothschild. All appeared to be in order. In response to requisitions, Rothschild confirmed that the existing mortgage on the property would be discharged. On 9 March 2009, N released the mortgage amount to D. On 12 March 2009 contracts were signed and exchanged by telephone, the charge in favour of N was executed and the purchase price was remitted by D to Rothschild and the purchaser was registered as the proprietor. However the existing charge on the property was not discharged and N’s charge was not registered. It transpired that an impostor had notified the Law Society and the Solicitors Regulation Authority of a false business address for an existing sole practitioner. The genuine practitioner had informed the Law Society and SRA that the information was false but they had failed to rectify their websites. The trial judge found against the appellants and ordered them to pay damages and costs. The solicitors’ firm appealed. The Court of Appeal allowed the appeal and decided that, despite acting in breach of trust, the appellants were entitled to relief under s 61 of the Trustee Act 1925. The firm had acted ‘honestly, reasonably and ought fairly to be excused’. The appellants had acted reasonably in obtaining an undertaking to discharge the existing mortgage from a person purporting to act as the vendor’s solicitors, and reasonably believed to be so. The appellants had verified the branch office of Rothschild and the solicitor who was purporting to deal with the transaction from the websites of the Law Society and the SRA. Further, the respondent’s loss was not directly linked to the appellants’ conduct.



‘The section [s 61 of the Trustee Act 1925] only requires Mr Wilkes to have acted reasonably. That does not, in my view, predicate that he has necessarily complied with best practice in all respects. The relevant action must at least be connected with the loss for which relief is sought and the requisite standard is that of reasonableness not perfection. It is seldom helpful to compare conduct found to be reasonable or not in one case with that of another; but the factual similarity of this appeal with that in Lloyds TSB Bank plc v Markandan & Uddin justifies pointing out that the conduct of the solicitors in that case was quite different from that relied on in this case. In my view, Mr Wilkes did, [solicitor for the appellants] in all the circumstances, act reasonably.’

Morritt LJ

Other factors that have been taken into account by the courts include the status of the adviser to the trust and the size of the trust estate. It has been suggested that nothing less than the advice of a Queen’s Counsel should be taken by the trustees in respect of a large estate. The circumstances regarding the breach of trust may be considered by the courts, in particular, whether the breach of trust originated from a complicated rule of law and whether the trustees acted on the erroneous belief that the beneficiaries had consented.

Assuming the defendant has acted honestly and reasonably the additional issue under s61 of the Trustee Act 1925 is whether he ‘ought fairly to be excused’. It would appear that a relevant factor to be taken into account in exercising the court’s discretion to grant relief in favour of the defendant is whether the loss was caused by the fraud of an unconnected third party. In Santander (UK) plc v R.A. Legal (firm of solicitors) [2013] EWHC 1380, the High Court granted relief to a firm of solicitors which acted honestly and reasonably but in breach of its duties in releasing trust funds to a fraudulent third party. The loss suffered by the claimant was entirely attributable to the fraud of an unconnected third party.



‘The law generally (although not invariably) leans towards confining the responsibility of professional people to a duty to take reasonable care to avoid liability for breach of that duty, and in particular does not readily impose on them responsibility for loss resulting from the fraud of others.’

Smith J

16.4.4 Limitation and laches

The limitation periods concern the time limits during which a beneficiary is entitled to pursue a cause of action in respect of trust property. The remarks of Kekewich J in Re Timmins [1902] 1 Ch 176 refer to the rationale concerning an earlier limitation statute:


image ‘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:



‘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.


image 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.



‘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:


21 No period of limitation prescribed by this Act shall apply to an action by the beneficiary under a trust, being an action –

(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or

(b) to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his own use.’

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.

Section 38 of the Limitation Act 1980 provides that the expressions ‘trust’ and ‘trustee’ have the same meanings respectively as in the Trustee Act 1925. This extends the meaning of those expressions to ‘implied and constructive trusts’: see s 68(17) of the Trustee Act 1925.

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.

In Statek Corp v Alford [2008] EWHC 32 (Ch), the High Court considered whether any of the exceptions enacted in s 21(1) of the Limitation Act 1980 were applicable, in a case where a de facto director dishonestly assisted in a fraudulent scheme. A material issue was whether a person who dishonestly assists another in breach of trust is to be treated as a trustee for the purposes of s 21(1) of the 1980 Act. On this issue, Millett LJ in Paragon Finance v Thakerar [1999] 1 All ER 400 (see Chapter 8) drew a distinction between two categories of fiduciaries, the first (traditionally called ‘category ľ trustees) being trustees or fiduciaries established as such before the events complained of in the proceedings, and ‘category 2’ trustees being those whose status is created because of the transaction, the subject-matter of the claim. Millett LJ acknowledged that ‘category ľ trustees are correctly to be classified as constructive trustees but ‘category 2’ ‘trustees’ are not in reality trustees but, owing to their fiduciary status, are required to account to the beneficiaries as if they are trustees. In Millett LJ’s view, the expressions ‘constructive trust’ and ‘constructive trustees’ are misleading when referring to ‘category 2’ fiduciaries. The issue in this case was whether the defendant (Mr A) was a ‘category ľ trustee which would attract the exceptions in s 21(1) of the 1980 Act. It was significant that the defendant became a de facto director before he undertook the impugned transaction.



Statek Corp v Alford [2008] EWHC 32 (Ch)
The claimant company (S Corp), a trading company incorporated in California, commenced proceedings against the defendant (Mr A) for damages for dishonest breaches of fiduciary duties owed to the claimant. Alternatively, the claimant sought an account for moneys received by the defendant as a constructive trustee. In February 1984 S Corp was purchased by Technicorp International II Inc (TCI) and Mr Johnston (J) became president of TCI. Sandra Spillane, a close business associate of J became vice-president and secretary of TCI. Between February 1984 and January 1996 J and Spillane were the prime movers in a substantial fraud against S Corp. The extent of the fraud was to deprive TCI of $10.5 million and S Corp of $19.8 million. In UK court proceedings J and Spillane were removed from the Board and deprived of control of S Corp.

Mr A was a long-time business associate of J and Spillane and in 1980 was appointed a director of J’s two companies. In April 1988 J and Spillane started to treat Mr A as a director of S Corp and told him that he would be appointed as such. Although never formally appointed as director, Mr A regarded himself as a director and acted as such an officer so as to be constituted a de facto director of S Corp. Between April 1988 and December 1995 J and Spillane procured a series of payments into and out of Mr A’s personal bank accounts in the UK totalling in excess of $1.8 million. These sums were derived from the assets of S Corp. Mr A was told that the reason for paying S Corp’s money into his accounts was to remove it from the ‘normal banking system’, i.e. to conceal the existence of the moneys. Mr A asked no questions when substantial amounts of the funds were paid to J and treated the transactions as normal.

S Corp’s claims against Mr A were based on the premise that Mr A knowingly assisted J and Spillane in their fraud by receiving S Corp’s moneys into his personal bank accounts and paying out those sums in accordance with the directions of J and Spillane. S Corp contended that Mr A must have known that the moneys passing through his accounts were S Corp’s property. There was no good reason why Mr A’s accounts were used to receive and disburse moneys. Mr A had known that many of the payments were to J or on his behalf for no apparent commercial purpose. Accordingly, S Corp claimed that Mr A carried out the transactions dishonestly and was required to compensate S Corp by way of damages, or alternatively that Mr A was subject to an account for the moneys received as a constructive trustee.

Mr A contended that the claims were statute-barred as they fell within s 21(3) of the Limitation Act 1980. The court rejected this argument and held that the defendant (Mr A) was liable to the claimant as an accessory, in that he dishonestly assisted in a fraud perpetrated by J and Spillane. Mr A became a de facto director of the claimant company before the existence of the impugned transactions. Thus, Mr A owed fiduciary duties towards the claimant in respect of assets within his control and, in breach of those duties, became a constructive trustee within ‘category ľ.



‘In my judgment, s21 (1) of the Limitation Act 1980, following the decision of Dankwerts J in G L Baker Ltd v Medway Building and Supplies Ltd [1958] 3 All ER 540, and the obiter dicta of Lord Esher and Bowen LJ in Soar v Ashwell [1893] 2 QB 390, is to be construed as applying to accessories to the fraudulent breaches of trust of others with the result that no period of limitation is applicable to claims against them. I do not read the decision of the House of Lords in the Dubai Aluminium Ltd v Salaam [2002] UKHL 48 as authority to the contrary.

For these reasons, if I had not already concluded that a defence of limitation was not available to Mr Alford because he was a category 1 fiduciary but was to be treated as an accessory to the fraudulent breaches of trust of Johnston and Spillane, with respect to him, I would not have followed Mr Sheldon’s decision in Cattley v Pollard [2006] EWHC 3130, and would have concluded that no limitation period applied to Statek’s claim against him as an accessory to that fraudulent breach of trust.’

Evans-Lombe J

On the other hand, a dishonest assistant or knowing recipient is not a ‘trustee’ for the purposes of s 21(l)(a) of the Limitation Act 1980. Such persons are accountable to the trust for the breach of their duties and the normal limitation period is applicable to claims against them. It would have been unreal to make them liable in the same way as trustees. In addition, on construction of s 21(l)(a), the exception to the limitation period with regard to trustees who were fraudulent did not include an action against a party who was not himself a trustee, but liable to account. In Williams v Central Bank of Nigeria [2014] UKSC 10, the Supreme Court reversed the decision of the Court of Appeal and decided that the limitation period was applicable to claims against a defendant who intermeddled with the trust property, i.e. the ancillary liability of strangers to a trust.



Central Bank of Nigeria v Williams [2014] UKSC 10
The claimant, Dr Williams (W), a Nigerian national, was resident in the UK. W alleged that an English solicitor, Mr Gale (G), had defrauded him of a sum of over $6 million and the defendant, the Central Bank of Nigeria (CBN), was an active participant in the fraud. The claimant alleged that G held the sum of money in his client account on trust for him but had fraudulently paid the sum to CBN in an account in England. W sought to make CBN liable to account as a dishonest assistant. The claim was brought outside the limitation period. The issue in this case was whether s 21 (1)(a) permits such a claim outside the limitation period against the fraudulent trustee only (i.e. category 1 constructive trustees in Millett U’s classification in Paragon Finance, see Chapter 8) or whether the extension laid down in s 21(1)(a) is applicable to category 2 constructive trustees, i.e. fiduciaries who are liable to account. The Court of Appeal decided that the distinction between category 1 and category 2 constructive trustees had not been imported into the definitions of ‘trusts’ and ‘trustees’ within the 1980 Act or its predecessors. The wording of s 21 (1)(a) of the 1980 Act could not justify an implication that the action may only be brought against the fraudulent trustee. On appeal, the Supreme Court allowed the appeal, reversed the decision of the Court of Appeal and decided that a stranger to a trust who knowingly received trust property for his own benefit (or a dishonest assistant) is accountable to the trust for the breach of duties, but is not a trustee for the purposes of the Limitation Act 1980. The Justices of the Supreme Court by a majority decided that s 21 (1)(a) was concerned only with actions against trustees on account of their own fraud or fraudulent breach of trust. This conclusion was justified for five reasons:

(a) Section 21(3) was intended to relieve trustees without limitation in time, save in the two cases specified in s 21 (1). The exceptions were required to apply to the same persons as the rule and the rule had never been applied to strangers who were subject to ancillary liability.

(b) Section 21 (1)(a) was limited to cases of fraud or fraudulent breach of trust ‘to which the trustee was a party or privy’. These words were enacted to relieve trustees who acted in good faith, including the honest co-trustees of a dishonest trustee. Such expressions would be unnecessary if the provision applied to actions against strangers to the trust.

(c) The ancillary liability of a stranger to the trust arises independently of any fraud on the part of the trustee. Liability on the footing of knowing receipt does not require proof of any dishonesty. Whereas liability based on dishonest assistance is based on fraud; but it is clear that such persons are liable on account of their own dishonesty, irrespective of the dishonesty of the trustees, see Royal Brunei Airlines v Tan [1995] 2 AC 378.

(d) There is no rational reason why the draftsman of s 21 (1)(a) would have intended that the availability of limitation to a non-trustee should depend on a consideration which had no bearing on his liability, namely the honesty or dishonesty of the trustee.

(e) Section 21(1)b) of the 1980 Act is limited to actions against the trustee. It does not apply to actions against third parties such as knowing recipients of trust property.

Accordingly the claim was struck out.


image ‘[The second meaning of the phrase constructive trustee] comprises persons who never assumed and never intended to assume the status of a trustee, whether formally or informally, but have exposed themselves to equitable remedies by virtue of their participation in the unlawful misapplication of trust assets. Either they have dishonestly assisted in a misapplication of the funds by the trustee, or they have received assets knowing that the transfer to them was a breach of trust. In either case, they may be required by equity to account as if they were trustees or fiduciaries, although they are not. These can conveniently be called cases of ancillary liability. The intervention of equity in such cases … is purely remedial.’

Lord Sumption

In Halton International Inc and another v Guernroy Ltd [2006] EWCA Civ 801, the Court of Appeal decided that the exception enacted in s 21(1) of the Limitation Act 1980 was not applicable to a disputed transaction that did not involve proprietary rights. Carnwath LJ remarked that the exception is required to be clearly justified by reference to the statutory language and the policy behind it. The policy ‘is not about culpability as such’ but about ‘deemed possession – the fiction that the possession of property by a trustee is treated from the outset as that of the beneficiary’.

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:


image ‘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.



‘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 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. In this case, the defendant’s predecessor in title assumed ownership of her parents’ house after their deaths. The claimant brought a claim to recover the property some 24 years after the cause of action accrued. The court held that the defendant had acquired title from a constructive trustee and the claim was not time barred.

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:

(i) the nature and classification of the fiduciary relationship, as laid down by Millett LJ in Paragon Finance plc v Thakerar [1999] 1 All ER 400 (see Chapter 8). The first covers ‘genuine’ cases of constructive trusts concerning a pre-existing fiduciary relationship (proprietary claims) and the second use involves those cases where the breach of duties creates the fiduciary obligation (personal claims);

(ii) the nature of the conduct which gave rise to the duty to account. At one end of the spectrum would be a case in which a director has acted innocently, by failing to disclose an interest of which he was unaware, but is nonetheless liable to account for any profits. At the other end would be a case in which the non-disclosure of interest was deliberate and fraudulent. In the former, the limitation period of six years will apply but in the latter s 21(l)(a) of the 1980 Act will operate, and no limitation periods will apply to the claim.



Gwembe Valley Development Co Ltd v Koshy and Others [2003] EWCA Civ 1048, CA
In 1986, a joint business venture was formed to develop a cotton and wheat farm of 2,500 hectares in Zambia. A group of investors funded the project. Each investor was allowed representation on the board of Gwembe Valley Development Co Ltd (GVDC) as the corporate vehicle for the project. Representation on the board was proportionate to the size of the investment. By far the largest investment in GVDC was made by a UK company, Lasco, controlled by Mr Koshy (Mr K). In 1987 Lasco made a loan of $5.8 million to GVDC, repayable to Lasco on demand. Mr K was a director and in de facto control of Lasco. At the same time he was the managing director of GVDC. Lasco stood to make a massive profit of $4.8 million on the deal. By 1993 the venture failed. The investors fell out and GVDC became insolvent and was put into receivership. In 1996 GVDC, through its receiver, commenced proceedings against Mr K and Lasco for an account of the profits made from the business transaction, equitable compensation for breaches of fiduciary duty and a declaration that Mr K and Lasco were liable as constructive trustees for all GVDC moneys received by them. The trial judge found that Mr K was dishonest and in breach of his fiduciary duties in procuring GVDC to enter into the loan transaction with Lasco without making proper disclosure to the other directors of GVDC of the extent of his personal interest in Lasco. The judge limited the account to the value of property, belonging in equity to GVDC, that Mr K had received, and refused a more general account of profits. The defendant appealed against these findings and alleged that the claims were statute-barred under the Limitation Act 1980. GVDC contended that the judge should have ordered an account of all of the unauthorised profits made by Mr K as a result of his breaches of fiduciary duties.

The Court of Appeal dismissed the appeal by Mr K and allowed GVDC’s appeal on the following grounds:

1. Mr K acted in breach of his fiduciary duties as a director of GVDC in deliberately and dishonestly concealing from the other directors the nature and extent of the profits made by him in the loan transaction.

2. A claim by GVDC for an account of profits against Mr K is a claim for, or is treated for limitation purposes as analogous to an action for, ‘fraud or fraudulent breach of trust’ under s 21(1)(a) of the Limitation Act 1980.

3. The claim for an account of profits against Mr K was not a claim ‘to recover from the trustee trust property … in the possession of the trustee’ within s21 (1)(b) of the Limitation Act 1980.

4. No limitation period applied to the claim by GDVC against Mr K.

5. The claim by GDVC was not barred by laches or acquiescence.

6. The judge was wrong to confine the scope of the account of profits. A general account of the profits was ordered.

In accordance with s 22, the limitation period in respect of any claim to the estate of a deceased person is 12 years.

Furthermore, the limitation periods mentioned above do not apply to an action for an account brought by the Attorney General against a charitable trust, because charitable trusts do not have beneficiaries in a way similar to private trusts: A-G v Cocke [1988] Ch 414.


Where no period of limitation has been specified under the Act (see s 21(1)), the doctrine of laches will apply to equitable claims. Section 36 of the Limitation Act 1980 enacts that nothing in the Act affects any equitable jurisdiction to refuse relief on the grounds of acquiescence or otherwise.

The doctrine of laches consists of a substantial lapse of time coupled with the existence of circumstances which make it inequitable to enforce the claim of the claimant. The doctrine is summarised in the maxim ‘Equity aids the vigilant and not the indolent.’ The rationale behind the doctrine was stated by Lord Camden LC in Smith v Clay (1767) 3 Bro CC 639, thus:


image ‘A court of equity has always refused its aid to stale demands, where a party has slept upon his rights and acquiesced for a great length of time. Nothing can call forth this court into activity, but conscience, good faith and reasonable diligence; where these are wanting, the court is passive and does nothing.’

It may be treated as inequitable to enforce the claimant’s cause of action where the delay has led the defendant to change his position to his detriment in the reasonable belief that the claim has been abandoned, or the delay has led to the loss of evidence which might assist the defence or if the claim is to a business (for the claimant should not be allowed to wait and see if it prospers).

The jurisdiction of the court in respect of laches was summarised by Lord Selborne in Lindsay Petroleum Co v Hurd (1874) LR 5. The court decided that an essential ingredient of the defence of laches requires the defendant to establish that the delay in commencing proceedings by the claimant has caused the defendant to suffer detriment to such an extent that it would be unjust to allow the claimant’s action to succeed:



‘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:


image ‘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.


image 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.



‘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

16.5 Proprietary remedies (tracing or the claim in rem)

The claimant beneficiary who suffers a loss as a result of a breach of trust is entitled to claim restitution of the trust estate in an action for an account against the wrongdoers, the trustees. Such an action is a claim against the trustees and is referred to as a claim in personam, i.e. the claim is against the trustees personally, who are required to satisfy the claim from their personal assets. Provided that the trustees are solvent and have sufficient assets to satisfy the claim of the innocent beneficiary, the claimant will not be out of pocket. But if the trustees are insolvent, the claimant’s cause of action will rank with the claims of the trustees’ other unsecured creditors. This may result in the order of the court remaining unsatisfied. An alternative process that is available to the beneficiary is to ‘follow’ or ‘trace’ the trust assets in the hands of the trustees or third parties, not being bona fide transferees of the legal estate for value without notice, and recover such property or obtain a charging order in priority over the trustees’ creditors. This is known as a proprietary remedy or a claim in rem or a ‘tracing order’.


Process of identifying and recovering the claimant’s original or substituted property from the defendant.

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