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Equity all topics

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Sofia Nordengren

on 25 October 2014

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Transcript of Equity all topics

2. Judicial discretion to award “generous equitable allowance”
1. Boardman v Phipps
1. General Principles re account of profits
1. Breach of trust

Personal remedies (monetary) for:

Taking accounts:
If, as a result of the breach, a loss is incurred to trust property, T must make good the loss

Equitable compensation
if, as a result of the breach, a loss is incurred to the B, T must make good the loss

disgorgement of profits/account of profits
-If, as a result of the breach, T has made a profit, he owes a personal duty to account for the profits.

2. Breach of fiduciary duty

General framework is the same, except where
is incurred, the compensatory remedy is called:
“equitable compensation”
Lord Millett’s article - Surcharging the account
C. Defaulting fiduciaries – Breach of fiduciary duty– equitable compensation
(d)Alternative approach: strict liability subject to the defence of change of position
1. General Principles re account of profits
1. Boardman v Phipps
Personal liability
Imposition of constructive trust
2. Warman v Dwyer
There can be 2 possibilities:
(i) To give F proportion of the profits court may order a sharing of profits (applicable where fiduciary has contributed a lot.

(ii) To give an allowance:
D has to account for ALL the profits except for fee for skill and efforts.

just pay salary for all the contributions made.

this is the most onerous one for D.

It is for D to establish that it is inequitable to order an account of the entire profits

A time limit may be imposed on the account of profits.
3. Kao Lee Yip
By artificially jerking up the contribution paid he was in breach of fiduciary duties.

Deal would still go through, but F would be a different amount of profit.

question is should we strip him of all the profit if he should get it in any event.

CA: causation was irrelevant in awarding account of profits,

will strip him from ALL HIS PROFITS.

Subject to equitable allowance to T for his skills and expertise in getting the profit (Warman)
2. Judicial discretion to award “generous equitable allowance”
Defaulting T may nonetheless be given allowance for his skills and effort observed in obtaining the profits

Recognised in Boardman v Phipps

HL: D liable to account for profits subject to an allowance, they have “acted with complete honesty throughout”.

Allowance for work and skill on a liberal scale.

But the jurisdiction to award allowance is discretionary, only exercised sparingly because courts do not want to encourage F to act in breach of F duty

•So where they have been involved in dishonest dealings, court might not be willing to award allowance
3. Causation required
3. Causation required
1. Murad v Al Saraj
causation IRRELEVANT
By artificially jerking up the contribution paid he was in breach of fiduciary duties.

Al Saraj breached F duty in failing to disclose certain secret arrangements with the hotel vendor.

The Murad sisters sought to disgorge the entire profits made by Al Saraj under their profit-sharing agreement on a 50/50 basis.

Had he not jerked up the contribution the sisters had still gone ahead, but probably just agreed to 20% share of profits to mr Al Saraj and not as big share of profits as now.

Must there be a causal link between the breach and the gain?

CA: causation was irrelevant in awarding account of profits, will strip him from ALL HIS PROFITS.

Subject to equitable allowance to T for his skills and expertise in getting the profit (Warman)
Reason 1:

Supported by Regal (Hastings), Plaintiff’s position irrelevant in quantifying D’s gain
•Para 127: “an irrelevant consideration so far as an account of profits is concerned”

•Para 128: if there is fraud or bad faith, then F will not be allowed to take that benefit
son 2:
duciary rules of equity is strict in order to achieve a policy of deterrence
a 139: court limited the account accordingly
– Warman was a very exceptional case in which F was given allowance for his duty and skills
B.Taking accounts– defaulting trustees
1. Traditional family trusts
1. Re Dawson
•Issues of causation – legal causation – NAI remoteness/foreseeability are NOT relevant.

•It is CLEAR that you do need to establish but for causation – THIS IS FACTUAL CAUSATION
At the date of judgment, NOT at the date of breach!

•Even though it might not be foreseeable at the day of breach that NZ dollar would appreciate, it did not matter

. T still need to compensate on the basis of trust fund at the date of restitution

•But the language used by the judgment is a little bit misleading…we are talking about the issue of foreseeability and remoteness, but not of causation.
2. Bare Commercial Trusts
1. Target Holdings
Bare Commercial Trusts

•Lender lent money to purchaser on the security of a legal charge over property.

•Solicitors instructed to hold loan on trust until the purchaser had executed legal charge.

• But in breach of trust, they transferred the mortgage loan to the purchaser before execution.

•Relevant test – ‘but for’ test

•Breach by solicitor firm was releasing the money to purchaser before completion of mortgage. To soon. This was I breach of terms of the trust.

•Mortgagee tried to sell it at the market to retain the money.

•Early 90’s property price very low. Also due to the jacked up price.

•Did not manage to make sufficient profits to male up the mortgage

.• Mortgagee made a big loss (similar to Mothew case).

• Sued solicitor firm.

The misapplication was fully corrected, so solicitors not entitled to compensation.

•T’s obligation to restore trust property is not an obligation to restore it in the very form in which he disbursed it, but an obligation to restore it in any form authorised by the trust.

•B can ask for the account immediately after the breach, or after the trial, it is B’s choice, there is only duty to restore or restitute, there is no crystallization of loss as such.

If we apply the rules about causation, foreseeability, remoteness, we are in effect treating as if the loss was crystallized at the time the breach was completed

•“There is no ‘stopping of the clock’”, loss would not be crystallized at the time of breach, any loss throwing from T’s breach shall be restored.
2. Youyang v Minter Ellison
Facts quite similar to TH:

P transferred $ to Minter Ellison, a law firm, to be held on trust pending investment.

ME paid away P’s money to a company before an agreed security was received.

P’s investment was ultimately a loss as the company went bust.

P sought to have the fund replenished

ME relied on Target Holdings: P would have suffered the same loss anyway.

Even if the agreed security was received, the loss would not have been prevented since the company went bust.

Held there was breach of trust, solicitors obligation was to restore the money in full, irrelevant that security would not have prevented the loss

HCA: this case was distinguishable from Target Holdings, as the proposed security was never received
No But For’ causation.

• The loss would have happened even if there were no breach.
•Whether the solicitors would be liable to make good the loss of the misapplied trust amount if P would have suffered the same loss without the breach anyway

•HL: rejected CA’s decision.

Solicitors no need to compensate the claimant

•Ratio: if loss is caused by 3P, T still liable to account, causation IRRELEVANT.
•If T is allowed to invest trust property in shares, and T does invest in shares, but he fails to exercise the necessary standard of care in making the investment.

In other words T has negligently failed to obtain all that he should have done for the trust.

And as a result of his negligence, the trust estate suffers.

If T had acted properly, trust estate would have earned money instead. B can require that account be surcharged.
•B can require T to alter the account so that they now read as if T had invested properly.

T would need to change the account so that it shows that the trust has earned money instead had T not been negligent.

In the end T would be required to make good of the loss caused by his breach of duty – in effect a compensatory remedy.

The excess is calculated on the footing of wilful default, in other words by reference to the specific amount of the loss occasioned by T’s lack of skill and care.

•If T is not allowed to make that investment.

But he did invest the property in shares. So there is a misappropriation of trust property/unauthorised investment.

Falsify the item on the trust account is treated as “false”, that investment would be disallowed and need to be erased.

Then according to trust account, the relevant trust property would still be held by T as if that T has not used that piece of property to invest in shares.

The end result would be T would be compelled to compensate for B for the loss caused by his breach

Correlation between the loss and the breach i.e. causation is TOTALLY IRRELEVANT in the case of surcharging/ falsifying the account!!
1. Jurisdiction affirmed in
1. Nocton v Lord Ashburton
•Confirmed court’s inherent jurisdiction to award compensation.
2. Old test of causation
•After this case, it was thought that causation was not required because of this particular passage

•“When a fiduciary commits a breach of duty by non-disclosure of material facts…undoubtedly a breach…once the court has determined that the non-disclosed facts were material, speculation as to what course the constituent, on disclose would have taken is not relevant”
•Subsequent case developments have confirmed that Brickenden was NOT authority for the proposition that but-for causation was not required.

Rather this case is simply about the burden of proof. In other words, once P made …non-disclosure, the onus will be on the defaulting F to prove that P would have suffered the same loss regardless the same breach.

Simply laid down rule of evidence.
1. Swindle v Harrison
3. New Measure
1. First: Identify the Scope of the duty breached i.e. the relevant wrong

•Involves identifying scope of duty breached and the purpose of the rule imposing the dutyo“A wrongdoer is only liable for the consequences of his being wrong and not for all the consequences of a course of action”

•In this case, the breach was non-disclosure in loan transaction

2.Second: establish sufficient nexus between the breach and the loss

“It is, however, necessary to address the issue of causation”i.“Although foreseeablility of loss is not a concern in assessing equitable compensation, compensation is limited to the loss flowing from the breach of the relevant equitable duty.

The exercise is one of restoration to the P of the value of what has been lost ‘through the breach’ or ‘as a result of the breach’.” (DM Pg. 58)

•Seems that we need to separate the issue of breach and the issue of legal responsibility/ extent of liability
2. Canson Enterprises Ltd v Broughton & Co
• Solicitor acted on behalf of purchaser in the purchase of a piece of land, without disclosing the fact that previous sale marked up the price.

• Solicitor shared some of the profits.

• Purchaser went ahead with the purchase, engaged some engineers to build on the land, because of their negligence, property built was not fit for use.

P suffered a huge loss

• P failed to recover from engineers in full, turned to solicitors for breach of f duty

• Claimed compensation for loss arising from the defects done by engineers

• SCC: loss arising from negligence of 3P (engineers) was not recoverable


• Majority: applying common law rules, the loss was too remote
•Minority (McLachlin J):

loss could not, on a common sense view of causation, be said to be caused by the breach

•View endorsed by Lord BW in TH

•Losses are to be assessed at the date of judgment using the benefit of hindsight and common sense

•Foreseeability is not a concern in assessing compensation but it is essential that the losses made good are only those which flowed from the breach


•Whether we adopt the majority or minority view, we can see that in the context of a claim of compensation for breach of f duty, the notion of NAI would be relevant.
D. Controversies
1. Contributory negligence?
Pilmer v Duke Group Ltd
2. Availability of punitive damages?

1. Harris v Digital Pulse Pty Ltd
E. Deafulting fiduciaries – Breach of the duty of care by fiduciary – equitable compensation
Bristol & West Building Society v Mothew
A. Account of profits
B. Taking accounts– defaulting trustees
1. Traditional family trusts
2. Bare Commercial Trusts
Lord Millett’s article - Surcharging the account
C. Defaulting fiduciaries – Breach of fiduciary duty– equitable compensation
.1. Jurisdiction affirmed
2. Old test of causation
3. New Measure
1. Brickenden v London Loan Savings Company
•Acquisition transaction.

•Buyer company (Duke) wanted to acquire another company.

•buyer retained an accountant to produce report on finance status of target company.

•Accountant firm produced positive report, so acquisition took place.

•But turned out the acquisition was disastrous so that the buyer went into liquidation afterwards

.•Court found that buyer company was at fault as well.

•Issue: whether the accounting firm

(1) owed and breached f duty?

(2) if there is breach, would compensation owed be reduced by the contributory fault by buyer company?
(1) accountant firm did not owe and breach f duty, firm had not acted in any such capacity for they buyer company.

(2) Even if there was a breach, equitable compensation would not be reduced by the contributory fault by the claimant.

•According to the court, common law is not the same as equity.

• Although we have the concept of contributory negligence at CL, does not imply that it is applicable in equity to the same extent

•In equity, F are to act in best interest of P
•Employees acted consciously and dishonestly in misappropriating employer’s confidential info and diverting its business opportunities.

•Clear breach of f duty.

• Punitive damages?

•Court categorised the breach as conscious and dishonest one

•Claimants argued for punitive damages on the ground that it would be necessary to punish the wrong-doers for their reprehensible conduct since breach was outrages

•However the problem is that there does not seem to be jurisdiction to award punitive damages in equity.

•Claimant argued that if jurisdiction does not exist, then court should recognise this jurisdiction by drawing an analogy from tort law.
•Majority: NO!

•Courts of equity had not exercised any punitive jurisdiction and on the basis that there is no fusion of law at equity, there is only join of administration, but the principles or the substantive doctrines of law and equity remains different.

•To say there is substantive fusion, is fallacious – fusion fallacy

•Minority (Mason P): Yes

•Breach of f duty was closely analogous to tort, given punitive damages is available in tort, should also be available in equity

•Fusion by analogy
D. Controversies
1. Contributory negligence?
2. Availability of punitive damages?
E. Deafulting fiduciaries
– Breach of the duty of care by fiduciary
– equitable compensation
1. Bristol & West Building Society v Mothew
•Solicitor held loan on trust before transaction,

•S negligently failed to include certain statements in a report regarding the charges as well.

•Subsequent purchaser defaulted on loan repayment.

•Not worth suing purchaser, so sued solicitor

•Breach of trust, breach of f duty, breach of duty of care

•On breach of F duty: no disloyalty, so no breach

•But solicitor were negligent in the preparation of the report.

• So there was a breach of duty of care

•Millett LJ: not all breaches of duties by a f is a breach of F duty

•So solicitor’s breach of duty of care was NOT a breach of F duty
There is a breach of DoC, remedy is equitable compensation.

•A breach of DoC by F is similar to a breach of DoC at common law

•Equitable compensation for breach of duty of skill and care resembles CL damages…

•there is no reason in principle why the CL rules of causation, remoteness of damage and measure of damages should not be applied by analogy in such a case

•So common law rules applicable to equitable --Compensation for breach of DoC by fiduciaries
A. Account of profits
A. Account of profits
.Taking accounts–
defaulting trustees

- Surcharging the account
C. Defaulting fiduciaries –
Breach of fiduciary duty–
equitable compensation
D. Controversies
E. Deafulting fiduciaries – Breach of the duty of care by fiduciary – equitable compensation
1 Traditional view
2 sets of RT, as set out in Vandervell No.2: Automatic RT and presumed intention RT
1.Vandervell v IRC
(1) Presumed intention RT

•Where property is transferred in the name of one, but more than one person contributed to the purchase price, then those who have contributed will be presumed to hold the equitable title

•Equity will presume intention of parties as to ownership

•Rebuttable presumption, usually by way of positive evidence as to actual intention between the parties, or by presumption of advancement

•Presumption of advancement only available in relationships of father to child; husband to wife

•Weak presumption, force diminishing now

(2) Automatic RT

•Arises where disposition of B interest is incomplete

•If I declare a trust, transferred property to T, but failed to name B, then there would be automatic RT, meaning T would hold property on ART in favour of S
•This kind of trust is called automatic resulting trust•Is used in contradiction to another “presumed (intention) RT”oRefer to land law example: Equity would presume they share the title in proportion to the purchase money paidDistinctions:E.g. 1) Trust for Amy for life and then for her children in equal shares, Amy dies without any children. -In this situation, B interest would jump back to S, this trust arises automatically when the disposal of the equitable interests is effectiveE.g. 2) A and B put their money together to purchase a property-Equity will presumed that they intend to share the equitable title in proportion to the amount of money they put in – purchase money resulting trust-Presumed (intention) RTE.g. 3) A transfers his property to B gratuitously -Equity will presume that A intends to create a trust in his favour, B simply holds the property on trust for A -The finding of a trust is because equity presumes A intended to create a trust for himself, so presumed RT-More accurately called presumed intention RT, because it presumes S’ intention-Presume rebutted if there is counter presumption at playE.g. 4) Special relationship between A and B, say husband and wife, then counter presumption will operate, that is, the presumption of advancement, or if there is actual evidence to the contrary
6.2.1. William Swadling: intention to create a trust•Intention in RT relates to intention to create a trust, where an express trust fails to dispose of trust property – there is an intention to create a trust in the first place. •Beneficial interests jump back to S. •Transferor did intend to keep B interest for himself • intention to create a trust!•Problem with this view is that intention may be artificial. •There are certain circumstances where the intention is simply used as a tool to give effect to social policy
6.2.2. Robert Chambers: absence of intention to benefit•Transferor did not intend to make a gift, therefore RT arises • when transferors transfer legal title to transferee, but transferor does not intend to benefit the recipients, so recipients are not free to dispose of property
Why is this distinction important? Practical significance!
• E.g. A transferred $100 to B in the mistaken belief that A owed B a debt of $100
• B went into bankruptcy
• If A can establish that she has proprietary interests in the $100, then A would have priority over other creditors in respect of that $100, does not matter that B has insufficient assets
• Can A claim proprietary interests in the money by way of RT?
• Chambers: mistaken transfer, A had no intention to benefit B, B would hold $100 on RT for A
• Swadling: there was already mistaken intention to pay debt, no room for presumed intention to create any trusts, there for A would not be able to say there is a RT arising in his favour, B has no obligation to return $100 to A
• → Significant distinction!!!! In particular where there is insolvency!
.1 Quistclose trust •Where A advances money to B on terms mutually agreed that money is to be used exclusively to pay B’s other creditors, •it does not become part of B’s general assets (available for distribution on bankrupcy),• but must be used for the specified purpose or returned to A.
1.Barclays Bank v Qusitclose Investments
2. Twinsectra v Yardley
3.1. Mistaken payment
1.Chase Manhattan Bank v Isarel-British Bank
2. Sinclair v Brougham
3. Westdeutsche Landesbank
4. El Ajou v Dollar Land Holdings
5. Re Goldcorp Exchange
Papamichael v National Westminster Bank
Resulting Trusts arising from void/voidable transactions?Vitiating factors:•Misrepresentation•Undue influence •Unconscionability•Duress
Void Contracts
Chase Manhattan
Westdeustche (
Voidable contracts
Papamichael (mistake)Timing of discovery of mistake should not defeat the operation of the principle. Once there has been a mistaken payment there will be a potential for a trustPresence of a fund + actual knowledgeEl Ajou (fraud)Victims of fraud misrep…are entitled to rescind the transaction and revest the equitable title to the purchase money in themselves at least to the extent necessary to support an equitable tracing claim, a trust would arise to vindicate this equitable interest, which is an old fashioned institutional RTRe Goldcorp (misrep)Rescission, if effected, would revest proprietary title back. But no rescission in this case before Goldcorp went into liquidationWestdeustche CT available for property obtained by fraud
Constructive trust
Institutional Constructive Trust
1. Misappropriation of trust funds
1. Foskett v McKeown
Lord Millett:

“ Where a trustee wrongfully uses trust money to provide part of the cost of acquiring an asset, the beneficiary is entitled to his option, either to claim a proportionary share of the assets or to enforce a lien upon it a to secure personal profit."
2. Breach of fiduciary duty
Pure breach of trust or fiduciary duty Conflict of duties – obtain unauthorised gain – or receive a bribe.
1. Keech v Sandford
•Acquisition of property that should have been acquired on behalf of the trust (First semester)•Unauthorised gain takes the form of property •It seems like the law is more willing to say that the property should be held on behalf of the trustee
2. Boardman v Phipps
• There was a breach, but did not involve any misappropriation of trust property
• 2 remedies available – account of profits, CT
• Mr Boardman solicitor of the trust
• Held that they were acting honestly – thought best interest of the trust
• HL said acting honestly but should still be held liable
•CT was declared over the shares that the solicitors bought with their own fundsoLH: CT is indeed regularly given in these cases, when CT is used in these cases, 99% of them DO NOT involve insolvency or bankruptcy! oEven though CT is used in these contexts, very much used as an instrument to justify the liability to account of profits, with no proprietary implication – not controversial in this case. oCT basically means you are liable as a trustee, no proprietary implication
3. Bribes
1. Lister v Stubbs
- disapproved in AG v REID, but Sinclair preferred Lister v Stubbs •Mr Stubbs invested bribe in land and other investments •Claimant wanted to establish proprietary interest in the bribe •Mr Stubbs mere personal obligation to account for the bribe •A fiduciary should not be made a constructive trustee in the case of unauthorised gain•If we want to impose constructive trust creating proprietary interest afresh. •The bribee should only account for the bribe •Acoount for the bribe like an equitable debt – according to court in Lister in Stubbs •Subsequently disapproved in AG v Reid•Only personal
Critic – cons of Lister v Stubbs.
1. In personam duty to account for money. Downside – if I were a fiduciary and I take bribe then what should I do? I should immediately pass it on to my wife and then there’s nothing the fiduciary can do. They could keep the practical benefit of the bribe. 2. General creditors will benefit from the bribe. The total asset of the bribee will be swollen. My general creditors should not benefit from this unjust enrichment. That one million would go into my general assets. My general creditors would have one million more to share among themselves. These general creditors should not be better of than they should have been. 3. If you have this rule there will not be sufficient deterrence. You want to deter people from accepting bribes. If they can pas the benefit on to their families, than there is not sufficient deterrence.
2. A-G for Hong Kong v Reid
disapproved Lister & Stubbs

•“Bribery is an evil practice”
FACS: • As deputy DPP, he had the discretion to decide which criminal to press charges on, •turned out that he had been taking bribes from criminal to not press charges against them. •Managed to make a lot of money out of it.• The properties that HK govt could trace were 2 estates in NZ. •Hong Kong govt no proprietary interest in bribe money •HK govt. wanted to assert proprietary interest in the bribe money by way of constructive trust •He did not buy these in his own name, but registered in the name of his wife and his sister. •If we apply Lister v Stubbs in this case, HK Govt cannot recover a penny from the DPP because the use of bribe money but registered in name of another.
•no way you can analyse the bribe money as belonging to HK govt. This bribe and hence the houses held on constructive trusts for the HK govt.
Equity would treat this money and houses acquired to be held on trsst for the beneficiary.

“Equity treats as done what ought to be done” - Turns equitable right into proprietary right.
Main reasoning: 1st step: when F commits breach of F duty in obtaining secret bribes, he owes duty to account for bribe to P 2nd step: because he owes such duty to a/c, equity treats as done as what ought to be doneConclusion:•once the bribe is received, equity treats that he has already accounted for the bribe, and the moment he received the bribe he holds it on CT.•You are deemed to have returned it already, thus the trust arose at the time you received the property. •So HK government has equitable interests that defeats/binds the legal title of the wife and solicitor
3. Sinclair Investments v Versailles Trade Finance Ltd
•Decided NOT to follow AG for Reid.

•Agreed with Listerv Stubbs
•Agree with Listre and Stubbs or Ag v Reid (privy council) •Not binding on English CA •Held prefer Lister& Stubbs •No proprietary claims unless – laid down two proprietary examples, unsless the party actually ahd a beneficial interest to the property right in the asses if you don’t not possible for party to make a proprietary claim
4 Unconscionability or fraud on part of D
1. Westdeutsche Landesbank Girozentrale v Islington LBC
- Problematic passage under the heading “the stolen bag of coins”
- Lord BW: “CT would be available for property obtained by fraud.”

o When it comes to thieves, when they steal from you, they only get possessory title instead of ownership, thief can never be T of the legal title.
2. Shalson v Russo
FACTS: Russo defrauded the plaintiffs into entering into certain loan contracts, and used loans to construct a luxurious yacht. Q: Fraudulent Misrepresentation. Did the borrower hold the funds? (and hence yacht) on constructive trust for the lenders.

If the thief has no title in the property, I cannot see how he can become T of it for the true owner who retains the legal and beneficial title…equity has traditionally been regarded as similarly incompetent unless it could first identify a relevant F relationship”
3. Neste Oy v Lloyds Bank
FACTS: Payment made and received at a time when the recipient company had resolved to cease trainingBingham J: Company could not in good conscience receive those payments.

oDirector didn’t do the right thing in returning the money back, simply kept the money. Whether the money falls into the general pool of insolvent assets or held on CT of payor?oHeld: money held on CT for Payor. Reasoning very broad-brushed. Director should have done the right conscionable thing to return $ otherwise he would be unconscionable to keep the money. oLH: Usually when court impose decision on a broad notion, it is fishyoProblematic: but this was the decision BW relied on
4. Re Farepak Food and Gifts Ltd
. Farepak ceased trading and did not deliver hampers. 3 days after ceasure, Farepak wanted to protect the money that were paid in those 3 days from anyone, don’t want to fall into general insolvency pool. But the trust ran into technical problem, no ET. So can only rely on Neste Oy case to establish CT•If director could not in conscience retain receipts, CT. But no F duty in this case, pure ordinary commercial settings, contractual relationship•Argued that fraudulent for company to retain moneys•What the court did was: recognized BWs’ dictum was too broad brush to just say that CT would be imposed on the basis of fraud, instead we can use BW’s interpretation of Chase Manhattan.
5. Cobbe v Yeoman’s Row Management Ltd
•Just for completeness sake another line of authority used. Proprietary estoppel•CT used as proprietary estoppeloWhat if company goes into liquidation before honouring the distribution? When you buy cake coupon, purely contractual relationship, a promise to deliver cakes in presentation of the coupon
Institutional Constructive Trust
Institutional Constructive Trust
Institutional Constructive Trust
Institutional Constructive Trust
2. Remedial Constructive Trust
2. Remedial Constructive Trust
•Discretionary•ONLY accepted in Canada and the US2 main difference: discretionary, depends on exercise of judicial discretion as to whether it should be awarded, not a matter of vindication of right. Date of which arises is also discretionary, can arise at the previous time at the date of wrongful conduct or on the date of judgment. Because it operates as a court order, affects only as of the date of the order
1. Westdeutsche Landesbank Girozentrale v Islington LBC
2. Re Polly Peck International Plc (No2)
RCT in English law, not accepted (Westdeutsche, Re Polly Peck)oRejected in Re Polly Peck, the court made it explicit that if you accept RCT, would have serious policy implication in the insolvency regime. oDiscussed in Westdeutsche, BW hinted that it might be appropriate tool for the development of proprietary restitutionary remedies. But this serves no more than just a hint, not adopted’
3. London Allied Holdings Ltd v Anthony Lee
Judge recognised that if you adopt RCT, it does have policy implications, would give B priority over the other creditors (secured/insecured) of the insolvent company/ bankrupt person. Even though there is such risk/possibility, the concern should not be serious enough for us to reject RCT, maybe for us to accept it and come up with clear guidelines as to when to allow it and when It can affect 3P
2. Remedial Constructive Trust
1. UK
2 New Zealand
1. MacIntosh v Fortex Group Ltd
- Basically followed Polly Peck approach – no RCT!
3. Canada
1. Soulos v Korkontzilas
-FACTS: estate agent who owes F duty to P, supposed to look for a building for P to purchase. Agent did identify a building, P made offer for Vendor, V came up with counter offer, instead of passing counter offer to P, A bought it for himself. Clear breach of F in buying property that he was supposed to look for P.

-So remedy sought not just account of profits, claimed that A should hold building on CT for him. -Canadian approach is very much the concept of RCT approach, first of all if there is a prima facie unconscionable conduct, (breach of equitable duty in equity as referred by the court). All it needs is breach of equitable duty.-On the facts CT should be granted because no alternative remedy would do better to do justice in that case.
Third party liability
-knowing receipt
When answering PQ always look at the three requirements first.
1. There must be an antecedent breach of F duty
2. Beneficial receipt of the trust property disposed of or its traceable product in breach of trust or fiduciary duty.
(a)What does beneficially received mean?
•When you receive the nature of the transaction must be that you are intended to receive it for your own benefit.
•Defence may be I didn’t receive it for my own benefit. Have to show that the property was received for his own benefit.
(b) Establish traceable product
–To establish that it is the traceable product you have to go through all the steps we did in topic 7.
3. Requisite Knowledge by recipient What constitutes knowledge?
2. What does Receipt mean?
3. What does Knowledge mean?
(a) Constructive knowledge is sufficient:
•All you need is constructive knowledge: Maybe you don’t know, but a reasonable person in your position would know.
• Purely objective standard based on the standard and practices of the people in your industry.
El Ajou v Dollar Land Holdings Plc (1994)
Thanakharn v Akai
Ji Lian Yap Artcle
R Lee & L Ho
Karak Rubber V Burden (1972) Belmont Finance Corporation v Williams Furniture (1980)Rolled Steel Products v British Steel Corporation (1986) Ch 246 at 306-397 Per Browne- Wilkinson LJ:
Agip (Africa) v Jackson (1990)
•Millett: he is liable…if he received it with notice, actual or constructive•In order to prove constructive notice, facts known to D, imperative for him to seek for explanation because it was obvious that the transaction is probably improper
Houghton v Fayers Lloyds Rep Bank 145 at 148 per Nourse LJ
(b)Actual knowledge is necessary
Re Montagu’s Settlement Trusts (1987) Eagle Trust Plv v SBC Securities (1993) per Vinelot J:Cowan de Groot Properties v Eagle Trust (1992)
(c)Recent approach (since 2001): unconscionability
1. BCCI v Akindele
HELD: •Court found that Mr Akindele was not unconscionable. •No evidence that would make Mr Akindele suspect or knowledge that ICIC or it’s controlling company BCCI was doing something wrong. The test was quite leniently applied. •Subsequent courts may not come to the same conclusion.•Nourse LJ: dismissed bank’s claim, no requisite knowledge, not unconscionable for Akindele to return the property •The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receiptoLooked at what A knew at the time when he entered into agreement. He knew agreement was profitable to him, would be risky at the same time. Court also referred to facts surrounding the transaction. But decided out of these knowledge that A actually knew, it cannot say that it should be unconscionable for him to keep the benefit because there could be no suspicion on A’s part that the bank officers actually entered into contract on behalf of bank as a result of breach of F dutyoWhen CA looked at knowledge of A, did not look into the direct question: did he or did he not know. Court asks himself what did A know about the circumstances of the transaction, and out of that circumstances applied the test of unconscionablity. oCourt did not say “A should have known the contract was a breach” so there was knowledge. Asked what A actually knows on the basis of the available evidence, as a matter of actual knowledge. Not for D to pick and choose what he likes to know…but what is available…as a matter of evidence. •Why did he adopt unconscionability as the test?oTrack development of law of KR, deliberately moved away from knowledge, emphasising at what D knew was not sufficient. oInstead, we should look at the whole state of affairs surrounding the transaction. Court requires D to take into acct the whole of the circumstance, the objective facts of transaction and see whether or not that suggests the property he would acquire out of the transaction would probably come from a breach of F duty. If suggests so, unconscionable for him to keep his benefit
Criterion Properties v Stratford UK Properties
-Not necessary to require actual knowledgeOther decisions may not be made so leniently. Standard is now a bit more stringent and definitely not based on objective knowledge. Otherwise onerous liability on banks to protect.
Papamichael v National Westminister
-Test of knowledge should be: if you know, you know In establishing unconscionability what the court would require is actual knowledge in the circumstances. You need to have actual knowledge of those facts or of the circumstances of those facts. Constructive knowledge is not sufficient. “ The recipient’s state of knowledge (in a case of knowing receipt) must be such as to make it unconscionable for him to retain the benefit of the receipt. (Akindele) It is unconscionable for him to retain the benefit of the receipt where he has actual knowledge of the circumstances, which make the payment a misapplication (Criterion Properties v Sratford). This would appear to be an indication of what is meant by knowledge in the judgement of Hoffmann LJ in El Ajou v Dollar Land Holdings.
Criterion Properties v Stratford UK Properties
• Nicholls (dictum): if however, agreement is set aside, D would be accountable…Irrespective of whether D has property in hand, P would have claim against him subject always to change of position defence
• So there should be strict liability of KR by showing receip
Article of by Lord Nicholls relying on Ministry of Helath v Simpson (1951) HL Re Diplock on appeal to the HL
“Knowing Receipt: The Need for a New Landmark” – Lord Nicholls-The present approach of the law lumps together all careless recipients-He advocated apart form the current test of uncon in KR, there should be a parallel personal liability on KR – a receipt based liability -Once plaintiff proves that D received trust property which was misapplied by way of breach of F duty, then there will be remedy for KR, subject to the defence of change of position-Keep Akindele intact, so there is test of ucon to decide whether D has to restore prop-At the same time there should be another test which simply requires P to prove receipt of property by D subject to antecedent breach. -But D would have defence of change of position-Policy considerations involvedoDesirability of protecting property interestsoDesirability of promoting the speedy transaction of businessoBlameworthiness of being honest but careless oUndesirability of imposing liability on a recipient who paid for the property or changed his position in good faith-The attempt to formulate one single principle of personal liability should be abandoned. Instead, it should be based on the combination of two separate principles of liabilityoRecipient liability should cover all 3P recipients•Strict liability, restitutionary in nature, confined to restoring an unjust gain, subject to change of position defenceoDishonest recipients should be personally liable to make good losses as well as accounting for all benefits-“On this equity will happily follow the law”
But see Akindele per Nourse LJ: “While in general it may be possible to sympathise with a tendency to subsume a further part of our law of restitution under the principle of unjust enrichment, I beg leave to doubt whether strict liability coupled with a change of position defence would be preferable to fault to fault based liability in many commecial transactions, for example where, as here, the receipt is of a company’s funds which have been misapplied by its directors. Without having heard argument it is unwise to be dogmatic, but in such a case it would appear to be commercial unworkable and contrary to the spirit of the rule in Royal British Bank v Turquand (1856) that, simply on proof of an internal misapplication of the company’s funds, the burden should shift to the recipient to defend the receipt either by a change of position or perhaps in some other way. Moreover, if the circumstances of the receipt are such to make it unconscionable for the recipient to retain the benefit of it, there is an obvious difficulty in saying that it is equitable for a change of position to afford him a defence.”
Dishonest Assistance
What “dishonesty” means has evolved. now we’re settled on Barlow Clowes. Pre-Royal Brunei Airlines v TanRequirement was knowledge, not dishonest. Diff views on whether subjective or objective knowledge needed. all CFI decisions, no definitive authority
Royal Brunei Airlines v Tan
Lord Nicholls A matter of policy. Rationale of the claim for dishonest assistance is to stop professionals from assisting in breaches, but don’t want to make it too onerous for them. else they may incur a lot of costs to protect themselves, and then charge more from the public for their services Therefore draw a balance. a test higher than reasonableness: dishonesty. And this test of dishonesty is objective. “acting dishonestly... means simply not acting as an honest person would in the circumstances.” Ask the reasonable person if a particular act would be dishonestNotes that honesty has a connotation of subjectivity, aot negligence... but the standard of what constitutes honest conduct is not subjective.
2. Twinsectra
Lord Hutton in HL Held test of dishonesty is the criminal law Ghosh test for dishonesty! It has a subjective and an objective limb. harder to impose liability than beforeMillett in dissent: Not so! objective only. that’s the proper interpretation of Lord Nicholls in Tan It’s not criminal liability, but civil. using the less stringent test won’t do injustice to Df. But in applying the test, we can attribute Df’s experience/ intelligence/ knowledge to the comparator. so the test isn’t as difficult to satisfy as if we used a morally upright, honest comparator
3. Barlow Clowes
Hoffmann in PC
Was part of majority in Twinsectra. but adopted Millett! and said that he meant to say objective test in Twinsectra, but was misinterpreted. hah, I doubt it. but anyway, now the law is quite settled.

What he said in Twinsectra: dishonesty means consciousness that one is transgressing ordinary standards of honest behaviour
What he said he meant: dishonesty means consciousness of those elements of the transaction which make participation transgress ordinary standards of honest behaviour.
Well! that’s quite different. first one is subjective, second is objective. and he blames other ppl for misinterpreting him??

Since then, law quite settled. see an example of application below
4. AG of Zambia
Zambian royalty embezzled money, got a UK law firm to help set up company to launder the moneyHeld: hv to take into account the fact that the lawyer was not competent. v keen for business and didn’t think to consider that it might be dishonest. this incompetence can be attributed to the comparator. CA found Df not dishonest, but incompetent Judge used a reasonable and competent comparatorCA held should use a reasonable but incompetent comparator here. just bc he’s incompetent doesn’t mean he’s dishonest. therefore lawyer not liableSo we can see that the test is not entirely objective. allows for honest fools, but not for Robin Hood. court said: “the test is an objective one, but an objective one which takes account of the individuals’ characteristics in question.”
5. Peconic
HK CFA applying the test
Different remedies available (HM) If falsification and T made to pay money, TP jointly and severally liable If surcharging and T made to pay up, TP jointly and severally liableIf T has to disgorge, TP mb jointly and severally liable for the same amount (tho a case saying that’s punitive, not so) If TP made profits of his own, then disgorge hm... equitable compensation available? probably superseded falsification/ surcharging basically it appears he is jointly and severally liable for whatever T is liable for
Topic 4 – Fiduciaries duties and powers
A. Who are fiduciaries?
1. Position of employees
B. What are the contents of fiduciary duties?
1. Conflict of duties
2. Conflict of interest
(i)No unauthorized remuneration
(ii) No self dealing
(iii) Fair-dealing rule - sale of the beneficiariy's beneficial intrests to trustee.
(iv) Loans by fiduciaries
(v) No secrets bribes
(vii) Not to obtain unauthorized profits
viii Duty of disclosure

3. In solicitors
Duties of trustees
1. Duty to abide by the terms of the trust

2.Duty to provide information

3. Fiduciary duty of loyalty

4. Duty to exercise reasonable prudence

5. Duty to exercise discretion properly and in good faith.
2.Duty to provide information
3. Fiduciary duty of loyalty
4. Duty to exercise reasonable prudence
5. Duty to exercise discretion properly and in good faith.
-strict liability

Always a conflict relating to what the beneficiaries should know

One view: Court wants to make trustees accountable for their decisions.

Other hand: Courts are mindful of the importance of independent discretion of trustees.
Should be allowed to exercise their discretion independently.

Try to see how court sway from one policy consideration to another and try to strike a balance.

Discretionary trust: Applicant was given absolute and uncontrolled discretion to deal with the trust properties.

Trustee memorandum: Suggestions of distribution.

Not willing to disclose to respondent who been kept in the dark as to the identities of the other beneficiaries.
(i)A modern trust deed
1. HSBC International Trust Ltd v Tam Mei Kam
(ii) What information are
trustees entitled to?
1.Re Londonerry's Settlement
HELD: Beneficiaries are prima face entitled to see trust documents, because the trust documents are owned by them, except if such documents disclose the deliberation of the trustee in exercising its discretion.

Beneficiaries have proprietary rights in the documents.

COMMENTS: Rationale for exception:
Necessary because otherwise it will make the role of trusteeship impossible.
Might lead to family strive.

Not engage in policy issues what and when disclosure should be allowed by simply saying trust docs should be disclosed.

Beneficiaries are entitled to see trust documents because they belong to trustees.

Entail information that beneficiaries are entitled to know.

Proprietary argument.

This is a CIRCULAR argument - criticized.
2 Steps:

1. Is it a trust document 

2.If it is - does it disclose the trustees?
2. Hartigans Nominees v Rydge
Considered whether Re Londonerry was a good approach.

FACTS: One of beneficiaries sought disclosure of the memorandum of wishes. She was disappointed.

HELD: Different reasoning by different judges. Difficult to discern ratio.

ISSUE 1: Whether letter of wishes is a trust document?

HELD : 2/3 said yes.
Confidential in present case and should thus not be disclosed.
Re Londonerry's approach was satisfactory.

Dissent: Re Londonerry was outdated in view of the modern practice.
Modern trust involves paid professional trustees.

More documents should be disclosed to hold trustees accountable.

Present letter of wishes was confidential one and should thus maybe not be disclosed.

Reserved his opinion on this issue.
3. West v Lazard Brothers
FACTS: Beneficiaries of discretionary trust sought disclosure of the trust accounts.

HELD: Wide construction of accounts. Instead of classifying the documents into whether it is or is not a trust account.
4. Re Rabaiottis Settlement
FACTS: Beneficiary of discretionary trust sought disclosure of the letter of wishes and the accounting documents for divorce proceedings in English courts.


(1) Letter of wishes should not be disclosed unless disclosure is essential.  Falls part of protected under Re Londonerry

(2) Accounting documents disclosable. In this case were disclosable to support court in divorce proceedings.

4. Schmidt v Rosewood Trust
Discussed Hartigans Nominee

Prior to this decision there had not been any doubt as to the right of beneficiaries of fixed and discretionary trusts to require information as to the state of the property and any dealings with it or any trust documents.

Nor was any distinction drawn between beneficiaries with interest or those with whose interest had not yet been vested.
Father set up 2 trusts with distribution to be made by exercise of powers of appointment vested in trustee.
Son sought access to information regarding the distribution.
Son had no vested interest.
Trustee no appointment in favor of son.

ISSUE: Do people with no vested interest have any right to access any information of the trust?

Trustee would obviously argue that only beneficiaries have the right to access information.
Son has no proprietary right.

Son would argue that no distinction should be drawn between a beneficiary and an object of power.

HELD: No distinction should be drawn between beneficiaries of a discretionary trust and those of objects of a power.

Lord Walker:

“ A benficiary’s right to seek disclosure of trust documents, although sometimes not inappropriately described as a proprietary right, is best approached as one aspect of the courts inherent jurisdiction to supervise the administration of trust. … Evaluation of the claim of the beneficiary may be an important part of the balancing exercise that the court has to perform on the materials placed before him. “
Look at nature of beneficiary’s interest as one factor to take into consideration. Re Londonerry:
Look at nature of information of documents. If confidential documents will not be disclosable; Prior to Schmidt v Rosewood.

Now replaced by more broad discretion of the court: No need to consider whether a particular document is a trust document or not.
5.Breakspear V Ackland
Considered whether to follow Schmidt v Rosewood

FACTS: Sought disclosure of letter of wishes.

Set up a trust to provide for his third wife.

Children disagreed with distribution made by trustee.

Children sought disclosure.

Trustee refused on the basis that letter of wishes was confidential as usual.

Matter went to court.
HELD: Letter of wishes is a confidential document.
No need to disclose letter of wishes unless disclosure in the interest of the trust

Letter of wishes confidential and not to be disclosed.

Disclosure available based on the special facts of the case.
A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. "
1/ No authorized remuneration:
2. No self dealing - sale of trusts property to trustee/fiduciary
3.Fair dealing rule -sale of beneficiary's beneficial interest to trustee
4. No unauthorized profits.
5. No competition with the beneficiary
See Topic 4!
1. Speight v Gaunt
FACTS: Trustee hired a broker to purchase stocks, and was issued and bought note in return.
Irregularities in the bought note.
Broker cashed the cheque and ascended with the money.
HELD: "conduct the business of the trust in the same manner as an ordinary man of business would conduct his own".
ordinary prudent man of business test. Wh
at questions would the court need to consider:1. Would an ordinary man of business have done this under the same consequences? ---> YES2. Would an ordinary man of business be put on inquiry? --> NO 3. Would an ordinary man of business pay the purchase money to the broker? --> YESIn relation to investment (as opposed to general management) of trust property.
2. Learoyd v Whiteley
FACTS: Trustees made 2 investments in brickfield;
4 freehold houses. Invested 4000 on the mortgage of a house called Brickfield and then he invested 2000 on the mortgage of 4 houses.

Mortgage of 2 properties went into liquidation trustee lost investment.

Mortgage of Brickfield was very risky.

"such care as an ordinary man would take minding that he is making an investment for people for whom he feels morally bound to provide"
BRICKFIELD An ordinary man of business should not have made such an investment as it was too risky.
Thus trustee has breached his duty.
---> In relation to the 4 other houses.
Not risky as income exceeds rate.
Use test in Speight v Gaunt.
"More stringent duty on professional trustees"

FACTS: Professional trustee involved.

Managing family settlement.
Trust assets comprised 99.8% of shares of a particular company.
Trustee not represented in this particular company.
Not represented as one of the investor.
Trustees were thus not consulted before making investment decisions.
Trustee did not ask to be consulted either.
Company made 2 investments.
1 successful other one very unsuccessful.
Trustee lost money.
Was the trustee in breach of his duty?

HELD: Putting aside that the director was a professional.

He still owned a big part of the shares and should thus be more involved and put on enquiry.

He would probably fall below standard of care.

However, court went further and said that a more stringent duty should be imposed on trustees. Professional trustee holds themselves out as having special knowledge.

Also professional trustees are paid - reasonable to expect higher duty.
3. Bartlett v Barckays Bank
1. Re Hastings-Bass
(A) Judicial control (or review) of trustee's power.
Takes into account irrelevant considerations/fails to take into account relevant considerations.
2. Sieff v Fox
" Where a trustee acts under a discretion.... but the effect of the exercise is different from that which he intended, the court will interfere with his action if it is clear that he would not have acted as he did had he

- not failed to take into account considerations which he ought to have taken into account, or
- taken into account considerations which he ought not have taken into account.

When will this rule be invoked?
- Tax issues.

Trustees held certain trust property, which were subject to tax liabilities.
In order to avoid such tax, advisers to trustees gave certain advice on appointment, which turned out to be incorrect and gave rise to substantial tax implications.
Appointment valid?
Trustee invoked advice by solicitor.
Took an irrelevant consideration into account - solicitors advice.
Transaction should be set aside.
Who would benefit?
What are advantages of invoking rule in Hastings Bass.
If trustees exercise of power could be set aside it would be beneficial to trustees.
Trustees could avoid tax burden.
Trustees may also stand to benefit if transaction could be set aside, as he can avoid liability.
Trust legal advisers might also benefit.
Legal advisers might be liable for professional legal negligence.
Advantages of rule in Hastings Bass.
Why should trustees be allowed to undo their action.
In what circumstances should the court intervene?
When should trustees be allowed to get away from their negligent decisions?
3. Abacus v Barr
Settlor asks tax adviser to ask trustee to appoint 40% of the trust fund to his children.
Advisor made mistake and told trustee that he would appoint 60% of the trust fund to the children.
Settlor knew about this and did nothing for 10 years until he wanted to set this appointment aside.

HELD: Voidable transaction, but not void.

To hold that it was void would mean entire payment would have to be paid back to settlor.
Court was not that willing to say that the exercise was void.
Whether it must be showed that trustee might or would have acted differently.
Must be shown that trustees would have acted differently.
However in later decision Stannard v Fisons court adopted less stringent test.
Distinguished based on fact that it was pension fund.
Where they were under a duty to act a less stringent might test can be applied.
Even though no fiduciary duty breach can still invoke rule of Hastings v Bass.
4. Smithson v Hamilton
Drafting error in pension scheme executed by the trustees on behalf of the participating companies.
(Rule in the definitive deed) Reduction if you want to draw you pension at an earlier time.
Rule also for deferred members - seized to work for company.
However, due to drafting error.
Unintended consequence was that the active member might have become an active member to take advantage of this drafting error.
Incurred cost would be imposed on participating companies.

What could have been done?
What might be the legal doctrine to invoke.
Ratification. If mistake in recording intention of partied in docs.
Decided not to pursue claim in ratification.
May not be able to overcome hurdles for claim of ratification.
Relied on rule in HAstings v Bass.
Claimed that entire rule was void.
Case went to court and court dismissed claim based on Hatsings v Bass.

Ratification could not be obtained by back door.
Should not be allowed to achieve indirectly what they could not obtain directly.
Secondly court held that adoption of deeds (rules) was company's decision, in the exercise of their discretion, not trustees.
Re Hastings Bass applies only to those acts of trustees in respect of which they owed a fiduciary duty.
5. Pitt v Holt
Neither Mrs Pitt nor her adviser considered the tax liability before setting up the trust.
Trust should be void, because she failed to take tax
consideration into considerations and would not have been involved if she would have known about the tax liability.

Acted within power conferred by the court.
Mrs Pitt had not been in breach of fiduciary duty as she searched proper advice before stetting up trust even though because of incorrectness of advice.
Substantial tax liability
6. Futter V Futter
FACTS: Trustees exercised powers of advancement upon incorrect advice on tax liability.

Lord Justice Lloyd overturned his own decision.
Distinguish trustee acting beyond the scope of his power vs trustee acting within powers but in breach of fiduciary duty.
First act void, second act could only be voidable.
However, he said that if trustees fulfilled duty of care by seeking professional advice and acting on this advice no breach of duty if relying on this incorrect advice.
Fiscal consequences of an act relevant.

Trustees acted within their of advancement.
Not acted in breach of trust or duty, because acted according to advice by solicitor.
Exercise of power will not be set aside as void or voidable complete change of attitude from previous case law.
3. Relief from liability
A.Exemption clauses
1.Armitage v Nurse
Leading case in exemption clauses - included in other decision...

The trust deed contains a clause " No trustee shall be liable for any damage or loss unless caused by his actual fraud."
(1) Construction of the clause?
(2) Void for repugnancy to the trust
or being void for being contrary to public policy?
2.Walker vStones
3. Spread Trustee Compnay Limited
v Hutchessson
4. RE Clapham
5. Citibank v MBIA
B. Statutory relief of trustee's liability:
Beneficiaries argued actual fraud means constructive or equitable fraud. = Breach of duty which attracts equity.

(1) Construction of the clause?

(2) Void for repugnancy to the trust or being void for being contrary to public policy?


Millett LJ:

(1) Construction:
Meaning of actual fraud:
Meaning of dishonesty/ recklessness

Trustee was recklessly indifferent to whether a particular cause of action was contrary to the beneficiaries' interest or not.

Does not include negligence.
Or breaching of fiduciary duty in good faith.

Can exempt liability for negligence: Not repugnant to the trust: Core obligations of trustees are to act honestly and in good faith in the interest of the beneficiaries.

Would not affect core liability of the trust and NOT REPUGNANT to the trust.

Core obligations do not include duty of care and skill.

Not contrary to public policy.
Exemption clause: No trustee liable other than " wilful fraud or dishonesty ".

Trustee solicitor Diversion of money alleged.

If solicitor was dishonest could not rely on the exemption clause to protect him

Trustee claimed his act was with the genuine belief that it was in the best interest of the trustees.

In other words an honest, but deliberate breach committed.

HELD: Disagreed with LJ Millett's approach :
Meaning of dishonesty?
A solicitor-trustee who deliberately did something that no reasonable solicitor-trustee could consider to be in the interest of the beneficiaries was dishonest,
Exemption clause:
Not liable except for ' willful and individual fraud and wrongdoing on the part of the trustee'.

Trustee had been grossly negligent ( Not deliberate fraud)

Whether trustee could exclude liability for gross negligence?

Legislation expressly prohibiting such an exclusion clause n Guernsey in 1989. Q: Position prior to 1989.

Possible to exclude a trustees liability for gross negligence.

Lord Clarke: Before 1989 could be lawfully excluded.

Considered english position alongside position in Scotland etc.

Armitage v Nurse: No distinction between ordinary negligence and gross negligence in english law.

Beneficiaries tried to argue that wrong.

Irreducible core should include a duty not to act in a grossly negligent manner.

Response: Should be a difference between fiduciary duties and other duties owed by trustees. He also said that if a line is to be drawn between negligence and gross negligence should be drawn by statute, by legislator.

Privy councils decision, but will be taken into account by supreme court.
Father left residuary estate to 2 daughters, B and M.
M misapplied the trust money and sought to rely on the wide exemption clause to avoid liability.
If B and M has children and any of them predeceases the father then their share would go to the child.
B died shortly after father but before distribution of assets and M distributed B's share of the assets to B's daughter
. Misdistribution and B's children refused to give back the assets.
If B died assets should go to husband not the children under the law of intestacy. Children's stepfather.

M sought to rely on exemption clause as to avoid liability:

Exclusion clause: Liability for loss shall be excluded
" ..unless the same shall have happened through his own personal act done by him either with the knowledge that it was wrongful or without any belief that it was wrongful..."


M did not know that the payment was wrong.
Rather, M did genuinely make mistake.
Liability exempted.
Irreducible core obligations of trustees

Complex securitisation transaction.
Transforming assets to from of securities to raise funds,
Citibank was the trustee for the holders of debt notes issued to securities Eurotunnel debt (bond arrangement)
MBIA was the guarantor of a guarantee given to certain note-holders for repayment of the notes.
QVT was one of the net-holders (subordinate note-holders)
Not subject to guarantee given by MBIA.
MBIA had right to give Citibank instructions concerning the exercise by Cititbank of its owners and discretions as trustee.
MBIA gave Citibank an instruction which was challenged by the QVT.

The contractual documents provided that the Trustee was bound to exercise the option as directed by MBIA..
By acting in accordance with MBIA's directions the Trustee was not acting incompatible with the irreducible core of the trust.
The trustee continued to have an obligation of good faith and retained certain discretions.

Respect commercial arrangements of parties: The court will give effect to the contractual provisions even though in the face of it the core obligations were not compromised.

Provides a defense: 3 things need to be proved:
1) Act honestly?
2) Act reasonably?
3) Fair for the court to excuse him in the circumstances
The court has discretion in deciding whether s. 60 should be invoked.

“If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this ordinance, 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.“
s 60 Trustee Ordinance. :
Re Clapham (above)
Relationship with trustee exemption clauses:

Not necessary to consider whether statutory relief would be available.
M was not acting reasonably - acting negligently and ought not to be excused.
Statute ought not to be fairly excused.
Re Clapham (above)
C. Doctrines of concurrence, release or acquiescence:

" The court has to consider all the circumstances in which the concurrence of the cestui que trust was given with a view to seeing whether it is fair and equitable that, having give his concurrence he should afterwards turn around and sue the trustees. "

"that, subject to this it is not necessary that he should know that what he is concurring in is breach of trust, provided that he fully understand what he is concurring in, and that it is not necessary that he should himself…
Re Paulings Settement Trusts
Topic 2 – Establishing a trust

Necessary conditions for establishing an express trust
A. Creating an express trust
1. Declaration of trust

The settlor must declare the trust.
The settlor must declare that he himself will hold certain property as trustee upon certain trusts.
2. Constitution of trust
Transfer of the legal title to the trustee.
1.Formal validity of declaration
Declaration of trust
a) LAND - evidenced in writing (s. 5(1)(a), CPO)

b) Other properties: Oral declaration suffices .

c) Testamentary:
In writing: i) signed by testator ii) Presence of two witnesses (s5, Wills Ordinance)
2. Substantive validity of the declaration
A. The three certainties:
1.Certainty of subject matter
1. Re London wines
• Create a trust over certain wines.
 No trust had arisen. The subject matter had not been separated from the bulk.
2. Hunter v Moss
Trust of 50 of my shares in HSBC holdings.


HELD: Subject matter sufficiently certain.

Re London Wines distinguished.
Intangible vs Tangible Property
Identification not necessary for intangible property.
3.White v Shortall

Trust in respect of 220,000 of 1.5 million.

Shares D held in a company. No segregation.

Trust valid.
Trustee had power to split up the shares
2. Certainty of intention
(a) Is a trust intended?
1. Adam v Kensington Vestry
"precatory words will not be sufficient."

Testator let all his estate to his widow absolutely.

"If the confidence is that she will do what is right as regards the disposal of the property
. I cannot say that is, on the true construction of the will, a trust imposed on her."

 No trust in favour of the children.
2. Jones v Lock
"Equity will not perfect an imperfect gift. "

“The necessary intention must be satisfactorily shown"

•Father handed over $900 cheque to his infant son, saying
" I give this to baby for himself".

He thereafter took it back and put it away.
Father died .

•To effect a perfect transfer he should have paid the cheque.

Nor had he made a valid declaration of trust, since no interference that he had made himself trustee could be deduced from his words or actions.
3. Paul v Constance
"Circumstances including pattern of behaviour or dealing may constitute sufficient evidence of intent."

Deceased separated from wife.

Later lived with P for 7 years until death.

Deceased received compensation for injury put in deceased account, which was used jointly.

Deceased died intestate.

The widow claimed his estate.

The statement "the money is as much yours as mine" sufficient to constitute a trust in favour of himself and P.
3. Certainty of objects
1.IRC v Broadway Cottages Trust
Old position laid down

Discretionary trust to apply income for the benefit of all or of any of a class of beneficiaries as they might think fit.

CA: complete list test applied.

"If the court was called upon to execute the trust then the court of equity would only be able to do so on the basis of equal division. thus, need knowledge of all the members of the class.

Overruled –
2. McPhail v Doulton
Discretionary trust in favour of employees of the settlers company and their relatives and dependants.

Not possible to create a complete list.

CFA relaxed the test.

There could be other ways to divide trust then equal division

 Test: is or is not

Whether a member is or is not a member of a class of beneficiaries.

Lord Wilberforce: must be administratively workable. If the class is too wide cannot include.
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