Breach Of Trust And The Defences Available

• Publication Date: 26 January 2021
• Subject: Corporate/Commercial Law, Criminal Law, White Collar Crime, Anti-Corruption & Fraud, Trusts
• Law Firm: Ashfords LLP
• Author: Mr Robert Horsey and Rebecca Milton

Trustees are jointly and severally liable for breach of trust to their beneficiaries where that breach has led to a loss to the trust fund.

Common allegations of breach of trust include where a trustee:

• Distributes trust assets to a beneficiary who is not entitled to them under the terms of the trust document.
• Invests the trust fund in a way not permitted by his express or statutory powers of investment.
• Breaches a fiduciary duty such as the duty not to profit from the trust.
• Breaches the common law or statutory duty of care, for example by exercising a power of investment without exercising such skill and care as is reasonable in the circumstances.

THE DEFENCES AVAILABLE

EXEMPTION CLAUSE

A trustee who has committed a breach of trust could be protected from a breach of trust claim by an exemption clause in the trust deed. However, even if there is an exemption clause, trustees still have a minimum duty to perform the trusts honestly and in good faith for the benefit of the beneficiaries. An exemption clause cannot excuse a trustee who either knows that his act or omission is contrary to the beneficiaries' interests or is recklessly indifferent to the beneficiaries' interests.

LIMITATION

If a trustee is not protected by an exemption clause, he/she could escape liability if the claim is time-barred. It has long been established law that, in general, wrongdoers ought not to be subjected to the threat of legal proceedings for an indeterminate period after the occurrence of the events to which they relate. The Limitation Act 1980 sets out limitation periods which specify a time limit within which legal proceedings of a particular kind must be brought.

Limitation serves as a defence to a claim and must be pleaded as such. Once a limitation defence is raised, however, it is for the claimant to show that its claim is not statute-barred.

With regards to breach of trust claims, the starting point is six years from the date on which the right of action accrued, i.e. the date of the breach (not the date of the loss): section 21(3) of the Limitation Act 1980. It is worth noting that the six year period will not run against a beneficiary whose entitlement is contingent upon attaining a certain age or upon the occurrence of a future event, until the interest has vested (Armitage v Nurse 1998).

The six year time limit is, however, subject to section 21(1) of the Limitation Act 1980 which provides that there is no limitation period in respect of any fraud or fraudulent...