This post briefly discusses three questions:
1. What is the legal basis for claiming equitable compensation for breach of fiduciary duty?
2. Is a tenant in common (‘A’) potentially liable to a personal representative (‘B’) of a deceased co-owner (‘C’), to pay equitable compensation for loss of development value (‘DV’), on the grounds of breach of fiduciary duty, where A has applied for a sale of land under s.14 of the Trusts of Land and Appointment of Trustees Act 1996 (TLATA) as a ‘trustee of land’ under s.14(1)?
3. Can a sale of property ordered by the court following an application made under s.14 TLATA be an unauthorised disposal of trust property, in breach of fiduciary duty, by a trustee (who is an equitable co-owner)?
Subject to the disapplication of s.11(1) TLATA (duty to consult) by s.11(2), or the court relieving the trustees of the obligation, where C owns the lion’s share of the equitable interest in the property, B is the majority shareholder on C’s death. A will therefore not be acting in the ‘best interests’ of B if he causes a s.14 application to be made which results in a declaration that the property be sold for a price which results in the incurrence of economic loss by B where the property is sold for a price below DV.
That on its own, I submit, taking into account the propositions set out below, is enough to ground a claim by B for breach of fiduciary duty by A, thereby opening the door to the recovery of economic losses as ‘equitable compensation’ payable by A, which does not depend upon foreseeability of loss. I further submit that the implicit authorisation of the sale transaction evidenced by the declaration made by the court under s.14 is irrelevant where A proceeded to issue a Part 7 claim before obtaining a valuation with and without planning permission), because it cannot be possible to consult beneficiaries about a valuation which has not yet been obtained and disclosed.
In other words, the s.14 application was defective by reason of breach of s.11 by A. Therefore the order made by the court can be appealed, and cannot safely be relied upon pending the appeal.
Equitable compensation is not limited by foreseeability, remoteness, and other considerations which affect the recovery of common law damages, and permits recovery of economic loss caused by breach of fiduciary duty.
‘Liability in the abstract depends on three main questions: (1) what duties were the trustees required to perform, (2) did the trustees fail to perform any of those duties properly, and (3) do the trustees have a defence to the liability ordinarily arising from that failure? If these inquiries (into duty, breach, and defence) lead to the conclusion that trustees are guilty of an unexcused breach of trust, it is then necessary to examine the consequences of that breach. There are two additional questions that must be answered: (4) what effect did that failure have on the trust assets, beneficiaries, and trustees and (5) what can be done to correct the situation?
… A breach of trust is any act or neglect on the part of a trustee which is not authorized or excused by the terms of the trust instrument or by law, or which fails to satisfy the duties imposed on a trustee conducting authorized activities.’
‘Breach of Trust’ edited by Peter Birks and Arianna Pretto.
In relation to a trust, there are personal obligations between trustee and beneficiary in relation to the treatment of the trust fund and the performance of the trustee’s obligations under the trust. The trustee will be liable to the beneficiaries both to reinstate the trust fund and for compensation if there is any breach of trust.
The remedies available for breach of trust involve obligations to effect specific restitution of the trust property and to provide equitable compensation, without the need for the beneficiaries to satisfy common law tests as to causation or remoteness of damage. Equitable compensation provides monetary compensation for actual or potential harm or loss caused by a breach of fiduciary duty.
A trust takes effect over property creating equitable proprietary rights in favour of the beneficiaries, and Trustees owe fiduciary duties to beneficiaries not to:
(i) make unauthorised profits;
(ii) allow any conflict of interest; and
(iii) self-deal with trust property.
‘Trustees are under a duty to act in “the best interests” of their beneficiaries. This is such a firmly established assumption that the duty has been incorporated explicitly in various statutes.’ The Law of Trusts by Geraint Thomas and Alastair Hudson. It is also a fiduciary duty.
If the trustee makes an unauthorised disposal of the trust property, the obvious remedy is to require him to restore the assets or their monetary value. It is likely to be the only way to put the beneficiaries in the same position as if the breach had not occurred. It is a real loss which is being made good.
‘Trust duties are… fiduciary duties, trust relationships are necessarily fiduciary relationships, and trustees are… fiduciaries. On the other hand, fiduciary duties may not be trust duties.… [Fiduciaries] are obliged, within the fiduciary elements of their interactions to focus their energies on serving their beneficiaries’ best interests. The definition of “best interests” is not entirely straightforward, though.
Does it entail that fiduciaries have positive duties to foster or further their beneficiaries’ interests, such as taking positive steps to obtain the best possible price for a property? Alternatively… must fiduciaries only refrain from acting in ways that are detrimental to their beneficiaries’ interests, thereby entailing that their duties are negatively fashioned – for example, a duty not to engage in conflicts, whether of interest and duty or of duty and duty?...
Whether or not the rules and obligations imposed upon fiduciaries are positive (you must do this) or negative (you may not do that), the fact is that the fiduciary concept prescribes such rules and obligations: these are positive, purposive inclusions designed to achieve particular results.
As with the situation involving express trustees, once persons or things are described as fiduciaries, Equity intervenes and prescribes a standard of conduct to which they must adhere.’ ‘Fiduciary Law’ by Leonard L. Rotman.
‘Although the normal remedy for equitable wrongdoing is restitutionary … the notion of equitable compensation is recognised by English law. Although this remedy has sometimes been called restitutionary, since the effect of it is to restore the claimant to the position which he or she occupied had the wrong not been committed, the remedy has nothing to do with the law of restitution as such simply because it is not assessed by reference to the gain made by the defendant but is instead assessed by reference to the loss suffered by the claimant… It is still unclear, however, to what extent the prevalence of restitutionary remedies for equitable wrongdoing will be affected by the growing recognition of equitable compensation.’ The Principles of the Law of Restitution by Graham Virgo.
Any s.14 application should be issued as a Part 7 claim. In addition to CPR r.8.8 (Procedure where defendant objects to the use of the Part 8 procedure), CPR, r.8.1(3) allows the court to make an order that the claim continues as if the claimant had not used the Part 8 procedure.
As there are significant issues of fact, the Part 7 procedure is more appropriate. ‘Similarly, it is sensible for the claim to be formulated, as between solicitor and client, under the stricter Part 7 analysis before the question of issue arises, so that a weak claim can be filtered out and significant savings in costs achieved before too much money has been spent and too much has been incurred by way of a potential costs liability to the opposing party.’ Cohabitation Claims, 2nd Edition, by John Wilson QC, paragraph 14.26.
The costs management rules contained in CPR rules 3.12 to 3.18 and in PD 3E will apply. Where an application for a declaration under s.14 TLATA is issued by the claimant in his capacity as a person who ‘has an interest in property subject to a trust of land’, he is personally liable for costs, and if he loses, costs will not be indemnified out of C’s estate.
What is the legal basis for claiming equitable compensation for breach of fiduciary duty?
It is submitted that when considering compensation for a breach of an obligation the focus is not on the classification of the relationship as a whole but on the nature of the obligation which has been breached.
In AIB Group (UK) Plc v Mark Redler & Co Solicitors  UKSC 58 (a case argued and decided in the context of a claim for breach of trust), Lord Reed stated,‘Notwithstanding some differences, there appears to be a broad measure of consensus across a number of common law jurisdictions that the correct general approach to the assessment of equitable compensation for breach of trust is that described by McLachlin J in Canson Enterprises and endorsed by Lord Browne-Wilkinson in Target Holdings.
In Canada itself, McLachin J’s approach appears to have gained greater acceptance in the more recent case law, and it is common ground that equitable compensation and damages for tort or breach of contract may differ where different policy objectives are applicable.
Following that approach, which I have discussed more fully at paras 90-94, the model of equitable compensation, where trust property has been misapplied, is to require the trustee to restore the trust fund to the position it would have been in if the trustee had performed his obligation. If the trust has come to an end, the trustee can be ordered to compensate the beneficiary directly. In that situation the compensation is assessed on the same basis, since it is equivalent in substance to a distribution of the trust fund. If the trust fund has been diminished as a result of some other breach of trust, the same approach ordinarily applies, mutatis mutandis.
The measure of compensation should therefore normally be assessed at the date of trial, with the benefit of hindsight. The foreseeability of loss is generally irrelevant, but the loss must be caused by the breach of trust, in the sense that it must flow directly from it. Losses resulting from unreasonable behaviour on the part of the claimant will be adjudged to flow from that behaviour, and not from the breach. The requirement that the loss should flow directly from the breach is also the key to determining whether causation has been interrupted by the acts of third parties.
The point is illustrated by the contrast between Caffrey v Darby, where the trustee’s neglect enabled a third party to default on payments due to the trust, and Canson Enterprises, where the wrongful conduct by the third parties occurred after the plaintiff had taken Page 42 control of the property, and was unrelated to the defendants’ earlier breach of fiduciary duty.
It follows that the liability of a trustee for breach of trust, even where the trust arises in the context of a commercial transaction which is otherwise regulated by contract, is not generally the same as a liability in damages for tort or breach of contract. Of course, the aim of equitable compensation is to compensate: that is to say, to provide a monetary equivalent of what has been lost as a result of a breach of duty. At that level of generality, it has the same aim as most awards of damages for tort or breach of contract. Equally, since the concept of loss necessarily involves the concept of causation, and that concept in turn inevitably involves a consideration of the necessary connection between the breach of duty and a postulated consequence (and therefore of such questions as whether a consequence flows “directly” from the breach of duty, and whether loss should be attributed to the conduct of third parties, or to the conduct of the person to whom the duty was owed), there are some structural similarities between the assessment of equitable compensation and the as assessment of common law damages.
Those structural similarities do not however entail that the relevant rules are identical: as in mathematics, isomorphism is not the same as equality. As courts around the world have accepted, a trust imposes different obligations from a contractual or tortious relationship, in the setting of a different kind of relationship. The law responds to those differences by allowing a measure of compensation for breach of trust causing loss to the trust fund which reflects the nature of the obligation breached and the relationship between the parties. In particular, as Lord Toulson explains at para 71, where a trust is part of the machinery for the performance of a contract, that fact will be relevant in considering what loss has been suffered by reason of a breach of the trust.
This does not mean that the law is clinging atavistically to differences which are explicable only in terms of the historical origin of the relevant rules. The classification of claims as arising in equity or at common law generally reflects the nature of the relationship between the parties and their respective rights and obligations, and is therefore of more than merely historical significance.
As the case law on equitable compensation develops, however, the reasoning supporting the assessment of compensation can be seen more clearly to reflect an analysis of the characteristics of the particular obligation breached. This increase in transparency permits greater scope for developing rules which are coherent with those adopted in the common law. To the extent that the same underlying principles apply, the rules should be consistent. To the extent that the underlying principles are different, the rules should be understandably different.’
Is a tenant in common (‘A’) potentially liable to a personal representative (‘B’) of a deceased co-owner (‘C’), to pay equitable compensation for loss of development value (‘DV’), on the grounds of breach of fiduciary duty, where A has applied for a sale of land under s.14 as a ‘trustee of land’ under s.14(1)?
Does A owe any fiduciary duties as a trustee to B, which are governed by TLATA and the general law applicable to fiduciaries?
Whilst the scope of s.22(2) is unclear, and It is submitted that it means a beneficiary with a present right to present enjoyment, and therefore does not apply to an absolute gift of property made to an adult beneficiary, under s.22(1), a 'beneficiary' of a trust of land includes a 'personal representative' [who] 'under the trust has an interest in property subject to the trust', i.e. a personal representative/trustee of a deceased co-owner in equity.
Can a sale of property ordered by the court following an application made under s.14 TLATA be an unauthorised disposal of trust property, in breach of fiduciary duty, by a trustee (who is an equitable co-owner)?
TLATA came into effect on 1 January 1997, and applies to situations where there is a conveyance of land to equitable co-owners, and where equitable interests in land arise by way of a constructive, resulting or implied trust.
s.4 (Express trusts for sale as trusts of land) provides,
‘(1) In the case of every trust for sale of land created by a disposition there is to be implied, despite any provision to the contrary made by the disposition, a power for the trustees to postpone sale of the land; and the trustees are not liable in any way for postponing sale of the land, in the exercise of their discretion, for an indefinite period.
(2) Subsection (1) applies to a trust whether it is created, or arises, before or after the commencement of this Act.
(3) Subsection (1) does not affect any liability incurred by trustees before that commencement.’
TLATA, which scrapped the concept of the ‘trust for sale’, gave the trustees of a trust of land (who more often than not would also be the beneficiaries of the trust) all the powers of an absolute owner, whilst continuing to subject them to their traditional fiduciary duties, and placing upon them the obligation to consult with the beneficiaries and obtain their consent before acting.
‘Although the trustees are given all the powers of an absolute owner, there are obvious and necessary restrictions on those powers. In particular:
(i) in exercising their powers, the trustees must have regard to the rights of the beneficiaries;
(ii) the trustees must not exercise their powers in contravention of, or of any order made in pursuance of, any other enactment or any rule of law or equity; and
(iii) if another enactment, other than section 6 of TLATA, confers on the trustees authority to act subject to any restriction, limitation or condition, the trustees of land are not entitled to exercise the powers conferred by section 6 to do any act which they are prevented from doing under the other enactment by reason of the restriction, limitation or condition.’ Cohabitation Claims – Law, Practice and Procedure, by John Wilson QC.
S.6(9) provides, ‘The duty of care under section 1 of the Trustee Act 2000 applies to trustees of land when exercising the powers conferred by this section.’
S.1 of the Trustee Act 2000 provides,
‘(i) Whenever the duty under this section applies to a trustee, he must exercise such care and skill as is reasonable in the circumstances, having regard in particular:
(a) to any special knowledge or experience that he has or hold himself out as having; and
(b) if he acts as trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession.
(ii) In this Act the duty under sub-section (1) is called “the duty of care”’.
S.11(1) further requires,
‘(a) so far as practicable, consult the beneficiaries of full age and beneficially entitled to an interest in possession in the land; and
(b) so far as consistent with the general interest of the trust, give effect to the wishes of those beneficiaries, or (in the case of dispute) of the majority (according to the combined value of their combined interests).’
In considering an application under s.14 the court is given extremely wide powers, and can relieve the trustees of the obligation to consult the beneficiaries in connection with the exercise of their functions. However these powers are declaratory.
In the context of a co-habitation claim, ‘… a legal analysis may be that the couple as trustees, with all the powers of absolute owners, disagree about whether or not the land should be sold. The restrictions on their powers as trustees mean that it is not possible for one party to obtain an order for sale without the other’s consent.
The party seeking sale must apply to the court. The party has the right to apply in his or her capacity as trustee and person interested in the land. The court having given consideration to the factors set out in section 15, can, if appropriate, order the sale of the property. In doing so the court is exercising the powers of the trustees, as absolute owners, without the restrictions – such as requiring consents – which the cohabiting couple, in their capacity as trustees, must have.’
Cohabitation Claims – Law, Practice and Procedure, by John Wilson QC.
S.15 (Matters relevant in determining applications) provides,
‘(1) The matters to which the court is to have regard in determining an application for an order under section 14 include –
(a) the intentions of the person or persons (if any) who created the trust,
(b) the purposes for which the property subject to the trust is held…’
It is submitted that intention needs to be read in conjunction with the need to consider the purpose of the trust.
Where a property, although co-owned by C along with other family members who contributed to the price, was purchased primarily as a residence for C, it is submitted that a s.15(1)(b) factor must be C’s will, because it provides for the final disposition of his beneficial interest in the property where C’s beneficial interest was an estate asset at the date of his death. Therefore the court should take into account the valuation of the property with planning permission, on the premise that an inherently probable purpose of the trust of land is the development of trust property following C's death, to maximise the value of any testamentary gift of his beneficial interest.
There may also be a s.15(1)(a) argument based upon C's actual or imputed intentions. Sections 11 (Consultation with beneficiaries), and 15(3) should be carefully considered before a s.14 application is made, as it cannot be possible to consult about a valuation which has not yet been obtained and disclosed.
Subject to the disapplication of s.11(1) by s.11(2), or the court relieving the trustees of the obligation to consult, the duty to consult is a duty to listen. There is no duty to comply with the wishes of the beneficiaries, unless the wishes are those of the majority shareholders in equity, and are also consistent with the general interest of the trust.
Therefore where C owns the lion’s share of the equitable interest in the property, B is the majority shareholder on C’s death. A will not be acting in the ‘best interests’ of B if he causes a s.14 application to be made which results in a declaration that the property be sold for a price which results in the incurrence of economic loss by B where the property is sold for a price below DV. That, I submit, is a standard of conduct prescribed by Equity, to which a fiduciary must adhere. Therefore failure to adhere to that standard, is sufficient, on its own, to ground a claim by B for breach of fiduciary duty by A, thereby opening the door to the recovery of economic losses as ‘equitable compensation’ payable by A, which does not depend upon foreseeability of loss.
I further submit that the implicit authorisation of the sale transaction evidenced by the declaration made by the court under s.14 is irrelevant where A proceeded to issue a Part 7 claim before obtaining a valuation with and without planning permission), because it cannot be possible to consult beneficiaries about a valuation which has not yet been obtained and disclosed. In other words, the s.14 application was defective by reason of breach of s.11 by A. Therefore the order made by the court can be appealed, and cannot safely be relied upon pending the appeal.