A breach of trust occurs when a trustee fails to comply with the terms of the trust instrument or with the duties imposed on them by law. This includes both positive duties (such as the duty to invest trust property) and negative duties (such as the duty not to profit from the trusteeship). A breach may be intentional or unintentional; a trustee is liable even for an innocent breach, though the remedies and defences available may differ.
Many breaches of trust also constitute breaches of fiduciary duty. Trustees owe fiduciary duties to the beneficiaries, including the duty of loyalty, the duty to act in good faith, the no-conflict rule, and the no-profit rule (see Topic 8). Where a trustee profits from their position, commits a conflict of interest, or acts in bad faith, the breach will be both a breach of trust and a breach of fiduciary duty. The remedies available for breach of fiduciary duty include account of profits and constructive trust, which can apply alongside the remedies for breach of trust.
A trustee is liable for breach of trust even if the breach was committed innocently or through mere oversight. Lack of intention does not excuse the breach, though it may affect the remedy and the trustee's ability to rely on exclusion clauses or statutory relief. Do not assume that only dishonest trustees are liable.
The primary remedy for breach of trust is to restore the trust fund to the position it would have been in but for the breach. This means the trustee must make good any loss suffered by the trust estate as a direct result of the breach. For example, if a trustee wrongfully disposes of trust property, the trustee must restore the value of that property to the trust fund. This is a personal remedy against the trustee, not a proprietary claim over substitute assets.
Where a trustee has profited from a breach of trust, the court may order the trustee to account for all profits obtained through the breach. This is an equitable remedy designed to prevent unjust enrichment. The trustee must disgorge the full amount of profit made, regardless of whether the trust suffered any corresponding loss. For example, if a trustee uses trust money to make a speculative investment that succeeds, the profit belongs to the trust even though the beneficiaries have not lost anything.
In addition to account of profits, the court may award equitable compensation for losses directly caused by the breach of trust. This is a compensatory remedy, measured by reference to the loss actually suffered by the trust fund. The trustee is not liable for all losses that occurred during their trusteeship — only for those that are causally connected to the breach.
In Target Auditing Ltd v Lewington, the court confirmed that there must be a causal connection between the breach of trust and the loss suffered. The loss must be attributable to the breach; it is not sufficient that the loss occurred while the trustee was in breach. The court applies a "but for" test: would the loss have occurred but for the breach? If the loss would have arisen regardless of the breach, the trustee is not liable to compensate for it. This is an important limitation on a trustee's exposure to liability.
In Armitage v Nurse, the Court of Appeal confirmed that trustee exemption clauses are valid and effective EXCEPT in relation to fraud. A trustee cannot contract out of liability for their own dishonesty. However, a trustee can validly exclude liability for negligence, breach of trust, and breach of fiduciary duty, provided the exclusion is not so wide as to amount to excluding fraud. The decision means that professional trustees can rely on exclusion clauses to limit their exposure to claims, but they remain personally liable if they act dishonestly.
In an exam answer, be precise about which remedy applies. Restoration is about putting the trust fund back in position. Account of profits strips the trustee of gains. Equitable compensation makes good losses. These are separate remedies and the court may apply one, two, or all three depending on the circumstances.
The trust instrument may contain provisions excluding or limiting the liability of trustees for breaches of trust. Following Armitage v Nurse, such clauses are valid except insofar as they purport to exclude liability for fraud. A well-drafted exclusion clause will cover negligence, inadvertent breach, and errors of judgment, while preserving liability for dishonest conduct. Trustees should always check the trust instrument for any such provisions before acting.
Where it appears to the court that a trustee has acted honestly and reasonably, and ought fairly to be excused for the breach of trust, the court may relieve the trustee either wholly or partly from personal liability for the breach. This is a discretionary jurisdiction and the court will consider all the circumstances, including the trustee's experience, the nature of the breach, and whether the trustee sought advice.
Beneficiaries with full capacity and full knowledge of the relevant facts can ratify a breach of trust and release the trustee from liability. This requires that all beneficiaries consent (or at least all beneficiaries who are sui juris and whose interests are affected). The consent must be fully informed — the beneficiaries must understand the nature and consequences of the breach. Once beneficiaries have ratified the breach, they cannot subsequently bring a claim against the trustee in respect of it.
Trustees have a right to be indemnified out of the trust assets for expenses properly incurred in the administration of the trust. This means that if a trustee incurs costs or liabilities in properly carrying out their duties, they can reimburse themselves from the trust fund. The right of indemnity is a first charge on the trust assets and takes priority over the beneficiaries' interests. However, the indemnity is only available for properly incurred expenses — not for losses caused by breach of trust.
The Trustee Act 2000 provides a statutory framework for trustees' investment powers and the standard of care expected of them. Section 1 imposes a statutory duty of care on trustees when exercising any function. The duty of care is defined by reference to the ordinary prudent person of business. Section 2 provides that trustees are not liable for losses arising from the decisions of their agents, provided the appointment was made in good faith. These statutory protections help to encourage competent persons to act as trustees without excessive fear of personal liability.
Do not state that a trustee "will be" relieved under s.61 Trustee Act 1925. The court has discretion and will only grant relief where the trustee acted honestly and reasonably. You must apply the test to the facts of the question and explain why relief should or should not be granted.
No action to recover trust property or in respect of any breach of trust shall be brought after the expiration of six years from the date on which the right of action accrued. For breach of trust, the right of action generally accrues on the date of the breach.
The limitation period starts from when the beneficiary knew or ought to have known about the breach. Where the breach was concealed or latent (not readily apparent), the limitation period does not begin until the beneficiary discovers the breach or could with reasonable diligence have discovered it. This is particularly relevant where a trustee has failed to invest trust property or has made improper investments, as the beneficiary may not discover the breach until they seek an account.
Where the breach of trust involves fraud, there is no limitation period. The right of action does not accrue until the beneficiary has discovered the fraud or could with reasonable diligence have discovered it. This means that a beneficiary can bring a claim for fraudulent breach of trust no matter how many years have passed, provided the claim is brought within six years of discovery. This is an important exception and reflects the seriousness of fraudulent conduct by trustees.
In an exam answer, always address the limitation period when a breach of trust is alleged. State the general six-year rule under s.21 Limitation Act 1980, consider when the right of action accrued, and address whether the breach was concealed or involved fraud. If the facts suggest the breach was discovered late, explain how the discovery rule affects the limitation period.
A trustee has a right to be indemnified out of the trust assets for all liabilities and expenses properly incurred in the course of administering the trust. This includes legal costs, professional fees, tax liabilities, and other expenses that are necessarily incurred in performing the trustee's duties. The right of indemnity arises by operation of law and does not depend on any provision in the trust instrument.
A trustee has a lien over trust property for unpaid expenses and liabilities properly incurred. This means that if a trustee has advanced money or incurred costs on behalf of the trust, they can retain trust property until those expenses are reimbursed. The lien is a proprietary right — it attaches to the trust property itself, not merely to the trustee's personal claim against the trust fund. This gives the trustee a degree of security for their outgoings.
A trustee who commits a breach of trust loses their right to indemnity in respect of that breach. This is a critical point: if a trustee improperly invests trust money and the investment fails, the trustee cannot claim to be indemnified from the remaining trust assets for the loss. The trustee bears the loss personally.
Trustees are personally liable for contracts they enter into on behalf of the trust. This is because a trust is not a separate legal entity — unlike a company, it cannot sue or be sued in its own name. When a trustee signs a contract (for example, for the purchase or sale of trust property, or for the employment of professionals), the trustee is contracting personally and bears personal liability under that contract.
| Feature | Personal Liability | Trust Liability |
|---|---|---|
| Who is liable? | The trustee(s) personally | The trust fund (via indemnity) |
| Can the third party recover from the trust? | No, unless trustee has right of indemnity | Yes, from trust assets |
| What if trust assets are insufficient? | Trustee bears the shortfall personally | N/A — loss falls on trustee |
| Can the trustee limit exposure? | Only via exclusion clause in trust instrument | By proper administration |
| Nature of the liability | Contractual or tortious | Equitable — right of indemnity |
If a trustee properly enters into a contract on behalf of the trust (within their powers and in the course of proper administration), they have a right to be indemnified from the trust assets. This means that although the trustee is personally liable to the third party, they can recover the amount from the trust fund. The trustee should ensure that contracts are entered into properly and that they have the authority to bind the trust, so that the right of indemnity is preserved.
If the trust assets are insufficient to meet the trustee's liabilities, the trustee bears the shortfall personally. This is a significant risk, particularly where trustees enter into substantial obligations on behalf of the trust. For this reason, professional trustees often require personal guarantees from beneficiaries or take out trustee indemnity insurance to protect themselves against this risk. Trustees should always consider whether the trust can afford the obligations they are undertaking.
On the application of the trustee or guardian of a minor who is entitled to any property held on trust, the court may, if it thinks fit, approve any arrangement varying or revoking the trust, or the trusts thereof, for the benefit of the minor. This power allows the court to alter the terms of a trust where it is in the best interests of a minor beneficiary, even if the variation would not otherwise be possible.
If all adult beneficiaries with full capacity and full knowledge consent to a variation of the trust, the trustees may vary the terms of the trust in accordance with the beneficiaries' wishes. This is because the beneficiaries, as the equitable owners of the trust property, can collectively direct how the trust is to be administered. The consent must be unanimous among all adult beneficiaries whose interests are affected by the proposed variation. Where a beneficiary is a minor or lacks capacity, the court's approval under s.64 will be needed.
In addition to the statutory power under s.64, the court has an inherent jurisdiction to approve variations of trust on behalf of minors, unborn beneficiaries, and persons lacking capacity. This jurisdiction was confirmed in Re Druce, where the court approved a variation to enable the sale of trust property. The inherent jurisdiction is broader than the statutory power and is not limited to arrangements proposed by trustees or guardians. The court will exercise this jurisdiction where it is satisfied that the variation is in the best interests of the beneficiaries as a whole.
The court will only approve a variation of trust where it is satisfied that the variation is in the best interests of the beneficiaries as a whole. The court will consider the nature and purpose of the trust, the terms of the proposed variation, the views of the adult beneficiaries, and the likely impact on each class of beneficiary. The court acts as a protective jurisdiction, ensuring that the interests of those who cannot protect themselves (minors, unborn beneficiaries, and persons lacking capacity) are safeguarded. The burden is on the person seeking the variation to show that it is desirable and beneficial.
Identify the need for variation — e.g., change in circumstances, tax planning, or beneficiary needs
Determine whether all adult beneficiaries can consent — if so, variation may be possible without court involvement
If minors, unborn, or incapacitated beneficiaries are affected, consider s.64 Trustee Act 1925 or inherent jurisdiction
Prepare evidence showing the variation is in the best interests of the beneficiaries as a whole
Apply to the court, providing full details of the proposed variation and its impact on all classes of beneficiary
The court considers the application and approves the variation if satisfied it is beneficial
When answering a question on variation of trusts, first identify which beneficiaries are affected and whether they are adults with full capacity. If all affected beneficiaries are adults who can consent, explain that the trust can be varied by consent. If minors, unborn, or incapacitated beneficiaries are involved, address the court's statutory and inherent jurisdiction and explain the test the court applies.