Trustees' liability for breach: proprietary claims - Situations with no change in trust property

The answers, solutions, explanations, and written content provided on this page represent PastPaperHero's interpretation of academic material and potential responses to given questions. These are not guaranteed to be the only correct or definitive answers or explanations. Alternative valid responses, interpretations, or approaches may exist. If you believe any content is incorrect, outdated, or could be improved, please get in touch with us and we will review and make necessary amendments if we deem it appropriate. As per our terms and conditions, PastPaperHero shall not be held liable or responsible for any consequences arising from the use of the content on this page. This includes, but is not limited to, incorrect answers in assignments, exams, or any form of testing administered by educational institutions or examination boards, as well as any misunderstandings or misapplications of concepts explained in our written content. Users are responsible for verifying that the methods, procedures, and explanations presented align with those taught in their respective educational settings and with current academic standards. While we strive to provide high-quality, accurate, and up-to-date content, PastPaperHero does not guarantee the completeness or accuracy of our written explanations, nor any specific outcomes in academic understanding or testing, whether formal or informal.

Overview

Understanding trustees' liability for breaches, especially when trust property stays unaltered, is vital for excelling in trust law and the SQE1 FLK2 exam. This article explores proprietary claims against trustees, highlighting legal principles, key cases, and practical applications in trust management. By studying these concepts, candidates will better understand fiduciary duties and remedies available to beneficiaries, preparing for both exams and real-world legal practice.

Fiduciary Duty and Breach of Trust

The Nature of Fiduciary Duties

Fiduciary duties are central to trustee obligations and a key topic in the SQE1 FLK2 exam. These include:

  1. Duty of loyalty
  2. Duty to avoid conflicts of interest
  3. Duty not to profit from the trust
  4. Duty to act in beneficiaries' best interests

A breach occurs when trustees fail to meet these obligations, even if trust property is unaffected.

Identifying Breaches in Unchanged Property Scenarios

Trustees can breach duties without changing trust property through:

  • Misusing confidential information
  • Failing to disclose necessary facts
  • Not acting impartially among beneficiaries
  • Exploiting opportunities from their position

Example: A trustee learns of a lucrative investment through their role but uses personal assets instead of trust funds to invest. Despite no change to trust property, this is a fiduciary breach.

Proprietary Claims: Legal Foundations and Principles

Proprietary claims let beneficiaries assert rights over specific property or its value if trustees breach duties, even with unchanged trust property.

Key Principles of Proprietary Claims

  1. Equitable Ownership: Beneficiaries have an equitable interest in trust property.
  2. Tracing: Allows beneficiaries to follow and recover trust property or its proceeds.
  3. No Change of Position Defence: Proprietary claims are generally immune to this defence.

Distinguishing Proprietary and Personal Claims

Understanding this distinction is critical for SQE1 FLK2 candidates:

Proprietary ClaimsPersonal Claims
Target specific property or its valueSeek compensation from trustee personally
Not subject to statutory limitation periodsSubject to limitation periods (typically 6 years)
Take priority in insolvencyRank as unsecured claims in insolvency
Based on equitable ownershipBased on breach of duty

Case Law Analysis: Boardman v Phipps and Beyond

Boardman v Phipps [1967] 2 AC 46

This landmark case demonstrates proprietary claims when trust property remains unchanged:

  • Facts: Boardman, a solicitor, and Tom Phipps, a beneficiary, acquired shares where the trust had a minority stake.
  • Issue: Whether profits from this acquisition should be held for the beneficiaries.
  • Holding: The House of Lords required Boardman and Phipps to account for profits, despite no trust loss.
  • Principle: Opportunities secured through a fiduciary role belong to the trust, regardless of trustee action.

Subsequent Developments

Recent cases have refined these principles:

  1. FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45: Bribes and secret commissions are held on constructive trust for the principal.
  2. Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908: Liability covers profits from opportunities gained through a fiduciary position.

Remedies for Breach in Unchanged Property Scenarios

Several remedies exist when breaches occur without altering trust property:

1. Account of Profits

  • Trustees must return profits made from the breach.
  • Relevant where trustees misuse opportunities or information.
  • Involves detailed accounting of profits related to the breach.

2. Constructive Trust

  • Imposes trustee obligations on the wrongdoer.
  • Profits or property held on trust for beneficiaries.
  • Provides priority in insolvency and is free from limitation periods.

3. Equitable Compensation

  • Restores the trust to its potential position but for the breach.
  • Includes lost opportunities' value.
  • Applicable even without direct financial loss.

Practical Applications and Modern Contexts

Corporate Trusteeships

In modern business, corporate trustees face specific challenges:

  • Implementing barriers to stop confidential information misuse.
  • Ensuring trust-related opportunities benefit the trust, not the company.

Example: A bank, as a corporate trustee, learns of a merger. Using this information for its investment arm breaches duties, even if the trust isn't affected.

Digital Assets and Information

Digital scenarios present new breach potentials:

  • Using big data analytics for personal gain.
  • Investing in cryptocurrencies with trust-related knowledge.

Defenses and Mitigating Factors

Trustees may defend against claims by:

  1. Authorisation: Showing prior approval from beneficiaries or the trust.
  2. Good Faith: Actions believed to be in the trust's best interests.
  3. De Minimis: Arguing the benefit was too minor for a claim.

Success in these defenses is limited, focusing on unauthorized benefits over intentions in proprietary claims.

Limitation Periods

Limitation periods are key for legal practice and SQE1 FLK2 preparation:

  • Personal Claims: Usually have a six-year window from the breach date.
  • Proprietary Claims: No statutory limitation, allowing claims if property or its value remains identifiable long after the breach.

Distinguishing between claims is crucial when dealing with older breaches, to determine claim viability.

Conclusion

A solid command of proprietary claims and trustees' liability, especially in unchanged property scenarios, is essential for SQE1 FLK2 success and future legal practice. This area shows the wide reach of fiduciary duties and protections for beneficiaries. By understanding the principles, case law, and practical applications discussed here, candidates will be well-prepared to handle the complexities of trust law.

Key Points:

  1. Breaches can occur without affecting trust property.
  2. Proprietary claims enable recovery of unauthorized benefits.
  3. Boardman v Phipps established essential principles for these claims.
  4. Remedies include account of profits, constructive trusts, and equitable compensation.
  5. Modern contexts introduce new challenges.
  6. Limitation periods differ between personal and proprietary claims.