Is the cost of breach by a trustee always the restoration of the trust fund?

Claimants are often keen to allege breach of trust since, if established, they are entitled to have the trust fund reconstituted. Arguments as to remoteness or foreseeability are not available to the trustee to try and reduce the quantum of the claim. Compensation is due even if the loss in question could not have been reasonably foreseen.

However, that does not mean that where there is wrong doing by a trustee no defence can ever be raised. This article considers the important distinction between breaches of trust and breaches of a trustee’s duty of care.

The Principles

A trustee will be in breach of trust if he acts in a way that is not authorised either by the trust document or by law. For example, if a trustee:
• Breaches a fiduciary duty such as the duty not to profit from the trust
• Invests the trust fund in a way not permitted by his powers of investment
• Distributes assets to a beneficiary who is not entitled to them under the terms of the trust

In contrast, a trustee may not be in breach of trust, but may be in breach of his common law or statutory duty of care, if he makes an investment decision without seeking appropriate advice or fails to monitor the performance of the trust’s investments.

In the latter examples, although the breach was committed by a fiduciary, it is not a breach of fiduciary duty. The trustee’s liability will be determined by the usual common law rules on causation, remoteness and quantification of damages.

An illustration

The implications of this are demonstrated in the case of Bank of New Zealand v New Zealand Guardian Trust Co Ltd, in which it was alleged there had been breaches of both the defendant trustee’s fiduciary duties and duties of skill and care.

The defendant was the trustee of a debenture deed, which arranged advances to a company by a bank pursuant to the debenture.

Under the debenture deed, the trustee had an obligation to use reasonable diligence to detect breaches of the debenture by the company. The trustee failed to detect advances made to the company’s subsidiaries in breach of the debenture. Had these breaches been detected, the bank would have been able to exit the debenture and get its money back. However, by the time the breaches were discovered the company was heading for insolvency. The failure of the company was not attributable to the breach of the debenture.

The court found that there had been no breach of trust or fiduciary duty.

However, there had been a failure to exercise reasonable skill and care. The common law tests of remoteness and foreseeability applied and the trustee was not liable, because the losses arose from an independent cause, ie from the company’s failure, which occurred for reasons unrelated to the trustee’s failure to detect the advances.

Our conclusions

This clearly illustrates the potential significance of common law arguments, which are not available where a trustee has acted in breach of trust.

It can be seen that it is critically important to identify the precise nature of any alleged breach. A failure to do so may well mean that arguments that are legitimately available to a trustee are otherwise lost.