Breach of trust

Q7) Breach of Trust “Auctor in rem suam”

Trusts are in a fiduciary relationship both to the truster and to the beneficiaries. There is a requirement for the trustees clearly separate their personal interests from the interests of the trust. They must avoid placing themselves in a position where two interests conflict. This puts trustees in a strong position as it makes it relatively easy to commit fraud. Therefore to prevent this, the law precluded a trustee from being Auctor in rem suam.

Trustee must act in the best interests of the beneficiaries personal considerations, if allowed to interfere, would clash with this fiduciary capacity. The trust is entitled always to independent advice. Trustees have knowledge of trust affairs which 3rd parties dealing with at arm’s length would not have and it would be regarded as unfair if they used this knowledge for their own benefit as seen in the case of Hamilton v Wright 1842. The rule of a trustee being Auctor in rem suam is strictly applied. It’s irrelevant whether a transaction is perfectly fair or if the trust estate would gain a benefit and suffer no loss. The trustee would be in breach and the transaction would be voidable. Any profit made would have to be paid back to the trust estate. Transaction voidable at instance of beneficiaries or co-trustee or judicial factor appointed by court.

There are certain exemptions of this principle. A trustee may act as Auctor in rem suam when it is expressly sanctioned by the truster who has foreseen the conflict of interests. This was illustrated in the Buckner v Jopps Trs 1887 case. Section 32 of the Trust Act states to still act honestly and reasonably.

A trustee must not transact with the trust estate, trustee may not borrow from trust estate, may not sell property to trust and may not buy property from trust. If a trustee agrees with a 3rd party that the latter will purchas the trust property and then sell it on to him, it would be possible to seek interdict to prevent the transfer to the trustee or have it reduced if it had taken place as illustrated in the case of Clark v Clarke Exrx 1989 offer received from third party for farm this qualified acceptance issued purchaser failed to pay price missives assigned to widow (also trustee). Held that this was a clear conflict of interest granted reduction of assignation of contractual rights .

Must not use position to obtain personal advantage Inglis v Inglis in this case, the son was executor of deceased farmer. The farm leased. Son nominated himself as tenant under 1964 Act, then surrendered large part of leased subjects on receipt of compensation. Held he was in breach

A trustee must act with proper motivation as it is part of his fiduciary duties. He must not be influenced by personal benefits such as moral, ethical or cultural. Trustee may not borrow from trust estate may not sell property to trust may not buy property from trust. Magistrates of Aberdeen v Uni of Aberdeen. Trustees sold to themselves, later bought salmon fishing’s – when transaction reduced fishing’s went as well trustee may transact with beneficiary provided beneficiary is fully informed trustee then must act fairly.

Trustees must not act from improper motives duty to invest and review investments should not be abused. As illustrated in the Cowan v Scargill where the trustee attempted to change assets held in miners’ pension fund to show solidarity with striking miners. Held improper motive – breach of trust

Office of trustee is gratuitous. The trustees may not remunerate themselves. It may be overridden by express provision in deed. Problems occur in relation to indirect remuneration such as commission or director’s fees. Directors’ fees. This is a more difficult issue. Norrie asserts that where appointment arises solely because of ownership of shares by trust in a private company then fees have to be accounted for normally appointed as director because of business acumen and not merely because trustee. Solutions to problem was to confer power in trust deed as seen in the case of Johnston v MacFarlane. The power in trust deed to sell to beneficiary expressly conferred. Held this conferred no power to sell to a beneficiary who was also trustee. Martin v Edinburgh DC In this case, Trustees sought to divest trust of assets in South Africa as they were opposed to apartheid. Held had to take professional advice, had to consider interests of beneficiaries own political beliefs must be ignored.

Range of breaches; fraud and embezzlement, unintentional negligence, omission or delay.

Trustees are supposed to act as reasonably prudent men of business. No excuse to say that used same standards in trust as they did in personal affairs. If standards in personal affairs are careless in other words standard is objective and not subjective.

Interdict can only be used to prevent a breach from happening or continuing to happen it cannot be used to compel performance of duty and cannot be used in respect of a single breach which has already occurred.

Beneficiary instigated or consented to breach Trusts(S) Act 1921 s31. Third party protection is under Trusts (S) Act 1961 s2. Knox v Mackinnon, In this case deceased left life rent to widow and fee to children son took over father’s business -£25000 paid £13000 approached trustees for loan offered security over life policy for £500 Son became bankrupt action raised against trustees for breach of trust, trustees sought to rely on immunity clause in trust deed. Held did not apply.

SLC proposed reform as current law too strict. Propose to restrict liability to bad faith actions. Lack of due care. In addition to breaches within duties it would operate where the original act was ultra vires. Proposed standard: Man of ordinary prudence would adopt in managing the funds of another. Works when there is a body of jurisprudence with this standard