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Trust disputes - interesting decisions from 2016

Part 1

Court decisions are very useful in reinforcing knowledge and understanding, especially in the area of trust law. Recently we have looked at some cases involving trustee mistakes and rectification. As it happens, in 2016 there were quite a few very interesting trust cases which deserve proper consideration. This month we will look at two of these - the first concerning trustees' duties when investing trust funds, and the second dealing with the more fundamental question of whether a trust in fact existed or not.

Trustees' duties when investing trust funds 

In the case of Daniel and Another v Tee and Others [2016] EWHC 1538 (Ch), whilst the beneficiaries failed in their claim for compensation for losses suffered by the trust, the Court was critical of the trustees' approach when devising an investment strategy.

This was a case of two beneficiaries of a Will trust suing the trustees of the trust for losses resulting from allegedly bad investment decisions.

The facts of the case were as follows.  Mr Daniel senior died in 1999 and under his Will a trust was created for his two children, then aged 13 and 16, with the trustees being Mr Daniel's solicitors.  The trustees had no personal expertise in managing investments and during the years 2000 to 2002 relied on the advice of an IFA.  Based on that advice the trustees decided to invest in a range of equities linked to the technology sector with around 80% of the fund being in those equities.  Needless to say the funds performed poorly and suffered heavy losses in 2001. 

Many years later the beneficiaries claimed compensation of over £1.4 million for breach of trust, claiming that the trustees were at fault in failing to take appropriate care to formulate and implement a, suitable investment strategy and to review the investments made and in relying on the IFA's advice and recommendations which in fact turned out to be poor advice and costly to follow. 

The trustees denied the claims and relied on section 61 of the Trustee Act 1925 which gives the Court discretion to absolve trustees in situations where the trustees have acted reasonably and honestly. 

On the face of it the trustees, having obtained investment advice from an IFA, clearly acted reasonably and, indeed, in accordance with their duty under the Trustee Act 2000.  Nevertheless, the Court held that the decision to opt for an investment portfolio comprising of 80% equities was "one which no trustee could have reasonably made whilst complying with his duty to act prudently". 

However, the Court agreed that the trustees had acted to the best of their abilities and in reliance of what they reasonably believed to be competent professional advice.  As such, had they been found liable for breach of trust, then most likely the Court would have granted relief under section 61 of the Trustee Act 1925.  In the event, the Court decided that whilst certain breaches may have occurred, the claimants had failed to prove that those breaches had resulted in any losses which would otherwise not have occurred.  Therefore the beneficiaries' claim for compensation was rejected.

Comment

The case illustrates the point that if the trustees can show they have sought appropriate professional advice then they are very unlikely to be found liable for any breach of trust. Nevertheless, it is important to note the judge's criticism of the trustees' approach to trust investments.  Specifically, the judge stated that the trustees "adopted an approach which was less balanced and diversified" than, in his opinion, many trustees would have thought appropriate.

This confirms that even where the trustees instruct a professional, such as an IFA, to advise them on investments, this does not absolve them from taking active part in making decisions, bearing in mind the objectives and risk profile of the trust.  Whilst trustees will generally not be and are not expected to be experts in investments, they do need to ensure that investments are reviewed periodically bearing in mind all the relevant factors.

It may also be useful at this stage to consider fully the above-mentioned section 61 of the Trustee Act 1925.  Under this provision, the Court has discretion as to whether or not it grants relief. Before it can exercise its discretion, it must be satisfied:

  1. that the trustee in question acted both reasonably and honestly, and
  2. that it would be fair to excuse the trustee, having regard to all the circumstances of the case.

The burden of proving these points is on the trustee seeking relief.

In order to show reasonableness, a trustee will, in general, need to demonstrate that they treated the trust property in a way that a prudent man of business would deal with his own property. Lay people, acting as unpaid trustees, are more likely to find themselves excused under this provision than professional, remunerated trustees. However, whether the Court exercises its discretion ultimately depends on the facts of each case.

Proving the existence of a trust

In the case of Singha v Heer (2016) EWCA Civ 424 the Court of Appeal decided that letters written between former business partners did not amount to declarations of trust.

It is  well known that to have a valid trust there must be three certainties: certain beneficiaries, certain property and certain intention.  Whilst proving which property is to be held in trust and who the beneficiaries are may be relatively straightforward, proving the intention, i.e. a valid creation of a trust, is not necessarily so, unless there is proper, preferably written, evidence of the same.

The case mentioned above concerned a dispute between former business partners who, some years earlier, formed a partnership for the acquisition of properties.  One of the properties was registered in the sole name of Mr Singha (Mr S) and became the matrimonial home of Mr and Mrs S.  Mr Heer (Mr H) claimed that he had provided £45,000 to Mr S towards the purchase of the property to be repaid within 5 years and this was not disputed.  However, he also claimed that the agreement was that, whilst the legal ownership will be in Mr S' name only, Mr H was the beneficial owner until such time as the £45,000 loan was repaid in full. 

The loan was not repaid and Mr S and Mr H fell out in due course and dissolved their partnership.  However, nothing was done at that time in relation to the property in question.  In 2010 Mr and Mrs S were divorcing and Mr S was ordered to transfer the property to his wife so she could sell it and take £125,000 from the proceeds.  At this time Mr H asserted that he had a beneficial interest in 100% of the property.  Mrs S asked the Court to determine whether Mr H had any beneficial interest in the property.  Mr H produced three letters written to him by Mr S between 2005 and 2009 which referred to Mr S "holding the property on trust" for Mr H.  Mr H claimed that the letters collectively amounted to an express declaration of trust in favour of Mr H.  The County Court in the first instance disagreed with Mr H and the case went to the Court of Appeal, which in due course ruled that indeed the letters were not sufficient to amount to a full declaration of trust.

Interestingly, the Judge said that just because the word "trust" had been used, this did not mean that Mr S had intended to use it in a legal sense.  It was important to look at the letters "as a whole" and the Court found no reason why the letters should be read in a technical sense, carrying all the legal consequences of a valid trust.  The outcome was that Mr H was entitled to a 50% interest in the property, which is what he was offered initially.

Comment

It should really go without saying that, especially in matters involving the purchase of property, it is essential that the intentions of the parties, where there are more than one, about how the property is owned between them, should be settled in very clear terms at the outset.  This is especially important where the owners' interests are intended to be different from the position reflected by the legal title.  Although this case related to business partners, the same principles apply to any joint purchasers, other than married couples, in relation to any property acquisition.  Even where the individuals concerned get on very well (and Mr S and Mr H were in fact childhood friends), given the importance of any property purchase it should always be recommended that each individual takes separate independent advice and that the terms of the ownership are clearly set out in writing and filed with the Land Registry.

Next month we will look at some more cases, this time involving a settlor's mistake as to the consequences of a transfer of an asset to a trust and the beneficiaries' rights to information about the trust.