22.4 Breach of Trust, Tracing and Equitable Remedies

When trustees step outside their duties or powers, FLK2 asks four liability questions and then a remedies question: was there a breach of trust; what is the measure of liability; what protection exists; what is the limitation period; and what is the nature of equitable remedies, including tracing in equity. This independent OpenExamPrep section is written for those headings in the SRA SQE1 FLK2 Trusts Law list from 1 September 2026. It is not official SRA material. The fiduciary rules that often generate the breach are in 22.1 Fiduciary Obligations and Liability of Strangers. How trustees are appointed is in 22.2 Trustees: Appointment, Retirement and Removal, and how they should invest and advance is in 22.3 Trustees’ Duties: Care, Investment and Advancement.

Breach of trust

A breach of trust is any act or omission by a trustee that falls short of their duties or exceeds their powers. Examples: paying the wrong person; investing without applying the standard investment criteria; selling to themselves; taking an unauthorized profit; failing to safeguard title; distributing in the face of a known claim. Good faith is not a defence to the existence of a breach, though it is central to relief under s.61.

Liability among trustees is joint and several. A passive trustee who leaves decisions to a dominant co-trustee is still liable (Bahin v Hughes (1886) 31 Ch D 390). Contribution between trustees is available under the Civil Liability (Contribution) Act 1978. If a beneficiary instigated or requested the breach, TA 1925 s.62 lets the court impound that beneficiary's interest to indemnify the trustee.

Measure of liability

The trustee's obligation is to put the trust fund (or the beneficiary) back in the position it would have been in if the trustee had performed. Traditionally that was described as reconstituting the fund. After Target Holdings Ltd v Redferns [1996] AC 421 and AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] UKSC 58, the Supreme Court has insisted on a causal measure of equitable compensation, assessed with hindsight at the date of trial. In AIB, solicitors paid away mortgage advance money in breach of a bare trust before the lender had the first charge it had stipulated. The transaction still completed, but as a second charge. The lender recovered the difference between the security it should have had and the security it got — not the whole sum wrongly paid away. If the same loss would have occurred even if the trustee had performed, compensation for that loss is not awarded.

For a traditional family trust the same idea is usually expressed as restoring the misapplied money plus interest, or bringing an unauthorized investment into the account. Beneficiaries may elect to adopt an unauthorized investment if it has risen, or to reject it and demand restoration of the purchase money if it has fallen. Account of profits is a different, gain-based measure: Boardman profits are stripped even if the trust suffered no loss. Do not mix the two. Nestle underperformance still requires proof that a reasonable trustee would not have held the portfolio; the court will not reconstitute a notional FTSE tracker simply because one was available.

Interest may be added. Where the trustee has used the money in trade or has been fraudulent, a higher rate or compound interest can be awarded; otherwise a fair simple rate on the restored sum is typical.

Protection of trustees

Four protections appear constantly in FLK2-style facts.

1. Exemption clauses. The instrument may exclude liability for negligence, including in many cases gross negligence. It cannot exclude the irreducible core of honesty and good faith (Armitage v Nurse [1998] Ch 241). A clause that purports to excuse actual fraud or dishonesty is void to that extent. The statutory duty of care in Trustee Act 2000 can be modified by the instrument (Schedule 1 paragraph 7). A professional trustee who drafts their own wide clause, without the settlor understanding it, invites both construction against them and SRA scrutiny.

2. TA 1925 s.61. The court may relieve a trustee wholly or partly from personal liability if they acted honestly and reasonably, and ought fairly to be excused for the breach and for not asking the court. All three elements are required. Professional trustees obtain relief less readily than unpaid family trustees (Re Pauling's Settlement Trusts [1964] Ch 303). Paying the wrong person after careful enquiries is the classic meritorious case; paying a friend without reading the will is not.

3. Beneficiary consent, release and acquiescence. An adult beneficiary with capacity who, with full knowledge of the facts and of their rights, consents to the act cannot afterwards sue in respect of their own share (Re Pauling). Acquiescence and delay overlap with laches. Consent obtained by withholding the material facts is worthless.

4. Statutory advertisement and court directions. TA 1925 s.27 lets trustees advertise in the Gazette and a local paper and then distribute having regard only to claims of which they have notice. That protects against unknown creditors and unknown beneficiaries; it does not protect against a known beneficiary who was simply unpaid. A Benjamin order permits distribution on the footing that a missing beneficiary is dead. A trustee who is in genuine doubt should seek the court's directions rather than guess.

Limitation

Limitation Act 1980 s.21 is the trusts section.

• s.21(1)(a): no limitation period for an action in respect of fraud or a fraudulent breach of trust to which the trustee was party or privy.
• s.21(1)(b): no limitation period for an action to recover from the trustee trust property, or the proceeds, still in the trustee's possession, or previously received by the trustee and converted to their use.
• s.21(3): otherwise, six years from the date the right of action accrued. For a beneficiary with a future interest, time does not run until the interest falls into possession.

Williams v Central Bank of Nigeria [2014] UKSC 10 is the stranger point. Persons liable for knowing receipt or dishonest assistance are not "trustees" within s.21(1). The six-year period in s.21(3) applies to them, subject to postponement for fraud, concealment or mistake under s.32. A true trustee who still holds the misapplied painting cannot plead six years. A dishonest solicitor who only assisted and never received it generally can, once six years (plus any s.32 extension) have passed.

Laches can still bar equitable relief where it would be unjust to allow the claim, even inside a limitation period, and it is the only time bar where s.21(1) removes limitation.

Nature of equitable remedies

Equitable remedies are discretionary. The court looks at clean hands, delay, the effect on third parties, and whether a common-law award would be adequate. For trustees the everyday orders are:

• an injunction to restrain a threatened sale or distribution;
• an order for an account;
• equitable compensation (the personal measure above);
• rescission of a self-dealing purchase;
• a declaration of constructive trust or an equitable charge over identified property;
• appointment or removal of trustees;
• specific performance or delivery up in a suitable case.

Tracing is not itself a remedy. It is a process of identification. Once value is located, the claimant chooses a proprietary claim (beneficial ownership of an unmixed substitute, a proportionate share of a mixed asset, or a charge) or falls back on the personal claims.

Tracing in equity

Following is tracking the same asset. Tracing is identifying the value in a substitute. Common law tracing cannot survive a mixed fund. Equitable tracing can, but equity historically required a fiduciary relationship to start the trail (Re Diplock [1948] Ch 465: next of kin could trace through personal representatives into the hands of innocent charities). A beneficiary of an express trust always has that fiduciary starting point.

Foskett v McKeown [2001] 1 AC 102: tracing is a matter of property, not discretion. Where trust money and the trustee's money buy an asset, the beneficiary may claim a proportionate share (capturing any rise) or an equitable charge for the amount of trust money. They will elect whichever is more valuable.

Mixing rules the exam uses:

• Re Hallett's Estate (1880) 13 Ch D 696: a trustee who mixes trust money with their own in a bank account is presumed to spend their own money first. The trust clings to the remaining balance.
• Re Oatway [1903] 2 Ch 356: if the trustee buys a surviving asset out of the mixed account and then dissipates the rest, the beneficiary can claim the surviving asset. The trustee is not allowed to say the dissipated money was the trust's.
• Roscoe v Winder [1915] 1 Ch 62: the claim against a mixed account cannot exceed the lowest intermediate balance. Later deposits are the trustee's own unless there is proof of an intention to replenish the trust.
• Two innocent funds mixed together: Clayton's Case (first in, first out) is a last resort for a current account. Barlow Clowes International Ltd v Vaughan [1992] 4 All ER 22 prefers pari passu sharing where FIFO would be unfair or arbitrary.
• An innocent volunteer is not liable personally without more, but proprietary tracing can still reach remaining value (Re Diplock), subject to change of position and to the unfairness of tracing into money spent on altering buildings.
• A bona fide purchaser for value of the legal title without notice (equity's darling) stops tracing against that asset.
• Coordinated backward tracing into an asset bought shortly before the trust money arrived is possible in a tightly connected scheme (Federal Republic of Brazil v Durant International Corpn [2015] UKPC 35). It is not a general licence to pick any earlier purchase.

A client-shaped example

Lay trustee Ceri, in breach, pays £80,000 of trust money into her own current account, which already holds £20,000. She buys a painting for £50,000, spends £40,000 on a cruise, and later pays in her salary of £15,000. The lowest intermediate balance after the cruise is £10,000, then £25,000 after salary. Hallett and Roscoe v Winder give a claim against the account of £10,000, not £25,000, unless she intended the salary to replenish the trust. Oatway lets the beneficiaries claim the painting as trust money's product. The cruise is dissipated: personal equitable compensation against Ceri remains, subject to limitation and s.61 (which will fail if she was not honest and reasonable). If she had paid £80,000 to her brother, who spent £30,000 and still holds £50,000, the personal knowing-receipt claim and the proprietary tracing claim travel together against him, on the tests in 22.1.