Breach of trust and equitable compensation

When a trustee breaches trust, the beneficiary may claim equitable compensation to restore the trust fund to the position it would have been in but for the breach. This remedy operates on a fundamentally different basis from common law damages: it is restorative rather than compensatory, focusing on making good the trust fund rather than compensating for loss suffered. The remedy reflects equity's concern with enforcing the trustee's duty of undivided loyalty and ensuring beneficiaries receive what they are entitled to under the trust. Unlike damages, equitable compensation is not constrained by common law principles of remoteness or foreseeability—the trustee must restore the trust fund regardless of whether the loss was foreseeable.

Target Holdings v Redferns [1996] AC 421: Solicitor-trustees released mortgage funds before obtaining good security; House of Lords held that while equitable compensation aims to restore the trust fund, causation still matters—the breach must have caused the loss claimed. Establishes that equitable compensation requires a causal connection between breach and loss.

AIB Group v Mark Redler [2014] UKSC 58: Supreme Court refined Target Holdings, confirming that equitable compensation depends on proving the trustee's breach caused the loss, rejecting any suggestion of strict liability for all losses following breach. Critical for understanding modern limits on equitable compensation.

Armitage v Nurse [1998] Ch 241: Exemption clause relieving trustees from liability except for actual fraud held valid; establishes that trustees cannot exclude liability for dishonesty but can exclude liability for negligence, even gross negligence. Essential for understanding scope of trustee exemption clauses.

Bartlett v Barclays Bank Trust Co Ltd [1980] Ch 515: Professional trustee failed to supervise company in which trust held controlling shareholding; held liable for losses from speculative development. Establishes heightened duty of care for professional trustees and active supervision requirements.

Courts apply a three-stage analysis: (1) Identify the breach—was there unauthorised investment, failure to supervise, conflict of interest, or other violation of fiduciary duty? (2) Establish causation—would the loss have occurred but for the breach? Post-AIB Group, claimant must prove factual causation between breach and loss. (3) Quantify compensation—calculate what sum restores the trust to its pre-breach position, including lost profits or gains the trust would have made. For unauthorised investments, trustees must restore the full amount misapplied plus interest. For breaches involving conflicts of interest, stricter rules apply—trustees may be liable to account for all profits made, regardless of whether the trust suffered loss (following Brickenden principles).

Students wrongly assume all breaches trigger automatic liability for any subsequent loss—but Target Holdings requires causal connection. Another error: applying common law damages principles like remoteness or contributory negligence, which don't apply to equitable compensation. Many conflate compensation claims with account of profits—these are distinct remedies with different requirements. Watch for exemption clauses: remember Armitage v Nurse permits exclusion of negligence liability but never dishonesty.