First-class Oxford trust law notes
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Key Point
- Where a trustee engages in self-dealing (i.e. dealing as trustee with themselves in their personal capacity) in breach of his fiduciary duty, the transaction is rendered voidable and the beneficiary can rescind the contract and seek an account of profits
- Where a trustee makes an unauthorised investment with trust money, the beneficiaries can choose to adopt the investment and hold it as trust property with unanimous approval. Otherwise, the investment will be deemed the property of the trustee making the unauthorised investment and he will be liable as a debtor to the trust for the purchase price
Facts
- Douglas George Wright (W) was one of the trustees for his father’s testamentary estate
- W had an option to purchase the properties held under the trust, which had been assigned to him by another trustee
- W resigned his trusteeship, but exercised the option to purchase before his resignation
- In all, W purchased two properties from the trust:
- Surrey Hills
- Windmere, including land known as Chapman’s Block which was purchased by the trustees without authority
- Mrs. Morgan (M), one of the daughters of the testator and a beneficiary, brought an action to set aside the sale of and for an account of profits to be made to the trust estate
- Appeal was made to the Privy Council from the Court of Appeal of New Zealand
Held (Privy Council)
- The sale is rescinded and account of profits is to be made
- The sale had be voidable due to conflict of duty and interest by W as trustee
- However, account of profits will not have to be made for the sale of Chapman’s Block as the beneficiaries did not unanimously adopt it as an investment and refund of the purchase price had been made to the trust
Viscount Dunedin
Self-dealing rule
- ‘…a contract between the trustees and himself as a trustee, and that is what the law will not allow. It would be profitless to quote the many cases which have arisen to illustrate the doctrine. They may all be referred to the same root idea, that equity will not allow a person, who is in a position of trust, to carry out a transaction where there is a conflict between his duty and his interest’: p.797
Current case
- ‘[T]he position of Douglas as a trustee and as the assignee of the option to purchase was one which would involve a conflict of duty and interest’: p.798
- The circumstances which led to a conflict of interest for W was described:
- ‘The best moment for the trust was the moment when prices generally were high. The best moment for a purchaser was when prices generally were low, and such prices would be naturally reflected in the value fixed by the valuers. So also as to the terms of payment, the best term for the trust was cash down; the best term for the purchaser was some easier arrangement. Their Lordships do not think it necessary to go into the actual terms of payment here, although it is perhaps startling to find that the whole transaction was carried out by the payment in cash of quite an infinitesimal sum.’: p.798
- ‘Their Lordships, therefore, come to the conclusion that this case falls within the general rule, and that the sale being, as carried out, a sale of trust property to a trustee, cannot be allowed to stand’: p.798
Claiming (in relation to Windmere)
- ‘This is not a case of improper employment by the trustees of trust funds for the purposes of their own business and speculation. It is the case of an improper investment. Now, if a trustee has made an improper investment, the law is well settled. The cestuis que trustent [(beneficiary)] as a whole have a right, if they choose, to adopt the investment and to hold it as trust property.’: p. 799A
- ‘But if there is not unanimity then it is not trust property, but the trustee who has made it must keep the investment himself. He is debtor to the trust for the money which has been applied in its purchase.’: p. 799A
- ‘Now, it is admitted that there has been no unanimity on the beneficiaries’ part to consider Chapman’s Block as trust property. Further, it is admitted that the money used in the purchase of Chapman’s Block has been refunded to the trust. The result is that the inquiry directed by the Court of Appeal must exclude inquiry as to Chapman’s Block.’: p. 799A
Commentary
- Although in this case Lord Dunedin noted that the sale of the properties was made at undervalue, it is not necessary for the beneficiaries seeking to set aside a transaction for self-dealing by the trustee to prove that the transaction had been unfair, proving self-dealing per se sufficient: Tito v Waddell (No.2) [1977] Ch 106 at 241