DA Foster

d.a.foster@qmul.ac.uk
Breach of Trust (Investment)
A trust instrument may grant trustees power to deal with trust property in a certain manner (for
example, to invest in certain shares).
In exercising this power, the trustee owes a duty to his/her beneficiaries. This duty has two limbs:
1. to act within the power granted to the trustee; and
2. to exercise their trust powers in a reasonable and prudent manner.
1. The Trustee's Duty to Invest, 1678-2000
(a) Early cases on Breach of the Duty of Care - Wilful Default
Palmer v Jones (1678) per Lord Nottingham LC
Palmer v Jones (1683) per North LK
Bromfield v Wytherly (1719) per Lord Macclesfield LC
Keech v Sandford (1726) per Lord King LC
Jackson v Jackson (1737) per Lord Hardwicke LC, reflecting on the South Seas Crisis:
'This is a mere falling of stock without the trustees' neglect...But it is well known, that during the
golden dream,1people were so infatuated as to look upon imaginary wealth as equally valuable with
so much money...But...to compel trustees to make up a deficiency, not owing to their wilful default, is
the harshest demand that can be made in a court of equity.'
(b) Acting within Investment Powers - Authorised Investments
The trustee's duty to invest was constrained by the trustee's power (or authority) to invest in certain
objects.
Trafford v Boehm (1746) per Lord Hardwicke, rejecting private stock as an authorised investment:
'I am of the opinion that the loss has not happened from a disposition of the trust money according
to the terms of the trust, but that it has been laid out in a different manner from what was intended
by the trust...The role of the court in all cases is, that if a trustee errs in the management of the trust,
and is guilty of a breach, yet if he goes out of the trust with the approbation of the cestui que trust, it
must be made good first out of the estate of the person who consented to it.'
In Howe v Earl of Dartmouth (1802) Lord Eldon LC ruled that trust funds held on Bank stock ought to
be converted into government stock. When counsel attempted to argue the contrary, Lord Eldon
exclaimed;
'I was astonished, when that was doubted, from general recollection. I had considered the practice to
be, that ... the Court would not permit property to be laid out or to remain upon such funds under a
direction to lay it out in Government securities; but would immediately order it to be converted
into...a Government security.'
1

Referring to the South Seas Mania.

DA Foster
d.a.foster@qmul.ac.uk
(c) Trustee's Duty to Act in a Reasonable Manner - A Common law duty of Prudence
The American case of Harvard v Armory (1830) rejected the doctrine of authorised investments,
replacing it with the standard of the 'prudent man.' Putnam J famously stated:
'Do what you will, the capital is at hazard...All that can be required of a trustee to invest, is, that he
shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of
prudence, discretion and intelligence manage their own affairs.'
*Speight v Gaunt (1883) adopted the prudent man rule in England, but retained the legal list.
In Re Whitely (1886) 33 ChD 347;
'The duty of a trustee is not to take such care only as a prudent man would take if he had only himself
to consider; the duty is rather to take such care as an ordinary prudent man would take if he were
minded to make an investment for the benefit of other people for whom he felt morally bound to
provide.' (per Lindley LJ, 355)
By the late Nineteenth century, however, confidence in the legal list had declined.
In Re Chapman [1896] per Lindley LJ:
'Owing to the great fall in the value of agricultural land, trustees of mortgage securities have been
placed in a position of great difficulty. To throw on trustees the loss sustained by the fall in value of
securities authorised by the trust, wilful default, which includes want of ordinary prudence on the
part of the trustee, must be proved; but it is not proved in this case.'
(d) The Emergence of Modern Portfolio Theory and the Genesis of the Trustee Act 2000
In the Twentieth century, the courts began to alter their approach, recognising that trustees ought
not only to preserve capital value, but to maximise trust income as well (by means of portfolio
theory).
The case law started the process of assimilating the new portfolio investment strategies into the
standard of the prudent man.
Trustees of the British Museum v AG [1984]: Megarry VC commented that:
'A fund that is very large may well justify a latitude of investment that would be denied for a more
modest fund; for the spread of investments possible for a larger fund may well justify the greater
risks that wider powers will permit to be taken.' (at 343).
*Nestle v National Westminster Bank (1988): Hoffman J stated that:
'modern trustees acting within their investment powers are entitled to be judged by the standards of
current portfolio theory, which emphasises the risk level of the entire portfolio rather than the risk
attaching to each investment in isolation.'

DA Foster
d.a.foster@qmul.ac.uk
(e) Trustee Act 2000
The Trustee Act 2000 S.3 implicitly reflects the modern portfolio theory:
-S. 3(1) grants a general power of investment to trustees, allowing them to 'make any kind of
investment that he could make if he were absolutely entitled to the assets of the trust.'
-S.4 sets out standard investment criteria, including: the duty to review investments; to reflect on
the suitability of individual investments and the need for diversification of investments of the trust.
2. Content of the Trustee's Duty to Invest
(a) A Low Standard of Care
Nestle v National Westminster Bank [1993] 1 WLR 1260, at 1284-1285;
'No testator...would choose this bank for the effective management of his investment...But by the
undemanding standard of prudence the bank is not shown to have committed any breach of trust
resulting in loss.'
R Thornton Ethical Investments: A Case of Disjointed Thinking (2008) 67 CLJ 369, 415-417, refers to
Nestle v NWB as granting the trustee 'de facto immunity' from suit.
(b) Ethical Investment
*Cowan v Scargill [1985] Ch 270
'In considering what investments to make trustees must put to one side their own personal interests
and views...[I]f investments of this type would be more beneficial to the beneficiaries than other
investments, the trustees must not refrain from making the investment by reason of the views that
they hold.' (Megarry VC, p. 287-8)
Harries v Church Commissioners for England [1992] 1 WLR 1241
(c) Duty of Impartiality: Balancing interests of Beneficiaries and Remaindermen
In Re Whitely (1886) 33 ChD 347;
The trustee must have regard 'not only to the interests of those who are entitled to income, but to
the interests of those who will take in future.' (per Cotton LJ , 350)
*Nestle v National Westminster Bank [1993] 1 WLR 1260;
'At times it will not be easy to decide what is an equitable balance. A life tenant may be anxious to
receive the highest possible income, whilst the remainderman will wish the real value of the trust
fund to be preserved. If the life tenant is living in penury and the remainderman already has ample
wealth, common sense suggests that a trustee should be able to take that into account, not
necessarily by seeking the highest possible income at the expense of capital but by inclining in that
direction.' (per Staughton LJ, 1279)