- Breach of Trust: Definition
- Case Study
- What Constitutes a Breach of Trust?
- What is the Required Standard of Care?
- What Action Can be Taken to Remedy a Breach of Trust?
- What are the Possible Defences of a Breach of Trust Claim?
- Setting a Trust Aside
- Time Limits for Bringing a Claim
1. Breach of Trust: Definition
A breach of trust is a violation of a law, contract, or obligation that gives an individual the right to expect honest and fair treatment from another party. Breaches of trust can range from deception about a product’s quality, quantity, or price to underpaying agreed-upon wages. When a breach of trust is made knowingly and with intent to deceive, it is considered fraud. When it involves gross negligence, it is called malicious falsehood, and when it is willful it is called perjury.
If one acts dishonestly or maliciously to breach the trust of another party by deception, he may be taken to court for his actions. There are two types of offences that constitute a breach of trust: criminal and civil. Criminal offences include fraud and criminal breach of trust under the Fraud Act 2006. One or more plaintiffs in court bring a civil action to recover damages for losses caused by a party's fraudulent conduct.
2. Case Study
Luke Wright, a 51-year-old man, was arrested in 2010 by West Yorkshire Police for insider trading. Investigations revealed that Wright had used his position to access confidential information regarding the major takeover deal of hotel group Whitbread between Whitbread and Intercontinental Hotels.
The information was then passed on to his father and brother, who were able to profit significantly from trading in the company's shares. During the investigation, it was also revealed that Wright himself sold £5 million worth of shares in Whitbread before the takeover deal became public knowledge.
Wright bid at the auction for two paintings by noted landscape artist Charles Wheatley in early 2009 when he was already involved in insider trading with his family. Wright bought the paintings for £1.2 million, which he later turned around and sold for £2.5 million at a profit of £550,000.
3. What Constitutes a Breach of Trust?
A breach of trust occurs when an individual is deceived by another party. Generally, the deceiver will be successful in obtaining personal information about the victim.
A breach of trust can take place in any number of forms. Some common ones include:
1. When the deceiver obtains important information knowingly and with intent to deceive.
This occurs in a wide variety of ways, including fraud, intimidation, false pretence, trickery or fakery, or deception. Personal information obtained this way includes any form of identification used by an individual to prove his or her identity including but not limited to passports, driver’s licenses, or IDs.
2. When the deceiver can obtain personal information using coercion or force.
This occurs when an individual has no choice but to give the deceiver information about himself or herself to gain the deceiver’s favour.
3. When an individual gives personal information which allows third-party access to another individual’s account to obtain money.
4. When an individual gives personal information to obtain a service or product that the victim will not receive.
This includes situations in which an individual pays money but the product or service is fraudulent, defective, or never delivered.
5. When an employee owing a fiduciary duty to his employer causes harm to the employer by improperly using the information or resources entrusted to him.
6. When an individual gives personal information to obtain credit but the credit is not provided as agreed upon.
This applies to both financial credit and non-financial credit such as airline tickets.
7. When a private investigator, law enforcement agent, or police officer takes advantage of his or her position of trust and authority.
8. When a teacher takes advantage of a student.
9. Inability to repay debt as promised.
The list is practically endless. Generally, a breach of trust can be seen as a violation of “a law, a contract, or an obligation that gives an individual the right to expect honest and fair treatment from another party".
Breach of trust is a criminal offence in the United Kingdom. In addition to being a criminal offence, breach of trust can also be seen as a civil case.
Contract law provides remedies for breach of trust through the court system. If terms regarding payment, time, or quantity are not adhered to by one party then that party will be forced to repay any outstanding debt or provide what has been promised. Breach of trust is seldom pursued as a criminal act unless there is significant evidence of fraud involved.
4. What Is the Required Standard of Care?
The fair and honest treatment of another person is a fundamental principle of law. The standard of care for a breach is determined by the legal system and the individual’s country of residence.
Those who violate the standard of care, even unintentionally, may be found liable for damages or face criminal charges. Depending on one’s country's laws, there may be no required amount of damages for a breach.
When looking at the criminal breach of trust offences in the UK, there are three main elements to the offence:
- A special relationship of trust between the parties involved in the offence;
- That the relevant conduct was dishonest or fraudulent
- That the relevant conduct caused loss or damage to the claimant.
The relevant conduct consists of one party being unduly put at risk by another, deceitfully deprived of its property, deceived about an expectation of performance, caused to enter into a contract, etc.
The standard required by law is that there is a duty placed on an individual owing a particular relationship with another individual to act in his best interests. The victim is therefore owed a duty of care and must be protected from harm stemming from this duty.
The standard of care and actions that can be taken relate to situations involving different types of assets:
Those who provide products or services typically do not violate the standard of care for those products and services. Those who provide services such as medical treatment, accounting services, defective automobiles, etc. are generally under no applicable standard of care.
Those who purchase products or consume goods generally do not violate the standard of care for those goods. Although purchases made by minors are subject to different standards elsewhere, these purchasers are usually presumed to have full knowledge of the product’s purpose/intent/quality when they are examined at the time of purchase or later in life for health or safety issues discovered years later.
Those who contract with others for services or products are typically subject to the standard of care associated with that product or service. The contractors may be liable if they know about any potential risk associated with the product or service they provide (but usually not if it was unknown to them). If this is not known, then it is usually presumed they did not know.
Those who sell products or services are generally subject to the standard of care for those products and services. Vendors may be liable if they know about any potential risk associated with the product or service they sell.
Suppose a business has a contract to build a house. The subcontractor that is building the house does not follow the standard of care and uses materials that do not meet accepted standards for building houses. The subcontractor would need to pay for the damages caused by his breach of trust and would be subject to any penalties imposed under the laws related to breaking contracts.
5. What Action Can Be Taken To Remedy a Breach of Trust?
There are three main ways in which a breach of faith claim can be established:
- Materialisation: The affected party seeks compensation for the value of the property that was taken from them.
- Nominalism: The affected party seeks compensation for losses that resulted from someone’s interference with its property such as the costs incurred to reconstruct the property.
- Restitution: The affected party seeks restitution to restore the property to its original condition, or to take possession of stolen materials and return the materials to the rightful owner.
If a person has been harmed by a breach of trust, he may be able to seek damages from those responsible for the breach. In most cases, the person whose assets were wrongfully committed may not be able to make a monetary gain or receive satisfaction from those responsible for the breach (due to civil liability). However, as mentioned above it depends on the laws of one’s country.
Usually, the legal action taken to remedy a breach of trust is a civil lawsuit or criminal prosecution. Civil lawsuits usually do not require “proof beyond a reasonable doubt”, rather “preponderance of evidence” is required. Penalties may include jail time, fines, and/or repayment of debts.
In some cases, civil lawsuits result in settlements for monetary relief. In other cases, the person who sues to receive compensation from those who broke his trust often receives nothing or very little from those responsible for breaking the trust.
Legal jurisdictions that follow the "tort system" apply a two-step process for breach of faith claims: culpability and damages. Culpability in the context of a breach of faith claim means whether there is a civil liability and can be established in three main ways:
Negligence is the most straightforward. Negligence can be established if a party acts negligently, that is, with disregard for the safety of others or the rights of others to lawful possession of its property. This includes situations where a contractor fails to keep the machinery running, or a homeowner fails to maintain his house properly. Negligence can also be established where one party possesses assets that are used by another party without the first party’s consent for any unlawful purpose.
In the UK, assault is a culpable act that produces a harmful effect on the person of another. Assault can generally be grouped into two types: aggressive and non-aggressive. Aggressive assault is the assault intended to cause fear in or apprehension of the victim. This may include acts such as punching, kicking, and biting. Non-aggressive assault involves acts such as ignoring, embarrassing and annoying the victim.
In some civil cases, the law will hold a party responsible if it has used deceit or deception to take possession of someone else’s property or resources without consent. This includes situations where a business sells an item that turns out to be defective, or an individual sells property that turns out not to be his (such as another’s car).
Suppose an individual is provided with defective medical treatment that leads to the spread of disease. The person who is responsible for the breach of trust in providing the bad medical treatment would need to compensate the individual for any harm caused by the breach of trust. If there is no burden of proof required in civil cases, then it would be difficult to prove whether or not the “causation” occurred between the medical treatment and damage suffered.
6. What Are the Possible Defences of a Breach of Trust Claim?
The defences that can be used to defend against a breach of trust claim may vary based on the stage at which the claim is made.
Application (1st stage)
At this early level of the claim, the defendant may be able to raise issues such as an inability to pay (for example, a person who is unable to pay because his assets were wrongfully committed), or another defence such as:
- The right of a third party to assert its interests;
- The right of the person against whom liability is asserted, to assert an adverse interest; and
- The doctrine of equitable estoppel.
Shakedown Jurisdictions (2nd stage)
At the second stage, when damages are being sought, common defences that can be used are:
- The exercise of legal rights in good faith;
- The absence of fault in fact or law;
- Contributory negligence by the person claiming breach of trust;
- Breach of implied obligations arising from the principal's acceptance of certain services or benefits under circumstances in which it is reasonably foreseeable that damage may result to the other party; and
- The doctrine of estoppel.
Defence-based/Equity Jurisdictions (3rd stage)
An equity jurisdiction is one in which a person's claim can be defended using equitable defences. Equity judgments are not subject to the same high level of rigour as injustice systems like Canada, Australia, or the United States. The most common defences in an equity jurisdiction are:
- The existence of the doctrine of statutory liability;
- The statute of frauds;
- The rule against perpetuities;
- The change in the law; and
- Lack of jurisdiction.
Malpractice Jurisdictions (4th stage)
At the fourth stage when litigation has taken place for many years, or when damages have already been awarded to the victim, most jurisdictions will follow practices in civil procedures that allow for alternative methods of dispute resolution. These alternative methods of dispute resolution typically include mediation and arbitration. Other alternatives may include:
- Criminal prosecution;
- Civil prosecution;
- Defamation; and
- Class action lawsuits.
Appeals Jurisdictions (5th stage)
If all other methods of dispute resolution fail, the parties to the legal action may file an appeal against the court’s decision to a higher court or jurisdiction. For example, with civil suits, parties may be able to appeal their case to the next highest level in the legal system (the Court of Appeal).
In certain countries, there are specific guidelines that relate to how to calculate one's losses after suffering a breach of trust. The formula that is used to calculate the number of damages is based on the legal system of one’s country.
Punitive damages are used to punish the person responsible for one’s damages. The amount of punitive damages usually depends on how severely the person has been harmed by the breach.
7. Setting a Trust Aside
A trust can be “set aside” when it is determined that the person who created the trust intended to defraud another person. That person may be able to ask the court to have the trust declared invalid. If this occurs, then the assets in question are returned to the rightful owner.
A trust can be set aside when there is a “technical breach”. This occurs when a person assumes a relatively minor position in trust and breaches their duties of confidentiality. If the technical breach was small enough, a court will not allow the perpetrator to claim any legal defences like lack of knowledge or intent not to act (malice). The person who has assumed the position in the trust will still be responsible for his or her actions, however.
Lack of knowledge or intent to act (malice) are often used in traditional justice systems like Canada, Australia, and the United States, however, they are rarely used in civil suits under equity jurisprudence systems like Singapore. In a traditional justice system, malice is a difficult defence to prove. In a civil suit under equity jurisprudence, there are no requirements to prove malice.
In certain countries such as New Zealand, the law provides for the possibility of initiating action under public policy. This occurs when a person believes that one's trust was intended to be used for criminal or fraudulent purposes rather than business transactions.
In Australia, on the other hand, only legitimate trusts have been recognized as being capable of being set aside under Federal law. It is best advised to seek advice from a lawyer on the exact circumstances before moving forward with an action against a trust that has been created by one’s bank or another financial institution.
Lack of Intent or Knowledge
A person who has not taken the steps to adequately protect his assets against third parties is deemed to have acted with negligence. This means that he is still assuming liability for the damages associated with his actions or inactions. With these types of legal cases, however, intent does not come into consideration.
For example, if a trust was created for one’s children and it fails to ensure that all assets are protected against creditors, the beneficiary may be able to sue the trustee to recover any losses that he has suffered because of this breach of trust. He may also be able to sue any other person who has benefited from sheltered assets sheltered by the trustee.
Another example of a situation where the intent is not considered is when a person creates a trust for insurance purposes. As long as the beneficiary has sufficient assets to cover the cost of the insurance, there will be no need to consider whether the beneficiary was aware that he was taking such steps. The beneficiaries themselves may still be able to claim any loss that they have suffered because of this breach of trust.
Another example of situations where intent or knowledge is not considered is financial fraud. Although there may be legal defences that would protect others from paying out on claims, such as lack of knowledge and lack of intent to act (malice), the fraudster will take complete responsibility for any damages associated with his actions.
8. Time Limits for Bringing a Claim
In some countries, there is a time limit on when a person can bring a claim for breach of trust. A person may be allowed to bring a claim in the future if certain conditions are met. In the UK, a civil lawsuit has a limitation period of twelve years after the incident has occurred. However, one may be able to bring an action if the harm was not apparent at the time of the incident.
For example, if a farmer builds a road through one’s land without his knowledge, then that road might injure the individual who uses it ten years later. In this situation, that individual can bring suit after he has discovered that his injury was caused by the farmer’s negligence within the limitation period
Given the difficulty in establishing liability for breach of trust claims in most countries, some initiatives seek to overcome this problem by streamlining potential legal claims using new technology. These initiatives are known as "cyber trust" or "cyber trust registries". For example, the government of Ukraine has set up a cyber trust registry to help users of electronic media to secure their rights and interests.
If a claim is brought before the limitation period, then any breach of trust action that is later introduced will be invalidated provided that the person bringing the later claim had actual knowledge of his rights at that time.
For example, if a person brings a breach of trust claim against someone who has stolen money from him and wins the lawsuit, he will be awarded compensation for his losses. However, the person bringing the second claim will be able to bring it in the future and will not need to do so promptly (provided that he has actual knowledge of his rights).
In civil cases under equity jurisprudence where time limits do not apply, such as Singapore and Malaysia, a person can bring a claim at any time. The reason is that such claims are not considered to be "property" rights. This means that they can be brought at any time regardless of when they were caused by another's actions. However, if there is a breach of trust, then this may result in one having to wait until another party mitigates its damages before bringing suit.
Breach of Trust vs Negligence
The purpose of a trust is to ensure that assets are kept under the control of another person until they are needed by another person or persons. The trustee is legally required to exercise reasonable care, skill, and caution in managing the trust property so that breaches do not occur. This means that if the fiduciary duty of trust is breached, he could have a cause of action against the trustee for his losses.
Negligence, however, does not mandate a person to take care or control of another person's property. Instead, it is a violation of a legal duty to take care to prevent injury or loss to another person. In other words, negligence refers to how one has acted in the past whereas breach of trust refers to how one has failed to act in the past.
As such, damages for these two legal theories are calculated differently from one another under civil law. For negligence, damages are calculated based on the loss of future earning capacity. For breach of trust, damages are calculated by taking into account the past and future loss of income, the value of the fund that was stolen, the recovery of the fund, and any additional legal or administrative expenses.
One scenario where a person has a right to bring an action against someone who is not his trustee is when he has been defrauded. Although it may be difficult to prove that someone has been defrauded without evidence such as those listed above, those who commit fraud can still be held accountable for their actions and may be ordered to pay compensation to those that they have deceived.
Breaches of trust occur in many different types of cases and the standards that apply to the action depend on the context in which the breach is discovered. People who are aware that their trust has been violated may be able to seek compensation for their losses.
A lawyer may be able to help determine whether a claim can be brought and how much is due in damages. However, many claims will need to be decided by a court where the laws and precedents create unique rules for how such disputes are handled.