Pleading Fraud/Dishonesty, Striking Out & JENE

Pleading Fraud/Dishonesty

The function of pleadings is to give the party opposite sufficient notice of the case which is being made against him.

There are two distinct and separate rules that apply to pleading allegations of fraud/dishonesty. The allegations must be both:

(i) clearly pleaded; and

(ii) particularised.

If a pleading is ‘equivocal’, i.e. it permits an innocent explanation, it is bad in law, because it is not open to the trial judge to make a finding of fraud.

In Mullarkey & Ors v Broad & Anor[2007] EWHC 3400 (Ch), Mr Justice Lewison stated the primary rules as follows: 

Pleading and proving intentional wrongdoing

41.   In Belmont Finance Corporation Ltd. v. Williams Furniture Ltd. [1979] Ch. 250, at 268 Buckley L.J. said:

An allegation of dishonesty must be pleaded clearly and with particularity. That is laid down by the rules and it is a well-recognised rule of practice. This does not import that the word ‘fraud’ or the word ‘dishonesty’ must be necessarily used. The facts alleged may sufficiently demonstrate that dishonesty is allegedly involved, but where the facts are complicated this may not be so clear, and in such a case it is incumbent upon the pleader to make it clear when dishonesty is alleged. If he uses language which is equivocal, rendering it doubtful whether he is in fact relying on the alleged dishonesty of the transaction, this will be fatalthe allegation of its dishonest nature will not have been pleaded with sufficient clarity.” …

43.   In Paragon Finance plc v D B Thakerar & Co he said on the question of pleading:

“It is well established that fraud must be distinctly alleged and distinctly proved, and that if the facts pleaded are consistent with innocence it is not open to the court to find fraud.”’

Striking Out

The court can strike out a Defence under CPR, r.3.4(2)(a) – if it ‘discloses no reasonable grounds for defending the claim’

The legal test for striking out a statement of case for non-compliance with these special pleading rules (which is a power the court may exercise at a CMC of its own initiative), was stated by Sir Julian Flaux (who is now Chancellor of the High Court) in JSC Bank of Moscow v. Kekhman and others [2015]: JSC Bank of Moscow v Kekhman & Ors [2015] EWHC 3073 (Comm) (29 October 2015) (bailii.org) at [20]

The correct test is whether or not, on the basis of the primary facts pleaded, an inference of dishonesty is more likely than one of innocence or negligence. As Lord Millett put it, there must be some fact “which tilts the balance and justifies an inference of dishonesty”At the interlocutory stage, when the court is considering whether the plea of fraud is a proper one or whether to strike it out, the court is not concerned with whether the evidence at trial will or will not establish fraud but only with whether facts are pleaded which would justify the plea of fraud. If the plea is justified, then the case must go forward to trial and assessment of whether the evidence justifies the inference is a matter for the trial judge.’

If a Defendant [‘D‘] (whose Defence is based upon an allegation of e.g. deceit by the Claimant), has refused to reply to specific allegations in the Particulars of Claim, and instead pleaded a ‘bare‘ or ‘blanket’ denial, it follows that:

(i) D is deemed under CPR, r.16.5(5) to have admitted the facts to which he has failed to reply; and

(ii) the Defence may be struck out under CPR, r.3.4(2)(a), because D has failed to plead a complete defence to the Claim, by failing to advance an affirmative case.

Blackstone’s Civil Practice 2021, at para 33.7‘a defence may be struck out if it consists of a bare denial or otherwise fails to set out a coherent statement of facts, or if the facts set out, even if true, do not amount in law to a defence to the claim. Many institutional defendants have been in the habit of filing short defences making blanket denials without stating any positive case. These defences ought to be a thing of the past.’ 

The approach of the court

The power to strike out is exercised sparingly. An alternative strategy is to apply for JENE (see below).

In Three Rivers District Council v. Governor and Company of The Bank of England [2001] UKHL 16, Lord Hope of Craighead stated:

‘106. … the overriding objective of dealing with cases justly includes dealing with them in a proportionate manner, expeditiously, fairly and without undue expense… each case is entitled only to an appropriate share of the court’s resources. Account has to be taken of the need to allot resources to other cases. … The most important principle of all is that which requires that each case be dealt with justlyIt may well be that the claimants, on whom the onus lies, will face difficulties in presenting their case. They must face the fact that each and every allegation of bad faith will be examined rigorously. A trial in this case will be lengthy and it will be expensive. There is only so much that astute case management can do to reduce the burdens on the parties and on the court. Nevertheless it would only be right for the claim to be struck out if it has no real prospect of succeeding at trialI do not think that one should be influenced in the application of this test by the length or expense of the litigation that is in prospect. Justice should be even-handed, whether the case be simple or whether it be complex. It is plain that the situation in which the claimants find themselves was not of their own making, nor are they to be blamed for the volume and complexity of the facts that must be investigatedI would hold that justice requires that the claimants be given an opportunity to present their case at trial so that its merits may be assessed in the light of the evidence.

    107. I have taken one other factor into account. The decision which your Lordships are being asked by the Bank to take is to give summary judgment in its favour on the entire claimIt would only be right to strike out the whole claim if it could be said of every part of it that it has no real prospect of succeeding. … I think that that is too big a step to take on the available material. Conversely, I consider that if one part of the claim is to go to trial it would be unreasonable to divide the history up and strike out other parts of it. A great deal of time and money has now been expended in the examination of the preliminary issues, and I think that this exercise must now be brought to an end. I would reject the Bank’s application for summary judgment.

Lord Hutton further stated:

113. The Court of Appeal (Auld LJ dissenting) upheld the decision of Clarke J and delivering the joint judgment of himself and Robert Walker LJ, Hirst LJ stated [2000] 2 WLR 15, 101F:

“… The tort alleged is a tort of dishonesty, and the plaintiffs’ claim must be rigorously assessed on their pleaded case and the evidential material shown to be available to support it.”

In his dissenting judgment, at p 180F, Auld LJ stated:

“As the authorities to which Hirst and Robert Walker LJJ have referred indicate, it is normally only in clear and obvious cases that a court should strike out a claim as incapable of proof at the interlocutory stage and before full discoveryIn cases, such as this, of great legal and factual complexity, it requires a justified confidence that the plaintiffs’ case is and will remain incapable of proof and most exceptional circumstances to justify stifling it at an early stage. For the reasons that I have given, I do not consider that the court can be confident that all the evidence material to Clark J’s conclusion about the Bank’s state of knowledge has been gathered in or, which is as important, properly tested.”

    117. The 1999 White Book stated at 18/19/10 with reference to r 19(1)(a):

A reasonable cause of action means a cause of action with some chance of success when only the allegations in the pleading are considered (per Lord Pearson in Drummond-Jackson v British Medical Association [1970] 1 WLR 688; [1970] 1 All ER 1094, CA). So long as the statement of claim or the particulars (Davey v Bentinck [1893] 1 QB 185) disclose some cause of action, or raise some question fit to be decided by a judge or a jury, the mere fact that the case is weak, and not likely to succeed, is no ground for striking it out (Moore v Lawson (1915) 31 TLR 418, CA; Wenlock v Moloney [1965] 1 WLR 1238; [1965] 2 All ER 871, CA); “

Therefore if a plaintiff would be entitled to judgment if he were successful in proving the matters alleged in his pleadings, the statement of claim could not be struck out under rule 19(1)(a) on the ground that he had no prospect of adducing evidence to prove the matters which he alleged. …

    118. In the present case when Clarke J struck out the action he did so on the ground that even with all the proposed re-re-amendments the plaintiffs’ claim was bound to fail and that in those circumstances it would be an abuse of the process or vexatious or oppressive to allow the action to proceed (see paragraph 6 and 7 at p 172 of his third judgment).

    119. The applications before Clarke J and the Court of Appeal were governed by the Rules of the Supreme Court but those Rules have now been replaced by the Civil Procedure Rules. I think that rule 3.4 (2)(a) of the new Rules corresponds in a broad way to Ord 18, r 19(1)(a) and rule 3.4 (2)(b) and rule 24.2 (a)(i) correspond in a broad way to Ord 18, r 19(1)(b) and (d). Rule 3.4(2) provides:

The court may strike out a statement of case if it appears to the court—

(a) that the statement of case discloses no reasonable grounds for bringing or defending the claim;

(b) that the statement of case is an abuse of the court’s process or is otherwise likely to obstruct the just disposal of the proceedings;”

Rule 24.2(a)(i) provides:

The court may give summary judgment against a claimant or defendant on the whole of a claim or on a particular issue if—

(a) it considers that—

(i) that claimant has no real prospect of succeeding on the claim or issue. … 

    122. Bad faith is an essential element in the tort of misfeasance. In accordance with a well established rule it is necessary that bad faith (or dishonesty – the term used in some authorities) should be clearly pleaded. In Davy v Garrett (1878) 7 Ch D 473, 489 Thesiger LJ said:

“There is another still stronger objection to this statement of claim. The plaintiffs say that fraud is intended to be alleged, yet it contains no charge of fraud. In the Common Law Courts no rule was more clearly settled than that fraud must be distinctly alleged and as distinctly proved, and that it was not allowable to leave fraud to be inferred from the facts. It is said that a different rule prevailed in the Court of Chancery. I think that this cannot be correct. It may not be necessary in all cases to use the word ‘fraud’ – indeed in one of the most ordinary cases it is not necessary. An allegation that the defendant made to the plaintiff representations on which he intended the plaintiff to act, which representations were untrue, and known to the defendant to be untrue, is sufficient. The word ‘fraud’ is not used, but two expressions are used pointing at the state of mind of the defendant – that he intended the representations to be acted upon, and that he knew them to be untrue. It appears to me that a plaintiff is bound to show distinctly that he means to allege fraud. In the present case facts are alleged from which fraud might be inferred, but they are consistent with innocence. They were innocent acts in themselves, and it is not to be presumed that they were done with a fraudulent intention.”

I would observe that the last two sentences in this passage have to be read together with the sentence which immediately precedes them.

In Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch D 250, 268 A-C Buckley LJ stated:

“In the present case, do the facts alleged in the statement of claim suffice to bring home to the defendants or any of them a charge that (a) the object of the alleged conspiracy was a dishonest one; and (b) that they actually knew, or must be taken to have known, that it was so?

“An allegation of dishonesty must be pleaded clearly and with particularity. That is laid down by the rules and it is a well-recognised rule of practice. This does not import that the word ‘fraud’ or the word ‘dishonesty’ must necessarily be used: see Davy v Garrett, 7 Ch D 473, 489, per Thesiger LJ. The facts alleged may sufficiently demonstrate that dishonesty is allegedly involved, but where the facts are complicated this may not be so clear, and in such a case it is incumbent upon the pleader to make it clear when dishonesty is alleged. If he uses language which is equivocal, rendering it doubtful whether he is in fact relying on the alleged dishonesty of the transaction, this will be fatal; the allegation of its dishonest nature will not have been pleaded with sufficient clarity.”

    124. In Armitage v Nurse [1998] Ch 241, 256G Millett LJ said:

“It is not necessary to use the word ‘fraud’ or ‘dishonesty’ if the facts which make the conduct complained of fraudulent are pleaded; but, if the facts pleaded are consistent with innocence, then it is not open to the court to find fraud.”

Later in his judgment at p 259G the learned Lord Justice said:

“I am of opinion that, as at present drawn, the amended statement of claim does not allege dishonesty or any breach of trust for which the trustees are not absolved from liability by clause 15.”

In Taylor v Midland Bank Trust Co Ltd (unreported, 21 July) 1999 Buxton LJ referred to the first observation of Millett LJ at p 256G and said:

“That, however, was an observation about pleading, not about substance. If (unlike the pleader in our case) the claim does not expressly allege dishonesty, but stands on facts alone, those facts on their face will meet the requirement of a specific allegation of dishonesty only if they can bear no other meaning.”

But in the present case, unlike in Armitage v Nurse, the pleader does expressly allege bad faith because paragraph 37 pleads that “the motives of the Bank in acting as pleaded above were improper and unlawful and in the premises the Bank acted in bad faith” and the paragraph sets out particulars in support of that allegation. In my opinion those particulars are not consistent with mere negligence.

    125. I further consider that if a plaintiff clearly alleges dishonesty or bad faith and gives particulars, the statement of claim cannot be struck out under rule 3.4(2)(a) because the facts he pleads as giving rise to an inference of dishonesty or bad faith may at the trial, after a full investigation of the circumstances, be held not to constitute proof of that state of mind. If a defendant applies to strike out an action on the ground that the plaintiff has no prospect of adducing evidence at the trial to establish the case which he pleads the application should be brought under rule 3.4(2)(b) or rule 24.2(a)(1).’ 

JENE

If D refuses to mediate, then as part of his/her active case-management role, i.e. inherent judicial function, a procedural judge at a CMC, has the power to order a JENE. This does not require an application where the proposal is made in the Claimant’s Proposed Directions, or the procedural judge grants leave to the parties to make representations about JENE. I submit, that even in the County Court, JENE is arguably beneficial, proportionate and will involve a sensible use of the the court’s resources, where a case has been allocated to the Multi Track, i.e. because of the complexity of the: legal; procedural; and evidential issues in the case and consequently the length of the trial. That is because a JENE judge can reality-test the actual litigation risks that will confront the parties at trial, resulting in a re-calibration by each party of their litigation risk calculus, which should focus their minds and those of their legal advisors, upon settlement, rather than going to war. Hopefully, cooler minds will then prevail! See my article:

 ‘Judicial-ENE and the New Normal’published by Trusts & Trustees (Oxford University Press), 14 December 2020 on the ‘Publications’ page at www.ihtbar.com

 Recent authorities about pleading fraud/dishonesty

See Civil Fraud – Law, Practice & Procedure, edited by Thomas Grant QC and David Mumford QC (2018), published by Sweet & Maxwell, paragraphs 1-008 to 1-017 [The Decision to Allege Fraud].

Recent cases include:

1.        McEaney and Other v. Ulster Bank Ireland Ltd and others [2015]: McEneaney & Ors v Ulster Bank Ireland Ltd & Anor [2015] EWHC 3173 (Comm) (09 November 2015) (bailii.org)

‘It is an ingredient of a claim in fraud that the person making the false representation intended his statement to be understood by the representee in the sense in which it was false (see Cassa di Risparmio della Repubblica di San Marino SpA v Barclays Bank Ltd, [2011] EWHC 484 (Comm) at para 221) and, as it used to be put, there must be “moral obliquity”: (per Lindley LJ in Angus v Clifford, [1891] 2 Ch 449, 468, and see Maple Leaf Macro Volatility Master Fund v Rouvroy, [2009] EWHC 257 (Comm) at para 327). That was not originally alleged.’ Mr Justice Andrew Smith at para 54.

2.        JSC Bank of Moscow v. Kekhman and others [2015]: JSC Bank of Moscow v Kekhman & Ors [2015] EWHC 3073 (Comm) (29 October 2015) (bailii.org)

‘2.     CPR 3.4(2) gives the court power to strike out a statement of case which discloses no reasonable grounds for bringing or defending a claim or a statement of case which is an abuse of process. Where, on the material before the court, there are disputed issues of fact, the court should not strike out a claim unless certain it is bound to fail: see per Peter Gibson LJ at [22] in Colin Richards & Co v Hughes [2004] EWCA Civ 226. The test is similar but not identical to that for summary judgment where the court will not grant summary judgment, here in favour of a defendant, unless the claim has no real prospect of success. It is well established that where it is clear that there are disputed issues of fact between the parties, the court should not engage in a mini-trial of the merits at an interlocutory stage …

14.            However, Mr Swainston QC for Mr Kekhman submits that in a case where fraud is alleged (as is the case with both the original conspiracy plea and the proposed plea of fraudulent misrepresentation) there is an anterior question as to whether fraud is properly pleaded at all, in other words whether the requirements imposed by the rules of Court and as a matter of law in respect of pleading fraud have been satisfied. In that context, Mr Swainston QC relies upon the principles as to the pleading of fraud restated by the House of Lords in Three Rivers District Council v Bank of England[2001] UKHL 16[2003] 2 AC 1.

15.            At [55]-[56], Lord Hope of Craighead stated the principles as follows:

“As the Earl of Halsbury LC said in Bullivant v Attorney General for Victoria [1901] AC 196, 202, where it is intended that there be an allegation that a fraud has been committed, you must allege it and you must prove it. We are concerned at this stage with what must be alleged. A party is not entitled to a finding of fraud if the pleader does not allege fraud directly and the facts on which he relies are equivocalSo too with dishonesty. If there is no specific allegation of dishonesty, it is not open to the court to make a finding to that effect if the facts pleaded are consistent with conduct which is not dishonest such as negligence. As Millett LJ said in Armitage v Nurse [1998] Ch 241, 256G, it is not necessary to use the word “fraud” or “dishonesty” if the facts which make the conduct fraudulent are pleaded. But this will not do if language used is equivocal: Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250, 268 per Buckley LJ. In that case it was unclear from the pleadings whether dishonesty was being alleged. As the facts referred to might have inferred dishonesty but were consistent with innocence, it was not to be presumed that the defendant had been dishonest. Of course, the allegation of fraud, dishonesty or bad faith must be supported by particulars. The other party is entitled to notice of the particulars on which the allegation is based. If they are not capable of supporting the allegation, the allegation itself may be struck out. But it is not a proper ground for striking out the allegation that the particulars may be found, after trial, to amount not to fraud, dishonesty or bad faith but to negligence. …

 16.      At [160] Lord Hobhouse stated:

Where an allegation of dishonesty is being made as part of the cause of action of the plaintiff, there is no reason why the rule should not apply that the plaintiff must have a proper basis for making an allegation of dishonesty in his pleadingThe hope that something may turn up during the cross-examination of a witness at the trial does not suffice. It is of course different if the admissible material available discloses a reasonable prima facie case which the other party will have to answer at the trial.”

17.      The fullest statement of the relevant principles upon which Mr Swainston QC relied is that of Lord Millett from [184] onwards:

184.  It is well established that fraud or dishonesty (and the same must go for the present tort) must be distinctly alleged and as distinctly proved; that it must be sufficiently particularised; and that it is not sufficiently particularised if the facts pleaded are consistent with innocence: see Kerr on Fraud and Mistake 7th ed (1952), p 644; Davy v Garrett (1878) 7 Ch D 473, 489; Bullivant v Attorney Genera; for Victoria [1901] AC 196; Armitage v Nurse [1998] Ch 241, 256. This means that a plaintiff who alleges dishonesty must plead the facts, matters and circumstances relied on to show that the defendant was dishonest and not merely negligent, and that facts, matters and circumstances which are consistent with negligence do not do so.

185.  It is important to appreciate that there are two principles in playThe first is a matter of pleadingThe function of pleadings is to give the party opposite sufficient notice of the case which is being made against him. If the pleader means “dishonestly” or “fraudulently”, it may not be enough to say “wilfully” or “recklessly”. Such language is equivocal. …

186.  The second principle, which is quite distinct, is that an allegation of fraud or dishonesty must be sufficiently particularised, and that particulars of facts which are consistent with honesty are not sufficientThis is only partly a matter of pleading. It is also a matter of substance. As I have said, the defendant is entitled to know the case he has to meet. But since dishonesty is usually a matter of inference from primary facts, this involves knowing not only that he is alleged to have acted dishonestly, but also the primary facts which will be relied upon at trial to justify the inference. At trial the court will not normally allow proof of primary facts which have not been pleaded, and will not do so in a case of fraudIt is not open to the court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honestyThere must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved.”

20.      … The correct test is whether or not, on the basis of the primary facts pleaded, an inference of dishonesty is more likely than one of innocence or negligence. As Lord Millett put it, there must be some fact “which tilts the balance and justifies an inference of dishonesty”. At the interlocutory stage, when the court is considering whether the plea of fraud is a proper one or whether to strike it out, the court is not concerned with whether the evidence at trial will or will not establish fraud but only with whether facts are pleaded which would justify the plea of fraud. If the plea is justified, then the case must go forward to trial and assessment of whether the evidence justifies the inference is a matter for the trial judge. This is made absolutely clear in the passage from Lord Hope’s speech at [55]-[56] which I quoted above.

The Honourable Mr Justice Flaux (who is now Chancellor), at [12] –[23].

European Commission has declined consent to the accession of the UK to the Lugano Convention

The European Commission has officially announced its opposition to the UK’s application to join the Lugano Convention 2007.

‘In view of the nature of the Lugano Convention (see below, section 2.1.) and the existing framework of judicial cooperation with third countries (see below, section 2.2.), the Commission considers that the EU should not give its consent to the accession of the United Kingdom to the Lugano Convention.’

1_en_act_en.pdf (europa.eu)

Brussels, 4.5.2021 COM(2021) 222 final COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Assessment on the application of the United Kingdom of Great Britain and Northern Ireland to accede to the 2007 Lugano Convention 

‘Experts at London law firm Dentons say that ‘UK accession to the Lugano Convention is a significant issue because membership would enable more judgments to be swiftly recognised and enforced across borders.’ They note that ‘the Lugano Convention is wider in scope than the Hague Convention, the main difference being that the Lugano Convention applies to contractual relationships governed by non-exclusive and asymmetric (one-sided) jurisdiction clauses, as well as exclusive jurisdiction clauses.’

Law firm Farrer & Co has expressed the view that enforcement of foreign judgments abroad could become an uphill struggle and UK courts could be a ‘less attractive venue for international litigation’ if the UK’s application to accede is rejected.’ STEP Industry News Bulletin 06.05.2021.

The instruments that prior to Brexit determined governing law,Regulation (EC) No 593/2008 on the law applicable to contractual obligations (Rome I) and Regulation (EC) No 864/2007 on the law applicable to non-contractual obligations (Rome II), were implemented in UK domestic law and continue to apply post-Brexit. 

Articles 3 and 4 of Rome I lay down the basic rules, namely that a contract is generally to be governed by the law chosen by the parties – this choice may be express or clearly demonstrated by the terms of the contract or the circumstances of the case. In the absence of choice of law, the law of the contract will be that of the habitual residence of the seller of goods or the provider of services. There are exceptions to this rule, such as if the contract relates to immovable property (whereby the Lex Situs rule will apply). 

The choice of law in a tort claim is governed by the Rome II regulation. Under article 4 of Rome II, the law applicable to non-contractual obligations arising out of a tort will be the law of the country where the damage occurs. This will be irrespective of the country in which the event giving rise to the damage occurred, or where the indirect consequences of the tort may be felt. However, where both parties to the dispute have their habitual residence in the same country at the time the damage occurs, the law of that country shall apply, and where the tort is manifestly more closely connected with another country, the law of the other country will apply. 

Under English Law, in a contract or tort action ‘in personam‘ (i.e. against a person), the English court has residual jurisdiction in three situations:

(i)     where the defendant has been served with the statement of claim whilst in England;

(ii)     where a person who might otherwise be excluded, submits to the jurisdiction; or

(iii)    if the case comes within CPR, r. 6.20, where discretionary leave is granted for service of proceedings outside of the jurisdiction. 

Following Brexit, The doctrine of Forum non conveniens also applies.

The post-transition period trade deal now in force does not provide for any other civil justice regime. 

For cases commenced after 1 January 2021, if there is an exclusive jurisdiction agreement and the chosen court is a contracting party to the Hague Convention, the 2005 Hague Convention will apply. In the absence of this, decisions on jurisdiction and enforcement will fall to domestic law.

Book Reviews – Contentious Trusts Handbook

My seventh book, the ‘Contentious Trusts Handbook’ was published by the Law Society in July 2020, and can be ordered from the Law Society and Wildy’s Bookshop in London online.

Contentious Trusts Handbook – Law Society Bookshop

Wildy & Sons Ltd — The World’s Legal Bookshop : Islam, Carl

Book Reviews

‘This practical overview of contentious trusts sets out a clear route from letter before claim to costs orders. Its logical and helpful structure enables readers to find what they want to know exactly where they would expect to do so. The case analyses are cogent and commendably concise. The reviews of the law on liability for ‘dishonest assistance’ and Beddoe orders are models of their kind. The author is to be commended on succeeding in providing a portable reference work covering all aspects of the law and practice governing trust disputes in the English courts.’

Ian Mayes QC, Head of Chambers, 1 Essex Court, London EC4Y 9AR

‘Carl Islam has an impressive set of credentials and has much experience in advising on all aspects of contentious trusts. In his work Contentious Trusts Handbook, he has produced a practical reference guide for practitioners, enabling them to undertake litigation in this complex and specialist area of law. As a practical and comprehensive reference work for busy practitioners, the author is to be commended.’

Henry Frydenson LLB MBE TEP CTAPS

‘This book gives the reader what they need to know when arguing – or defending – a contentious case. Overall, the book admirably meets the authors aims. It fills a clear need for a simple guide to the principles and conduct of trust litigation and should be a welcome addition to all practitioners’ libraries.’

Richard Dew, Barrister, Ten Old Square.

Contentious Trusts Handbook – Law Society Bookshop

For more information about the book and purchasing links please visit the ‘Contentious Trusts Handbook’ page at www.ihtbar.com

A book review is also scheduled for publication in the next edition of Trusts & Trustees (Oxford University Press): Trusts & Trustees | Oxford Academic (oup.com) This journal is sold and circulated by OUP to trust practitioners, academics, and judges, worldwide.

My next in-depth article which I am planning to co-write with a leading trust law academic at Cambridge University in the Summer will be about ‘Executors and Trustees Duties and Powers in relation to investments and property’.

I am also developing ‘Art Litigation and Cultural Heritage Disputes’ as a niche practice area, and am a member of the Institute of Art & Law in London, where I am studying for a Diploma in Art Law. The ‘Contentious Trusts Handbook’ contains a practice note contributed by the distinguished Art Historian, Pandora Mather Lees (www.artonsuperyachts.com), entitled, ‘Art & Heritage Assets – Duties of Trustees’, and I am currently researching substantive aspects of art and antiquities law for a new book I am planning to write for publication in 2023 provisionally entitled,

‘Fiduciary Theory of Art And Cultural Heritage’.

The outline of the book appears on the ‘Art & Antiquities Disputes’ page at www.ihtbar.com

Foreword to the Contentious Trusts Handbook (2020)

‘Sir John Baker explains that the publication in 1837 of “A Practical Treatise on the Law of Trusts” authored by Thomas Lewin signified a shift away from perceiving trusts as principally an adjunct of conveyancing of land towards an institution in their own right. Trusteeship shifted from being a relatively passive office ancillary to landed settlements towards a more general and demanding role. Trusts ceased to be the exclusive preserve of the aristocracy also becoming a vehicle for the wealth of Victorian England’s middle classes. The book is now known as Lewin on Trusts. It continues to dominate the English texts.

Similar observations might be made of the Contentious Trusts Handbook commissioned by the Law Society and written by Carl Islam (who like Thomas Lewin is a leading barrister practicing in the field). This is because its publication reflects the unfortunate fact that the risk of trustees becoming involved in court proceedings appears to be on the increase. Such proceedings are increasingly hostile and hard fought. This handbook provides the busy practitioner with a practical overview of themes that are commonly encountered. It will guide them through every stage of proceedings, from pre-action protocols through discovery to settlement and trial. It contains a detailed discussion of mediation and arbitration and it is accompanied by a set of useful precedents and contributions from an art expert (Pandora Mather-Lees), an expert in trust litigation in the Cayman Islands (Hector Robinson QC) and a mediator (Anthony Trace QC).

The handbook will enable practitioners to anticipate and head off problems, thus hopefully reducing the risk of litigation, as well as providing guidance if and when proceedings are necessary. As with its non contentious cousin, authored by Gill Steel, Mr Islam’s handbook will become a well established staple on our bookshelves. The author and the publishers are to be congratulated.’

Toby Graham

Partner and Head of the Contentious Trusts and Estates Group at Farrer & Co LLP

Co-editor of Trust & Trustees (Oxford University Press)

To read reviews of my book the ‘Contentious Probate Handbook’ please visit the ‘Publications’ page at www.ihtbar.com

I would like to take this opportunity to thanks each of the reviewers for their time in reading and reviewing my new book.

With my kindest regards,

Carl

Breach of duty – The taking of an account against defaulting charity trustees

As a general rule the High Court has jurisdiction to enforce the observance or redress breaches of all trusts, charitable as well as private. The jurisdiction in the case of charities is more extensive than in the case of private trusts, where the trust is charitable, the court has jurisdiction not only to enforce it and to redress all breaches, but also, in certain circumstances, to make schemes for the administration of the charity and to alter or modify the trust to a greater or less degree by virtue of the cy-pres doctrine.’ (Halsbury’s Charity Law (2020), paragraph 10.23).

Thus, if it is established that the stated objects of a charitable gift fail, either:

·       the property can be applied cy-pres; or

·       the whole gift fails, giving rise to a resulting trust in favour of the donor.

The duties of trustees of charitable trusts do not differ in principle from those of non-charitable trustees. Their primary duty is to execute the trust in accordance with its terms, and with the general law, in the interests of the intended beneficiaries, i.e. the ‘objects’ of the charitable trust. See HMG Guidance – The essential trustee: what you need to know, what you need to do:

The essential trustee: what you need to know, what you need to do – GOV.UK (www.gov.uk)

Charity trustees who use trust money for their own purposes, or for purposes not in accordance with the trust, or who negligently allow others to misappropriate it, are strictly liable to make good any deficiency or loss, and the court is severe with trustees who willfully, corruptly or negligently misapply trust property.

It is a breach of trust for trustees to divert a charitable fund given for one object to another not contemplated by the Donor.

The assets owned by a charity cannot be used to indemnify a person injured by a breach of trust committed by a trustee of the charity.

A threatened application of charity property for non-charitable purposes may be restrained by injunction.

With the exception of exempt charities and charitable companies, charity trustees must ensure that accounting records are kept which are sufficient to explain all of the charity’s transactions, and which are such as to:

·       disclose at any time, with reasonable accuracy, the financial position of the charity at that time; and

·       enable the trustees to ensure that where any annual statements of account are prepared by them, those statements comply with the statutory requirements.

The primary personal equitable remedies available in relation to breach of fiduciary duty are:

·       rescission;

·       equitable compensation;

·       an account of funds;

·       an account of profits; and

·       injunctions.

In contrast to proprietary remedies, personal remedies operate against the person of the defendant wrongdoer irrespective of whether he retained property that may have been the subject of the claim.

Taking an account is simply a process that can be employed in order to assess the state of the trust fund. In this respect, the taking of an account can enforce the trustees’ primary duty to provide information … and keep accurate accounts of the trust. All express trustees owe a primary duty to account for their administration of the trust fund, including all receipts, investments, and distributions. Taking an account may lead to the enforcement of primary or secondary obligations. When an account is taken, two principal problems may be revealed: the trustees may have misappropriated assets from the trust fund, for example by making unauthorised investments; or alternatively, the trustees may have breached their duty in failing appropriately to safeguard the value of the fund, which will be the case, for example, where they have negligently failed to diversify the types of assets held by the trust. In the first situation, a [claimant] might falsify the unauthorised disbursement; in the second, the account might be surcharged to bring its value up to the appropriate level. Significantly, the trustee will be liable to compensate the trust fund from their own resources whether the account is falsified or surcharged.’

(Davies, Paul and Graham Virgo (2019). Equity & Trusts – Text, Cases And Materials. Third edition. Oxford University Press, p.806).

‘Where the beneficiary complains that the trustee has misapplied trust money, he falsifies the account, that is to say, he asks for the disbursement to be disallowed. If, for example, the trustee lays out trust money in an unauthorised investment which falls in value, the beneficiary will falsify the account by asking the Court to disallow both the disbursement and the corresponding asset on the other side of the account. The unauthorised investment will then be treated as having been bought with the trustee’s own money and on his own behalf. He will be required to account to the trust estate for the full amount of the disbursement – not for the amount of the loss. That is what is meant by saying that the trustee is liable to restore the trust property; and why common law rules of causation and remoteness of damage are out of place … Where the beneficiary elects to falsify the account, the unauthorised investment is not shown as an asset, the disbursement is disallowed, and the trustee is accountable in every respect as if he had not disbursed the money. He is liable to restore the money to the trust estate; as notionally restored it remains subject to all the trust’s powers and provisions of the trust as if it had never been dispersed; and the account is taken accordingly. …

If the beneficiary is dissatisfied with the way in which the trustee has carried out his trust – if, for example, he considers that the trustee has negligently failed to obtain all that he should have done for the benefit of the trust estate, then he may surcharge the account. He does this by requiring the account to be taken on the footing of wilful default. In this context “wilful default” bears a special and unusual meaning: it means merely lack of ordinary prudence or due diligence. The trustee is made to account not only for what he has in fact received, but also for what he might with due diligence have received. Since the trustee is, in effect, charged with negligence, and the amount by which the account is surcharged is measured by the loss occasioned by his want of skill and care, the analogy with common law damages for negligence is almost exact. Although he is a fiduciary, his duty of care is not a fiduciary duty. In this context it must be right to adopt the common law rules of causation and remoteness of damage to their fullest extent. The trustee’s liability is enforced in the course of taking the trust account rather than by an action for damages, but the obligation of skill and care is identical to the common law duty of care.’ ‘(‘Equity’s Place in the Law of Commerce’ by Lord Millett, (1998) 114 LQR 214, 225-7).

As a general rule accounts are to be taken against the trustees from the date at which the misapplication commenced. Where the misapplication has been innocent, accounts are usually directed from the commencement of the action. However, they may also be ordered from;

·       the date at which notice was given to the trustees questioning the propriety of the application; or

·       the date of the decree declaring the application improper.

Where a charity trustee uses trust funds for trading purposes, he is accountable to the charity for any profit made, or for interest at the rate of 5%.

Since the decision of the House of Lords in Sempra Metals Ltd v. IRC [2007] UKHL 34, the Court has had the power to make an award of compound interest where that is necessary to achieve full restitution.

‘Questions relating to charities may be compromised and the terms of the compromise confirmed by the court. Trustees for charities have power to compromise claims under the Trustee Act 1925. In addition, a compromise may be approved by the Charity Commission under the Charities Act 2011. Where the Attorney General is a party to any legal proceedings affecting a charity, no compromise can be enforced without his sanction. The Attorney General is a necessary party to all charity proceedings, other than any commenced by the Charity Commission, and must be joined as a defendant if he is not a claimant. In proceedings, other than charity proceedings, which concerned the interests of the charity, the Attorney General, if not the claimant, should generally be made a defendant. … Thus where proceedings are necessary to test the validity of an alleged charitable gift, even where the class to benefit is a foreign community, or to determine whether a claim to the benefit of a charity is properly founded, or to enforce the execution of a charitable purpose or to remedy abuse or misapplication of charitable funds, or to administer a charity, the Attorney General is generally a necessary party, and is normally the proper claimant. He represents the beneficial interest, in other words the objects, of the charity. Even if all the subscribers to a charitable fund are made claimants, a claim for the regulation of the charity is defective unless the Attorney General is also a party.’

(Halsbury’s Charity Law (2020), paragraphs 11.13 and 11.15).

Watson v Kea Investments Ltd [2019] – Rate of interest awarded against trustees

In Watson v. Kea [2019] the Court of Appeal ‘considered the basis on which interest is awarded against trustees. It surveyed the history of awards of interest on equitable compensation and trust claims, and found that the courts have consistently tried to make awards that were suited to investment of trust funds and the economic realities of the times. It is no longer realistic to assume that a missing trust fund would have been invested with no regard for capital accretion. It was therefore appropriate in determining a rate of interest to have regard to evidence of how a trustee might have invested the funds in the period for which interest is awarded, and to determine the rate accordingly even though it will include nominal capital return as well as missed income. This new [counterfactual] approach can be justified on the footing that, where a higher rate has historically been charged where a trustee has made a profit using trust money, the interest has been awarded in lieu of profit.’ [Lewin on Trusts 20th edition (2020), Vol 2, 41-060].

This new ‘counterfactual’ approach impacts:

(i) quantification of loss, i.e. the value of the claim;

(ii) pleading; and

(ii) proof – i.e. the need for expert evidence of the counterfactual, and related to that about norms and standards of behaviour expected of trustees.

Later in the year, together with a leading trust law academic at Cambridge University, I will be co-writing an in depth article ‘Trustees and Executors Duties and Powers in relation to Property and Investments’.

Watson v Kea Investments Ltd [2019] EWCA Civ 1759 (23 October 2019)

Extracts from the leading judgment by Lord Justice McCombe (with whom Lord Justice Hamblin and Sir Bernard Rix agreed):

Issue

‘3. The issue on this appeal raises the question whether the interest, payable by Spartan, and continuing to accrue, should properly have been fixed by the judge at 6.5% to reflect what the money to be recovered would have produced if invested in “proper trustee investments” – this would include an element of total return (including capital return) to the victim (Kea) – or should be fixed at some other (and if so, what) rate. The judge set the rate as a proxy for the rate of return that trustee investments would achieve. He did so based on performance indices of investment managers in different risk categories, as analysed by two (as was and is accepted) independent and reputable organisations, Asset Risk Consultants (“ARC”) and the Society of Trust and Estate Practitioners (“STEP”). The judge adopted a medium-risk rate identified by reference to those two indices.

Law

47. As one reads through the cases, one notes that the courts’ awards of interest in equity, while proceeding from certain basics, have been astute to adapt to developments in contemporary economic conditions, in giving weight to the arguments presented to them by the parties. This feature of adaptability recalls the comment made by Lord Scarman, in an entirely different context, in Gillick v West Norfolk AHA [1986] AC 112 at 183 B-D. about changing social conditions. His Lordship said:

“The law ignores these developments at its peril. The House’s task, therefore, as the supreme court in a legal system largely based on rules of law evolved over the years by the judicial process, is to search the overfull and cluttered shelves of the law reports for a principle, or set of principles recognised by the judges over the years but stripped of the detail which, however appropriate in their day, would, if applied today, lay the judges open to a justified criticism for failing to keep the law abreast of the society in which they live and work.”

I see much the same exercise being conducted by the equity courts in adapting awards of interest to changing economic conditions. In exercising that wide discretionary jurisdiction, the courts have been clearly as free as a supreme court in Lord Scarman’s example.

48.The next case to which we were taken, A-G v Alford (1855) 4 De GM & G 843, illustrates the principle that the defaulting trustee must account for profit actually received, or for the money that he must be presumed to have earned (and which has been lost to the trust) or pay interest instead. In that case the trustee had for several years retained trust funds uninvested which he ought to have invested. He was found liable to account and chargeable with simple interest at 4% because there was nothing to show that he had profited by misconduct. He was only liable for what would have been earned on proper trust investment, i.e. at the usual rate of 4% simple. Lord Cranworth LC said (at p.851):

“What the Court ought to do, I think, is to charge him only with the interest which he has received, or which it is justly entitled to say he ought to have received, or which it is so fairly to be presumed that he did receive that he estopped from saying that he did not receive it. I do not think there is any other intelligible ground for charging an executor with more interest than he has made, than one of those I have mentioned. Misconduct does not seem to me to warrant the conclusion, that the executor did in point of fact receive, or is estopped from saying that he did not receive, the interest, or that he is to be charged with anything he did not receive, if it is not misconduct contributing to that particular result.”

As Nugee J observed this was a case where the trustee was made liable for interest on the basis of what he ought to have received on the uninvested funds: see paragraph 22 of the Interest Judgment.

49.In Re Emmet’s Estate (1881) 17 Ch. D. 142 a trustee was ordered to pay interest at 4% compound in respect of a portion of a fund invested in unauthorised investments (and in respect of some funds not invested at all). The original trust had also required the trustee during the beneficiary’s minority to accumulate surplus income. The award seems to have been made on the basis of the failure to invest in the way that he should have done and to compensate for the absence of accumulation after the fund should have been handed over on the beneficiary’s attaining majority, i.e. to compensate for loss of return that the trust fund would otherwise have achieved. In the course of his judgment, Hall V-C said (at p. 149-150):

“There being, then, no trust for accumulation directed beyond the time of minority, we must now consider what is the obligation so created. There is, I consider, a liability and obligation to accumulate the income subject only to such application as might be made of any part of it, less or more, for the specified purposes of maintenance, education, or advancement. The trust comes to an end when a child attains twenty-one. So far I hold the trustee liable to account at compound interest for non-accumulation. Does his liability go beyond the date when a child attains twenty-one? After a child attains twenty-one there is no duty undischarged, except to hand over to the child the fund with the accumulations. The trustee did not so hand it over, nor did he explain to the child that he was entitled to call for and have transferred to him the fund, with the accumulations upon it, in his hands, but he left things in exactly the same position as they were in when the child attained twenty-one. Can I then allow a trustee, under such circumstances, to say, “I am, now that the child has attained twenty-one, holding the fund on a different trust, which does not require any accumulation at all, but merely makes me liable for simple interest; and I can keep it in my hands and use it, and only charge myself with simple interest”? That would be inconsistent with the duties the trustee had undertaken. The accumulations should have gone on until the trustee transferred the fund. In my opinion, if he does not hand it over when he ought to do, he must be taken to be holding it still on the same trust and subject to the same obligations as before.”

50.It is instructive to note that from the end of the 19th century it was clear that the set rate of 4% was (a) based upon the rate expected that trustees might be expected to achieve, and (b) liable to change with changing economic conditions. Re Lambert [1897] 2 Ch. 169, which was not a breach of trust case, illustrates the principle. Commenting on the earlier case of Re Rees (1881) 17 Ch. D. 701, Stirling J said (at [1897] 2 Ch. At 180):

In re Rees (1) that rate of interest had been adopted by the Court of Chancery as representing the average rate of interest payable in respect of investments such as trustees were authorized by the Court to invest in; it is also a rate of interest which is charged according to the rules on debts which are provable in administrations, and as to which there is no special provision as to their bearing interest. The rule as to the interest payable on debts has not yet been altered, and that remains the rate at which interest is charged on debts; but as regards other applications of the rule charging 4 per cent., it has in recent times been thought that it is excessive, inasmuch as in these days trust investments do not yield anything like 4 per cent., and several judges, I think North J. and Kekewich J. particularly in the number, have under circumstances such as these said that only 3 per cent. ought to be charged.”

51.In Re Beech [1920] 1 Ch 40, Eve J said (at p. 44) this:

“In In re Woods Kekewich J. allowed only 3 per cent. interest, and in so doing he expressly took into consideration two factors, the one that the securities were of a wasting nature, and the other that the value of money had then materially altered since the date when 4 per cent. had been fixed as the correct rate. In 1905, in In re Chaytor, Warrington J. not only followed what had been done in In re Woods as to unauthorized securities of a wasting nature, but fixed 3 per cent. as the interest to be paid on the value of all unauthorized securities, whether wasting or not. There can be no doubt that in 1904 and 1905 the income derivable from trust securities was very much less than it had been in the days when Meyer v. Simonsen was decided, but subsequent experience perhaps provokes the observation that a departure from a salutary rule in matters of this kind – introducing as it does an element of uncertainty in practice and administration – can only be justified if the changed conditions on which it is founded continue at least as constant as those upon which the rule was itself framed. Had the value of money remained till to-day the same as it was in 1904 and 1905 I might have felt myself constrained to follow these last two cases, and to hold that as between tenant for life and remainderman 3 per cent., and not 4 per cent., was now the proper rate of interest. But the conditions have materially changed since 1904 and 1905, and at the present date, when first-class investments can be obtained for trust moneys yielding interest at 5 per cent., matters approach much more near to the condition of things subsisting when Meyer v. Simonsen was decided than to those obtaining when In re Woods and In re Chaytor introduced exceptions to the rule laid down in the earlier case, and on these grounds I think much of the reasoning on which these later decisions were based has no application to-day.”

The judge reverted to 4%. Again, it seems to me the Chancery court was astute to fix interest rates in varying types of trustee cases in accordance with the economic realities of the day. The idea that the court should be hidebound to any rigid rate, irrespective of the loss caused to a trust by a trustee’s default, seems to be contrary to the principle emerging from such cases.

52.In Wallersteiner v Moir (No.2) [1975] QB 373 the court was faced with an argument that it had no jurisdiction to award interest under the statutory jurisdiction conferred by the Law Reform (Miscellaneous Provisions) Act 1934 on a default judgment and, therefore, that it had no jurisdiction to award interest at all. The court held that, whatever the true range of the statutory power, it would award interest under the equitable jurisdiction of the court. The judgments do not discuss the rate, however it can be seen from the report that the judgment was to bear compound interest at one per cent over bank rate or minimum lending rate with yearly rests from time to time from the date of original indebtedness and at 7 ½ % from judgment.

53.The judgments in that case discuss the principles upon which the courts of equity award interest. At p. 388B-H, Lord Denning MR said:

“The principles on which the courts of equity acted are expounded in a series of cases of which I would take the judgment of Sir John Romilly M.R. in Jones v. Foxall (1852) 15 Beav. 388, 391: of Lord Cranworth L.C. in Attorney-General v. Alford (1855) 4 De G.M. & G. 843, 851: of Lord Hatherley L.C. in Burdick v. Garrick (1870) 5 Ch.App. 233, 241-242 and of Sir W. M. James L.J. in Vyse v. Foster (1872) 8 Ch.App. 309, 333; (1874) L.R. 7 H.L. 318. Those judgments show that, in equity, interest is never awarded by way of punishment. Equity awards it whenever money is misused by an executor or a trustee or anyone else in a fiduciary position – who has misapplied the money and made use of it himself for his own benefit. The court:

“presumes that the party against whom relief is sought has made that amount of profit which persons ordinarily do make in trade, and in these cases the court directs rests to be made,” i.e., compound interest: see Burdick v. Garrick, 5 Ch.App. 233, 242, per Lord Hatherley L.C.

The reason is because a person in a fiduciary position is not allowed to make a profit out of his trust: and, if he does, he is liable to account for that profit or interest in lieu thereof.

In addition, in equity interest is awarded whenever a wrongdoer deprives a company of money which it needs for use in its business. It is plain that the company should be compensated for the loss thereby occasioned to it. Mere replacement of the money – years later – is by no means adequate compensation, especially in days of inflation. The company should be compensated by the award of interest. That was done by Sir William Page Wood V.-C. (afterwards Lord Hatherley) in one of the leading cases on the subject, Atwool v. Merryweather (1867) L.R. 5 Eq. 464n., 468-469. But the question arises: should it be simple interest or compound interest? On general principles I think it should be presumed that the company (had it not been deprived of the money) would have made the most beneficial use open to it: cf. Armory v. Delamirie (1723) 1 Stra. 505. It may be that the company would have used it in its own trading operations; or that it would have used it to help its subsidiaries. Alternatively, it should be presumed that the wrongdoer made the most beneficial use of it. But, whichever it is, in order to give adequate compensation, the money should be replaced at interest with yearly rests, i.e., compound interest.

Buckley LJ (at p. 397B-F) said:

It is well established in equity that a trustee who in breach of trust misapplies trust funds will be liable not only to replace the misapplied principal fund but to do so with interest from the date of the misapplication. This is on the notional ground that the money so applied was in fact the trustee’s own money and that he has retained the misapplied trust money in his own hands and used it for his own purposes. Where a trustee has retained trust money in his own hands, he will be accountable for the profit which he has made or which he is assumed to have made from the use of the money. In Attorney-General v. Alford, 4 De G.M. & G. 843, 851, Lord Cranworth L.C. said:

“What the court ought to do, I think, is to charge him only with the interest which he has received, or which it is justly entitled to say he ought to have received, or which it is so fairly to be presumed that he did receive that he is estopped from saying that he did not receive it.”

This is an application of the doctrine that the court will not allow a trustee to make any profit from his trust. The defaulting trustee is normally charged with simple interest only, but if it is established that he has used the money in trade he may be charged compound interest: see Burdick v. Garrick. 5 Ch.App. 233, per Lord Hatherley L.C., at p. 241, and Lewin, Trusts, 16th ed. (1964), p. 226, and the cases there noted. The justification for charging compound interest normally lies in the fact that profits earned in trade would be likely to be used as working capital for earning further profits. Precisely similar equitable principles apply to an agent who has retained moneys of his principal in his hands and used them for his own purposes: Burdick v. Garrick.”

Buckley LJ said that the court in that case should not work on the basis that the moneys were working capital of the victim companies as interest was not normally to be paid to compensate for loss but to ensure that the defendant does not retain a profit. In any event, it had not been shown that the moneys were working capital. (p.398F-399A).

54.At p. 406 of the report there is the judgment of Scarman LJ (as he then was) to similar effect as to the equitable principles set out by Lord Denning and Buckley LJ, which I do not think it is necessary to quote here.

55.The next case to which I should refer is Bartlett v Barclays Bank Trust Co. Ltd. [1980] Ch 515. This was a case where a professional trustee had permitted a company in which it was a majority shareholder to invest in property development of a speculative character which it could have stopped and which Brightman LJ (as he had become between trial and judgment) held it should have stopped. The trustee was held liable to compensate the trust fund for its loss until such time as restitution of the fund had been achieved. As for interest on the sum to be recovered, the plaintiffs sought interest at a borrowing rate currently obtainable by reference to Wallersteiner: see per the late Mr Nugee QC (senior; our judge’s father) and Mr Sher for the plaintiffs at p.540C. For the defendant, Mr Sebestyen referred to the old standard rate of 4% and said that to fix a rate pre-empted the enquiry as to damages. Interestingly, Brightman LJ referred to the help he had gained from the tables of borrowing and deposit rates provided to him by one of the parties. Compare here the use of the ARC and STEP materials upon which Nugee J (junior) relied.

56.Brightman LJ awarded interest at the rate available on the courts’ short-term investment account. At pp.546G-547D, he said this:

“I turn now to the question of interest. It is common ground that interest can be claimed on the compensation which is found due. Dispute only arises on the rate of interest to be charged. In former days a trustee was as a rule charged only with interest of 4 per cent. unless there were special circumstances. That rate seems to have prevailed as the general rule until recent years. The defendant has helpfully supplied the court with a table of bank and minimum lending rates, and bank deposit rates. Between 1963, the year in which the Old Bailey scheme began, and the present day there have been nearly 80 changes of bank rate of minimum lending rate and nearly 70 changes in Barclays Bank deposit rate. The bank or minimum lending rate during this period has varied between 4 per cent. and 17 per cent. and deposit rate has varied between two per cent. and 15 per cent. In these days of huge and constantly changing interest rates (the movement being usually upwards so far) I think it would be unrealistic for a court of equity to abide by the modest rate of interest which was current in the stable times of our forefathers.

In my judgment, a proper rate of interest to be awarded, in the absence of special circumstances, to compensate beneficiaries and trust funds for non-receipt from a trustee of money that ought to have been received is that allowed from time to time on the courts’ short-term investment account, established under section 6 (1) of the Administration of Justice Act 1965. To some extent the high interest rates payable on money lent reflect and compensate for the continual erosion in the value of money by reason of galloping inflation. It seems to me arguable, therefore, that if a high rate of interest is payable in such circumstances, a proportion of that interest should be added to capital in order to help maintain the value of the corpus of the trust estate. It may be, therefore, that there will have to be some adjustment as between life tenant and remaindermen. I do not decide this point and I express no view upon it. I merely mention it as something which may have to be considered by the trustees and their legal advisers.”

57.The principle for Brightman LJ was to “… compensate beneficiaries and trust funds for non-receipt from a trustee of money that ought to have been received…”. The rate was not that which had been awarded in any previous case. It was not the old 4%, nor was it the proxy for a borrowing rate that had been awarded in Wallersteiner. It was a rate to provide for both capital and income loss which would need to be apportioned between life tenant and remaindermen accordingly.

58.I should mention briefly Re Duckwari PLC [1999] Ch 268, in which a company sought successfully to recover from a director a loss incurred in respect of a transaction entered into by the company in contravention of section 320 of the Companies Act 1985. That section prohibited transactions with persons connected with the company unless approved by the company in general meeting. A question arose as to the proper rate of interest to be awarded on the compensation. The defendants’ counsel, somewhat hesitantly it seems, advanced the old 4% rate as being appropriate, but he accepted that in recent years that rate had been departed from; he suggested base rate less 0.5% would be correct on that basis. The claimant’s counsel argued for a rate reflecting the amount that the company would have had to pay to borrow the money, i.e. base rate + 3%. The court awarded base rate, plus 1%.

59.Nourse LJ (with whom Pill and Thorpe LJJ agreed) said (at p. 273C-H):

“There remains the question of interest. Mr. Hoser’s formal position is that we should follow the established practice, dating from before the time of Knott v. Cottee, 16 Beav. 77, which was to charge the trustee with simple interest at 4 per cent. unless there was misconduct. More realistically, he accepts that in recent years the court has regularly departed from that rate. His alternative submission is that Duckwari should be held to the notional interest rate (base rate less 0.5 per cent., simple not compound) which it has claimed in respect of the £155,923 applied in part payment of the purchase price. I will say at once that no case has been made out for compound interest.

On the other side, Mr. Richards has relied on the judgment of Forbes J. in Tate & Lyle Food and Distribution Ltd. v. Greater London Council [1982] 1 W.L.R. 149, 154 for the proposition that interest should be payable at a commercial rate, i.e. at the rate Duckwari would have had to pay in order to borrow the money, and that in the case of a small concern such as Duckwari the rate should be taken to be as high as base rate plus 3 per cent. My impression is that Forbes J.’s suggestion that the rate should vary according to the size and prestige of the concern which is taken to have borrowed the money has not won general acceptance. The practice of the Commercial Court is to award interest at base rate plus 1 per cent.

In Bartlett v. Barclays Bank Trust Co. Ltd. (No. 2) [1980] Ch. 515, 547 Brightman J. was of the opinion that a proper rate of interest to be awarded, in the absence of special circumstances, to compensate beneficiaries and trust funds for non-receipt from a trustee of money that ought to have been received was that allowed from time to time on the short term investment account, a rate which may be taken to be not more favourable than base rate less 0.5 per cent. However, such a rate is not appropriate where the entity which is out of pocket is not a private trust but a commercial concern. In such a case interest ought to be awarded at a commercial rate. A precedent is at hand in the shape of Belmont Finance Corporation Ltd. v. Williams Furniture Ltd. (No. 2) [1980] 1 All E.R. 393, 419, to which reference was made in my earlier judgment [1998] 3 W.L.R. 913, 920G. There simple interest was awarded on the sum recoverable by the company in constructive trust at base rate plus 1 per cent. I propose that we should award it at the same rate here.”

60.That was a case in which each side was contending for a borrowing rate in respect of a company which would not have been investing the money but would have been using it for its own business purposes. Thus, the rate awarded was a percentage over base borrowing rates. Again, this was a case where the court resolved the dispute by reference to the nature of the claimant with which it was concerned and the respective arguments presented. There was no argument that anything other than a borrowing rate should be adopted.

61.The next case is another in which each of the parties was contending for different borrowing rates to be awarded. This is Fiona Trust v Privalov [2011] EWHC 664 (Comm) (Andrew Smith J). There was no argument that the rate should be fixed by what return the claimants might have made from investing the funds to which they were entitled: see paragraph 14 of the judgment. In such circumstances, it is not surprising that the judge should have said that the court usually decides at what rate of interest the recipient could have borrowed the funds in question or that he should have referred to cases where that was the issue: see paragraph 14 of the judgment. Further, as Nugee J pointed out in the Interest Judgment (paragraph 32) the Fiona Trust case did not involve a claim against a defaulting trustee and it involved losses to a trading company. That case and the ones referred to by Andrew Smith J involved claims by trading companies for losses incurred in their businesses.

62.I turn to Challinor, to which I have referred in another context above. This was a case where solicitors were held to have paid away clients’ money without authority and in breach of trust. They were liable to restore the lost fund by way of equitable compensation. Argument arose as to the proper rate of interest. The rival contentions were for a borrowing rate of 5% over base by the claimants and a deposit rate, i.e. not more that 1% over base, by the defendant.

63.Hildyard J compared cases where there had been loss in relation to the conduct of a business, where it was assumed that money would be borrowed to replace it, with cases where the award amounted to an increase in the claimant’s funds rather than a replacement of what he had previously had (e.g. personal injury cases) where minimum return on deposit would be the norm. At paragraphs 33 and 34 of his judgment, Hildyard J said:

“33. This case does not really fit easily into either category. It seems to me an example of a third type of case, which is where the claimant is not running a business that depends upon credit, and where the loss of the money is likely to deprive the claimant of other opportunities, but where any ordinary presumption of the need for credit is weak or non-existent.

34. In cases of this third type, in my view, neither a minimum investment basis nor a proxy borrowing cost basis, is really a logical proxy. Thus, it is unlikely that any of the Claimants in this case, being sophisticated investors, would have left money on bank deposit at such low rates of return; but it is also unlikely that any of them would have borrowed at (say) 5% over base rate to make further investments: even someone with an unusual appetite for geared investment would be likely to be put off. Further, neither reflects the larger reality that in this case the Claimants’ real loss is the opportunity denied for further investment: and that is not measurable.”

He continued (at paragraphs 36 to 38) as follows:

“36. However, I have concluded that in this case, neither the investment rate nor the unsecured borrowing rate really provides a fair answer; and that the appropriate rate is such rate as is reasonable to assume that persons in the position of the Claimants would have had to pay for monies for geared investment. I have no direct evidence of applicable rates in such a context: and I suspect there are fairly broad variations according to personal circumstances.

37.That brings me to issue (2) in paragraph 30 above: what rate would be fair across the board. Again, a broad brush is required: in assessing any special rate the Court disclaims the task of determining what each claimant’s financial position is and at what rate that claimant could have borrowed money. It seeks to assess a reasonably representative or proxy rate which can without apparent injustice be applied across the class of claimants.

38.The fashioning and calculation of a representative or proxy rate is more art than science; and it is more in the nature of “one size fits all” than “made to measure”. It is an exercise of discretion rather than of settled rules. The Court must do its best to fashion a proxy which suits the nature of the case and the claimants as a whole, though it does not and cannot reflect the individual financial position of each claimant.”

64.As can be seen, Hildyard J had no evidence as to the applicable rates for the type of investment that he considered to be the most appropriate proxy. The judge reviewed such evidence as he had about the claimants as a whole and then reverted to what borrowing rates might be available. In the end his award was 3% above base. At paragraph 46, he set out his underlying thinking in setting this rate:

“46. …It is intended to reflect my assessment of (a) the general characteristics of the Claimants as appears likely from the nature of the activity in which they were all engaged, (b) the likelihood that they were as a class in a marginally better position than most to obtain credit in light of their likely standing and financial sophistication, and (c) an element of blending between rates available to borrowers and savers. It is, in a sense, intended to represent a pragmatically enhanced version of the old Commercial Court rate, taking into account the present unusual financial and economic circumstances.”

65.This seems to me to be a case where a judge had to award interest on what he saw to be inadequate evidential materials for his purposes. He did his best to assess the circumstances of a number of different types of claimant, but he recognised that none of the available proxies entirely filled the bill. That is not our case, however. Here the judge had very precise and reputable information from two sources by which to assess what would be returned on proper trust investments.

66.Finally, I would refer to Carrasco v Johnson [2018] EWCA Civ 87, in which the leading judgment was given by my Lord, Hamblen LJ, with whom Kitchin LJ (as he then was) agreed. The claim was to recover a balance of two unsecured loans. The claimant abandoned her original claim to contractual interest and claimed interest pursuant to statute. The District Judge awarded interest at the rate of 3% per annum. This represented between 2.5% and 2.75% over base rate in the relevant period. On the claimant’s appeal it was argued that the rate did not reflect the evidence as to the actual cost to her of being kept out of her money; no proper account had been taken of the expert evidence as to borrowing rates; and while the judge accepted that the parties were private individuals and not commercial concerns she had awarded interest at a commercial rate. Two other grounds arose which do not need separate mention.

67.This was, of course, a statutory interest case and did not involve equitable compensation and interest thereon at all. The defendant was not a defaulting trustee. The claimant was not a beneficiary of a trust fund. The cases referred to by my Lord in his judgment in that case (at paragraph 16) reflect those facts. Apart from Challinor, none of the cited authorities involved the equitable jurisdiction to award interest. At paragraphs 17 and 18, Hamblen LJ set out the guidance to be derived from the cases cited as follows:

“17. The guidance to be derived from these cases includes the following:

(1) Interest is awarded to compensate claimants for being kept out of money which ought to have been paid to them rather than as compensation for damage done or to deprive defendants of profit they may have made from the use of the money.

(2) This is a question to be approached broadly. The court will consider the position of persons with the claimants’ general attributes, but will not have regard to claimants’ particular attributes or any special position in which they may have been.

(3) In relation to commercial claimants the general presumption will be that they would have borrowed less and so the court will have regard to the rate at which persons with the general attributes of the claimant could have borrowed. This is likely to be a percentage over base rate and may be higher for small businesses than for first class borrowers.

(4) In relation to personal injury claimants the general presumption will be that the appropriate rate of interest is the investment rate.

(5) Many claimants will not fall clearly into a category of those who would have borrowed or those who would have put money on deposit and a fair rate for them may often fall somewhere between those two rates.

18. Challinor and Reinhard are examples of cases which were held to fall within that mid-category, justifying a blending between rates, and in both cases interest was awarded at 3% over base rate.

Applying those principles, the court dismissed the appeal.

68.In my judgment, while Carrasco provides an extremely useful and succinct statement of the principles governing the award of interest in the type of case there considered, it does not concern interest upon equitable compensation in general or the liabilities of constructive trustees in particular.

69.The cases in equity, some of which I have sought to summarise, do not concern cases of that type in issue in Carrasco. The courts of equity and later the Chancery Division have applied the principles developed in the trust cases over the years to fix interest rates appropriate to such cases.

70.A trustee’s position affords the ability to act in ways distinctly inimical to the interests of his beneficiaries and without necessarily the signs of default being readily discernible by the beneficiaries (a fortiori, if the beneficiaries are minors). The investing parties in this present case were sophisticated businesspeople but were entitled to similar protections for their trust funds as every beneficiary of a trust or of another fiduciary duty, once the funds came into the hands of a person (natural or legal) who owed trustee duties, including actual or notional investment duties. The principles governing recovery of equitable compensation are not, and need not be, the same as those governing damages or restitutionary claims arising between commercial parties or parties in “arms length” relationships (as in Carrasco).

71.In my judgment, in dealing with questions of interest on equitable compensation in trust cases, the courts have consistently tried to make awards that were suited to investment of trust funds and the economic realities of the times. In the 19th century the task was relatively simple; trust investments could be expected to yield 4%; trustees who mixed trust assets with their own for the purposes of commerce could safely be presumed to have earned at least 5% which they should restore to the trust. If they are thought to have offered 5% as a cheap price of their true profit, an account of that profit would be ordered, as in Docker v Somes (supra).

72.Reality required interest rates to change with the times: see the early 20th century cases cited above. Then in a very different economic climate in 1974, at the time of Wallersteiner v Moir, the traditional rates were simply not high enough. The court sought to deprive Dr Wallersteiner of his profit. It did so by reference to a convenient borrowing rate. The victims of his wrongdoing were commercial concerns. I do not read that case as laying down for all time a rule that borrowing rates were the appropriate ones in all cases. Indeed, later cases (even at common law – see the Carrasco principles) debate the relative merit of borrowing rates and deposit rates in various types of case. There can be no doubt, however, that the courts have sought to find, in each individual case, a suitable proxy rate for the general characteristics of the claimant entitled to the equitable remedy. As Nugee J pointed out, in paragraph 50 of the Interest Judgment, quoted above, this is entirely in accord with the approach to the interest award, in different circumstances, in Carrasco: see paragraph 27 of Hamblen LJ’s judgment.

73.A borrowing rate is simply not the realistic proxy in a case of this sort. It is unrealistic to assume that the deprived fund would have borrowed to invest; it would not have done so. It is unrealistic to assume that the trust fund, duly replaced, would have been placed (in breach of trust, one might add) on deposit with no regard to capital accretion; it would not have been so placed. That is simply not the real world of trustee investment and it is also unlike the world in the 19th century when trustees’ investment powers were substantially more restricted.

74.The material before the judge (ARC/STEP) illustrated precisely what a deprived fund of this type would have done with the misappropriated money. (Brightman LJ had such materials to assist with different rival arguments in Bartlett.) There was no need to work in a way contrary to reality or to embark on an element of speculation, as Hildyard J was constrained to do in Challinor. Why ignore reality? In my judgment, there was no need do so in this case and Nugee J did not do so.

Conclusion

75.As I said at the outset, in my judgment, Nugee J (long experienced and highly respected trust and equity practitioner and judge that he is) reached an answer in this case that was well within his wide discretion and in accord with the principles to be derived from, the relevant cases. I regret having had to expand on his reasoning which I would have liked to adopt without more ado. In this judgment, I have intended to say nothing inconsistent or in conflict with Nugee J’s judgment.

Mediation of Will Trust & Probate disputes

Mediation of Will Trust and Probate disputes involves both evaluative and facilitative negotiation.

Winning in a negotiation = doing an optimal deal.

That involves compromise, because in the real world, nobody ever gets everything that they want.

Furthermore, at mediation you may not have current property valuations, i.e. you are negotiating with imperfect information.

ADR is imperfect, but potentially more profitable than litigating, because in litigation one of you will lose.

It is also more creative, because you can agree terms that the Court cannot order at the conclusion of a trial. It therefore requires imagination.

Whereas in a court hearing counsel addresses the judge, in a mediation counsel can speak directly to the other parties in the dispute.

The keys to success are strategy and skillful negotiation, i.e.

(a)    planning, preparation, and critically, determination of your client’s settlement range (i.e. the zone within which your client has commercially decided to settle by ‘doing a deal’);

(b)    communication of litigation risks to your opponent, i.e. to:

(i)     reduce his expectations; and

(ii)     draw him into your client’s settlement zone; 

so that you can negotiate the best deal for your client; and

(c)    a structured and principled process for:

(i)     exploring the practical options available for ‘doing a deal’, i.e. based upon the assets available, values, and ownership claims; and

(ii)     agreeing terms of settlement that are both capable of practical implementation, and sustainable (i.e. a framework, or structure within which a pragmatic deal is ‘doable’).        

I have always advocated getting on with job, i.e. not wasting daylight on a plenary session, which risks inflaming tempers.

There is no risk of your client inadvertently bumping into a hostile family member in a remote mediation. Furthermore, I am hearing from mediators that parties tend to be more businesslike and focused in remote mediations, i.e. because there is less oxygen for posturing and grandstanding by the solicitors and barristers involved.

In a talk broadcast on 29 March to members of the Professional Negligence Bar Association, entitled ‘One year on: lessons to be learned from mediations and hearings during Covid-19’ Michel Kallipetis QC:

observed that:

1.     in a virtual hearing before a judge there are three questions the judge expects counsel to address:

1.1   what do you want me to do [i.e. what order do you want me to make];

1.2   can I do it [i.e. what jurisdiction and powers does the court have to make the order]; and

1.3   why should I do it [i.e. what are the merits based upon facts, evidence, and law];

2.     likewise, in preparation for a virtual mediation, the legal representatives need to discuss three questions with their client:

2.1   what must you have out of any settlement;

2.2   what can you not live with, [i.e. what are your walk-away red-lines];

2.3   what would you like to have out of a settlement [i.e. what is your shopping list, and is this merited, practical, and realistic].

The judicial ethos underlying PD57AC, which concerns witness statements for use at trials in the Business and Property Courts and applies to new and existing proceedings, but only to trial witness statements signed on or after 6 April 2021, is that less is more.

As a matter of best practice, I am advising clients to follow the PD whether it applies to their claim or not.

Culturally there needs to be a shift in emphasis is preparation for a hearing between:

(i)     the amount of time and costs incurred by solicitors in disclosure, preparing documents, and bundles; and

(ii)     intellectual time incurred by counsel in developing arguments and submissions to present at the hearing in order to persuade the judge on the day – because that is the work and product that will get a result.

I am not saying that counsel can make bricks without clay. However, at the hearing of an interim application (and you may only have 20-30 minutes in which to get your points across), a judge is more likely to be persuaded by the quality of oral advocacy, than by documents which he or she may not have even received, or have read beforehand.

I think that since Covid, the rules of the game have changed.

The message that appears to be coming from the Bench, is that in a remote hearing, a judge a more likely to be persuaded by oral argument than by documents.

If that observation is correct, then it does not matter whether your judge is someone who prefers to read or listen, it is striking the right balance between oral and written advocacy that will get a result on the day, i.e. a win.

While a chronology is key, and the Case Summary and List of Issues are important, witness statements should now comply with the guidance in PD57AC, and I think that the underlying ethos should be applied to: all documents; skeleton arguments; and the preparation of electronic bundles.

I also think that these practical ground-rules apply to preparation for a virtual mediation.

Mediation is not an adversarial duel. The aim is to do a deal. Therefore, the mediator is more likely to be effective from the outset, if he understands what your client wants; must have; cannot live with; and would like to get. In my experience, unless you have had that conversation with your client beforehand, it is unlikely that the case will settle, and some clients do not understand that mediation is all about doing a deal, and that there is no point in mediating unless and until all parties have the will to settle, i.e. are ready to do a deal.

So, focus on persuasion, rather than documents.

That is why you need counsel in mediation – not as a champion, but in order to persuade the other parties through the mediator, and of course the mediator cannot convey your message if he does not understand your client’s commercial thinking and imperatives. Do the mediation math!

The key to success is preparation.

For the methodology I have designed and pioneered for trust disputes – the ‘BME Mediation method’, see Chapter 12 (ADR and settlement) of my book the Contentious Trusts Handbook’, published in July 2020 by the Law Society of England and Wales.

For mediation techniques that apply in will and probate disputes, see Chapter 10 of my book, the Contentious Probate Handbook , published by the Law Society in 2016.

Purchasing links:

Wildy & Sons Ltd — The World’s Legal Bookshop : Islam, Carl

Contentious Trusts Handbook – Law Society Bookshop

See also Mediation of Will Trust & Probate Disputes: https://newsite.carlislam.co.uk/advocacy

Arbitration of trust disputes in London

Institutional arbitration of trust disputes in England and Wales is almost unknown, because the interests of unborn/unascertained beneficiaries cannot be reliably bound by an arbitration agreement when the trust instrument is drafted. Therefore, English will/trusts and settlements do not usually contain an arbitration clause.

CPR, r.26.4(1) provides, ‘A party may, when filing the completed directions questionnaire, make a written request for the proceedings to be stayed while the parties try to settle the case by alternative dispute resolution or other means.’

Section 6 of the Arbitration Act 1996 [‘AA 1996’] defines an ‘arbitration agreement’ widely as meaning any ‘agreement’ , i.e. whenever made, ‘to submit to arbitration present or future disputes (whether they are contractual or not).’ 

In a trust dispute, where the instrument does not contain an arbitration clause, does an English Court have the jurisdiction to grant a stay under CPR, r.26.4(1) where e.g. at the first CMC, an oral application is made by consent, for a stay for arbitration in London, and a litigation friend consents to act (e.g. for a minor) with the approval of the Court, following the making of submissions about why this is appropriate? 

In other words, can:

(i)              the parties agree to an ad hoc arbitration; and

(ii)              the court, then stay proceedings, so that the ad hoc arbitration can be convened?

The trustees would need to have the power to agree to arbitration. 

A theoretical obstacle is the extent to which the supervisory jurisdiction of the Court over trust administration cannot be ousted. 

However, logically, the jurisdiction of the Court cannot be ousted if it grants an order by consent, because the Court is acting in the exercise of its jurisdiction, and note the default procedural rules contained in sections 15 to 29 and 33 to 41 of the AA 1996

The Court could make it a term of the Order that the arbitration decision is subject to a right of appeal to the Court (see sections 67 to 69 of the AA 1996), i.e. so that:

(i)     the application for the Order cannot be, and therefore is not, in itself, an attempt to oust the jurisdiction of the Court, which is capable of depriving the Court of its power to grant the Order; and

(ii)     notwithstanding that the application is voluntary (i.e. where each beneficiary is an adult and has full capacity),the convention right provided for under Article 6.1 of the European Convention for the Protection of Human Rights and Fundamental Freedoms: (a) is not engaged; (b) cannot be infringed; and (c) is therefore satisfied.

‘In England and Wales, there is case law to the effect that a settlor or testator cannot validly exclude the jurisdiction of the Court from determining all issues which arise in the administration of a trust. [In Re Wynn [1952]] … Danckwerts J [had] occasion … to consider the juridical basis of allowing arbitration in a contractual context, stating:

“[o]ne’s mind naturally turns to provisions which are often found in contracts providing for the decision of disputes by an arbitrator, the common arbitration clause. After considerable doubt, the position of an arbitration clause appears to have been settled by Scott v Avery as being valid, provided that it merely requires as a condition precedent to the bringing of legal proceedings upon the contract that there shall have been an arbitration fixing the amounts to which the parties are entitled: and, on the other hand, that anything which goes beyond that, and attempts to deprive the parties of their right to bring an action is unlawful as an attempt to oust the jurisdiction of the Court.”

The principle is that the Court must be allowed to retain ultimate control, nowadays represented by the right of appeal on a point of law. In the context of a will it therefore appears to be settled that it is not possible to make a decision of the trustees final and binding. In the process of declaring the clause in In re Wynn to be void, Danckwerts J followed In re Raven, a decision of Warrington J. … As for arbitration clauses, the clear implication of both authorities is that such clauses are safe from invalidity for the very reason that the arbitrator’s decision is not final. In the ordinary course of an arbitration pursuant to a statute, there is a right of appeal, even if a limited one, and this prevents an arbitration clause from being void as an ouster of the Court’s jurisdiction. However, the corollary is that if an arbitration clause does not have an explicit or implicit right of appeal, then there remains a real danger that the clause does amount to an invalid ouster of the jurisdiction. The conclusion for present purposes is that the arbitration of trust disputes in England and Wales would need legislation.’ (‘Arbitration of Trusts Disputes – Issues in National and International Law’ (2016) edited by S.I.Strong, paragraphs 10.56 – 10.67, by Mark Herbert QC).

Why though, is legislation necessary if either:

(i)     an arbitration clause in a trust instrument expressly requires:

(a)    the consent of all beneficiaries; and

(b)    the approval of the Court where there are any: unborn; minor; or incapacitated beneficiaries, who in the exercise of it’s ‘supervisory jurisdiction’ can sanction the bringing of arbitration proceedings, supported by a stay, on terms which provide that any party is at liberty to apply to the Court to review the arbitrator’s decision, and then allow the decision to be appealed under s.69 AA 1996; or

(ii)     after a dispute has arisen, all trustees and beneficiaries agree to an ad hoc arbitration, and if as in (i) above, an application is then made to the Court for:

                  (a)    directions; and

                  (b)    if necessary a stay,

the Court grants its blessing, whilst preserving its supervisory jurisdiction?

In other words, can the Court grant an order by consent, which enables the parties to resolve their dispute by arbitration, i.e. because there is no prohibition in the circumstances outlined above?

I cannot see why not.

For a full discussion, please refer to Chapter 12 (ADR and settlement) of my book, the ‘Contentious Trusts Handbook’ (2020), published by the Law Society: Wildy & Sons Ltd — The World’s Legal Bookshop : Tax-Efficient Wills Simplified 2013/2014

To view my recent article ‘Judicial Early Neutral Evaluation and the New Normal’ published by Trusts & Trustees (Oxford University Press): Trusts & Trustees | Oxford Academic (oup.com) please visit the ‘Publications’ page at www.ihtbar.com

In the summer, I am planning to write an in-depth article about duties and powers of executors and trustees in relation to property and investments, which will be co-authored with a leading trust law academic at Cambridge University.

Deaccessioning of art & antiquities by a museum in breach of fiduciary duty

With reduced funding, some museums have turned to ‘deaccessioning’ the removal of an object from a museum collection with the intent to sell it.

‘Trustees of museums, like trustees of other public and charitable organizations, are subject to the legal obligations imposed upon fiduciaries.This proposition has, however, rarely been recognized either by museum trustees in their conduct of museum affairs, or indeed, by the legal system itself. As a result, museums have often been operated by their curatorial staffs and boards of trustees with little external supervision. Particularly in such areas as self-dealing, conflicts of interest and failure to observe donors’ directives.’ ‘The Fiduciary Duties of Museum Trustees’, by Patty Gerstenblith, Columbia-VLA Art and the Law (1983).

What claims may arise from deaccessioning in breach of fiduciary duty? see, ‘Art Deaccessions and the Limits of Fiduciary Duty’, by Sue Chen, Art Deaccessions and the Limits of Fiduciary Duty (duke.edu)

Art deaccessions prompt lawsuits against museums, and some commentators advocate using the stricter trust standard of care, instead of the prevailing corporate standard (business judgment rule), to evaluate the conduct of non-profit museum boards. This Article explores the consequences of adopting the trust standard by applying it to previously unavailable deaccession policies of prominent art museums. It finds that so long as museum boards adhere to these policies, their decisions would satisfy the trust standard. This outcome illustrates an important limitation of fiduciary law: the trust standard evaluates procedural care but cannot assess deaccessions on their merits. Yet this limitation, far from undercutting the trust rule, balances judicial review with protecting boards’ management discretion. This article ventures beyond formalist analysis of fiduciary duty and examines the non-legal, substantive rules governing art deaccessions. It argues that complemented by non-legal rules, the trust standard provides the best framework for adjudicating deaccession lawsuits because it ensures judicial scrutiny of deaccession procedures while leaving appraisal of deaccessions’ merits to museum professionals and the public they serve.’

The commercial settlement (i.e. through mediation) of a breach of fiduciary duty dispute resulting from the de-accessioning and sale of art and antiquities by a Museum, is therefore inextricably linked with established norms and standards of behaviour by Museum trustees.

See also Museum ethics: when the law plays catch up’

Posted on: March 23, 2021 by Alexander Herman:

Museum ethics: when the law plays catch up | Institute of Art and Law (ial.uk.com)

I am developing the negotiation and mediation of Art and Cultural Heritage Disputes as a niche practice area, and am a member of the Institute of Art & Law in London, where I am studying for a Diploma in Art Law. I plan to qualify as a mediator in 2024. I can then be appointed as an expert co-mediator to provide technical support to mediators on law, best practice, and ethics.

My book, the ‘Contentious Trusts Handbook’ contains a practice note contributed by the distinguished Art Historian, Pandora Mather Lees (www.artonsuperyachts.com), entitled, ‘Art & Heritage Assets – Duties of Trustees’, and I am currently researching substantive aspects of art and antiquities law for a new book I am planning to write for publication in 2023 provisionally entitled,

‘Fiduciary Theory of Art And Cultural Heritage’.

To view the current outline of the book please vists the ‘Art & Antiquities Disputes’ page at www.ihtbar.com.

Use of British soft power to protect Cultural Heritage in a conflict zone? – UK Review of Security, Defence, Development and Foreign Policy (March 2021)

State responsibility for intentional destruction of cultural heritage may also be conceived in terms of responsibility to protect (“R2P”) such heritage. R2P consists in the responsibility of each state to protect its populations from genocide, war crimes, ethnic cleansing and crimes against humanity, while the international community has the responsibility to help states to protect populations from such crimes. The three pillars of R2P – as specified by the UN Secretary General – are the following:

1)     each state has the responsibility to protect its populations from said crimes;

2)     the international community has the responsibility to assist states in fulfilling their R2P;

3)     when a state manifestly fails to fulfil its own R2P, the international community has a responsibility to take timely and decisive action through peaceful diplomatic and humanitarian means and, if that fails, through other more forceful means, including the use of military force.

Since intentional destruction of cultural heritage amounts to a war crime and a crime against humanity, it is straightforwardly subsumed within the scope of R2P. As regards the modalities through which R2P may be realized in concrete terms, it’s third pillar clearly shows that the United Nations, regional organizations, and even single states may take action to protect populations from intentional destruction of cultural heritagein territories where the territorial state manifestly fails to comply with its own R2P. In this respect, the denotation of international destruction of cultural heritage as an offence against humanity as a whole makes the international obligation to prevent and avoid such destruction an obligation erga omnes, with respect to which any state other than the one directly injured by a violation may take lawful measures to ensure that cessation of the breach and reparation in favour of the injured state or other victims of the breach, pursuant to the rule enshrined by Article 54 of the International Law Commission’s Articles on Responsibility of States for Intentionally Wrongful Acts. Among the possible measures to be taken in this respect, even recourse to military force would be possible, although only as a last resort and taking the relevant decision with the utmost caution and preferably with the authorization and under the guidance of the UNSC, acting pursuant to Chapter VII of the UN Charter. This conclusion is corroborated by the characterization of intentional destruction of cultural heritage as a threat to peace.’

[The Oxford Handbook of International Cultural Heritage Law, Chapter 4, Intentional Destruction of Cultural Heritage, by Federico Lenzerini (2020), at pages 97 to 98].

Global Britain in a competitive age – The Integrated Review of Security, Defence, Development and Foreign Policy(March 2021): Global Britain in a Competitive Age: the Integrated Review of Security, Defence, Development and Foreign Policy – GOV.UK (www.gov.uk) states:

‘The source of much of the UK’s soft power lies beyond the ownership of government – an independence from state direction that is essential to its influence. The Government can use its own assets, such as the diplomatic network, aid spending and the armed forces, to help create goodwill towards the UK – for example, through support to disaster relief or through our international work to protect cultural heritage in conflict settings.’

In any conflict, the humanitarian aim of Cultural Heritage protection always competes with military operations. Since there is no international authority responsible for defining: (i) each country’s cultural property; and (ii) the case of ‘military necessity’ / ’loss of immunity’, on the ground ‘it [is] difficult to separate military operations from cultural property under protection.’ [‘Legal Changes In The Regime Of The Protection Of Cultural Property In Armed Conflict’, Prof. Dr . Sabine von Schorlemer, Art Antiquity And Law, Vol IX, Issue 1, March 2004, p.43 at p.76].

Does an opportunity exist for Britain to use its diplomatic, military, and academic expertise and networks, to facilitate the development of an international code of ethics for the protection of Cultural Heritage in future conflicts around the globe?

The aim would be to develop a code that strikes a balance between:

(a) Cultural Heritage protection; and

(b) military interests.

The development, agreement, and practical implementation (e.g. through military training manuals) would require the ‘round-table’ expert involvement of: representatives of states; military officials; academics; UNESCO; the International Committee of the Red Cross; and NGO’s.

The ambition would be to develop clear norms of behaviour and standards, that are capable of practical and universal implementation on the ground by armed forces in a conflict zone.

The UNESCO ‘Protection Of Cultural Property Military Manual’ (2016) highlights the strategic importance of this global humanitarian challenge:

‘Over the past few decades, culture has moved to the frontline of war, both as collateral damage and as a target for belligerents who use its destruction to foster violence, hatred and vengeance. This destruction strikes at societies over the long term, weakening the foundations of peace and hindering reconciliation when hostilities end. Recent conflicts in Mali, Libya, Yemen, Iraq and Syria have demonstrated that the protection of heritage is inseparable from the protection of human lives. The destruction of heritage has become an integral part of a global strategy of cultural cleansing which seeks to eliminate all forms of diversity. In this context, military forces need to adapt their tools, behaviours and skills to take into account the protection of heritage as an integral part of sustainable strategies to build peace and security. Over the last seven decades, UNESCO has elaborated standard-setting instruments to help Member States tackle these issues. As the first international agreement of universal scope focusing exclusively on the protection of cultural property in armed conflict, the 1954 Hague Convention for the Protection of Cultural Property in the Event of Armed Conflict has made a tremendous contribution to the protection of cultural heritage and has inspired subsequent treaties aimed at preserving such heritage. Following the conflicts of the 1990s, the Convention was strengthened with the adoption in March 1999 of its Second Protocol, which reinforces the protection afforded to cultural property in armed conflict, notably through new mechanisms for its implementation on the ground. This has been complemented by several other instruments, notably the 1970 UNESCO Convention on the Illicit Import, Export and Transfer of Ownership of Cultural Property and the 1995 UNIDROIT Convention on Stolen or Illegally Exported Cultural Objects, as well as the 1972 UNESCO World Heritage Convention. Most recently, in 2015, UNESCO Member States adopted a fully-fledged strategy for the reinforcement of UNESCO’s action for the protection of culture. The examples of the rebuilding of the mausoleums in Timbuktu, Mali, destroyed by violent extremists, the training of military personnel for United Nations peacekeeping operations (MINUSMA) and the recent conviction of Ahmad Al Faqi Al Mahdi for war crimes by the International Criminal Court all attest to UNESCO’s determination to take this new strategy forward. Conventions and other legal instruments are necessary, but they are not enough to tackle increasingly complex situations on the ground. Just as culture is on the frontline of conflicts, it should be on the frontline of peace. To succeed, we need to broaden and rethink traditional approaches to protecting heritage. We need to connect the dots between the cultural, security and humanitarian aspects, while fully respecting the mandate and prerogatives of each actor. Military forces must pay particular attention and be capable of ensuring the protection of heritage in difficult circumstances. This is the aim of the present manual, namely to outline the practical implementation of the 1954 Hague Convention and its Second Protocol so as to enable Member States, in cooperation with UNESCO, to xiv include in their military directives guidelines and instructions on the protection of cultural property. All this should be viewed not as an additional burden on armed forces but as a means to achieve and consolidate long-term security objectives, in particular social cohesion and reconciliation.’

I am developing the negotiation, mediation, arbitration and diplomatic dispute settlement of Art and Cultural Heritage Disputes as a niche practice area, and am a member of the Institute of Art & Law in London, where I am studying for a Diploma in Art Law. I plan to qualify as a mediator in 2024. I can then be appointed as an expert co-mediator to provide technical support to mediators on law, best practice, and ethics.

My book, the ‘Contentious Trusts Handbook’ contains a practice note contributed by the distinguished Art Historian, Pandora Mather Lees (www.artonsuperyachts.com), entitled, ‘Art & Heritage Assets – Duties of Trustees’, and I am currently researching substantive aspects of art and antiquities law for a new book I am planning to write for publication in 2023 provisionally entitled,

‘Fiduciary Theory of Art And Cultural Heritage’.

To view the current outline of the book please vists the ‘Art & Antiquities Disputes’ page at www.ihtbar.com.

The state as a fiduciary?

Hobbes’s insight in ‘Leviathan’ (1651), to the collective action problem in the state of nature, was to empower some entity, i.e. the sovereign state, to make decisions for the group. However, by ‘[e]mpowering the state to override individual autonomy – which inevitably entails delegating powers of discretion to elites to carry out the task of governing – leaves the people subject to that power and discretion vulnerable to its abuse. … [E.G. through nepotism in awarding public contracts].

Conceiving of state authority in fiduciary terms has a long historical pedigree, dating back at least to Plato, Cicero, and Locke. …

Evan Fox-Decent [in his book ‘Sovereignty’s promise: The State as fiduciary’ (2011)] offers the most encompassing account of the state as fiduciary. He argues that the state, as a sovereign entity, is a fiduciary for “each person subject to its power and authority”. He derives this fiduciary relationship not from any contractual delegation of authority, but rather from Kant’s example of the obligations that a parent owes to a child. Just as children are subject to their parents’ discretionary decisions and incapable of either looking out for themselves or consenting to such an arrangement, the people are subject to the state’s administrative power and incapable of exercising state power on their own. According to Fox-Decent, the state’s fiduciary obligation to the people thus rests on trust, not consent. To fulfil that trust, the state must exercise its powers over it subjects for their benefit, not arbitrarily or for the aggrandisement of the ruling class. It must, in short, create a legal order that is governed by the rule of law and treat subjects fairly and reasonably. And those subjects owe a corresponding duty to obey the commands of the state that fulfils its fiduciary obligations. … Fox-Decent and Evan Criddle [in their book ‘Fiduciaries of Humanity: How International law Constitutes Authority’] have argued, that states may even have duties to other people who are not its subjects, including, for example, indigenous peoples within its borders who have not surrendered their own sovereignty, the subjects of other states, and future generations.’ [Extract from the Fiduciary Law Handbook, Chapter 17 ‘Fiduciary principles and the state’ by Theodore Rave].

Therefore,these duties could extend to protecting the environment, e.g. the Amazon Rainforest.

Do these duties need to be placed upon a statutory footing?

The relationship between the ancient idea of ‘Fiduciary Government’ and the existence of fiduciary duties owed by states in relation to cultural heritage, based upon a jus cogens theory, is a subject I am researching for my new book the ‘Fiduciary Theory of Art and Cultural Heritage’, see the ‘Art & Cultural Heritage Disputes’ page at www.ihtbar.com.