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Brudenell-Bruce v Moore & Cotton [2014]

Wednesday 26 November 2014

The Earl of Cardigan’s case: removing trustees and equitable compensation

Clare Stanley QC and Jack Watson acted for: the professional trustee

Despite its somewhat Dickensian facts, the decision of Newey J in Brudenell-Bruce v Moore & Cotton [2014] EWHC 3679 (Ch), provides the setting for the latest substantial guidance from the High Court as to the approach that the courts will take to compensating beneficiaries for trustees’ breaches of trust, and to contested applications for the removal of those trustees.

Facts

Lord Cardigan is the 49% beneficiary of a bare trust established in 1951 (‘the 1951 Trust’) with the remainder being held for the benefit of a trust established for Lord Cardigan’s son upon him reaching the age of 40 (the ‘Children’s Settlement’). The Trustees of the 1951 Trust were John Moore, a senior barristers clerk, and Wilson Cotton, a highly experienced professional trustee and founder of STEP. Following the Trustees’ decision to sell a number of the paintings belonging to the 1951 Trust (which itself was the subject of a decision of the high court: [2012] EWHC 1024 (Ch)), Lord Cardigan embarked on a course of conduct designed to remove the Trustees by alleging substantial breaches of trust, dishonesty and a breakdown in the
relationship of trustee and beneficiary. In addition, Lord Cardigan sought in the region of £4million in compensation for alleged breaches of trust, the most significant of which was an alleged failure to maintain the Stable Block of Tottenham House, the seat of the Cardigan family for many generations.

Three important points come from the judgment.

Point 1: Assessment of Equitable Compensation for Breach of Trust

In a careful and detailed judgment, Newey J held that the claims for breach of trust substantially failed and, in particular, that the failure to weatherproof the Stable Block was a reasonable one in all the circumstances. However, he went on to consider the way in which damages ought to be assessed. On behalf of Lord Cardigan it was suggested that the measure of damages in a breach of trust case is the cost of reinstating the asset to the state that it ought to be in, rather than the diminution in value of that asset, even if the costs of reinstatement were significantly greater than the diminution in value of the asset.

Newey J had little hesitation in rejecting this submission. He held instead (citing the decision of the Supreme Court in AIB v Mark Redler [2014] UKSC 58 and the line of breach of contract cases following Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344) that the measure of damages was the diminution in value of the asset, thereby reinforcing the fact that while the rules of remoteness of damage do not applying to compensation for breaches of trust, the rules of causation certainly do.

Point 2: Who to pay and how much?

Newey J did, however, find that on certain minor issues, the Trustees had acted in breach of trust. Yet it appeared that Viscount Savernake, who would be the sole entitled beneficiary of the Children’s Settlement upon his reaching the age of 40, had acquiesced or concurred in the breaches of trust. Accordingly, two issues arose: (1) whether Lord Cardigan could require the Trustees to fully reconstitute the 1951Trust or, given the potential acquiescence of Viscount Savernake, whether Lord Cardigan could only require the payment of 49% referable to his share (2) relatedly, whether payment should be made to the 1951 Trust or directly to Lord Cardigan as an absolutely entitled beneficiary.

Applying the AIB decision, the Judge held that Viscount Savernake was not an absolutely entitled beneficiary (having not achieved the age of forty) and therefore that full reconstitution of the 1951 Trust was required. He suggested that there may be scope for dealing with Viscount Savernake’s actions by impounding his interest by way of indemnity to the trustee (see section 62 of the Trustee Act 1925 and Underhill and Hayton, at paragraphs 97.1, 97.21 and 97.22).

The counter-argument to this approach is that while the beneficiaries of the Children’s settlement were not absolutely entitled, the trustees of that settlement were so entitled and appeared to have simply followed Viscount Savernake’s directions, thereby adopting his acquiescense/concurrence.

Nevertheless, it appears that the court will, even where there is potential acquiescence by some of the beneficiaries, be reluctant to reduce the award (or award damages directly to the beneficiary) and that, instead, a trustee should make a claim under s.62 Trustee Act 1925 to impound the acquiescing beneficiary’s interest. Of course there may be practical difficulties with such an approach (such as where a trustee has since retired) and the judgment of Newey J does not preclude a claim that damages should be paid only to the beneficiary in circumstances where the acquiescing beneficiary is absolutely entitled. Accordingly, the argument that damages ought to be referable only to the non-acquiescing beneficiary’s share and ought to be paid directly to that beneficiary may meet with greater success on more appropriate facts.

Point 3: Applying the test for removal of trustees

On the issue of removal, the judge started with the classic distinction between a breakdown in relations between trustee and beneficiary (which would justify the removal of the trustee) and mere friction which would not.

In Mr Moore’s case, he had made several criminal complaints against Lord Cardigan. As a result, Newey J reluctantly held that Mr Moore ought to be removed as a trustee as a result of the irretrievable breakdown in relations and the effect that would have upon the appearance of impartiality necessary to perform the office of Trustee ([257]- [262]). However, in the case of Mr Cotton, the judge declined to order removal, finding instead that while Lord Cardigan had made several complaints in relation to Mr Cotton’s conduct, those complaints were unfounded ([263]-[269]). In particular, the court noted that the cost of appointing new trustees was a significant factor (in the context of a Trust in serious financial difficulty) which weighed against removal (at [263]).

Newey J’s approach suggests that the court will adopt a robust approach to applications for the removal of trustees. In particular the courts will be wary of beneficiaries seeking to manufacture a breakdown in relationships in order to secure the appointment of replacement trustees. Accordingly, in the case of experienced professional trustees, given the significant expense involved in removing and replacing them, it will likely to be necessary to demonstrate either a significant breach of trust or a complete breakdown in relations in order to justify that expense.