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ICLR: Chancery Division/1886/Volume 31/BAHIN v. HUGHES. [1882 B. 6701.] - (1886) 31 Ch.D. 390 (1886) 31 Ch.D. 390 [COURT OF APPEAL]

BAHIN v. HUGHES. [1882 B. 6701.]

1886 Jan. 29, 30. COTTON, BOWEN and FRY, L.JJ. Trustee - Breach of Trust - Improper Investments - Liability of Husband for his Wife's Breach of Trust - Right to Indemnity by co-Trustee. A husband's liability for his wife's breaches of trust extends to breaches of trust arising from negligence, and is not confined to losses caused by her active misconduct. Where there are two trustees and the management of the trust is left in the hands of one, and the acting trustee commits a breach of trust, the passive trustee is not entitled to an indemnity from the acting trustee, unless there are some special circumstances, as where the acting trustee is the solicitor for the trust, or has derived a personal benefit from the breach of trust. Lockhart v. Reilly (1) and Thompson v. Finch (2) distinguished. ROBERT HUGHES, by his will, made in 1867, bequeathed the sum of 2000 to Eliza Margaret Hughes, Sarah Jane Hughes, afterwards the wife of James Burden, and Frances Mary Hughes, afterwards the wife of Edward Edwards, upon trust to invest in certain securities thereinafter mentioned, including Mersey Docks and Harbour Board bonds, and on real securities in England and Wales, and to pay the income to the Mrs. Bahin for life for her separate use, and after her death for her children. The testator died in 1868. The sum of 2000 was at first invested in Mersey Docks and Harbour bonds, but in September, 1880, the Mersey Docks Company gave notice to the trustees that they intended to reduce the interest, and that they might either receive the money or take a new bond at a reduced rate.

(1)

25 L. J. (Ch.) 697.

(2)

8 D. M. & G. 560.

(1886) 31 Ch.D. 390 Page 391

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Miss Eliza M. Hughes, who managed the business as the acting trustee, wrote to Mrs. Edwards advising her co-trustees to accept payment of the money and to reinvest it on mortgage. Mrs. Edwards at first refused to accept repayment of the money, but eventually, after some correspondence, she and her husband and also Mr. and Mrs. Burden signed a receipt for the money and gave an authority to Miss Hughes and Mr. Burden to receive the money from the Mersey Docks Company. The sum of 2000 was accordingly paid to Miss Hughes and Mr. Burden. Mr. Edwards afterwards denied that he had signed the letter authorizing the payment of the money by the company to Burden and Miss Hughes; but the Court held on the evidence that he had signed it. On the 14th of September, 1880, Miss Hughes wrote to Mrs. Edwards as follows:- "Mrs. Bahin would wish her money to be invested on mortgage, and when a suitable one has been found particulars will be sent to the trustees." On the 2nd of November, 1880, Miss Hughes wrote to Mrs. Edwards as follows:-

"A mortgage investment for the 2000 belonging to Kate (Mrs. Bahin) and her children has been lent on eight houses at Wood Green, Middlesex, at 5 per cent. interest. I am writing to Kate to-day on the subject."

The letter to Mrs. Bahin of the same date was as follows:"Miss Hughes writes to inform Mrs. Bahin that a mortgage investment for the 2000 has been found on eight leasehold houses situate at Wood Green, Middlesex, at 5 per cent. interest. The houses are let at a rental of 36 per annum. Should the borrower fail to pay the interest the trustees have secured to themselves power to sell the property, but twenty-one days are always allowed after the money is due."

The money was accordingly shortly afterwards re-invested by Miss Hughes and Mr. Burden on the proposed mortgage of leasehold houses. On the 18th of May, 1881, Mr. Edwards wrote to Miss Hughes as follows:"How came you to invest the money when no authority was given by us? I would therefore advise you in future not to do

(1886) 31 Ch.D. 390 Page 392


anything with any of the trust money without consulting us ... Is the building insured? Let me know, as my chief object is to know the position in which we are in, as I wish all the business to be transacted in a just and proper manner."

The investment had been found by Mr. Burden, and being leasehold was not sanctioned by the terms of the will. The security having proved insufficient, Mrs. Bahin and her children brought an action against Miss Hughes, Mr. Edwards - his wife being dead - and Mr. and Mrs. Burden, charging them with a breach of trust and claiming that they should make good the trust fund.

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Mr. and Mrs. Burden did not appear. Mr. Edwards served a notice on Miss Hughes under the third party procedure as follows:- "The Defendant claims to be indemnified by you against the claim for the said trust legacy, interest, and costs, on the ground that you were the acting trustee of the will of the testator Robert Hughes, and had assumed to act as the sole trustee thereunder, and that the mortgage of leasehold hereditaments was taken at your instigation and under your advice, and also that you represented to Frances Mary Edwards, the wife of the Defendant E. Edwards, that the mortgage was a proper and sufficient mortgage for the said trust legacy of 2000, and that the said 2000 was advanced on the faith of that representation." Mr. Justice Kay held J. Burden and his wife, Miss Hughes, and E. Edwards were jointly and severally liable to replace the 2000, and declared that the Defendant E. Edwards had no claim to be indemnified by Miss Hughes. From this judgment the Defendant E. Edwards appealed. Vernon R. Smith, for the Appellant:A husband is generally liable for his wife's devastavits and breaches of trust, but that only applies to those in which she has actively participated, not to losses for which she is only constructively liable through the misconduct or negligence of a co-trustee or co-executor. They signed the receipt only for conformity: Leigh v. Barry (1); In re Fryer (2). But if the Appellant is liable to the cestuis que trust he is entitled to an indemnity from.

(1)

3 Atk. 583.

(2)

3 K. & J. 317.

(1886) 31 Ch.D. 390 Page 393 Miss Hughes, the acting trustee. The evidence shews that the mortgage investment was made entirely by Miss Hughes with the assistance of Burden, neither Edwards nor his wife knowing anything of it. They were told by Miss Hughes in her letter of the 14th of September, 1880, that when a proper mortgage was found they would be informed of it, and they relied on that assurance. An innocent trustee, although equally responsible to the cestuis que trust with a guilty trustee, is not in pari delicto as between himself and the co-trustee and is entitled to indemnity from him: Lockhart v. Reilly (1); Thompson v. Finch (2); Earl Powlet v. Herbert (3); Franco v. Franco (4); Butler v. Butler (5). Dauney, for the Plaintiffs. Dunham, for Miss Hughes, was only called on as to the question of indemnity:-

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The cases cited do not support the contention of the Appellant. Miss Hughes acted with the best intentions, and she was not more to blame than Edwards. Vernon R. Smith, in reply.

COTTON, L.J. :This is an appeal by Edward Edwards, who married one of the three daughters of the testator, Robert Hughes, who were the trustees under the will. The appeal raises two points. The first was this. The Appellant contends that the Plaintiffs, who were the beneficiaries under the will, and were entitled to the sum of 2000 on account of the loss of which this action was brought, have no claim against him under the circumstances of the case. All Mr. Edwards alleged he had done in the matter was to leave it in the hands of his wife, and he repudiated the allegation that either he or she were negligent as to the disposition of the trust. The counsel for the Appellant has used the term "devastavit," as applying to this case. But devastavit is a term which has no application to the law of trustees, but rather to that of executors.

(1)

25 L. J. (Ch.) 697; 27 L.J. (Ch.) 54.

(2)

22 Beav. 316; 8 D. M. & G. 560.

(3)

1 Ves. 297.

(4)

3 Ves. 75.

(5)

7 Ch. D. 116.

(1886) 31 Ch.D. 390 Page 394 As regards this first question, namely, whether Mr. Edwards is answerable for the default of his wife in committing such a breach of trust as this, as much as if she had misspent the money, in my opinion he is altogether answerable. It was an action brought for the loss of the fund, occasioned by a breach of trust, being negligence, on the part of the trustees. We feel no doubt that the cestui que trust is entitled to redress as against the trustees, and therefore consider both that the wife of Mr. Edwards and himself, as well as Mr. and Mrs. Burden, were answerable. The facts are these. The money was invested on a Mersey Docks and Harbour bond, but in order to keep up the income it was decided, when the Mersey Docks Company reduced their interest, to withdraw the money, and place it on mortgage, and it was especially at the instance of Miss Hughes that this was done. Mr. Edwards alleges that both Mrs. Edwards and himself were unwilling for this to be done; but it was done. The money got into the hands of two of the trustees, and was ultimately mortgaged at the instance of Mr. Burden and Miss Hughes. Well, beyond question that was a breach of trust, and the cestuis que trust had a right to claim for any loss that might be occasioned in consequence of the

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trustees not having taken care that the money was properly invested, and in my opinion it would be wrong to raise a distinction as regards the liability of Mr. Edwards. He is answerable for the same breach of trust, and is not to be differently treated from the other trustees in the matter. The husband is acting and administering on the part and in the right of his wife the duty of trusteeship, who cannot act in the matter without him; therefore he is liable for the breaches of trust committed by her, without drawing any minute distinctions, as might have been done if the case had come within a recent Act, the Married Women's Property Act. But that Act does not apply to this case. But then we come to another and more difficult question, namely, how far Mr. Edwards can, as against Miss Hughes, have indemnity for the loss, on the ground that she was the acting trustee, that she and Mrs. Burden took upon themselves to invest this money, and that although both she and Mr. Edwards are liable to the beneficiaries, she is liable to Mr. Edwards, who left the matter in her hands. On going into the authorities, there are (1886) 31 Ch.D. 390 Page 395 very few cases in which one trustee, who has been guilty with a co-trustee of breach of trust and held answerable, has successfully sought indemnity as against his co-trustee. Lockhart v. Reilly (1) and Thompson v. Finch (2) are the only cases which appear to be reported. Now in Lockhart v. Reilly, it appears from the report of the case in the Law Journal that the trustee by whom the loss was sustained had been not only trustee, but had been and was a solicitor, and acting as solicitor for himself and his co-trustee, and it was on his advice that Lockhart had relied in making the investment which gave rise to the action of the cestui que trust. The Lord Chancellor (Lord Cranworth)(3) refers to the fact that he was a solicitor, and makes the remark: "The whole thing was trusted to him. He was the solicitor, and, independently of the consideration that one cannot help seeing it was done with a view of favouring his own family, yet, if that had not been so, the co-trustee leaves it with the solicitor-trustee, by whose negligence (I use no harsher word) all this evil, in a great degree, has arisen." Therefore the Lord Chancellor, in giving his decision, relies upon the fact of the trustee being a solicitor. In Thompson v. Finch a right was conceded to prove against the estate of the deceased trustee for the full loss sustained; but it appears that in this case also he was a solicitor, and that he really took this money to himself, for he mixed it with his own money, and invested it on a mortgage; and therefore it was held that the trustee was entitled to indemnity from the estate of the co-trustee, who was a solicitor. This was affirmed in the Court of Appeal; and the Court of Appeal took so strong a view of the conduct of the solicitor that both of the Judges concurred in thinking that he ought to be called on to shew cause why he should not be struck off the rolls. Of course where one trustee has got the money into his own hands, and made use of it, he will be liable to his co-trustee to give him an indemnity. Now I think it wrong to lay down any limitation of the circumstances under which one trustee would be held liable to the other for indemnity, both having been held liable to the cestui que trust; but so far as cases have gone at present, relief has only been granted

(1)

25 L. J. (Ch.) 697.

(2)

22 Beav. 316; 8 D. M. & G. 560.

(3)

25 L. J. (Ch.) 702.

(1886) 31 Ch.D. 390 Page 396

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against a trustee who has himself got the benefit of the breach of trust, or between whom and his co-trustees there has existed a relation, which will justify the Court in treating him as solely liable for the breach of trust. Here, when Miss Hughes got the money, she handed it over to the mortgagor - as I understand, she handed over to them the actual cheque received from the Mersey Docks Company. The Appellant, Mr. Edwards, relies on the fact that she sent him a letter with the cheque for him and his wife to indorse, saying that nothing should be done with the money without consulting him; but I think Mr. Edwards' own conduct shewed that that was not the view which he took. For she said in that letter that when a suitable mortgage was found and approved of, notice should be sent to the trustees; and undoubtedly on the 2nd of November, after the mortgage was completed, she wrote him with the information that the money had been invested upon leasehold houses. But nothing was done by him with reference to the matter till the 18th of May following, and I can hardly suppose that if he wished for information before the investment was taken that he would have made no inquiry as to what had been done with the money after he had notice that it had been invested. Miss Hughes was the active trustee and Mr. Edwards did nothing, and in my opinion it would be laying down a wrong rule to hold that where one trustee acts honestly, though erroneously, the other trustee is to be held entitled to indemnity who by doing nothing neglects his duty more than the acting trustee. That Miss Hughes made an improper investment is true, but she acted honestly, and intended to do the best she could, and believed that the property was sufficient security for the money, although she made no inquiries about their being leasehold houses. In my opinion the money was lost just as much by the default of Mr. Edwards as by the innocent though erroneous action of his co-trustee, Miss Hughes. All the trustees were in the wrong, and everyone is equally liable to indemnify the beneficiaries.

BOWEN, L.J. :In this case my judgment must be of an uncertain sound and weight. I do not see my way to dissenting formally from the view entertained by my Brethren, who are more familiar with (1886) 31 Ch.D. 390 Page 397 these matters than I can possibly be; but my difficulty has been in seeing that these parties, Miss Hughes and Mr. Edwards, were in pari delicto as between themselves. As regards the cestuis que trust, one stands in a no more favourable position than the other; but I have had some doubt as to whether Miss Hughes did not incur an obligation to her co-trustee, Mr. Edwards. I have difficulty in seeing that a trustee by allowing his co-trustee to receive a trust fund necessarily sanctions his co-trustee to do what he likes with it. If there had been an express bargain that Miss Hughes should not part with the fund without notice to Mr. Edwards, it would have been difficult to see that Miss Hughes ought not to indemnify Mr. Edwards for the breach of that bargain; and it seems to me to be a question of some little difficulty whether, if one trustee allows his co-trustee to receive the trust fund on the faith that he will not part with it without notice, though without any express bargain, it may not be said that the co-trustee comes under an obligation to indemnify him for any violation of that faith, either on an implied legal contract arising from the transaction, or by an equitable obligation arising from the relation between the parties; and the fact that both trustees were equally liable to the cestuis que trust would not be sufficient to prevent them from incurring that specific liability to one another. I cannot say that I feel any confidence in my scruples in this matter, nor do I think that there would be any advantage in taking further time to consider my decision, as my learned Brethren entertain a clear opinion on the matter.

FRY, L.J. :It appears to me that on the first point arising in this appeal there is no case at all. It appears that in a certain trust the wife of the Defendant Mr. Edwards was one of the trustees, and that he has been rendered liable for breaches of trust committed by her, which liability he repudiates by alleging that a husband is is not responsible for all, but only for some, of the breaches of trust which a wife may commit. I rather understand

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that he draws a distinction between active and passive breaches of trust, but it was admitted by Mr. Smith that there is no authority for such distinction, and I can see no principle in law for such a (1886) 31 Ch.D. 390 Page 398 distinction. The law of England, which has long existed, is that the husband is responsible for the breaches of trust of his wife. Upon the second point I also agree with my Brother Lord Justice Cotton. This part of the appeal is based upon some notion that one trustee is liable to indemnify his co-trustee against loss or injury from his acts, but I cannot think that such liability exists, for if it did exist the books would be full of authorities bearing upon the point, and the Courts would be crowded with litigation on the subject. It is well known that the authorities are extremely few, and the authorities which do exist do not favour the Appellant's contention. It has been pointed out by Lord Justice Cotton that in each of the two cases cited the trustee who was held to be secondarily liable, and who had a right of indemnity, had been misled by his co-trustee, who was the solicitor to the trust, and had been proved to have been guilty of negligence in his duty as such solicitor. In my judgment the Courts ought to be very jealous of raising any such implied liability as is insisted on, because if such existed it would act as an opiate upon the consciences of the trustees; so that instead of the cestui que trust having the benefit of several acting trustees, each trustee would be looking to the other or others for a right of indemnity, and so neglect the performance of his duties. Such a doctrine would be against the policy of the Court in relation to trusts. In the present case, in my judgment, the loss which has happened is the result of the combination of the action of Miss Hughes with the inaction of Mr. Edwards. If Miss Hughes has made a mistake, it was through simple ignorance and want of knowledge, and if on the other hand Mr. Edwards had used all the diligence which he ought to have done, I doubt whether any loss would have been incurred. The money might have been recovered before the property went down in value. I think therefore that it is not possible for Mr. Edwards to obtain any relief, and I concur with my Brethren that this appeal must be dismissed with costs. Solicitors: Peacock & Goddard, agents for Lloyd Griffith, Holyhead; J. J. Chapman; Carter & Bell.

M. W.