CILEx L3 Equity & Trusts Introduction 4 — Questions and Answers
Question 1: What is the 'no-conflict rule' for trustees?
- A trustee must not place themselves in a position where their personal interests conflict with their duty to the beneficiaries (Correct answer)
- A trustee must always act unanimously with co-trustees
- A trustee must not invest in the same assets as the trust
- A trustee cannot also be a beneficiary
Correct answer: A trustee must not place themselves in a position where their personal interests conflict with their duty to the beneficiaries
The no-conflict rule requires trustees to avoid situations where their personal interests conflict (or may conflict) with their duties to the beneficiaries. This is part of the broader fiduciary duty and protects the integrity of the trust relationship.
Question 2: What is the 'no-profit rule' for trustees?
- A trustee must not profit from their position as trustee beyond authorised remuneration, and must account to the trust for any unauthorised profit (Correct answer)
- A trustee is entitled to any profit they personally generate through the trust assets
- A trustee may keep profits if they were honestly earned
- A trustee may charge the trust a reasonable fee for their services without express authorisation
Correct answer: A trustee must not profit from their position as trustee beyond authorised remuneration, and must account to the trust for any unauthorised profit
The no-profit rule (Keech v Sandford [1726]) prevents trustees from making an unauthorised profit from their position, such as renewing a lease for their own benefit that they held in trust. All unauthorised profits must be disgorged to the trust.
Question 3: What equitable remedy prevents the defendant from doing something?
- An injunction (Correct answer)
- Specific performance
- An account of profits
- Rescission
Correct answer: An injunction
An injunction is the equitable remedy that restrains a party from doing something (prohibitory injunction) or requires them to do something (mandatory injunction). It is a discretionary remedy awarded where damages would be inadequate.
Question 4: What is the remedy of 'account of profits' in equity?
- A remedy requiring the defendant to hand over profits made from a wrong, rather than simply compensating the claimant for their loss (Correct answer)
- A remedy requiring the claimant to account for their own profits
- A remedy equivalent to damages in all equity cases
- A remedy only available against solicitors and fiduciaries
Correct answer: A remedy requiring the defendant to hand over profits made from a wrong, rather than simply compensating the claimant for their loss
Account of profits is an equitable remedy that strips the defendant of profits made as a result of their wrong (e.g., breach of fiduciary duty, breach of confidence). The claimant receives the defendant's gain, which may exceed their own actual loss.
Question 5: What is 'rescission' as an equitable remedy?
- Setting aside a transaction and restoring the parties to their pre-transaction positions (Correct answer)
- Amending the terms of a contract to make them fair
- Ordering one party to compensate the other for their loss
- Preventing a party from relying on a contractual term
Correct answer: Setting aside a transaction and restoring the parties to their pre-transaction positions
Rescission sets aside a voidable transaction (e.g., one entered into through misrepresentation, undue influence, or duress) and seeks to restore the parties to their pre-contractual positions. It is subject to bars including affirmation, lapse of time, and third party rights.
Question 6: What is 'subrogation' in equity?
- The substitution of one party in place of another with respect to a claim or right, typically where one party pays another's debt (Correct answer)
- A trustee's right to be indemnified from the trust fund
- The right of a beneficiary to sue in place of a trustee
- An equitable assignment of a legal chose in action
Correct answer: The substitution of one party in place of another with respect to a claim or right, typically where one party pays another's debt
Subrogation is an equitable doctrine allowing one party who has paid another's debt or satisfied a claim to step into that party's shoes and exercise their rights against a third party. It is commonly used in insurance law.
CILEx L3 Equity & Trusts Introduction 4
What is the 'no-conflict rule' for trustees?