Question

Hope Pty Ltd is the trustee of Jones Family Trust. The trust property is worth $500,000. Hope Pty Ltd runs an internet café on behalf of the trust. The trust deed notes that the trustee can only enter into contracts in relation to running the internet café. However, Hope Pty Ltd, on behalf of the trust, entered into several transactions worth $200,000. These transactions were in relation to building a railway in India. Hope Pty Ltd pays the $200,000.

Advise Hope Pty Ltd on its right of indemnification from the trust property.

Answer 1

Hope Pty Ltd is liable for breach of trust hence it has to pay the $200,000.

Indemnification involves shifting liability to alternative party henceforth the party that obligates the harm, damage, or loss is not held liable. When it comes to trust, a legal relationship that executes an obligation on a trustee concerning property, the right of indemnity can be applied. In a trust, the property is managed by the trustee for the benefit of the beneficiaries. Due to this, indemnification is applied as the trustee is authorized to have recourse to the property in situations where a debt incurred has to be satisfied. This means the trustee can use the trust funds and not be held liable for the debts.

This is not always the case as there are some circumstances when the right to indemnify is reduced or denied. For example, when a trustee breaches trust relating to the subject matter of indemnify. In this scenario, Hope Pty Ltd entered into a contract where were not related to the ones (subject matter) they had agreed (relating to running the internet cafe). By doing so, Hope Pty Ltd became guilty of a breach of trust. To claim recoupment, Hope Pty Ltd has to be held liable and provide compensation for the breach. This means it has to pay the $200,000 as the transactions were related to a subject matter which was not in their agreement.