Lecture 11 Duty of care and Trustee Exemption PDF

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Duty of Care Trust Law...

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Lecture 11 The Trustees’ Duty of Care We shall be looking at the obligations of trustees and the rights of beneficiaries once a trust has been created. Duties and Powers of trustees

Everything in the best interest of their beneficiaries, acting in accordance with the trust and powers giving to them by the settlor. Where are they found? The settlor of an inter vivos trust, usually by means of a deed, (or a testator by his will) declares the trust and appoints trustees. This trust deed (or will) is known as the Trust Instrument and within it the settlor also sets out the duties (trusts/obligations) he is imposing on the trustees together with the powers he is granting them. These are called express duties and powers. The trustees must fulfil the express trusts and act within the express powers granted by the trust instrument. Where a trust instrument is silent, the provisions of the Trustee Act 2000 will apply (unless expressly excluded by the trust instrument). There are also non-statutory duties imposed on trustees by the Common Law which apply (unless expressly excluded by the trust instrument).

Duties of Trustees The main duties of a trustee may be summarized as follows; 

to keep the trust property under his own control, segregated from assets held by him in his personal capacity; (see lectures on Tracing )

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to invest the trust property; (see lecture on Investment)

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to administer the trust impartially, holding a balance between beneficiaries presently entitled and those entitled in the future Nestle v National Westminster Bank[1994] 1 All ER 11 to account strictly to the beneficiaries;

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to distribute the trust property in accordance with the terms of the trust;

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not to profit from the trust nor put himself in a position in which his self- interest may conflict with his duties as a trustee; (see lecture on Fiduciary Duty)

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to act without remuneration, unless remuneration is authorized;

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to act personally, unless delegation is authorized;

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to discharge the standard of care applicable to him in the management of the affairs of the trust (see below).

Powers of Trustees These are authorities, which trustees may exercise at their discretion. Regulate how the trusts are run. A trustee may have, among others, the following powers: 

to apply to the court for directions in relation to the trust properly;

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to choose investments (subject to safeguards);

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to delegate duties, where authorized to do so;

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administrative powers (eg. to insure the trust property, to give receipts, etc.);

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powers of maintenance and advancement;

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powers to appoint the whole or part of the trust property

The Duty of Care 1. Definition A trustee must conduct all trust business in accordance with the standard required by the law. This general duty is called the duty of care. 2. The Standard A single appropriate standard may be difficult to ascertain Different kinds of trustees  the vicar, the family friend;  the solicitor or accountant;  the trust corporation, banks and financial houses acting as professional trustees, their job is to do this, charge for doing so. Different kinds of trusts  the family trust – very common, assets, once you have children you must make a will appointing guardians and trustees. Tax avoidance, inheritance tax.  the pension trust – Lots of different types of pensions, teachers pensions.  the charitable trust – leave trust fund for charity’s Different kinds of beneficiaries  those receiving a gratuitous gift – the volunteer beneficiary  those who have contributed to the trust fund themselves

The Common Law Duty “the trustee ought to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own ....Per Jessel MR in Speight v Gaunt (1893)22 Ch D 727

The Common Law Duty has been superseded by the Statutory Duty of Care in s1 Trustee Act 2000. However, in judgments which pre-date the TA 2000, it is the Common Law definition above to which judges are referring in expressions such as “by the undemanding standard of prudence”. Nestle v National Westminster Bank plc [1994] 1 All ER 118 At common law a higher duty was imposed on: a trustee who held himself out as having special skills eg “above ordinary mortals” Bartlett v Barclays Bank Trust Company Limited (No1) [1980] Ch.415  a trustee who was paid for acting as trustee Re Waterman (1952)

The Trustee Act 2000

The Duty of Care Section 1 of the Trustee Act 2000: “1.-(1) Whenever the duty under this subsection applies to a trustee, he must exercise such care and skill as is reasonable in the circumstances, having regard in particular(a) to any special knowledge or experience that he has or holds himself out as having, and (b) if he acts as trustee in the course of a business or profession, to any special knowledge or experience it is reasonable to expect of a person acting in the course of that kind of business or profession.” Paragraph 1 of Schedule 1 of the Trustee Act 2000: “1. The duty of care applies to a trustee(a) when exercising the general power of investment or any other power of investment, however conferred; (b) when carrying out a duty to which he is subject under section 4 or 5 (duties relating to the exercise of a power of investment or to the review of investments).”

Paragraph 2 of Schedule 1 of the Trustee Act 2000: “2. The duty of care applies to a trustee(a) when exercising the power under section 8 to acquire land; (b) when exercising any other power to acquire land, however conferred; (c) when exercising any power in relation to land acquired under a power mentioned in sub-paragraph (a) or (b).” The relationship between the common-law duty of care and the statutory duty of care. The Law Commission recognised that the proposed statutory duty was very similar, if not the same as, the common-law duty, see Law Com. No. 260, para. 3.24(3).

Trustee Exemption Clauses

1. The statutory duty of care can be excluded by the trust instrument. Trustee Act 2000 Sch 1 para 7. C – It cannot exclude a trustees fraud or dishonestly D – There can be no exemption from a trustee’s duty to act honestly and in good faith. 2. Armitage v Nurse [1998] Ch. 241 Under a variation of trust made on the 11 October 1984, the claimant, Paula Armitage, then aged 17, became entitled in remainder to agricultural land of which her mother was tenant for life. Paula became dissatisfied with the way in which the trustees had managed her portion of the trust and took action against the trustees alleging several breaches of trust. Clause 15 of the trust provided that no trustee should be liable for any loss or damage to the claimant’s fund or the income thereof at any time or from any case unless it was caused by his own actual fraud. Millett LJ held that “in my judgement clause 15 exempts the trustee from liability for loss or damage to the trust property no matter how indolent, imprudent, lacking in diligence, negligent or wilful he may have been, so long as he has not acted dishonestly. 3. Accordingly there can be no exemption from a trustee’s duty to act honestly and in good faith 4. This principle still leaves wide latitude for the scope of an exemption clause which can exclude liability for any misconduct by the trustee except his actual fraud ie liability for dishonesty cannot be excluded. See also Walker v Stones [2000] 4 All ER 412 – no body would have thought this would benefit the beneficiaries therefore acting dishonest. Bogg v Raper (1988/9) 1 ITELR 267

(Note the comments of Millett L.J. in Armitage v Nurse in which he speaks of the “irreducible core” of obligations owed by trustees to the beneficiaries which is fundamental to the concept of a trust. If an exemption clause is drawn so widely that it excludes these obligations ie honesty and good faith then there is no trust.) An exception clause cannot go that far because you must have a trust with honesty. But see the comments of the Court of Appeal in Citibank v MBIA Assurance [2007] 1 All ER (Comm) 475 which seems to contradict Millett’s comments on the core element of a trust. 4.The Law Commission considered trustee exemption in 2003 when it suggested that statutory regulation of exemption clauses was the way forward, and again in 2006, when it ultimately preferred a practice-based rather than a regulatory approach. Professional trustees must however ensure that the settlor fully I understands the import and effect of the exemption clause at the time the trust instrument is created, if they may later wish to rely on the clause to exempt them from all but fraud.

5. Unfair Contract Terms Act 1977 does not apply to a trust instrument. Because it’s not a contract it’s a trust....