Standard Form Trust Instruments

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Table of Contents

Introduction
Discussion
Current Practice
Dishonesty
Conclusion
Bibliography
Footnotes

Introduction

According to Sir Underhill, “A trust is an equitable obligation, binding a person (who is called a trustee) to deal with property over which he has control (which is called the trust property), for the benefit of persons (who are called the beneficiaries or cestuis que trust), of whom he may himself be one, and any one of whom may enforce the obligation.”¹This definition informs us the scope of the relationship between the trustee and the beneficiary. While it might give us a glimpse of the nature of the relationship, it does not however state the extent to which the trustee is liable to the beneficiary.

The unstated nature of the liability of trustees for breach of trust coupled with the need for standardization led to the development of ‘standard form’ trust instruments. These instruments purported to insert common form clauses in trusts excluding or restricting the trustee’s liability. These clauses are known as exemption clauses and they inform the discussion in this paper.

Traditionally, courts strictly construed exemption clauses against trustees. However, much has changed in the modern setting due to the emergent uses of trusts, novel nature of trust assets, expanded powers of trustees and the need to keep off an increasing number of litigious beneficiaries. Trustee exemption clauses are now wider in scope and it is common for these modern clauses to expressly exclude or restrict trustees’ liability even for acts and omissions that would otherwise have fallen under the ambit of breach of trust.

The length and breadth of these exemption clauses in the modern setting can be attributed the increased powers of trustees in statute. Another contributing factor is the restrictive approach that modern day courts have taken in their construction of these clauses. The protection that the law previously granted to beneficiaries is relatively weaker. This has come up mainly due to the need for courts and legislators to mould the law in a manner that makes business sense.

Discussion

The leading case in trust law today is Armitage v Nurse². First, it is prudent to analyze the body of case law culminating in the law of trusts that we have today especially that pertaining to the scope of exclusion clauses. The Scottish case Seton v Dawson & Others³ is the earliest case on exemption clauses in trust instruments. In this 1841 case, the trustee had inserted a clause in the trust instrument stating that he shall…not be liable for omissions or negligence of diligence of any kind…. The beneficiary sued the trustee for gross negligence and he purported to rely on the exemption clause. In making their decision, the judges relied on the rationale that trustees had an inescapable obligation towards the beneficiary. The majority were of the view that;

“The general principle of our law is that neither the clause which occurs in this particular deed, nor any of the usual clauses framed for the same object, can be held to liberate trustees from the consequences of [gross negligence].”

The above holding by the honourable judges seemed to state that there was a certain level of culpability that the trustees could not avoid by the mere insertion of an exemption clause. The rule in Seton was later considered in the 1888 Scottish case of Knox v Mackinnon⁴. In the case Lord Watson averred that;

…it is settled in the law of Scotland that… a clause [of this nature] is ineffectual to protect a trustee against the consequences of gross negligence on his part, or of any conduct which is inconsistent with bona fides. I think it is equally clear that the clause will afford no protection to trustees who…act in plain violation of the duty which they owe to the [beneficiaries]. I agree with the opinion expressed in Seton to the effect that clauses of this kind do not protect against a positive breach of duty.

In yet another Scottish case Clarke v Clarke’s Trustees⁵, the court added that;

“It is difficult to imagine that any clause of indemnity in a trust settlement could be capable of being construed to mean that the trustees might with impunity neglect to execute their duty as trustees, in other words, that they were licensed to perform their duty carelessly.”

From the above cases, we can see that the behaviour of the courts was to treat trustee exemption clauses as mere attempts to escape liability that the law had clearly imposed on the trustee. We can say that the courts did not perceive that the trustee could escape liability for breach of trust or gross negligence. The first acceptance of the right of a trustee to insert an exemption clause was in the 1861 case of Wilkins v Hogg⁶. However, the court in that case did not envisage that such clauses should be used to escape liability for breach of trust but instead they held that a settlor could limit or exclude the liability of his or her trustees as long as there was an express provision in the trust instrument granting such exclusion. It is notable that here the onus to do so was on the settlor not the trustee.

In Armitage v Nurse, the question of trustee exemption clauses was for the first time addressed in a comprehensive manner. Millett LJ made several rulings that still guide the decisions of trust cases to this day. First, the court was of the opinion that the rule in Seton to deny trustees leeway to escape liability was clearly wrong. Instead Millett LJ formulated the rule that a trustee could rely on an exemption clause and escape liability “no matter how indolent, imprudent, lacking in diligence, negligent or willful he may have been, so long as he had not acted dishonestly”.

This rule changed the traditional protection accorded to trustees in law choosing instead to allow a wider construction of the terms in a trust instrument. The court in Armitage v Nurse stated that when a court is pondering an exemption clause, it “must construe the words of the exemption clause in light of the conduct complained and decide whether liability has been excluded by the terms of the clause. In carrying out this exercise the clause must be construed fairly according to the natural meaning of the words used.” This suggests that trustees’ liability cannot be excluded in their entirety but instead courts shall consider the particular clause in trust instrument vis a vis the particular breach in contention. Therefore, a trustee can still be held liable for breach of trust if he breaches an express provision in the trust instrument, a provision in the Trustees Act of 2000 or any other law.

Current Practice

Nowadays, trustees widely use exemption clauses to elude liability for several types of breach of trust. These clauses can be “exclusion of liability” clauses which exclude the trustees’ liability for all kinds of breach or they can be “limitation of liability” clauses which seek to limit liability for particular types of breach such as mistake, negligence etcetera. Another current practice by trustees is to extend their powers such that even where breach occurs, the trustee can claim that the act or omission was within his/her powers. Yet another way to escape liability is the so called “duty modification” where the trustees’ duties are craftily constructed so as to limit their liability in case of breach of trust. However, the use of the term “exclusion of liability” refers to the intentions to escape liability using any of the above methods.

The settlor is technically responsible for providing exclusion of liability since he/she is the one who creates the trust and declares it. However, actual practice shows that drafting of trust instruments is usually done by professional trustees who are more often than not solicitors. This gives them the upper hand in deciding the duties and exemptions to include in the trust. This means that while it is the settlor who eventually grants the exclusion, it is the trustee’s crafty hand that ensures that such immunity is granted and not the will of the settlor.

Dishonesty

As stated in Armitage v Nurse, the only time that the courts will not allow an exemption clause to be relied on, is where there is dishonesty or the breach is brought about by the trustees “own actual fraud”. While the term dishonesty may seem plain and direct, courts have had trouble interpreting what constitutes it. The question as to what dishonesty refers to was discussed in the case of Walker v Stones⁷.

In the case, the court considered whether the acts of a solicitor could be found to be dishonest where the solicitor claimed that his seemingly dishonest act or omission was done in the best interest of the beneficiary. Nourse LJ formulated the rule that such a solicitor could not be allowed to escape liability in this manner where it is clear that a reasonable solicitor would not consider the act or omission to be honest in the circumstances. The test is that of objectivity.

The objective test in Walker v Stones and the previous case Royal Brunei Airlines v Tan⁸ seems to be in conflict with the subjective test stated by Millett LJ in the leading case of Armitage v Nurse. In the latter case, the court formulated the test for dishonesty as; “at the minimum an intention of the part of the trustee to pursue a particular course of action, either knowing that it is contrary to the interests of the beneficiaries or being recklessly indifferent whether it is contrary to their interests or not.” The question thus arises, is an intentional breach of trust a dishonest act?

Using the objective test, such a breach is clearly dishonest. However, the subjective test allows for the defense of “best interests of the beneficiary.” The question of intentional or deliberate breach was further considered in the case of Woodland-Ferrari v UCL Group Retirement Benefits Scheme⁹. In the case, two trustees of a registered pension fund were taken to court over a loss exceeding £870,000. In their defense, they claimed exemption under an exclusion of liability clause in the trust instrument. The court in this case considered whether their acts met the threshold of a “fraudulent breach of trust” in the wording of the Insolvency Act 1986. In consideration of this fact, the court referred itself to the test in Armitage v Nurse that required dishonesty to be the deciding factor.

The two trustees had committed money in the pensions fund to an investment which they also had sufficient interest in. While their act was deliberate and risky, there was no dishonesty or willful default on their part. The test in Armitage v Nurse thus sufficed to exclude the trustees from liability and the statutory fine could not be levied on them. The ruling shows that the courts continue to restrict themselves from finding exemption clauses void even where the acts of breach were done deliberately.

In Wight v Olswang¹⁰ the construction of exemption clauses was stated as an important factor for one to escape liability for breach. In the case, the trust instrument had two clauses, one generally exempting liability and another more specific one; both of which were contradictory. The court refused to allow the trustee escape liability by relying on the general clause since the settlor’s intention to grant such immunity was unclear.

In Barraclough v Mell¹¹ a will had a clause stipulating that the trustee would be excluded from liability “unless the same shall have happened through his own personal act done by him either with the knowledge that it was wrongful or without any belief that it was rightful and not caring whether or not it was wrongful”. This case was unique in the sense that it touched on an issue not covered under Armitage v Nurse – recklessness. While considering the facts of the case, Behrens QC vaguely agreed that recklessness just like any other breach could be excluded. However, the judge made the ruling on the merits of the case and so it is still quite unclear whether trustees can be exempted from liability for being reckless though the scholarly opinion is that they can¹².

Finally, in the case of Baker v JE Clark & Co (Transport) UK Ltd¹³ the courts considered whether the non-disclosure of an exemption clause has any effect on the trustee’s reliance on it. The court found that this does not meet the threshold of dishonesty and so trustees can still rely on undisclosed exemption clauses.

Conclusion

The question thus remains whether the trustee owes any obligation to the beneficiary. The law states that the trustee “must exercise such care and skill as is reasonable in the circumstances.¹⁴” However, it appears that even this duty of care and skill can still be taken away through express provisions excluding it. The court still insists on using Armitage v Nurse where Millett LJ states that;

“There is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts. But I do not accept the further submission that their core obligations include the duties of skill and care, prudence and diligence. The duty of trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts, but in my opinion it is sufficient… a trustee who relied on the presence of a trustee exemption clause to justify what he proposed to do would thereby lose its protection: he would be acting recklessly in the proper sense of the term.”

The rule clearly favors the trustee’s right to decide the terms of a trust over the right to protection owed to the beneficiary. This is because the former makes commercial sense. The Law Commission attempted to bring legal reform by recommending that professional trustees be required to bring notify the settlor on the existence and meaning of exemption clauses in the trust and also to adopt a code of best practice¹⁵. However, these reforms do nothing to curtail the trustees’ ability to reduce his obligations to nil.

Bibliography

Armitage v Nurse [1998] Ch 241Seton v Dawson & Others [1841] 4 D 310.

Baker v JE Clark & Co (Transport) UK Ltd [2006] EWCA Civ 464.

Barraclough v Mell [2005] EWHC 3387, [2006] WTLR 203.

Clarke v Clarke’s Trustees [1895] SC 693.

D. Hayton, P. Matthews and C. Mitchell, Underhill and Hayton: Law of Trusts and Trustees (17th edn LexisNexis Butterworths, London 2006).

Graham Moffat, Trusts Law (5^th edn CUP, London 2009).

Knox v Mackinnon [1888] 13 App Cases 753.

Law Commission ‘Trustee Exemption Clauses’ (Law Com No 301 2006).

Royal Brunei Airlines v Tan [1995] 2 AC 378.

The Trustees Act 2005 s 1(1).

Walker v Stones [2001] QB 902.

Wight v Olswang [1999/2000] 2 ITELR 689.

Wilkins v Hogg [1861] 31 LJ Ch 41.

Woodland-Ferrari v UCL Group Retirement Benefits Scheme [2002] EWHC 1354, [2003] Ch 115.

Footnotes

D. Hayton, P. Matthews and C. Mitchell, Underhill and Hayton: Law of Trusts and Trustees (17th edn LexisNexis Butterworths, London 2006).
Armitage v Nurse [1998] Ch 241.
Seton v Dawson & Others [1841] 4 D 310.
Knox v Mackinnon [1888] 13 App Cases 753.
Clarke v Clarke’s Trustees [1895] SC 693.
Wilkins v Hogg [1861] 31 LJ Ch 41.
Walker v Stones [2001] QB 902.
Royal Brunei Airlines v Tan [1995] 2 AC 378.
Woodland-Ferrari v UCL Group Retirement Benefits Scheme [2002] EWHC 1354, [2003] Ch 115.
Wight v Olswang [1999/2000]2 ITELR 689.
Barraclough v Mell [2005] EWHC 3387, [2006] WTLR 203.
Graham Moffat, Trusts Law (5^th edn CUP, London 2009).
Baker v JE Clark & Co (Transport) UK Ltd [2006] EWCA Civ 464.
The Trustees Act 2005 s 1(1).
Law Commission ‘Trustee Exemption Clauses’ (Law Com No 301 2006).

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