Issues Around Trustees Responsibilities

This question throws up issues around trustee’s responsibilities, duties and consequences if in breach of those duties.

S9a Trustees Act 1996 states that trustees have a duty to exercise such care as is skills as is reasonable when deciding whether to delegate and in keeping the delegation under review. If necessary they can give directions to the beneficiary or revoke the delegation. If trustees fail to comply with their duty of care then this may give rise to liability.

Pierre as a trustee has an express power giving him the discretion as to whether he retains the property or sells it.

Pierre, therefore, has duties in selecting investments for the benefit of the beneficiary.

Pierre’s, duties include the management of the trust with reasonable care of an ordinary prudent man of business in relation to his own finances. This duty means taking all appropriate advice and information on matters outside his own knowledge and skills. This is why the courts place a higher duty i.e. that of a professional as opposed to an ordinary person.

Where a trust deed gives the trustee (Pierre) a discretion, Pierre must fully familiarise himself as to the terms of that discretion and any limitation placed by statute on the trust deed. Pierre under The Trustee Act 2000 has specific duties in relation to the management of investments and the right to invest in any asset an ordinary prudent man of business would consider for his own investments. The Act also places a duty on the trustee to obtain professional advice in connection with the nature and value of the trust fund. The Act makes the trustee, upon failure to obtain appropriate advice, liable for reimbursing the beneficiaries personally. This action can follow years later and any shortfall or loss between the values of the fund and the value the fund would have been if advice would have been sought.

This means the beneficiary may be able to take action against Pierre if they can prove that he has been in breach of his duties and obligations of the trust deed.

One of these duties, that the trustee has, is a ‘fiduciary duty of care’ to the beneficiary. This duty is a serious legal duty with implications to the trustee. This fiduciary duty places a fundamental duty of care to the beneficiary.

In order to prove that Pierre has been in breach of his duty of care, the beneficiaries must prove under s11, Pierre failed to take appropriate advice and information prior to appointing Jean to auction the vase. Also Pierre failed to appoint a valuer to obtain a valuation and take specialist advice. Therefore Pierre failed to employ an appropriate agent under s13. Further the beneficiaries can claim that Pierre did not fulfil his duties, as stated in s21 Trustee Act 2000, to the beneficiaries by failing his duty to the agent under s22 and s23 of the Trustee Act 2000. It would appear that Pierre’s breach of duty has caused the vase to be lost and hence he is liable for its value.

In the case of Fry v Tapson the issue of whether the right sort of agent had been employed. The question here is that would an ordinary prudent man of business, have employed Jean, who is an estate agent, and an auctioneer, to sell a 15th century Chinese vase? It is obvious to any person that Jean is not an antique dealer and an ordinary person would have gone to an antique dealer for the simplest valuation of the vase.

As in the case of Fry v Tapson, Pierre failed to make all the appropriate inquires that an ordinary prudent man of business would have made and hence in breach of his duties to the trust deed and the trustee Act 2000.

In order to bring a claim, the beneficiaries have to show that a breach of trust has taken place. In the case of Target Holdings Ltd v Redferns (1995) the House of Lords held that Redferns would not be liable because there was no causal connection between the loss suffered and the loss committed, i.e. the loss was caused by the fraudulent over – valuation of the land and not by Redferns short – term use of the money, even though that was technically a breach of trust. Therefore, here the trustee’s liability is as set out by Target Holdings v Redferns.

This liability is divided in three sections. Firstly, there is a liability to recover specific property (i.e. vase) that had been misapplied in breach of trust. Secondly a liability to account to beneficiaries for the cash equivalent of the loss caused to the trust. Thirdly, a right to equitable compensation for the further loss caused by the breach. This could well apply to our scenario case.

The specific restitution remedy is to require the trustee to recover any property that was transferred in breach of trust. This remedy is proprietary and involves the recovery of the very property (i.e.) vase, that was formerly held on trust. This is as opposed to a substitute property. This remedy is of particular important to the beneficiaries as the vase is valuable and very important. Here the trustee will be required to deliver that specific property if in Pierre’s control or possession. If not then the law of tracing becomes very important.

The liability for breach of trust was described by Lord Browne – Wilkinson in Target Holdings V Redferns as in the form of an action against the trustees personally to receive the trust property in the first place. In the event the original trust property has passed out of the trustees control or possession. The action against the trustee for breach of trust converts to a mere action in money to recover from the trustees personally the equivalent cash value i.e. “the remedy of restoration.”

This liability becomes a two step stage. First being compensation for the vase. The second being for any other associated losses i.e. equitable compensation. This remedy applies when specific restitution is possible as the property cannot be located.

It was noted in the case of Swindle v Harrison 1997 and Bristol and West v Mathew 1996 that there is a difference between personal compensation for loss suffered as a breach of the trust and compensation equivalent to the value of the lost property to the trust. However, the level of compensation must equal to the loss the beneficiaries can show that was the cause by the breach and such that the trust has been placed back into the same position it would have been prior to the breach.

A good defence for Pierre would be as in the case of Nestle v National Westminster Bank PLC (1994), had the beneficiaries agreed to Pierre’s actions. However, Pierre cannot be excused his liability for dishonest activity.

Also according to s61 of the Trustees Act 1925, Pierre can be excluded if the court considers that Pierre acted honestly and reasonably e.g. Re Evans 1999 where a trustee had been excused from as they had searched for the beneficiary from whom they have not heard from for thirty years.

By adding an exclusion clause in the trust deed it limits or excludes the trustee’s liability for breach of trust.

However an exclusion clause does not protect trustees in cases of bad faith, recklessness or actual breach of duty. In the case of Armitage v Nurse it was held that the clause would protect the trustee as long as they did not act dishonestly. Lord Millet in the case explained “the irreducible core of obligations owed by trustees included the duty to act honestly and in good faith but did not include any duty of skill” therefore he allowed exemption from liability for gross negligence. However, after this case it has been held that exemption clauses covering defaults other than dishonesty cannot be relied on.

A trustee can only be responsible for actual dishonesty with regards to exclusion clause concerning negligence. These types of clauses try to exclude the ordinary prudent man of business test.

S30, Trustee Act 1925 act (now repelled) looks at general indemnity clauses. Here it states that trustees can only be liable for their own actions or if they are guilty of “wilful default.”

In the case of Re Vickery, it was interpreted to mean “personal dishonesty” revealing a subjective test showing that only negligent trustee’s would have been exempted from liability. Re Vickery has by large been overtaken by the 2000 Trustee Act. It is only now relevant when interpreting that exact phrase “wilful default.”

Many disagreements have arisen against this decision. First, it is argued that the phrase was interpreted as “wanton carelessness” making it subjective. Secondly he relied on two cases which were both company law decision which concerned the liability of directors of companies. In these cases the judge refused to follow the trust cases as directors are regarded differently to trustees. Finally, in previous trust cases “wilful default” had been interpreted as failing to take the care of an ordinary prudent man of business.

In the leading case Speight v Gaunt it was said that in Re Vickery the interpretation of “wilful default” was incorrect as this was decided when the S30 Trustee Act 1925 existed. In the case of Armitage v Nurse 1998 LJ Millet quoted Re Vickery with approval on that point.

The law commission before the 2000 Act thought it should be confirmed and made clear that the test is in fact objective. The 2000 Act S1 (1) makes it clear that the test is objective and that there is a duty to supervise even after appointment.

There have been cases to challenge this but the judges are reluctant to accept exclusion clauses. (Bogg v Raper 1998) and (Walker v Stones 2000.)

There are possibilities for reform and proposals for professional trustee not to be able to use exemption clause with regard to liability arising from negligence. There were consultation papers in 2002 (No.171) but not as yet legislation.

In light of the above case law and the Trustee Act 2000, I feel that Pierre has been careless and negligent in his duties as a trustee and hence he would not benefit from the exemption clause. Whilst the clause may provide a defence to some duties a duty of care still exists in law and equity. Finally equity will not suffer a wrong without a remedy.

What type of action the beneficiaries seek to take will depend upon them? Each remedy is more suitable depending on the circumstances and type of trust property. The remedies usually fall into three choices: a charge over the traced property, a possessory lien over the property or the award of proprietary rights in the form of a constructive trust over the property in favour of the claimant.

A charge over the property can only arise in equity and entitles the beneficiaries to seize the property and obtain a court order to make the defendant pay the amount owed. A lien will entitle the beneficiary to take possession of the property and to keep that property until the defendant pays what is owed. The two remedies above involve the beneficiaries being paid an amount of money and require that the property can be identified separately from other property. The final remedy involves a constructive trust which will entitle the beneficiary to an equitable proprietary interest in the traced property.

The beneficiaries have a choice of remedies but there are situations where the recipient of the traceable property can resist the claim. These recipients will have at least three choices: change of position, estoppels by representation and bona fide purchaser for value without notice.

Bibliography

E Martin, Jill, Hanbury & Martin, Modern Equity (sweet and Maxwell, 2009)18th ed

Hudson, Alastair, Understanding Equity and Trusts (Routledge Cavendish, 2008) 3rd ed

Watt, Gary, Todd & Watt’s cases & materials on Equity and Trusts (Oxford, 2009) 7th ed

www.friendsprovident.com (Guide to trusts and your responsibilities as a trustee)

www.estatesortrusts.co.uk/resonsibilities-of-a-trustee.htm (Responsibilities of a trustee)

www.anthonygold.co.uk (Duties and responsibilities of trustees)