Analysis of Section 61 of the Trustee Act 1925

The Trustee Act 1925, Section 61 and exemption clauses, allow the limitation or exclusion of trustee liability under certain circumstances particularly related to whether the trustee acted honestly or not. In Armitage v Nurse, the Court of Appeal rejected the argument that the core obligations of trustee include the duties of skill and care, prudence and diligence and held that such obligations could be exempted in the trust instrument and that it is only the duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries as the minimum standard necessary to give substance to the trusts. This essay argues that this represents an unwarranted reduction in the minimum standard that the law should expect from a trustee because it divorces the duty to act honestly from a standard of reasonableness. For students seeking guidance in navigating complex legal discussions, especially in areas like this, seeking law dissertation help can provide valuable insights and support.

Section 61 of the Trustee Act 1925 relates to provision of relief to the trustee from liability in cases where the trustee may be personally liable for any breach of trust, but acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach. Section 61 creates a duty on the trustee unless he acts honestly and reasonably, which may be inferred to mean that the trustee has to establish that he acted honestly. Furthermore, Section 61 also requires that the trustee establish that he acted reasonably. The principle of fairness is also applicable here because this would require that the position of both the trustee and beneficiary is considered.

Exemption or limitation clauses may also be included in the trust instrument to exclude the liability of the trustee under the application of the general law. The scope of exemption clauses in excluding trustee liability was considered in Armitage v Nurse. In this case, the beneficiary sued the trustee for breach of trust, regarding the management of a trust in agricultural land put into trust for her mother for life, and the remainder to herself contingent upon her attaining the age of 40. An exemption clause in the trust instrument provided that the trustee would not be liable for any loss or damage to the beneficiary daughter’s fund unless it was caused by actual fraud. Despite the exemption clause, the beneficiary claimed that there should be an irreducible core of obligations owed by trustees to their beneficiaries and that these should always be enforceable and exemption clauses that negate the effect of these obligations should not be allowed to take effect. The argument of the beneficiary was that the core of obligations that comprise duties of skill, care, prudence and diligence should not be allowed to be negated by an exemption clause in the trust instrument.

It has been noted that the argument that there is a irreducible core of trust that cannot be negated by the use of exemption clauses represents importance of the equitable ownership of the beneficiary or the obligatory nature of the trustee’s duties. The Court of Appeal in this case held that the trustee can exclude their liability in the trust deed except in cases involves dishonesty and that such exception clauses would be binding. On the face of it, this position may appear to be aligned with the Section 61 because this creates a duty on the trustee unless he acts honestly. However, there are also the requirements of seeing whether the trustee acted reasonably and whether it would be fair to exonerate the trustee from his liability. It can be argued that whether a trustee acted honestly also requires assessing whether another reasonable and honest trustee would have acted in the same manner. There are decisions prior to and after Armitage to illustrate this argument further.

But would an honest trustee have acted in a wilfully negligent and indolent manner? Royal Brunei Airlines v Tan requires that the trustee’s actions be compared with an honest trustee to understand whether the trustee has acted honestly. It can be argued that Armitage does not meet this standard. In Twinsectra v Yardley, the court held that the true test of honestly was to also consider whether other reasonable people would have considered the conduct to be dishonest; thus, linking honesty to reasonableness. It can be argued that the standard of reasonableness would require that the trustee does not act indolently, negligently and wilfully in a way to cause loss or damage to trust property. This is not the standard that is met by Armitage.

According to the decision in Armitage, trustees may be wholly exempted from their liability for breach of trust, except where their conduct involves dishonesty. But the standard of dishonesty does not appear to align with the decision in Royal Brunei Airlines v Tan, which requires that the trustee’s actions be compared with an honest trustee or Twinsectra v Yardley, which requires consideration of whether reasonable people would have considered the conduct to be dishonest. With regard to the reasonableness requirement, a noteworthy judgment is in the case of Walker v Stones, where the court held that it would be dishonest for a solicitor-trustee to commit a breach of trust even under a genuine belief that it would be in the interests of the beneficiary when no other reasonable solicitor-trustee could have thought to be in the interests of the beneficiaries. In this case, the court did not allow the solicitor-trustee to rely on an exoneration clause covering defaults other than dishonesty. This decision can be seen to be different from the one taken in Armitage because in the latter case, the court did not seek to link the actions of trustee to dishonesty even when the actions could be imprudent, lacking in diligence and negligent. It may be argued that this case involved a solicitor-trustee, who as a professional person was held to a higher standard. This is not in line with the decision in Wight v Olswang, where Peter-Gibson LJ noted that with regard to professional trustees and exemption clauses for breaches of trust or negligence by a trustee there should be clear and unambiguous words in the Settlement that allows such exemption. In Wight, the court allowed exemption if clear words to that effect were included. In Walker v Stones, the court sought to link dishonesty with reasonableness in order to ensure that exemption does not go so far as to exclude a professional trustee. How does Armitage relate to the standard that is required for a professional person and does it lower this standard unreasonably?

One of the problems with the reduction of the minimum standard that the law should expect from trustees is that it has not been able to distinguish the layperson trustee from the professional trustee. It can be argued that at least the professional trustee should be held to a higher minimum standard as compared to the layperson trustee; however, the Armitage judgment fails to make this distinction. The law on this remains permissive of exemption clauses for professional trustees who are paid for their services in the same way as for laypersons. In its Consultation Paper, Trustee Exemption Clauses, the Law favoured legislative regulation (though not prohibition) of exoneration clauses especially for professional trustees. However, in 2006, the Law Commission declared that they would not recommend statutory changes to the law on exemption clauses.

To conclude, the Armitage decision is an unwarranted reduction of the minimum standard of obligation of trustee, because by taking an obligation based approach, it allows the exemption clause to exonerate a trustee to the point that the trustee may be negligent or indolent. This does not align with the definition of honesty taken in other judgments discussed in this essay where dishonesty can be linked to what other reasonable person would have thought to be honest in the given circumstances.

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List of cases

Armitage v Nurse [1998] Ch 241.

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

Twinsectra v Yardley, [2002] 2 WLR 802.

Walker v Stones [2001] 2 WLR 623.

Wight v Olswang [1999] ITELR 783.

Books

Hayton D, ‘The Irreducible Core Content of Trusteeship’ in AJ Oakley (ed), Trends in Contemporary Trust Law (Oxford: Oxford University Press 1996).

Hudson A, Equity and Trusts (London: Cavendish Publishing 2003).

Moffat M, Trusts law: text and materials (Cambridge University Press 2005).

Journals

Groves C and J Ingham, J 'Trustee Exemption Clauses: Who Are We Trying to Protect' (2003) 6 Private Client Business 404.

Reports

Law Commission, Trustee Exemption Clauses (Law Com 301, 2006).

Law Commission, Trustee Exemption Clauses (CP171, 2003)