The Standard of Duty Expected from Trustees

Introduction:

Section 61 of the Trustee Act 1925 provides a discretion to the court to preclude a trustee from a liability arising out of his breach of trust if he acted honestly and reasonably and omitted to obtain courts’ directions of the court in the matter. It has been found that many cases where this section was applied involved a misunderstanding by the trustees of their duty. The courts’ discussion has usually centred around the argument that the default or misunderstanding must be a reasonable one.

In Armitage v Nurse, Millett LJ ruled that a trustee must act honesty and in good faith in the best interests of the beneficiaries. He mentioned “…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.” He held that a trustee will not be liable absence of any dishonest intention. This essay will explore whether this minimum standard has unwarrantedly reduce the minimum standard of duty expected out a trustee.

Absence of dishonest intention forgives all liability

In Armitage v Nurse, Millett LJ held that an exemption clause can exclude the trustee from liability for any loss and damage to the trust property notwithstanding “how indolent, imprudent, lacking in diligence, negligent or wilful he may have been, so long as he had not acted dishonestly”. The judgement demonstrates that the trustee could be absorbed from any gross negligence if he was not dishonest. Does this mean that a trustee could escape liability for gross liability? This kind of question is the core to the subject of this essay. Reading the judgment, it means that an exclusion clause that excludes liability of a trustee for fraud or dishonesty cannot be effective and it would mean that the deed did not create an effective trust. According to Millett LJ, the minimum element necessary to give substance to a trust is the duty of the trustee to perform the trust honestly and in good faith for the beneficiaries’ benefit. However, a trust duty involves care and skill in the management of the trust, in the event of the duty it cannot be subject to the determination of whether the act of breach is reasonable. Such duty requires more than reasonable behaviour. As per Section 1(1) of the Trustee Act 2000, a trustee is required to exercise reasonable care and skill in a given circumstances.

What is important is to consider two factors while determining liability of a trustee. The first factor is to consider whether or not a trustee misunderstood his duty where the court could sympathize. The second factor is whether or not the trustees has taken the appropriate procedural steps to perform the trust properly. When the courts give relief under Section 61, it appears that the law does not say that a trustee acted correctly for the way it acted. In Re Stuart, the court ruled that the burden is on the trustee to prove that he acted honestly and reasonably. This finds similarity in which the criminal defence mechanism provides for justification that provides a desirable behaviour, such as a reasonable force to prevent crime, and excuses where a behaviour may not be desirable but can be pardon, for instance stealing under duress. Using this reference, Section 61 defence based on honesty and reasonableness is an excuse and not a justification.

The problem arising from the ruling in Armitage is that subsequent case ruling led to trustees breaching laws and escaping liability causing loss to the state’s tax revenue. The principle laid down in Re Hasting-Bass and in Mettoy Pension Trustees Ltd v Evans where it was ruled that the courts would not interfere with the discretion of the trustees’ exercise of its power unless they accomplished something that they could not; have taken into accounts matters that they should not have; or have failed to take into account matters that they should have considered. Thus, it is argued that if the decision of the trustees produce unintended consequences, for example a large charge of taxation, they could apply to the court for setting aside stating that they did not account for matters they should have or considered matters that they should have not. This principle precludes trustees from any liability. After the Hastings-Bass, there were no cases that went upto the Court of Appeal or higher as trustees had taken advantage of the rule as interpreted in Mettoy. Even the revenue and customs office did not take up the matter for many years. This is one example demonstrating the effect of relying on the principle of honesty and reasonableness. The case ruling in Futter v Futter, brought some changes where it held that a trustee may seek to set aside decisions on the basis that they failed to consider a relevant matter or considered an irrelevant matter at the time of making a decision unless it could be shown that the trustee has committed a breach of a fiduciary duty. This is not possible if the trustee has obtained and followed a professional advice. This, however, does not preclude the beneficiaries from taking legal action against the trustees for negligence instead of a breach of trust.

Relief under the Section 61 appears to be limited to cases of honest mistake made notwithstanding every reasonable care. Trustees are normally denied relief under the section where there has been some element of carelessness in their conduct. After Futter, the exemption still holds but subject to the condition that there is no breach of fiduciary duty. This calls for a change in the judicial interpretation when applying Section 61 defences. Otherwise, trustees will not invoke Section 61 as a suitable alternative to the use of exemption clause. Thus, professional trustees are entitled to certain protection in the form of exclusion of certain liabilities. This demands that there is clearer provision other than solely resorting Section 61 defence. For example, there is a marked dissimilarities in regard to the treatment meted out to paid and lay trustees in terms of courts determine issues of reasonableness, fairness and merit. This is seen in the manner how there is an innate judicial resistance to granting of relief to professional trustee. At the same time, exclusion clauses for protecting trustees would remove statutory jurisdiction from this area of law. For example in Adams v Bridge, Section 61 assumed relevance only after finding that the exclusion clause was ineffective by because of the Pensions Act 1995, S33 that provides for liability arising from breach of duty to care or exercising skill by the trustee. In this light, there is difficulty in understanding the design and intent of Section 61 jurisdiction, which seems to have not recognised the socio-legal background.

The Section 61 defence or the exemption clauses cannot take away the liability for gross negligence by the trustees. The judgment in Armitage that exempts liability of the trustee as long as his acts were honest or reasonable. This represents a reduction of fiduciary duties where contractual exemption clause or similar clause can reduce the prescriptive fiduciary duties. The ruling gives dominant status to the defence of honesty over gross negligence. The ruling in Armitage ruled out trustees’ duty of care beyond the exclusive jurisdiction of equity. It subject a trustees’ negligence to procedural, remedial and evidential rules that are applied to obligations arising out of tort and contract with the rules of causation and proof of loss, proximity and remoteness, and contributory negligence. It excludes application of special rules relevant with pure fiduciary obligation of good faith and loyalty. Because of this, the courts have place the standard of trustees’ duty of care at a very low level to protect the trustees from oppressive liability. However, as discussed earlier, Section 61 defence and the exemption clause is an excuse and not a justification. A trust is based on duty of care and skill, which cannot subject to reasonableness or honesty. Continue your journey with our comprehensive guide to An Analysis of Basic Trust Elements.

Conclusion

Millett LJ ruling on Armitage uses honesty and reasonableness to determine the irreducible core of obligations. This gives a fiduciary duty of trustee a very low standard in determining the liability of trustee in case of breach of their obligations. The test of honesty and reasonable act cannot assumed a justifiable reason. A trustee can just escape liability by giving the excuse of honesty. The effect was seen after the Hastings-Bass ruling where lesser cases came to the Court of appeal.

It is also understandable that trust law needs to provide certain protections to trustees to exclude liability. Thus, while interpreting Section 61, the courts must find a balanced interpretation so as not to excuse gross negligence by the trustees. The use of honesty cannot precede over acts such as gross negligence.

Bibliography

Cases

Adams v Bridge [2009] Pens.L.R. 153

Armitage v Nurse [1997] EWCA Civ 1279

Futter v Futter [2013] UKSC 26

Perrins v Bellamy [1899] 1 Ch 797

Re Grindey [1898] 2 Ch 593

Re Houghton [1904] 1 Ch 622\

Re Turner [1897] 1 Ch 536

Re Stuart [1891] 2 Ch 583

Re Windsor Steam Coal Co (1901) Ltd. [1929] I Ch 151

Books

Atkins S, Equity and Trust (Taylor & Francis 2013)

Gardner S, An Introduction to the Law of Trusts (Oxford University Press 2011)

Getzler J, ‘Duty of Care’ in Arianna Pretto-Sakmann, Breach of Trust (Bloomsbury Publishing 2002)

Rose F, Restitution and Equity Volume 1: Resulting Trusts and Equitable Compensation (Taylor & Francis 2020)

Journals

Haley M, ‘Section 61 Of The Trustee Act 1925: A Judicious Breach Of Trust?’ (2017) 76 3 Cambridge Law Journal 537–565

Others

The Law Commission, ‘TRUSTEE EXEMPTION CLAUSES A Consultation Paper’ (2002) The Law Commission Consultation Paper No 171.