DUTIES OF EXPRESS TRUSTEES

Question 1

Harries v Church Ommission

Duties of trustees

Answer 1

• Sir Donald Nicholls explained that “trustees are concerned to further the purposes of the trust of which they have accepted the office of the trustee…to enable them the better to discharge that duty, trustees have powers vested in them. Those powers must be exercised for the purpose for which they have been given: to further the purposes of the trust”
  
  • There are duties and powers given because of the acceptance of the office of trustee
  • With an express trust, the trustee cannot be forced to do anything, they agree to be an express trustee and assume that office, and that brings with it responsibilities and powers
• Trusts are important because trustees have onerous duties imposed on them because they agreed to take on the position

Question 2

Duties of express trustees v other kinds of duties

Answer 2

• Normal duties of express trustees
  
  • Duties may be complex and onerous
  • Trustees have agreed to perform the trust
• Constructive and resulting trustees (bare trusts)
  
  • Arisen by operation of law in particular circumstances, and so the nature of the obligations is different
  • We are not justified in imposing the extensive, complex and onerous duties of an express trustee

Question 3

Sources of powers and duties

Answer 3

Express

Implied

Statute

Court

Question 4

Sources of powers and duties

Express

Answer 4

• On the terms of the trust
  
  • The starting point must always be the trust instrument to see what the powers and duties are expressly recognised in the trust document
  • To a limited extent, the trust document may exclude trustees from liability in certain circumstances, where the clause dictates
  • The trust instrument can impose extra duties by the terms

Question 5

Sources of powers and duties

Implied

Answer 5

• Duties imposed by law
  
  • The law gives the trustee certain powers (the body of a trust) as a matter of equity

Question 6

Sources of powers and duties

Statute

Answer 6

• Statutory extensions or restrictions
  
  • Duties, extensions and clarifications imposed by the Trustee Act 2000
  • By becoming a trustee, the law imposes a number of duties and obligations by virtue of accepting the office of trustee

Question 7

Sources of powers and duties

Court

Answer 7

• Can grant permission for certain things
  
  • The court has a limited residual jurisdiction in certain circumstances to approve something that otherwise the trustee would not be allowed to do

Question 8

Terms of the trust

Answer 8

• Start with the trust instrument
• Supplement with general law of trusts
  
  • Trustee Act 1925, s19 power to insure
  • Trustee Act 2000, ss3-10 power to invest
• Laws for special types of trust

Question 9

Duties on appointment of trustees

Answer 9

Trustees must

• Understand the terms of the trust
  
  • Must know what the trust assets are
  • Separate from requirement of certainty of subject matter
• Inventory trust assets
• Ensure compliance
• Account from previous trustee

Question 10

Exercise of discretions

Answer 10

• Not obliged to exercise discretions
• Must act unanimously
• Must not consider irrelevant matters
• Duty to account
• No general duty to give reasons
• Beneficiaries do not have a broad entitlement to access trust documents
• There is no general duty on the part of the trustees to consult the beneficairies over what they are doing
• There is a duty of evenhandedness as between beneficiaries

Question 11

Exercise of discretions

No obligation to exercise discretions

Answer 11

Tempest v Lord Camoys

• Trustees were given absolute discretion to sell land and the proceeds should be applied to buy other properties
• A trustee wanted to buy a large estate, and apply the fund to pay into court ahead of a further purchase, but the other trustee did not agree. The trustee wanted to get the court to force the other to agree
• A trustee cannot be obliged to exercise their discretion to agree to a particular sale
• Held: the court is not able to require the trustee to exercise their discretion in a particular way

Question 12

Exercise of discretions

Requirement of unanimous action

Answer 12

• Unless the trust instrument provides otherwise
• In Luke v South Ken Hotel, it was held that the act of a majority of trustees cannot bind a dissenting trustee
  
  • Unless the trust instrument provides it expressly, we require all the trustees to agree for it to be binding
• In Staechelin v ACLBDD Holdings, there was a provision in the trust instrument for the trustees to act by majority decision

Question 13

Exercise of discretions

Failure to exercise discretion at all

Answer 13

• Trustees cannot be obliged to exercise their discretion, but they can be obliged to do their duty as trustees in considering whether to exercise their discretion
• Trustees have a duty to understand the terms of the trust. In Turner v Turner, the trustees did not know what being a trustee involved, they just deferred entirely to what the settlor wanted and they did not exercise their discretion at all.
  
  • Trustees are under a duty to consider to exercise their discretion

Question 14

Exercise of discretions

Duty not to take account of irrelevant matters

Answer 14

Klug v Klug

• A third of the testators residuals estate was held on trust for his daughter, and there was provision that it could be applied to benefit her children. The mother of the beneficiary was one of the trustees and she declined to exercise powers in favour of her daughter because she had married without her consent.
• By holding a grudge, the mother was not taking into account relevant considerations
• This does not account as exercising discretion
• Trustees have a duty only to take into account relevant matters

Question 15

Exercise of discretions

Duty to account

Answer 15

• Requires trustees to maintain records
  
  • Statement of accounts
  • Other documents, such as minutes of meetings
• They may be obliged to provide information as to the status of the trust fund and account for it at the end of the trust
• Obligation to account at the end will either be at the end of the trusteeship, or if the trust is being wound up

Question 16

Exercise of discretions

Duty to give reasons?

Answer 16

• Trustees generally do not owe a duty to give reasons to their discretions
• All they have to do is decide whether to exercise their discretion
• The court requires to see the trustees are deciding to exercise their discretion, not to require reasons for them
• In Re Beloved Wilkes Charity, the court ruled that although you are not required to give reasons, if you do give reasons the court can scrutinise them to check whether or not they were relevant

Question 17

Exercise of discretions

Condifentiality

Answer 17

• Re Londonderry’s Settlement*
• Schmidt v Rosewood Trust*
• Breakspear v Ackland*

Question 18

Re Londonderry’s Settlement

Answer 18

• Beneficiaries do not have a broad entitlement to access trust documents
  
  • In this case, the court says that there is a difference between information relating to the assets of the trusts and the provision of information as to why a decision was made
  • Beneficiaries have the right to information as to what assets are held, they do not have a general right (unless the trustees chose to provide it) to know the reasons for the decisions being made
  • If the trustees do disclose the reasons, the adequacy of the reasons can be scrutinised [Re Beloved Wilkes Charity]

Question 19

Schmidt v Rosewoord Trust

Answer 19

• A Privy council decision on the administration of trusts. Mr Schmidt was the son of the settlor of the trust, and he had a discretionary interest and wanted disclosure as to the trustees decision making
  
  • Lord Walker said that the role of the court in supervising the operation of the trust is more important. It is a discretionary judgment by the court as to what is expected in cases. He points to relevant factors such as:
    
    • The nature of the claimants interest
    • Competing interests of beneficiaries and trustees
    • The type of document that is being requested
    • The need to protect confidentiality
  • A reaffirmation of the fact that there is no right to access documents that speak to the reasons of trustees and the fact that trustees do not need to give reasons, but it needs to be considered bearing in mind all the circumstances

Question 20

Breakspear v Ackland

Answer 20

• The idea of confidentiality was reaffirmed in Breakspear v Ackland, beneficiaries are not normally entitled to disclosure of trust documents
  
  • Settlors and beneficiaries can provide the trustees with a letter of wishes which describe how they would like the discretion to be applied
  • The courts are cautious of allowing beneficiaries too much information
  • Briggs J says that if the trustees consider that it is appropriate to disclose documents, that is fine. They are not to be hindered by the settlor not wanting them to disclose the information

Question 21

Exercise of discretions

Duty to consult

Answer 21

• There is no general duty on the part of trustees to consult the beneficiaries over what they are doing
  
  • They can choose to do so, or that the trust documents require them to consult

S11 TLATA

There is a duty to consult over trusts of land

1. The trustees of land shall in the exercise of any function relating to land subject to the trust
   
   1. So far as practicable, consult the beneficiaries of full age and beneficially entitled to an interest in possession in the land, and
   2. So far as consistent with the general interest of the trust, give effect to the wishes of those beneficiaries, or (in case of dispute) of the majority (according to the value of their combined interests)

• Not an absolute duty, “so far as practicable”
• Once you have consulted the beneficiaries, you must give effect to their collective view or the view of the majority

Question 22

Exercise of discretions

Duty of even-handedness as between beneficiaries

Answer 22

• You cannot have favourites amongst the beneficiaries
  
  • Different from discretionary trusts
• Where people already have beneficial interests vested in the original property, there is a duty of even handedness as between the beneficiaries
  
  • Duty not to have favourites between the beneficiaries
  • Duty to have regard to their interests equally
• Part of acting in good faith

Question 23

Standard of care in the common law

Answer 23

• Speight v Gaunt: the trustee employed a broker to make investments on behalf of the trusts. The broker swindled them out of the money. The question was whether or not the trustee had breached their duty of care in entrusting the broker
  
  • The court held that he wasn’t liable and that he had taken sufficient care; the standard expected of a trustee is that they are “only bound to conduct the business of the trust in such a way as an ordinary prudent man would conduct a business of his own”
  • Not holding trustees to an unduly high standard when it comes to the standard of care
• An objective standard of the ordinary and prudent person conducting business on their own

Question 24

Standard of care for professionals in the common law

Answer 24

Bartlett v Barclays Bank Trust

• Concerning a disastrous set of investments on behalf of the trust which the bank had agreed to
• Brightman J: “I am of the opinion that a higher duty of care if plainly due from someone like a trust corporation which carries a specialised business of trust management”
  
  • If you hold yourself out to a certain standard, the court will hold you accountable to that standard

Question 25

Duty of care in the Trustee Act

Answer 25

S1: the duty of care

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—
   
   1. to any special knowledge or experience that he has or holds himself out as having, and
   2. if he acts as trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession.

• The standard of the duty can be heightened depending on what you say you are capable of

Question 26

Traditional position on investment

Answer 26

• minded to make an investment for the benefit of other people for whom he felt morally bound to provide” [per Lindley LJ in Re Whiteley]
  
  • Not just your own risk aversion
• Historically, the law has been cautious of the trustees investment powers, and thus was very restrictive
• Re Harari’s Settlement Trusts: when construing provisions in a trust document relating to investments, it should be construed strictly so as to not give trustees to much latitude as to the types of investments they can make
  
  • Only if the trust document unequivocally provided for certain kinds of investments to be permitted would they be so permitted
• The statute also used to be very restrictive; unless the trust document provided otherwise, the courts will limit the kinds of investments trustees make in an effort to protect the beneficiaries from the risks of investments failing
  
  • Trustee Investments Act 1961 provided a limited list of categories of investments that trustees were allowed to make (reliable and less risky investments) that mitigate the risk of investments

Question 27

Current position on investment

Answer 27

TRUSTEE ACT 2000

• Adopts a fundamentally different approach to the common law and previous statute
• The act governs the duties over how powers in investments are exercised
• General powers, limited by specific duties and with reference to standard investment criteria

Question 28

Trustee Act; General power of investment

Answer 28

• S3(1): unless the trust document provided otherwise, the courts will limit the kinds of investments trustees make in an effort to protect the beneficiaries from the risks of investments failing
• S3(3): unless the trust document provided otherwise, the courts will limit the kinds of investments trustees make in an effort to protect the beneficiaries from the risks of investments failing
• Permits any kind of investment, as if the trustee was the sole absolute owner of the property
• There is still some limitation in respect of land

Question 29

Trustee Act

Standard Investment Criteria - duties and criteria

Answer 29

DUTIES

• S4(1) imposes a specific duty with specific to the standard investment criteria
  
  • Having regard for the standard investment criteria whenever exercising a power of investment
• S4(2) imposes a duty of periodic review to consider whether the investments should be varied

CRITERIA

• S4(3)
  
  • Suitability to the trust
  • The need for diversification of investments so far as it is appropriate – “the section 4(3) duty is a duty to review and consider diversification of the investments of the trust, it is not a duty to diversify [Gregson v HAE Trustees]”
• These are not duties themselves

Question 30

Portfolio Theory

Answer 30

Don’t put all your eggs in one basket

• The need for diversification under section 4(3) builds upon the portfolio theory recognised by Hoffmann LJ in Nestle v National Westminster Bank plc
  
  • You should not consider any one investment in isolation, you consider it as part of the overall holdings of the trust
  • An investment that might look risky on its own can be balanced out

Question 31

Trustee Act

Advice

Answer 31

S5

Additionally, imposes further duties which mirror s4

1. Before exercising any power of investment, whether arising under this Part or otherwise, a trustee must (unless the exception applies) obtain and consider proper advice about the way in which, having regard to the standard investment criteria, the power should be exercised
2. When reviewing the investments of the trust, a trustee must (unless the exception applies) obtain and consider proper advice about whether, having regard to the standard investment criteria, the investments should be varied
3. The exception is that a trustee need not obtain such advice if he reasonably concludes that in all the circumstances it is unnecessary or inappropriate to do so.
4. Proper advice is the advice of a person who is reasonably believed by the trustee to be qualified to give it by his ability in and practical experience of financial and other matters relating to the proposed investment.

Question 32

Cowan v Scargill

FACTS

Answer 32

• Scargill was appointed president of the national union of mineworkers. There was a mineworker’s pension trust with 10 trustees
  
  • 5 appointed by the employer (National Coal Board)
  • 5 appointed by National Union of Mineworkers
• When Scargill became president, he became deputy chairman of the trust
• The union trustees refused to approve investment plans unless it was restricted to exclude
  
  • Energies in direct competition with coal
  • Overseas investments
• Employer trustees applied for directions as to
  
  • Whether the union trustees were in breach of their fiduciary duty
  • Whether the investment plan should be adopted

Question 33

Cowan v Scargill

HELD

Answer 33

• The union trustees had adopted a blanket policy and had not asked what was in the best interests of the beneficiaries, which was in breach of their fiduciary duties
• “When the purpose of the trust is to provide financial benefits for the beneficiaries, as is usually the case, the best interests of the beneficiaries are normally their best financial interests” [per Megarry V-C]

Question 34

Martin v City of Edinburgh District Council

Answer 34

• The majority of the council decided to withdraw investments from South Africa during the apartheid era
• The trustees had not considered the primary obligation – the financial interests of the beneficiaries
• Failing to consider a factor that you should (in this case the best financial interests of the beneficiaries) is a breach of the fiduciary duty
• You cannot decide to invest / not to invest solely for ethical reasons

Question 35

Harries v Church Commissioners

Answer 35

• Charitable trusts associated with the Church of England. They already had an ethical investment policy which excluded 13% of the market
• The claimants wanted the trustees to exclude up to just under 40% of the market
• Qualifications
  
  • “When the objects of the charity are such that investments of a particular type would conflict with the aims of a charity” it is open to the charities to not invest in those sectors
  • Deterrence of donors or recipients
• It is an undue restriction on the ability to invest
• On the facts, it would have been an undue restriction to exclude nearly 40% of the market, but it was permissible to take ethical considerations into account into which investments to do

Question 36

Law Commission on Charities

Answer 36

• “Charity trustees are not under a duty to seek the best financial return from social investments, but may consider the overall return, comprising both the financial return and the furtherance of the charity’s purposes” (Law Commission)

Question 37

Charities (Protection and Social Investment) Act 2016

Answer 37

• The aim of this act is to enable trustees of charities to make social investments (investments that take into account the purposes being advanced). They must
  
  • Consider whether to obtain advice
  • Consider that advice if it has been obtained
  • Satisfy themselves that it is in the interest of the charity to make the social investment having regards to the benefit they expect it to achieve in the benefits of the charity
• Because these trusts are for purposes, you can make investments that advance the objects of the charity

Question 38

Acquisition of an investment in land

Answer 38

• “There is a distinction between purchasing freehold property for the sake of the income … and purchasing freehold property for the sake of occupying it or permitting somebody else to occupy it. in the former case, the purchase … is described as an investment. In the latter case, it is … a purchase for some other purpose than the receipt of income” [per Jenkins J in Re Power]
  
  • You cannot use powers of investment for it because it is not purchased as an investment
• TLATA s6
• Trustee Act s8

Question 39

TLATA s6

Answer 39

Relates to where land already forms part of a trust property – a trust of land

(3) The trustees of land have power to purchase a legal estate in any land in England or Wales.
(4) The power conferred by subsection (3) may be exercised by trustees to purchase land—
(a) by way of investment,
(b) for occupation by any beneficiary, or
(c) for any other reason.

The statute gives trustees the power to purchase land for investment or for occupation by a beneficiary

Question 40

Acquisition of land, Trustee Act s8

Answer 40

1. A trustee may acquire freehold or leasehold land in the UK
   
   1. As an investment,
   2. For occupation by a beneficiary, or
   3. For any other reason
2. “Freehold or leasehold land” means -
   
   1. In relation to England and Wales, a legal estate in land.
3. For the purpose of exercising his functions as a trustee, a trustee who acquires land under this section has all the powers of an absolute owner in relation to the land

Question 41

The rule formerly known as “the rule in Re Hastings-Bass”

Answer 41

• Re Hastings Bass concerned the invalid exercise of a discretionary power
  
  • The rule in Re Hastings-Bass came to be understood as “would the trustees have acted differently if they had not taken into account a factor that they should have (or if they had taken into account a factor that they should not have)?”

Question 42

Pitt v Holt and the rule in Re Hastings-Bass

Answer 42

• Lord Walker in Pitt v Holt / Futter v Futter said that the rule in Re Hastings-Bass was too generous
  
  • More restrictive test – focussing on whether there was a breach of duty by the trustees, instead of simply whether or not they would have done something differently with hindsight
  • “For the rule to apply the inadequate deliberation on the part of the trustees must be sufficiently serious as to amount to a breach of fiduciary duty. Breach of duty is essential … because it is only a breach of duty on the part of the trustees that entitles the court to intervene … Apart from exceptional circumstances … only breach of fiduciary duty justifies judicial intervention”
  • No longer a ‘would you have acted differently’ test, instead we must find a breach of duty by the trustees in their actions (more restrictive)
  • In these cases, it was held the trustees had not breached their duties and thus the actions were not void
  • The remedy, unless it could have been set aside as a mistake, is that the trust or the tax stands, but you can seek to sue the negligent advisers

Question 43

Sch1 p7 Trustee Act 2000

Answer 43

“The duty of care does not apply if or in so far as it appears from the trust instrument that the duty is not meant to apply”

Question 44

Armitage v Nurse

Answer 44

• Beneficiary alleged that the trustees had acted in ways that were detrimental to her interests as opposed to other beneficiaries
• Clause 15 of the settlement said that no trustee shall be liable for any loss or damage … unless such loss or damage shall be caused by their own actual fraud
• On the facts, Millet LJ said the clause was effective to exempt the trustee “from liability for loss or damage … so long as he has not acted dishonestly”
  
  • This is effective because there is still a trust – the obligations for duties of skill and care, prudence and diligence are not the core duties of trusts; these can be excluded by an exclusion clause in the trust document. “The duty of the 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”
• The leading authority – excludes liability for gross negligence

Question 45

Barnsley v Noble

Answer 45

• Dispute between brothers about the value of a family business
• “The phrase ‘wilful fraud’ means that it is a knowing and deliberate breach of a relevant equitable duty or reckless indifference to whether what is done is in breach of such duty which has to be shown… The same point applies in respect of the phrase ‘wilful wrongdoing’: it is the wrong doing, not the doing, which must be wilful” per Sales LJ

Question 46

Spread Trustee

Answer 46

• Lord Clarke says we should not differentiate between categories of negligence in terms of liability
  
  • Once you fail to exercise reasonable care
• “If, as is common ground, the essential obligation is to act as a prudent trustee would act, namely with reasonable care and skill, it can be said with force that the core obligation of a person acting en bon père de famille includes a duty to act with reasonable care and skill and thus without negligence. In these circumstances there might be much to be said for saying, as a matter of policy, that it is not permissible to exclude liability for any breach of that duty**.”
• Lady Hale (dissenting) said that there are good arguments for saying the bar should be higher for professional trustees

Question 47

Reform

Law Commission Consultation Paper

Answer 47

S Bridge ‘Better regulation of trustee exemption clauses’

• “The most appropriate response to the concerns which have been raised about the current use of such clauses [by paid trustees] is the introduction of a rule of professional practice”

Question 48

Reform

Law Commission Report

Answer 48

• Tentatively proposed to introduce legislation to prevent trustees from excluding liability in professional trustee cases – limit the ability of trustees to exclude the obligations that they owe
• When they consulted, this was unpopular with professional trustees

Question 49

Reform

Law Commission’s proposed rule

Answer 49

• Instead, the Law Commissioner encouraged the adoption of a rule of professional trustee – promising not to do it
• The rule: “Any paid trustee who causes a settlor to include a clause in a trust instrument which has the effect of excluding or limiting the liability for negligence must, before the creation of the trust, take such steps as are reasonable to ensure that the settlor is aware of the meaning and effect of the clause”
• The concern is that if these clauses are routinely included in templates, it is not a conscious decision by the settlor to limit or exclude liability
• A rule of professional practice that has been practiced in lieu of legislation