Topic 5: Duty of Care and Skill

Question 0

What is the difference between duty of care and skill and duty of administration?

Answer 0

Duty of administration is whether they have complied with the terms of the trust in whether the trustee has done something authorised or unauthorised. It is a yes or no question

Duty of care and skill is only concerned with HOW the authorised act was done.

Question 1

What is the duty of care and skill?

Answer 1

It is a duty imposed on the trustee that they are to exercise the requisite standard of care and skill in performing the authorised action.

Question 2

What is the standard of care expected of a non-professional trustee?

Answer 2

A trustee has to conduct the business of the trust in the same manner that an ORDINARY, PRUDENT business man would conduct his OWN business: Re Speight.

Question 3

What are the facts of Re Speight?

Answer 3

• The defendant was the executor and trustee of the Late Speight estate.
• Plaintiffs were beneficiaries under the will
• D decided to invest money in shares, this was authorised
• D engaged a stock broker (Mr C) who had previously acted as Speight’s broker
• No evidence that Mr C wasn’t anything other than competent and trustworthy.
• D instructed Mr C to invest an amount of money in 3 named companies
• Mr C issued D with a document confirming this and was a receipt for the amount of money paid
• Mr C then went bankrupt
• D realised Mr C hadn’t purchased shares but had misappropriated it for his own purposes
• No point suing Mr C, he’s bankrupt
• Plaintiffs sued Defendant on basis of breach of duty of care and skill.

Question 4

What was the decision in Re Speight?

Answer 4

Courts held:

• They set out test and applied it to the facts
• D had no choice but to engage a broker because he didn’t possess the skill.
• D had no reason to suspect Mr C as unreliable or untrustworthy, so he had exercised reasonable care in that aspect
• P argued failed to exercise reasonable care and skill in supervising transaction
• Evidence given by experts that there were irregularities in the receipt given to D, but they were experts
• A prudent man would not have identified the irregularities
• D not liable, he had met requisite standard of care

Question 5

What is the standard of care for an expert?

Answer 5

Where the trustee has a special skill or expertise, there is a higher standard of care and skill expected of a professional trustee of that profession: Bartlett v Barclays Bank Trust

Question 6

What are the facts of Bartlett v Barclays Bank Trust

Answer 6

• The Defendant dealt primarily with trust and managing them and held themselves out as having that expertise
• They managed a fund in which the trust property was a majority share holding in a company.
• The company had changed activities to a more risky form of property investment.
• The defendants never became aware of it.
• The company subsequently incurred huge losses and became insolvent
• Upon insolvency, majority shareholding (trust property) was much less valuable
• beneficiaries sought D to make compensation for trust estate

Court held:

• Majority shareholding means control over company and because the D held themselves out as having that skill, they had a higher standard of care
• D’s should have known about change in business and known about their ability to stop the change in business
• D held liable for breach of duty of care and skill.

Question 7

Is there a statutory modification to the standard of care?

Answer 7

Yes BUT ONLY IN RELATION TO INVESTMENTS.

Question 8

What is the statutory modification to standard of care in investments?

Answer 8

s22 Trust Act
(1)(a) - no longer concerned with holding itself out, as long as the business is or includes acting as a trustee or investment for other person.

(1)(b) - for non professional trustee, it is now ordinary prudent business man managing ‘other persons’ which suggest less risks may be taken because a business person may take more risks with their OWN affairs.

Question 9

There is a power to insure under s47 Trust Act. Can the trustee be held liable for not exercising that power?

Answer 9

Yes, only where it would be negligent for the trustee not to insure. Only then is a trustee under a duty to insure.

Question 10

What is case where the failure to insure was a breach of the duty of care and skill?

Answer 10

Pateman v Heyen

Question 11

What are the facts of Pateman v Heyen?

Answer 11

• D was executor of estate
• Part of the trust estate included a house made of timber
• The house was rented to tenants and was a source of income
• The house burnt down.
• The D had taken out insurance, but had forgotten to renew the insurance

Court held:

• An ordinary prudent business man would have insured the house as it was a source of income.
• Furthermore, the risk of burning down was increased because the house was made of Timber and the house had been leased which again increased the risk.
• The duty also depended on the cost of the insurance against the value of the trust property.
• D held negligent in failing to renew insurance

Question 12

What are the remedies for a breach of duty of care and skill?

Answer 12

1. Equitable compensation

Question 13

How is equitable compensation calculated?

Answer 13

It is an action to get the trustee to compensate for the LOSS caused to the trust estate.
The test is different than for a breach of duty of administration and a duty of Fiduciary duty.

The argument is: because it is a different type of duty analogous to the torts duty of negligence, the remoteness rule should apply: Bristol v Mothew.

Question 14

What is the problem of adopting the remoteness rule in Bristol v Mothew?

Answer 14

The High Court in Australia has not given a definitive answer of this and it has yet to be accepted in Australia: Yu Yang’s case

Question 15

What are the facts of Bristol v Mothew?

Answer 15

• D was acting for large company and also for the borrower.
• No breach of fiduciary duty because both were aware he was acting for both.
• Loan given on the terms that the borrowers would provide the balance of the purchase price so as not to take out a second mortgage - this was so that the company could exercise the power of sale without encumbrances.
• Mothew was told that if the borrower informed them that they were going to take out a second mortgage, he was to inform the company
• There was no policy or practice that they would withdraw from the mortgage
• In fact the borrower did tell Mothew but Mothew forgot to tell the company
• There was a default on the loan so in exercising the power of sale, the company failed to recover full amount of the sale because of the second mortgage
• They brought action against M for the loss it had suffered.

Question 16

What was the decision in Bristol v Mothew?

Answer 16

Court held:

• M had breached his duty of skill and care
• It wasn’t breach of duty of administration because how the system worked was: the solicitor would hold onto the funds until the property was settled and charged, then he would release the funds to them. He had discharged his duty properly, so no question. It was rather how he went about doing it
• There was no reason why the remoteness principle at CL for negligence shouldn’t apply because compensation in equity and damages in CL were essentially the same thing.
• Though compensation and dmages “in equity” (which is Re Dawson type damages) shouldn’t be confused.

In this case:

• If M was not negligent, evidence showed it was only a possibility, not certainty, that Bristol would have withdrew.
• Argument for M was can’t say it was reasonably foreseeable because there was no standard practice or policy that they would withdraw
• Onus was on Bristol to show if they had knowledge they PROBABLY would have withdrawn, which they did not show.
• M not liable.