Liability for breach Flashcards
(14 cards)
definition
point trustee can be held liable for their breach of trust
threshold trustees must not cross
liabilities and duties can be excluded from what is known as irreducible core of a trustee’s obligations
maxims:
he who seeks equity must do equity = beneficiary cannot claim trustee = liab for breach if they have also participated
He who comes to Equity must come with clean hands - trustee seeking equitable relief under an exemption clause or s 61 Trustee Act 2000 must demonstrate honesty and good faith
Liability for Breach of Trust: aren’t trustees always liable for a breach?
no -excluded:
an exclusion clause in the trust instrument - doc outlining trust terms - trustee’s powers over trust property, duties and beneficiaries
relief by court pursuant to s.61 trustees act 1925
only liab not excluded is what falls under irreducible core of obligations owed by all trustees to beneficiaries - perform trusts in good faith and honestly for benefit of beneficiaries
Liability for Breach of Trust – the statutory framework
s.61 trustees act 1925 - general discretion for court to grant trustee ex post facto relief from liab for breach where trustee acted both honestly and reasonably
s.62 - consent of a beneficiary to a trustee’s breach of duty may not only bar a claim, but also result in the beneficiary losing their beneficial interest
Trustee Act 2000, sch 1 para 7: ‘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
Liability for Breach – the statutory framework in other jurisdictions
New Zealand Trusts Bill 2017
s.20-26 = mandatory duties of trustee
s.24 - act honestly and in good faith
s.25 - act for benefit of beneficiaries or to further permitted purpose of trust
s 26A-36A outline the ‘Default duties’ which a trustee must perform ‘unless modified or excluded in accordance with section 5(3A) and (3B).’
s 37 restricts a trust instrument from excluding liability on grounds of ‘dishonesty, wilful misconduct, or gross negligence
Armitage v Nurse: Lord Millett’s ‘irreducible core’
irreducible core of obligations owed by trustees to beneficiaries and enforceable by them. if beneficiaries = no rights enforceable against trustees then no trusts.
trustees perform trusts honestly and in good faith for benefit of the beneficiaries
Any other obligation can be excluded by an exclusion clause
Armitage v Nurse: Lord Millett’s ‘irreducible core’ in practice
allowing a trustee to break their duty in certain situations might actually be beneficial.
Perrins v Bellamy,
“The main duty of a trustee is to commit wise breaches of trust.” - sometimes breaking the rules carefully and thoughtfully can be in the best interest of the people the trust is meant to help.
licence to act with greater discretion and obligation to act honestly and in good faith encourages more inds to take on important role of trustee in first place esp in family contexts
if s 61 Trustee Act 1925 permits certain trustee breaches ex post facto – ie after the breach has already taken place – it makes sense also to permit breaches ex ante – ie before they actually occur – via the incorporation of an exclusion clause. - helps reduce expensive and cumbersome litigation in courts if breach = permissible before it reaches courts
Applying Armitage in the Court of Appeal: Citibank v MBIA Assurance
trust instrument said guarantor (MBIA) right to instruct trustees as to exercise of their discretion and trustees not liable for breach if followed these instructions
clause appeared to permit trustees to follow instructions of guarantor and avoid liab for breach of trust even if instructions not benefit beneficiaries
exclusion clause = valid even though goes beyond irreducible core
What trustee duties can be excluded by an exclusion clause?
important for a settlor to be able to exclude some trustee duties and liabilities in the trust instrument.
non professional trustees e.g. family/spouses not held to same standard as professional trustees
if trust instrument spec monies = invest for childrens ed and it is not then can be liab for breach but exclusion clause can exclude liab for non prof if give monies to alt but for honest and good faith purpose
Trustee negligence vs trustee gross negligence: Spread Trustee v Hutcheson
Trustees are generally expected to act with reasonable care and skill—like a prudent person or, in Guernsey law, “a good father.” This sounds like an essential duty that shouldn’t be avoided.
However, both Guernsey and English law allow trustees to exclude liability for ordinary negligence (a lack of reasonable care and skill).
In short: the duty to avoid negligence is important, but it’s not part of the absolute core of a trustee’s responsibilities. - not an irreducible core
Trustee negligence vs trustee gross negligence: Barnsley v Noble
trustee can act negligently if an exclusion clause permits it
but gross negligence - lord millet - armitage - diff bet neg and GC in english law = merely one degree
gross negligence may be permitted so long as the trustee is a non-professional and has acted honestly and in good faith
B v N - trustee could benefit personally from trust transactions, but only if they acted honestly and the trust document allowed it
‘Dishonesty’ and professional trustees: Walker v Stones
CoA assessed meaning of dishonesty outlined in Armitage to exclusion clauses for professional trustees
prof trustees also partners in a firm of solicitors - trust inst excluded all liability except for wilful fraud or dishonesty
beneficiaries submitted that the trustees were in breach for having acted for the benefit of individuals not designated as objects of the trust, and the trustees relied on the exclusion clause.
Even if a trustee, , genuinely believes they are acting in the beneficiaries’ best interests, that belief won’t protect them from liability if it is clearly unreasonable. - if no reasonable solicitor-trustee would have thought the action was in the beneficiaries’ best interests, then the trustee can still be held liable—even if they acted honestly.
Professional trustees and non-professional trustees:
Armitage v Nurse: Trustees (especially non-professional ones) can be protected from liability for negligence—even gross negligence—by an exclusion clause.
Walker v Stones: Professional trustees (e.g., solicitors) are held to a higher standard and usually cannot escape liability for gross negligence.
The cases are reconcilable: Armitage dealt with family trustees; Walker with professional trustees. The law expects more from professionals.
Fraud: No exclusion clause can protect a trustee from liability for fraud.
If a clause appears to exclude all liability (including fraud), courts will apply the principle of severance:
If the settlor clearly intended to exclude liability for negligence, that part of the clause may still stand.
If the settlor’s intent is unclear or based on a misunderstanding, the entire clause may be struck out.
S 61 Trustee Act 1925: honesty, reasonableness and fairness
s.61 power to relieve trustee from personal liability
If a trustee has breached their duties but acted honestly and reasonably, and it’s fair to excuse them, the court can reduce or remove their personal liability.
meaning of “honestly” here is similar to how it’s used in Armitage: it involves both what the trustee believed (subjective) and what a reasonable person would think (objective)
‘Reasonableness’ under S 61 Trustee Act 1925:
Re Smith:
trustee appointed law firm to act as her agent, clerk in firm fraudulently obtained her signature and ran away with some trust monies
trustee not liable as she acted honestly and reasonably even though she hadnt taken all precautions against fraud that reasonable trustee would have
Re Stuart:
trustee made improper investment of trust funds
trustees are expected to be as cautious with trust money as they would be with their own money - here he didnt
