( Ante, July 20, 1888, 25 S.L.R. 737; 15 R. 1033.)
Subject_Trust — Bad Investment — Liability of Trustee and of Law-Agent in Trust — Title to Sue.
Trust funds which were held in terms of an antenuptial marriage-contract were lent on the security of houses in the course of erection, and were lost through the insufficiency of the security. The marriage-contract empowered the trustees to lend on heritable securities or personal securities or obligations, and contained a clause which declared that the trustees should not be answerable “for errors, omissions, or neglect of diligence, nor for the insufficiency of securities, insolvency of debtors, or depreciation in the value of purchases.” An action was raised by the beneficiaries who had a contingent right to the fee of the trust-estate, against the trustees and the law-agents in the trust, “conjunctly and severally, or severally, or in such other way or manner” as should seem just, to restore the money to the trust. Defences were lodged for one of the trustees and for the law-agents.
Held ( affirming the judgment of the First Division) that the action as against the law-agents fell to be dismissed, on the ground that these defenders would have been liable only if they had been employed to give advice to the appellants and neglected the duty of so doing; and further, that it did not appear from the evidence that the law-agents had been employed to advise the trustees as to the sufficiency of the security, or that the latter acted upon such advice.
Held ( reversing the judgment of the First Division) that the trustee was liable, as it appeared from the evidence that he had failed to show the same degree of reasonable care that a man of ordinary prudence would exercise in the management of his own affairs.
This case is reported ante, July 20, 1888, 25 S.L.R. 737; 15 R. 1033.
The pursuers appealed.
At delivering judgment—
In 1874 the trustees sold a portion of the trust property for £2750, and received payment of another sum of £2000, which had been lent on heritable security. They had thus £4750 to invest. On the 5th of May in that year a meeting of the trustees took place, at which Mr and Mrs Rae and Mr Meek were present, when it was resolved that a loan should be made to Mr William Anderson on the security of unfinished buildings in the Gallowgate, Glasgow, provided Mr Hotson, their law-agent, should be satisfied with the title, and that such part of the loan should be deposited in a bank in the joint names of the parties' law-agents as Mr Burnet, an architect who had valued the buildings, should deem to be sufficient for finishing them.
The loan was accordingly made, and the entire sum of £4500 ultimately paid to Anderson. I shall have presently to revert to the circumstances attending the loan, but it will suffice for the present to state that the transaction turned out a disastrous one for the trustees, and that the money lent has been lost to the trust-estate. This action has been brought by the present appellants to compel the defendant Meek to make good the loss. The law-agents who acted for the trustees at the time of the loan were joined as defendants, and the same relief was claimed against them.
The Lord Ordinary required the appellants to elect whether they would proceed against the trustee or the law-agents, and on their declining to do so, dismissed the action on the ground that the trustee and the law-agents ought not to have been sued in the same action. This interlocutor was recalled by the Inner House, and the parties were allowed to proceed to proof. After proof had been led the cause was argued before the Second Division and three Judges of the First Division of the Court. The Lord President, the Lord Justice-Clerk, and Lord Adam delivered their opinions in favour of all the defenders. Lord Young concurred in thinking that the defender Meek was not liable, but held that a case had been made out against the law-agents. Lords Mure, Shand, and Rutherfurd Clark thought that the liability of the trustee had been established, but that there was no case against the law-agents.
My Lords at the conclusion of the argument of the learned counsel for the appellants all your Lordships were of opinion that they had failed to show any ground for their action against the law-agents; I share the difficulty which was felt by the Lord Ordinary. I cannot see how the law adviser could in any view be held liable to restore to the trust fund the money lost, which was the claim against the other defender. If an action be maintainable against them at all it could only be to compel payment of such damages as the appellants have sustained by reason of their failure of duty. And considering the contingent nature of the appellants' interest in the fund it is obvious that this must be something very different from the amount of the loss to the estate. Liability as against the defenders, with whose case I am now dealing, could in my opinion only be established by proof that they were employed to give advice either by the appellants or by some person on their behalf, and that having undertaken this employment they neglected their duty. Now, they certainly were not employed by the appellants, nor do I think they were employed on their behalf. The alleged duty, if it existed at all, was to the trustees and not to the beneficiaries. If there has been a breach of it, the trustees and not the beneficiaries are the parties to sue. There may be cases where, if trustees failed to call to account those who are under liability in respect of acts injurious to the trust estate, the beneficiaries may compel them to do so or even enforce the right themselves. But no such question is raised by the averments in the present action. But further, I think it right to say that in my judgment the evidence does not establish that the law-agents were employed to advise the trustees as to the sufficiency of the security, or that they acted on any such advice. It seems to me therefore that the case against these defenders entirely fails, and that the appeal as against them ought to be dismissed.
I turn now to the case against the defender Meek, which has given rise to such divergence of opinion amongst the learned Judges in the Court below. I may remark at the outset that if a breach of duty on his part has been proved, I think it is competent for the appellants to maintain this action. It is clear that neither Mr nor Mrs Rae could obtain any relief against the defender Meek, for if there has been a violation of duty they were as much parties to it as he was. They cannot claim to have the sum lost replaced, to be held on
The law bearing upon the liability of trustees has been recently considered by your Lordships in the cases of Whiteley v. Learoyd and Knox v. Mackinnon, the one coming from the English, the other from the Scotch Courts. I think these cases establish that the law in both countries requires of a trustee the same degree of diligence that a man of ordinary prudence would exercise in the management of his own affairs. The Lord President in the present case did not adopt this as the test. “We must not demand,” he said, “of Mr Meek any more prudence or diligence or knowledge than he actually possesses or uses in the management of his own business. For that purpose we must consider what Mr Meek is.” As a result of this consideration he came to the conclusion that Meek was not a man of business habits, or of great intelligence or discretion. I do not think the inquiry thus entered upon was a relevant one. The test which the Lord President applied was rejected as erroneous by this House in Knox v. Mackinnon. Lord Watson there said—“It was seriously argued that according to the law of Scotland the responsibility of a gratuitous trustee must (apart from any special dispensation by the truster) be tested by reference not to an average standard but to the degree of care and prudence which he uses in the management of his private affairs. The rule which is quite new to me would be highly inconvenient in practice. In every case where neglect of duty is imputed to a body of trustees it would necessitate an exhaustive inquiry into the private transactions of each individual member, the interest of the trustee being to show that he was a stupid fellow careless in money matters, and that of his opponents to prove that he was a man of superior intelligence and exceptional shrewdness.”
I think therefore that the ground upon which the Lord President, and the learned Judges who concurred with him, rested their judgments upon this part of the case cannot be supported.
Has it then been shown that the trustee failed to exercise that degree of diligence which a man of ordinary prudence would exercise in the management of his own affairs? In order to answer this question it is necessary to lay the facts before your Lordships more fully than I have hitherto done.
The buildings which were to form the security for the loan agreed upon at the meeting of the trustees to which I have referred were an unfinished portion of a large block which the borrower was erecting in Gallowgate upon a site which was part of an area cleared of a very inferior class of buildings in the course of the city improvements. The ground annual upon that portion which was to be the security of the trustees amounted to £192. The buildings in course of erection were intended for use as warehouses and offices, and were of a character hitherto unknown in that locality. The only guide which the trustees possessed as to the adequacy of the security was an estimate of Mr Burnet, who valued the buildings when finished at £6500, over and above the annual feu-duty. This valuation was contained in a letter addressed by Mr Burnet to the agents of the borrower by whom it had been obtained. The trustees sought for no independent valuation. They made no inquiry before agreeing to the loan as to the rentals to be anticipated from the property, and had no estimate of those rentals before them. It has been suggested that they were advised by their law-agents that the security was sufficient. I can find no evidence of this. Mr Meek asked whether they could lend on unfinished buildings, and received the answer that they could, and that such loans were common. I see no reason to doubt that this answer was correct. If the buildings in course of erection had been of the same character as those which previously existed on the same site, and these had been constantly let, I do not think that the mere fact that the new buildings were unfinished would be material if due security were taken for their completion. I lay no stress therefore on the mere fact that they were not completed at the time of the loan. But I have said enough to show that the erection of these warehouses was an adventure on the part of Mr Anderson, the borrower. Whether it proved successful or not would depend entirely upon whether the business the purposes of which they were intended to serve took root in the locality or not. This was a pure matter of speculation. No doubt Mr Anderson was sanguine as to its success, and he was entitled to run what risk he pleased. But the duty of the trustees was to obtain a safe investment which would afford a security for the money advanced, and not to hazard it upon a speculation. The event which happened was such as ought to have been anticipated by any person of prudence, if not as a probable, at lesat as a possible one. The buildings remained in great part untenanted, the rents never reaching a sufficient sum to discharge the ground annual. Anderson became insolvent, and the trust fund has been lost. I cannot think that under these circumstances the defender Meek exhibited in this transaction the care which a person of ordinary prudence would exercise in the management of his own affairs.
The Lord President, who took the view most favourable to him in the Court below, used the following language with reference to the security taken—“The failure of the security arose from this, that the erection of buildings of the character of those which were erected in this locality—that is, in the Gallowgate of Glasgow—was in itself a very great risk, and an experiment, and turned out to be an entirely unsuccessful experiment.” The defender not only advanced money upon such a security, but he obtained no independent opinion as to the value to the property, the rental it was likely of yield, or the prospects of speedily obtaining
But it was urged on behalf of the defender that this did not conclude the case against him, inasmuch as he was protected by the clause of immunity contained in the trust-deed. That clause is in the following terms:—“That the said trustees shall not be answerable for errors, omissions, or neglect of diligence, nor for the insufficiency of securities, insolvency of debtors, or depreciation in the value of purchases, nor singuli in solidum, or for the intromissions of each other or of their factor, but each for his or her actual intromissions only.” Such a provision, in terms identical or not distinguishable in their effect, is a common one, and is to be found in many trust-deeds. It does not now come before the Courts for construction for the first time. Its effect was considered with great care in the case of Seton v. Dawson long before the preparation of the trust-deed with which we have to deal. And it has been the subject of discussion in several cases since the date of that decision. I adopt the law as laid down by Lord Watson in this House, which I think is well warranted by the authorities—“It is settled in the law of Scotland that such a clause is ineffectual to protect a trustee against the consequences of culpa lata or gross negligence on his part, or of any conduct which is inconsistent with bona fides. I think it is equally clear that the clause will afford no protection to trustees who from motives, however laudable in themselves, act in plain violation of the duty which they owe to the individuals beneficially interested in the funds which they administer. I agree with the opinions expressed by Lords Ivory, Gillies, and Murray in Seton v. Dawson, to the effect that clauses of this kind do not protect against positive breaches of duty.”
It is impossible to draw any hard and fast line between the want of that care which a man of ordinary prudence would display in the management of his own affairs and that high degree of negligence which is termed culpa lata. But I have arrived without hesitation at the conclusion that there was culpa lata in the present case. Indeed, I think that to advance money on such a security, with only such information and under such circumstances as I have described, was a positive breach of duty on the part of the trustee towards those beneficially entitled to the trust fund.
I feel some regret at being compelled to arrive at the conclusion that the defender is liable, for I should be most unwilling to press the case hardly against any trustee who has acted honestly and without any improper motive. But it is the bounden duty of the Courts to enforce against trustees the obligations they have undertaken, and to protect the trust funds committed to their charge.
I have already said that no order ought to be made in this case from which Mr or Mrs Rae can obtain any benefit. It is impossible therefore to ordain simpliciter that the defender should replace the lost trust fund, and that the fund thus replaced should be held subject to the trusts of the marriage-contract. I think the order should be as follows:—That the judgment be affirmed, and the appeal dismissed as regards the respondents other than John Meek, and that as regards that respondent the judgment appealed from be reversed, and that the case be remitted to the Court below with directions to ordain the said respondent to pay to a judicial factor to be appointed by the Court the sum of £4500, to be held by him for the trusts and purposes following—that is to say, to pay to the said John Meek the interest derived from the investment of the fund, less the necessary expenses, during the joint lives of Robert Reid Rae and Jessie Rae. In case the said Jessie Rae should survive the said Robert Reid Rae, then to transfer the said £4500, or the securities representing the same, to the said John Meek, but in case the said Robert Reid Rae should survive the said Jessie Rae, then to pay to the said John Meek the interest derived from the investment of the fund, less the necessary expenses, so long as the said Robert Reid Rae shall live and remain unmarried, and upon the decease or second marriage of the said Robert Reid Rae to hold the fund upon the trusts declared by the marriage-contract. And to further ordain that upon payment of the aforementioned sum to the judicial factor the security relating to the Gallowgate property be transferred to the respondent Meek at his expense, if he shall so require. And that the said respondent do pay the appellants their expenses of process in the Court below, so far as occasioned by his defence to the action; and that the said respondent do pay to the appellants two-thirds of their costs of this appeal, to be taxed in the manner usual when the appellants sue in forma pauperis. I move your Lordships accordingly.
Interlocutor appealed from, so far as regarded the respondents the law-agents, affirmed, and appeal dismissed; and so far as regarded the respondent the trustee, reversed.
Counsel for the Appellants— Asher, Q.C.— Rhind— A. S. D. Thomson. Agent— A. Beveridge, for W. Officer, S.S.C.
Counsel for the Respondent Meek— D.-F. Balfour, Q.C.— G. W. Burnet. Agents—
Counsel for the Respondents Hotson and Howie— Rigby, Q. C.— Law. Agents— Murray, Hutchins, & Stirling, for Hotson & Brown, Glasgow.