B e f o r e :
LORD JUSTICE DILLON
LORD JUSTICE STAUGHTON
LORD JUSTICE LEGGATT
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EDITH GEORGINA CORPE NESTLE
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Appellant
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v.
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NATIONAL WESTMINSTER BANK PLC
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Respondents
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(Transcript of The Association of Official Shorthandwriters Limited, Room 392, Royal Courts of Justice, and 2 New Square, Lincoln's Inn, London, WC2A 3RU).
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MR MICHAEL LYNDON-STANFORD Q.C. and MR JAMES CLIFFORD, instructed by Messrs Wood Awdry Wansbroughs (Devizes, Wiltshire), appeared for the Appellant (Plaintiff).
MR EDWARD NUGEE Q.C. and MR ANTHONY MANN, instructed by Messrs Wilde Sapte, appeared for the Respondents (Defendants).
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HTML VERSION OF JUDGMENT
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Crown Copyright ©
This is an appeal by the plaintiff in the action, Miss Nestle, against a judgment of Hoffmann J., given as long ago as 29th June 1988, whereby, at the end of the trial of the action, he dismissed all Miss Nestle's claims against the defendant in the action, National Westminster Bank Plc.
The Bank was sued by Miss Nestle as the trustee of the will of her grandfather, William David Nestle ("the testator") who died on 29th April 1922. By his will which was proved on 17th June 1922 the testator appointed the National Provincial Bank to be his sole executor and trustee. The National Provincial Bank merged with the Westminster Bank in 1968 to constitute the National Westminster Bank which thereupon succeeded to the trusteeship of the testator's will. In this judgment I use the term "the Bank" to designate whichever of the National Provincial Bank Limited and the National Westminster Bank plc was for the time being the trustee of the testator's will.
The appeal is concerned with the investment policies followed by the Bank from time to time in relation to the funds subject to the trusts of the testator's will, from the time of the testator's death in 1922 to the death of Miss Nestle's father, John Nestle, in 1986, when Miss Nestle became solely and absolutely entitled to the capital of the funds then still held on trust. Those funds were then worth f269,203, but it has been Miss Nestle's contention that if the funds had been properly managed by the Bank and proper investment policies had been followed by the Bank throughout they would have been worth well over flm. The argument on the appeal has therefore necessarily covered matters of general importance in relation to the investment of private trust funds, though the outcome must depend on the particular circumstances at any particular time of this trust.
The primary relief sought by Miss Nestle in the re-amended statement of claim and by the notice of appeal is (1) an inquiry as to what would be the value of the trust funds at the date of the conclusion of the inquiry if the trust funds had been invested and managed by the Bank with proper care and skill and a proper balance had been maintained between capital and income and (2) an inquiry as to the value of the actual trust funds at the conclusion of inquiry (1), and (3) payment by the Bank to Miss Nestle, by way of compensation or damages, of a sum equal to the excess of the amount certified under inquiry (1) over the amount certified under inquiry (2).
The beneficial trusts of the testator's will
The testator gave his widow, Mrs Barbara Nestle, a life interest in the family home, Winterbourne, Brighton Road, Sutton, Surrey and an annuity of €1500 free of tax during her widowhood. He directed the Bank, as trustee, to set aside a fund sufficient by its income to satisfy the annuity, with power to have recourse to the capital of the annuity fund if in any year there was a shortfall of income. Any surplus in any year of the income of the annuity fund was to be applied as income of residue. On the death of the widow, Winterbourne, or the property then representing it, and the capital of the annuity fund would fall into residue.
As to residue, each of the testator's two sons, George and John, was from the age of 21 to the age of 25 to have an annuity of f250 out of the income of residue. From the age of 25, each son was to have a life interest in one-half of the residue, with power to appoint the income of his share to a surviving widow for her life. The Bank was given power to pay the whole or any part of the capital of either son's share to that son for his absolute use or otherwise to apply it for his benefit. Subject to the foregoing, the capital of each son's share was to be held on trust for his children, with an accruer between the sons' shares if either should die without issue. In the event George Nestle had no children and John Nestle had only the one child, Miss Nestle; accordingly Miss Nestle, who was born in January 1942, became in due course solely and absolutely entitled to the capital of George's share and of John's share, save in so far as the capital was paid out to George or John or otherwise applied for their benefit during their respective lifetimes.
Relevant dates
Mrs Barbara Nestle, the testator's widow, was 24 years younger than the testator and she did not die until 1960. Winterbourne was sold during 1959 and the proceeds were invested.
George Nestle, born in 1903, was 18 years old when his father died and had just gone up to Cambridge. In 1933 he emigrated to Tanganyika and settled there. He bought a farm there, and to assist him in doing so the Bank, while the widow was still alive, advanced to him the whole of the capital of his share in the residue, other than the annuity fund and Winterbourne. In 1963 he left Tanganyika and moved to Malta where he lived for the rest of his life. He died in September 1972, leaving surviving him his widow Mrs Elsie Nestle who died in September 1982. Despite initial doubts on the part of the Bank, it was accepted that by his will he had validly appointed the income of his share to his widow Elsie.
John Nestle was born in 1912 and was nine years old when the testator died. He was married once only, but parted acrimoniously from his wife in 1945 and the marriage was dissolved. He was domiciled and resident in England until 1969, when he went to live in Cyprus and he died there in 1986.
The provisions of the testator's will as to investment
By clause 11 of his will the testator gave the Bank power to retain any investment comprised in his estate, notwithstanding that it might be of a wasting speculative or reversionary nature or be subject to any liability for calls outstanding thereto attached.
By clause 13 he gave the Bank powers of investment as follows:
"And I declare that all moneys liable to be invested under this my Will may be invested in and upon any securities or investments of the same or a similar nature to any which shall be held by or belong to me at the time of my decease or in or upon any stocks funds or securities of or guaranteed by the Government of the United Kingdom or any British Colony or Dependency or any Foreign State or the stocks shares bonds debentures or securities of any Railway or other Company or of any Municipal or other Corporation or Local Board or public Body established in any part of the United Kingdom or in any British Colony or Dependency or on Mortgage on any real or heritable or leasehold property in Great Britain or in any British Colony or Dependency And the Bank may alter vary and transpose all such stocks funds securities and investments from time to time as often as occasion shall require or as they shall deem expedient."
It is clear that the opening words of that clause, authorising investment "in and upon any securities or investments of the same or a similar nature to any which shall be held by or belong to me at the time of my decease" authorised investment in the purchase of ordinary shares in any company in which the testator had held ordinary shares at the time of his death, even though the testator's holding of ordinary shares in that company had been sold in order to pay his debts and funeral and testamentary expenses and had therefore not been retained by the Bank.
It is also now common ground, though not immediately clear on a first perusal of the clause, that the words in the clause "the stocks shares bonds debentures or securities of any Railway or other Company" authorised investment in the purchase of ordinary shares in companies incorporated in the United Kingdom. See Re Sharp XLV Ch.D. 286, a decision of this court, where Cotton L.J. said at page 289 in relation to a power to invest "upon the debentures or securities of any railway or other public company":-
"It is true that he refers to railway companies, but he also adds, 'or any other public company...'; and I think it would be a wrong interpretation of the will to say that those words, because they follow the reference to railway companies, must be confined to companies similar to them or to companies incorporated in the same way as railway companies are, namely, by special Act of Parliament."
It was the duty of the Bank to acquaint itself with the scope of its powers under the will. It is understandable that the Bank had doubts, on a mere perusal of clause 13, as to its powers to invest in ordinary shares. It is inexcusable that the Bank took no step at any time to obtain legal advice as to the scope of its power to invest in ordinary shares. Instead the Bank administered the trusts, until the enactment of the Trustee Investments Act 1961, on the basis that while it could continue to retain ordinary shares which had been held by the testator at the date of his death, the power it had to invest in further ordinary shares was limited to investment in further ordinary shares in the companies in which it still retained ordinary shares which had been held by the testator at the date of his death, or ordinary shares in "similar companies" e.g. ordinary shares in a further insurance company at a time when the Bank gtill retained insurance shares which the testator had held at his death.
After the enactment of the Trustee Investments Act 1961, the Bank erroneously assumed that its powers of investment were wholly governed by that Act.
On 25th November 1959 an official of the Bank told John Nestle, in a spuriously knowledgeable way, that this seemed to the Bank to be a case where the Bank should apply to the court under the Variation of Trusts Act 1958 for a widening of its investment powers. But again nothing was ever done, and no advice as to the scope of the Bank's investment powers was ever sought.
The testator's portfolio of investments and the setting up of the annuity fund
The testator held a substantial portfolio of investments which seems to have been reasonably well balanced for the time. Of a total value of f53,963.9.8, €13,951.2.6 (or 26%) was in fixed interest securities and €40,012.7.2 (or 74%) was in equities. The equities were predominantly in bank and insurance shares, which were particularly favoured at the time; but there were equity holdings in other well-known companies, such as the British South Africa Company, J.& P.Coates Limited, the Cunard Steamship Company, the Dunlop Rubber Company, the Hudson Bay Company and the Shell Transport and Trading Company. It seems from the portfolio that the testator was either himself knowledgable, or was well-advised about the investment of his moneys.
Investments had to be sold to pay estate duty (over €6000) and the debts and funeral and testamentary expenses. The widow's annuity fund was then set up with a total value of ^37,223.6.9 of which £15,998.19.3 (or 43%) was in fixed interest securities and €21,224.7.6 (or 57%) was in equities. The equities were all bank and insurance shares held by the testator at his death and retained by the trustees. There is no complaint in this court about the initial constitution of the annuity fund.
There remained, in addition to Winterbourne and its contents, investments of a value of some £9500 to £11,000 to constitute the shares of residue of George and John.
The administration of the annuity fund from 1922 to the death of the widow in 1960
At some stage in the 1930's it had been necessary to have recourse to capital of the annuity fund to pay the widow's annuity in full. This had come about particularly because Lloyds Bank had cut its dividend.
Despite that temporary setback, the annuity fund at the death of the widow in 1960 was of a total value of £105,270.39, of which £16,297.10, (or 15%) was in fixed interest securities and £88,973.29 (or 85%) was in equities. All the equities were however bank or insurance shares.
Mr Lyndon-Stanford Q.C. for Miss Nestle does not suggest that the proportion of equities should at any stage down to 1960 have been higher than it was. He says however that the equities should have been diversified, and not limited to bank or insurance shares, and he complains that before 1959 the Bank did not carry out regular reviews of the investments in the trust funds. He accepts that there were regular reviews from 1959 onwards.
As to reviews before 1959, the judge had evidence by affidavit from a retired bank officer, Mr Thomson, who deposed that in 1940 he set up a scheme for the annual review of the investments of all trust funds of which the Bank was trustee. The judge drew the inference that there had indeed been regular reviews of the investments of Mrs Barbara Nestle's annuity fund before 1940 also. I very much doubt whether there was any factual basis to warrant that inference being drawn, but the point is of no significance since any reviews there were before 1959 would have been on the basis of the Bank's erroneous belief that the Bank's power to invest trust moneys in equities was as limited as I have set out above. Consequently no review would have led the Bank to diversify its equities from bank and insurance shares only.
The Bank should, in my judgment, have appreciated the true scope of its powers of investment and should have reviewed the investments in the annuity fund regularly (if not necessarily strictly annually) with that in mind.
Mr Lyndon-Stanford submits that, if the Bank had done that, the equities would have been diversified and the equities in the annuity fund in 1960 would have been substantially higher in value by 1960 than they actually were. He points to the BZW Equity Index which stood at 119.8 in 1922 and at 789.7 in 1960, 6.59 times higher. By contrast the equities in the annuity fund rose from 621,224.7.6 to €88,973.2.9, a mere 4.19 times. He submits that the difference represents loss to the trust funds for which Miss Nestle is entitled to be compensated.
The difficulty about that approach is however, as Hoffmann J. pointed out, that the evidence showed that if the BZW Equity Index was applied over the period from July 1974 to December 1986 to "growth" unit trusts (as opposed to "income" unit trusts) it appeared that 12 of the "growth" trusts had done better than the index, but 21 had done worse. It is impossible to say that those 21 unit trusts must have been managed with a degree of incompetence which, in a trustee like the Bank, would have amounted to a breach of trust. The BZW Equity Index is calculated by reference to the performance of the leading equity shares, the composition of the list being changed from time to time with fluctuations of the companies' fortunes. It is thus difficult to beat, particularly for a fund which is not large enough to include substantial holdings in all the leading equities. It cannot be the criterion for the degree of performance which is expected of the ordinary prudent trustee.
Mr Lyndon-Stanford submitted in the alternative that because the Bank had failed to inform itself of the true scope of its powers of investment, Miss Nestle had lost the chance of the gain that might have been made if the equities in the annuity fund had been diversified beyond Bank and insurance shares. He submitted that she should be compensated, by a fair assessment, for the loss of the chance, and he referred to such well-known cases as Chaplin v. Hicks [1911] 2 K.B.786, Otter v. Church Adams Tatham & Co. [1953] Ch.280 and Kitchin v. Royal Air Force Association [1958] 1 W.L.R. 563. I shall return to this submission later in this judgment.
Mr Nugee Q.C. for the Bank rightly stressed the duty of a trustee to act prudently. The best known formulation of this is in the judgment of Lindley L.J. in Re Whiteley XXXIII Ch.D.347 at 355 where he said:-
"The principle applicable to cases of this description was stated... to be that a trustee ought to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own, and that beyond that there is no liability or obligation on the trustee. I accept this principle; but in applying it care must be taken not to lose sight of the fact that the business of the trustee, and the business which the ordinary prudent man is supposed to be conducting for himself, is the business of investing money for the benefit of persons who are to enjoy it at some future time, and not for the sole benefit of the person entitled to the present income. The duty of a trustee is not to take such care only as a prudent man would take if he had only himself to consider; the duty rather is to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide."
This principle remains applicable however wide, or even unlimited, the scope of the investment clause in a trust instrument may be. Trustees should not be reckless with trust money. But what the prudent man should do at any time depends on the economic and financial conditions of that time - not on what judges of the past, however eminent, have held to be the prudent course in the conditions of 50 or 100 years before. It has seemed to me that Mr Nugee's submissions placed far too much weight on the actual decisions of the courts in the last century, when investment conditions were very different. Indeed Mr Nugee's submissions accorded scant justice to such common sense and initiative as his client the Bank actually displayed in the management of the Nestle trust funds.
I should refer, however, to one decision of the last century on which Mr Nugee particularly relied - the decision of the Court of Appeal in Chancery in Robinson v. Robinson (1851) 1 De G.M.& G. 247. The problem in that case was that trustees had been directed by their testator to realise his investments and invest the proceeds in one or other of two forms of investment; but the trustees had delayed the realisation of the testator's investments. When they actually sold they realised more than they would have realised if they had sold immediately after the testator's death, but less than if they had sold immediately after the testator's death and had thereupon invested the proceeds in one, rather than the other, of the two authorised forms of investment. It was sought to charge the trustees for what they would have received if they had followed that course of realisation and investment which in the event would have been the most favourable to the beneficiaries, but the court rejected that claim.
The ratio, in the leading judgment of Lord Cranworth L.J. seems to have been in part, at the top of page 258, that:-
"Where a man is bound by covenants to do one of two things, and does neither, there in an action by the covenantee, the measure of damage is in general the loss arising by reason of the covenantor having failed to do that which is least, not that which is most, beneficial to the covenantee: and the same principle may be applied by analogy to the case of a trustee failing to invest in either of two modes equally lawful by the terms of the trust."
and in part, at the foot of page 259, that the liability of the trustee should not depend on the accident of the subsequent rise of one particular investment.
With every respect to the court, however, the first ground is flawed since there is no true analogy between a covenantee acting in his own interests who can choose the cheapest way to himself to perform or get out of his obligations - cf Lavarack v. Woods of Colchester Ltd. [1967] 1 QB 278 at 293 - and a trustee who owes duties to his beneficiaries, and cannot prefer his personal interest to theirs.
If what had happened in the present case had been that the Bank, through failure to inform itself as to the true scope of its investment powers, had invested the whole of the annuity fund in fixed interest securities, and no part in equities, for the whole period from 1922 to 1960, then, as on the evidence loss would clearly have been proved to have been suffered, the appropriate course would have been to require the Bank to make good to the trust fair compensation - and not just the minimum that might just have got by without challenge - for failure to follow a proper investment policy. On this I find the Canadian decision in Guerin v. The Queen [1984] 13 D.L.R. (4th) 321 helpful.
But the problem here is not one of failure to invest any adequate part of the annuity fund in equities. It is that the part invested in equities was from 1922 to 1960 invested in bank and insurance shares (which were good equities) only and not in a wider spread of equities. Since therefore, for the reasons given above I would reject the suggested use of the BZW Equities Index as proving loss as between bank and insurance shares only and fully diversified equities, the crucial question is whether the onus remains on Miss Nestle to prove loss for which fair compensation should be paid, or whether it is enough for her to claim compensation for loss of a chance (as in Chaplin v. Hicks) that she would have been better off if the equities had been properly diversified.
The starting point must, in my judgment, be that, as Miss Nestle is claiming compensation, the onus is on her to prove that she has suffered loss because from 1922 to 1960 the equities in the annuity fund were not diversified. See Hotson v. East Berkshire Area Health Authority [1987] 1 A.C.750 and Wilsher v. Essex Area Health Authority [1988] 1 AC 1074. In some cases, it is sufficient to prove loss of a chance because in such cases, as in Chaplin v. Hicks, the outcome, if the plaintiff had not lost the chance, can never be proved. But in the present case, if the annuity fund had been invested wholly in fixed interest securities, it would have been relatively easy to prove, even though the event never happened, that the annuity fund would have been worth much more if a substantial part had been invested in equities. Consequently fair compensation could have been assessed. Equally it would have been possible, even though more difficult and much more expensive, to prove, if it be the fact, that the equities in the annuity fund would have performed even better if diversified than they did as concentrated in bank and insurance shares. But Miss Nestle has not provided any such proof. She has not even provided any material which would enable the court to assess the strength of, or value, the chance which she claims she has lost. Therefore her claim for compensation or damages in respect of the investment of the annuity fund from 1922 to 1960 must, in my judgment, fail.
I should add that this has been a hard fought case. There were seven days of oral evidence in the court below together with voluminous documentary evidence. The hearing of this appeal lasted for eight days. It would be quite wrong now to direct enquiries, as sought in the re-amended statement of claim, so as to give Miss Nestle an opportunity to adduce yet further evidence in relation to this claim, not so far adduced.
Winterbourne
Winterbourne and its contents were sold in 1959, when the testator's widow, being elderly, went to live in a home. The proceeds were around C5000.
The Bank's stockbrokers suggested on 9th July 1959 that to make the portfolio rather more balanced, half the proceeds should be invested in Shell Transport and Trading Company and the other half in an electrical company, either A.Reyrolle Ltd. or Electrical and Musical Industries Ltd. The Bank preferred, however, to invest the entire proceeds in conversion stock. The only reason, apparent from the papers, for not accepting the brokers' recommendations was that the Bank's investment section was doubtful whether the brokers' recommendations were authorised by the investment clause; but no attempt was made to obtain legal advice.
The investment decision was therefore prima facie made for an untenable reason, but that is not the end of the matter since, as Sir Robert Megarry V.C. pointed out in Cowan v. Scarqill [1985] Ch.270:
"If trustees make a decision upon wholly wrong grounds, and yet it subsequently appears, from matters which they did not express or refer to, that there are in fact good and sufficient reasons for supporting their decision, then I do not think that they would incur any liability for having decided the matter upon erroneous grounds; for the decision itself was right."
The court has to look objectively at the circumstances, to see if there are in fact good and sufficient reasons for supporting the decision. Plainly there is such a reason in relation to the Winterbourne proceeds at that time, since more than 75% of the annuity fund was already invested in equities. There was therefore a finely balanced decision for the Bank, on a correct appreciation of the facts, between increasing the equity share yet further in the interests of having a somewhat more balanced portfolio, and leaving the equity percentage where it was and acquiring the conversion stock. In these circumstances a decision either way can be regarded as objectively right, and the Bank cannot be held liable for not having followed the brokers' advice.
I should add that strictly the proceeds of Winterbourne should have been invested as a separate fund and the income should have been paid to the widow until she died, since Winterbourne was settled land of which she was tenant for life.
In fact the proceeds were blended with the annuity fund, but nothing turns on that in the present context.
George Nestle's Share
On the death of the testator's widow, the annuity fund and the proceeds of Winterbourne were divided equally between George's share and John's share, by allocating half of each investment to each share.
The complaint of Miss Nestle thereafter is that the investment policy followed by the Bank thereafter was a policy which favoured the income beneficiaries, George, George's widow Elsie, and John at the expense of Miss Nestle herself as the capital beneficiary.
In his judgment, in considering the position as between tenant for life and remainderman, Hoffmann J. said that the trustee must act "fairly" in making investment decisions which may have different consequences for different classes of beneficiary. He then gave reasons why he preferred that formulation to the traditional image of holding the scales equally between tenant for life and remainderman. These passages in his judgment are singled out for criticism in the notice of appeal, but I do not find it necessary in this judgment to examine the difference, if any, between the judge's "new" formulation and the traditional image; it is sufficient to examine the facts.
Before I do so, however, I should mention that when the Trustee Investments Act 1961 came into force in that year the Bank regarded its powers of investment in equities as extended by that Act and no longer limited to bank and insurance shares.
The most important fact in relation to George Nestle is however that he was resident in Tanganyika from 1933 to 1963 and thereafter in Malta from 1963 until his death there in 1972. He was therefore constantly pressing the Bank, after his share was constituted by the division of the annuity fund after the widow's death, to invest his share in such a way that the dividends and income payable to him would not be subject to United Kingdom income tax. The Bank therefore had to consider and reject a succession of proposals for investment in ordinary shares in companies incorporated abroad or in ordinary shares registered on an overseas share register of a United Kingdom company.
The Bank did however invest a substantial part of George's share in exempt British Government securities. These are Government stocks issued on the terms, broadly, that the income is free of United Kingdom income tax in the hands of a recipient who is not resident here for United Kingdom tax purposes and the capital is free of estate duty or capital transfer tax on the death of a beneficiary domiciled abroad. This investment decision on the part of the Bank is strongly criticised by Mr Lyndon-Stanford on the grounds that it was adopted in order to favour the life tenant, George, by giving him an income which was free of United Kingdom income tax and that it involved a switch from equities with potential capital growth into fixed interest Government securities.
After the sales and reinvestments necessary to give effect to this changed policy, George's share, as constituted in 1961, was of a total value of C57,144.22 made up as to £39,581.54 (or 69%) of fixed interest securities which were almost entirely exempt Government securities and as to €17,562.68 (or 31%) of equities.
By the time of George's death in 1972, his share was of a value of C75,040 made up as to €43,735 (or 58%) of fixed interest securities and as to C31,305 (or 42%) of equities. This gives figures for capital appreciation over the period from 1961 to 1972 of 10% for the fixed interest securities and 78% for the equities.
In selecting the exempt British Government securities, the Bank avoided those which carried the highest interest rates, and preferred to buy stocks carrying relatively low interest rates which could be bought at substantially less than par, thus yielding a measure of capital appreciation if the stock was held until near maturity. Much more importantly, however, the exempt securities achieved exemption from estate duty on George's death. Calculations show that the net amount of George's share left after his death and after payment of estate duty merely on the equities then comprised in his share, was more than would have been left if the whole of his share had been invested in equities in 1961 and the equities had all appreciated at 78% until 1972 and had all then been subject to estate duty on his death. It must follow, in my judgment, that Miss Nestle has suffered no loss from, and can make no claim about, the management of George's share from the testator's widow's death until his own death.
Mr Lyndon-Stanford suggests that the calculations only cover the position if the whole of George's share had been put into equities in 1961, and that a yet more favourable result might have been achieved if something more than 31% but less than the whole had been kept in equities. I am not persuaded that that would mathematically have been so.
Mr Lyndon-Stanford also submits that the best of both worlds could have been achieved by investing more, if not the whole, in equities and switching to exempt gilts a few days before George died. That would have achieved the estate duty exemption, but it would have been a very risky policy for the Bank to have followed, since it would have depended on the Bank getting notice from Tanganyika or Malta of George's impending death so that they could effect the last-minute switch into exempt securities. I have no doubt that the Bank was under no obligation to take such a risk, and was not in breach of trust in not doing so.
Change of domicile of George's widow, Elsie Nestle
As I have already stated, after George's death it was accepted that he had validly exercised his power under the testator's will to appoint the income of his share to his widow, Elsie Nestle, for her life. The Bank, therefore, rightly divided what was left of George's share into two funds. One comprised the balance of the equities in George's share, after payment of estate duty thereon on his death; this fund would be exempt from duty under the surviving spouse exemption on Elsie's death. The other fund comprised the exempt Government securities which had escaped duty on George's death.
Elsie continued to have her home in Malta for some time after George's death, but from 1974 onwards she spent more and more time in England, partly for medical and surgical attention and partly because of the illness of a sister. In the event she died in 1982 in hospital in England, and the Revenue claimed successfully that by then she was no longer resident or domiciled in Malta. Therefore, the fund of exempt Government securities which had escaped duty on George's death bore duty on Elsie's death.
It was argued for Miss Nestle, particularly in Mr Lyndon-Stanford's skeleton argument in this court, that the Bank should have realised in 1974 that there was a grave danger of Elsie returning to England and failing to qualify for the exemption and that the Bank should therefore have monitored Elsie's movements or made enquiries of her as to her plans and should have switched the greater part of the exempt Government securities into equities so as to get the benefit of capital growth from 1974/5 to 1982.
This point however, in my judgment, is not open to Mr Lyndon-Stanford in this court. It was not pleaded, was not clearly taken by counsel then appearing for Miss Nestle at the trial and is not taken in the notice of appeal. Had it been clearly taken in the court below, other witnesses might have been called - in particular a member of the staff of the Bank's tax department at Chelmsford who handled Mrs Elsie Nestle's tax affairs and was the Bank's direct contact with her.
The only point therefore open to Mr Lyndon-Stanford in relation to the management of George's share after the death of George is the point taken also in relation to John Nestle's share, to which I now come.
John Nestle's share
After the death of the testator's widow, John Nestle's half-share of the annuity fund and of the proceeds of Winterbourne was added to John's original share in the residuary estate which, unlike George's original share, had not been paid out to him by the Bank. Since in 1961 the Bank began applying the provisions of the Trustee Investments Act 1961, there is no particular problem over John's share in relation to the period from 1960 to 1969. Hoffmann J. records that in 1968 77% of John's share was in well diversified equities.
In 1969, however, John emigrated to Cyprus and made his home there until his death in 1986. From the time he decided to move to Cyprus, he bullied the Bank continually to switch more and more of his share from equities into exempt gilts, in order that he, John, could enjoy the income free from United Kingdom income tax. Although Miss Nestle, the capital beneficiary, was John's daughter, he does not appear to have had any contact with her or affection for her.
Although John was continually pressing the Bank to increase his income, he was in fact well-off. When he died he owned (330,000 of investments held in Guernsey and he had an English estate of some €250,000, including €150,000 of exempt gilts purchased three days before he died in the place of equities; it is said he also had English liabilities of €100,000 for legal costs.
There is no indication that the Bank had any idea of John's private wealth. It made no enquiry, but I have no doubt, from the papers we have seen, that if the Bank had made an enquiry it would have received a dusty answer. Equally, though John succeeded in switching so much of his equities into gilts just before he died, the Bank could not have assumed that John would give it warning so that it could make a similar switch of equities in John's share in time.
Since the Bank had acceded to George's request to switch investments in his share into exempt Government securities, it is not surprising that it similarly acceded to John's original request; indeed in so far as John's share included fixed interest securities, it was the obvious course to switch them into exempt Government securities. Thereafter the Bank fought a rearguard action, succeeding in some skirmishes, but losing in others, and the effect was that the equity content of John's share was eroded.
Mr Lyndon-Stanford's main complaint is that the Bank in 1969/70 set itself an initial policy of preserving not less than 50% of the totality of John's share and George's share in equities. But in 1974 the value of the equities in the totality of the two funds dropped below 50%. This was in part due to Mr Morton, the Bank's investment manager, having thought, in February 1974, that market conditions justified the sale of what Hoffmann J. described as "a modest holding of certain equities (worth about E2600)" and the switch of the proceeds into fixed interest securities. But the fall below 50% was primarily due to a slump on the stock market in 1974, when the market went, as it has been put, into free fall following the upset of the oil market by Arab states in the previous year. That slump was of course not the responsibility of the Bank. A mere change of policy does not automatically involve a breach of trust; the prudent trustee will adjust his investment policy to fit in with market circumstances. No case of breach of trust is, in my judgment, made out against the Bank from the mere fact that in 1974 the value of the equities fell to less than 50% of the total of the two funds.
As a matter of history, the percentage of the equities remained below 50% of the totality from 1974 to 1982, but rose marginally above 50% in 1983 and remained marginally above 50% until John's death in 1986.
The policy of investing a large part of John's share in exempt Government stocks achieved the desired end of avoiding duty on John's death. The exempt stocks were then worth f123,700, and to produce the same net estate would have required those stocks to be replaced by dutiable securities worth f259,953. On the figures of the relative values of the gilts and equities in the total funds from 1972 onwards in bundle J tab 7, it seems unlikely that a total over 6259,953 (in addition to the actual equities held) could have been achieved by switching all the fixed interest securities into equities at any time from 1972 onwards, if the equities assumed to have been acquired in place of the fixed interest securities achieved no greater growth than the actual equities held.
The BZW Equity Index shows massive growth from 1976 to 1986 (and particularly from 1981 to 1986). This growth seems to have passed John's share by, although there is no criticism put forward of the actual equities held. This is disturbing, as is the fact that the management by the Bank of the Nestle funds over these years seems to have been weak, with much correspondence and discussion but no one clearly having the responsibility to make decisions. The problem does not lie, however, in any favouring of the life tenant at the expense of the remainderman; the policy of investing in exempt Government securities was at least as much directed to favouring the remainderman by avoiding inheritance tax on the capital on the life tenant's death. The problem seems rather to have been one of lax management of the equities, when equities should have been riding high. But I am unable to say that any breach of trust has been proved by Miss Nestle in respect of this period 1976 to 1986.
The case for Miss Nestle in the court below seems largely to have been founded on the BZW Equity Index and the opinions of her expert witnesses, as against the opinion of the Bank's expert witnesses, on the desirability or prudence of investment in equities at various stages between 1922 and 1986. On that controversy the judge made his findings, and those findings have not really been challenged on this appeal. Mr Lyndon-Stanford has concentrated instead on the practicalities of what the Bank was actually doing, or failing to do, with the trust funds, rather than on the expert evidence. Mr Lyndon-Stanford has put his case with very considerable skill, and there is at the end of the day not much for the Bank to be proud of in its administration of the Nestle trusts - particularly since John went to Cyprus in 1969 or the death of George in 1972. But I am unable to see that any breach of trust which has caused loss to Miss Nestle has been proved. Accordingly this appeal must, in my judgment, be dismissed.
LORD JUSTICE STAUGHTON: When Mr William Nestle died in 1922, the value of his trust fund (after payment of debts, legacies and estate duty) was about €50,000. In November 1986, when his granddaughter Miss Georgina Nestle became absolutely entitled after the death of the last life tenant, it was worth £269,203. That, it might be thought, was a substantial improvement. But during the same period the cost of living had multiplied by a factor of 20, so that it would have required fl million to provide equivalent wealth: see the BZW Equity-Gilt Study of 1988. The same source shows that an equity price index rose by 5203 per cent in that period. An equivalent appreciation in the value of the trust fund would have left it worth C2.6 million in 1986. It is true that a small portion of the fund was advanced to life tenants, that some capital was used to supplement income for an annuity, and that there were no doubt transaction costs; against that, a sum of about €5000 was added to the fund in 1959 when Mr Nestle's house and contents were sold. Nevertheless, it is apparent that the investments retained or made by the trustees fell woefully short of maintaining the real value of the fund, let alone matching the average increase in price of ordinary shares.
Of course it is not a breach of trust to invest the trust fund in such a manner that its real value is not maintained. At times that will be impossible, and at others it will require extraordinary skill or luck. The highest that even Miss Nestle puts her claim is that, if the equity portion in the fund as it stood in 1922 (74 per cent) had been invested so as to achieve no more than the index, the fund as a whole would have been worth over €1.8 million in 1986.
In the pleadings it was alleged that the trustees mismanaged the investments throughout their period in office. Despite a request for particulars, little detail of individual transactions was given. But in my view - and this does not appear to have been contested - it was open to Miss Nestle at the trial to challenge any and every decision that the trustees took, or did not take.
In the experts' reports and during the course of the trial it appeared that there were four main strands to Miss Nestle's case:
(1) The trustees misunderstood the investment clause in the will.
(2) The trustees failed to conduct a regular and periodic review of the investments.
(3) Throughout the trust period, but in particular in the later stages when there were life tenants domiciled abroad, they retained or bought too high a proportion of fixed interest securities and too few ordinary shares.
(4) To the extent that the trustees did invest in ordinary shares, they concentrated too heavily on shares in banking and insurance companies, to the exclusion of other sectors.
Misunderstanding, and failure to review
In my judgment the first two charges were proved. It was admitted that at times the trustees misunderstood the investment clause; but the evidence showed that they continually misunderstood it, and there is nothing to show that they ever understood it correctly. To a novice in these matters it seems that they might deserve to be forgiven, since only among much other detail are to be found the words
"stocks shares bonds debentures or securities of any Railway or other Company."
But there is authority which shows plainly that the word "Company" in such a clause is not limited by its context. Trustees are not allowed to make mistakes in law; they should take legal advice, and if they are still left in doubt they can apply to the court for a ruling. Either course would have revealed their mistake in this case.
I also consider that, for a substantial period, the trustees failed to conduct regular periodic reviews of the investments. From 1922 to 1959 there was only one change of an investment, other than changes which were forced on the trustees by rights issues or because a security reached its redemption date. Seeing that there were 53 holdings in the original portfolio, including a number which sooner or later must have become of little value except as wallpaper (such as Chinese Government bonds and the United Railways of the Havana and Regla Warehouses), I can see little sign of periodic reviews. There was no evidence of reviews up to 1940, but some evidence that they took place between then and 1959. I would not accept that evidence (although the judge did), since documents of some kind must have been created if there were reviews, but none were produced.
However, the misunderstanding of the investment clause and the failure to conduct periodic reviews do not by themselves, whether separately or together, afford Miss Nestle a remedy. They were symptoms of incompetence or idleness - not on the part of National Westminster Bank but of their predecessors; they were not without more breaches of trust. Miss Nestle must show that, through one or other or both of those causes, the trustees made decisions which they should not have made or failed to make decisions which they should have made. If that were proved, and if at first sight loss resulted, it would be appropriate to order an enquiry as to the loss suffered by the trust fund.
It may be difficult to discharge that burden, and particularly to show that decisions were not taken when they should have been. But that does not absolve a plaintiff from discharging it, and I cannot find that it was discharged in this case, with the possible exception of one decision which will be considered later. We were referred to quite a number of individual transactions, and a number of occasions when nothing was done. But I can find no other where it was proved that the trustees ought to have acted differently, and failed to do so either because they misunderstood the investment clause or because, until 1959, they failed to conduct periodic reviews of the investments.
The balance of the fund between equities and gilts
That brings me to what I regard as the substance of the case, the failure to invest a higher proportion of the trust fund in ordinary shares. Here one must take care to avoid two errors. First, the trustees' performance must not be judged with hindsight: after the event even a fool is wise, as a poet said nearly three thousand years ago. Secondly (unless this is the same point), one must bear in mind that investment philosophy was very different in the early years of this trust from what it became later. Inflation was non-existent, overall, from 1921 to 1938. It occurred in modest degree during the war years, and became a more persistent phenomenon from 1947 onwards. Equities were regarded as risky during the nineteen-twenties and thirties, and yielded a higher return then gilt-edged securities. It was only in 1959 that the so-called reverse yield gap occurred.
During the period from 1922 until the death of Mrs Barbara Nestle in 1960, the proportion of ordinary shares in the trust fund as a whole varied between 46 and 82 per cent. Until 1951 it never rose above 57 per cent; there was then quite a sharp rise until 1960, not caused by any change in investment policy but presumably by a general rise in the value of ordinary shares (183 per cent, according to the index, between 1950 and 1960).
In my judgment the trustees are not shown to have failed in their duties at any time up to 1959 in this respect. I cannot say that, in the light of investment conditions then prevailing, they were in breach of trust by not holding a higher proportion of ordinary shares. In addition, they were charged with the duty of providing an annuity of C1500 after tax for the widow of Mr William Nestle, and of setting aside a fund for that purpose. Miss Nestle's expert witnesses were themselves disinclined to criticise the balance of the fund, as between fixed interest and ordinary shares, in that period.
After 1959 the situation had changed. Mrs Barbara Nestle died in October 1960, and the trustees were relieved of the task of providing for her annuity. The cult of the equity had begun by then, if not some years before. From that date I would accept the evidence of Miss Nestle's experts that, all other things being equal, there should be at least 50 per cent of the fund in ordinary shares.
The trustees' experts countered that on two grounds. First, they pointed to evidence that pension funds and life assurance companies continued to invest less than half their funds in equities, and a substantial proportion in gilt-edged securities. Counsel for Miss Nestle provided us with a calculation which was said to disprove this in the case of pension funds. But it had not been made in the court below or put to witnesses, and was incomplete for this purpose: it should have included monetary obligations such as loans with the fixed-interest content, and real assets such as property with the equities; there were also other assets held, where it was doubtful into which category they fell.
There is in my opinion a better answer to this comparison. Life assurance companies and pension funds have as their primary duty an obligation to pay at some future date a sum that is fixed in monetary terms. No doubt they offer profits, or an increase on the promised pension; and it may be that even in 1959 there was competition between companies by reference to their past records of success. But I am convinced that they could be expected to follow a policy of considerable caution in order to ensure that, come what may, their minimum obligations in monetary terms were fulfilled. I do not regard them as a reliable guide to what would have been done by private investors, or should have been done by trustees of a private family trust.
The second point is this. Professor Briston, who gave evidence for Miss Nestle, made a calculation on the basis that the part of the trust fund which was invested in ordinary shares initially remained in ordinary shares throughout. His appendix IX shows that, if one takes the 74% proportion of equities when Mr William Nestle died, the fund as a whole would have grown to fl.8 million in 1986. Alternatively, the portfolio had a proportion of 54 per cent in equities after the setting up of the annuity fund and some restructuring between 1922 and 1924; if that part of the fund had remained in ordinary shares, the value of the fund as a whole would in 1986 have been fl.36m.
I have already expressed the view that, in the light of investment conditions then prevailing, the trustees are not to be criticised over the balance of the fund between fixed interest and equities in the period from 1922 to 1959. It follows that I do not accept the evidence of Professor Briston that they ought to have acted differently in that period. Neither did he persist in it when cross-examined:
"Q. I see. So you are happy about the composition of the funds as between equities and fixed income up to 1945, 1946. Would you alter that?
A. I said the late '40's.
Q. Well, the latest '40 is '49. You have got €29,000 equities and €53,000 fixed income. Would you alter that?
A. I think that by around this time, possibly a little later, the advantage of equities would have been clearer. I would have thought perhaps in the early 1950's."
In an earlier passage Professor Briston had described the proportion of the total fund in equities in 1959 (76.8 per cent) as "by no means unacceptable".
For the period after 1959, I consider that Professor Briston is on much firmer ground. But Professor Brealey and Mr Sladen, who gave evidence for the trustees, asserted that professor Briston had made a "methodological error" in that
"he fails to keep the proportion of equities and fixed income constant throughout the period i.e. assumes no rebalancing to maintain the original proportions."
For example, Professor Briston's calculation which led to a final value of C1.8 million in 1986 thereby assumed eventual proportions of 99.3 per cent equities and 0.7 per cent fixed interest.
The fact that Professor Briston originally overstated his case and later withdrew from it in part is no reason to reject the whole. Nor do I regard the evidence of the trustees' experts as immune from criticism; Mr Sladen, for example, regarded it as a reason for selling a share that it had gone up in value and was showing a profit on its historic cost. And Professor Brealey in his report plainly implied, to my mind, that the Trustee Investments Act 1961 required trustees to maintain no more than 50 per cent of their fund in ordinary shares at all times. This was put forward as a reason why the trustees in this case were right to carry out a periodical rebalancing exercise, by reducing the equity content of the portfolio when it grew in value. It was said to show that Professor Briston was wrong to suggest that the equity content should have been allowed to grow in value undisturbed, until it reached 99.3 per cent.
The Trustee Investments Act does not, of course, impose any such rebalancing obligation, as Professor Brealey acknowledged in his oral evidence. The philosophy of the Act may be said to be curious, in that trustees to whom it applies may place no more than 50 per cent of their fund in ordinary shares initially, and thereafter they may allow that part of the fund to grow as much as it will. But that is unquestionably its effect.
These trustees were not affected by the Act, as they already had wider powers than it affords. In my judgment they should, in the investment climate prevailing from 1960 onwards, have followed Professor Briston's policy, subject only to one important consideration - the overseas domicile of life tenants. If all the beneficiaries had been subject to United Kingdom tax, they should have regarded the 76.8 per cent of the fund that was in ordinary shares in 1959 (or even the 82.6 per cent in 1960) as devoted to equity investment, and only the balance as available for fixed interest securities. No doubt there were times during the period from 1960 to 1986 when it would not have been a breach of trust, and may even have been wise, to depart temporarily from that policy. But in the main I am convinced that it is the policy which they should have followed. With hindsight, one can see that the BZW equity index rose from 789.9 to 6353.2 in that period; the gilt index fell from 74.6 to 48.4. But my conclusion is based on the evidence of Professor Briston and Mr Harris, not on hindsight.
That, however, assumes that all the beneficiaries were subject to United Kingdom tax, which they were not. George Nestle lived in Tanganyika from 1933 to 1963, when he moved to Malta and lived there until he died in 1972. Elsie, his widow, continued to live there until 1980, when she returned to England. She died in 1982. John Nestle went to live in Cyprus in 1969, and died there in 1986. The fiscal effects of residence/ordinary residence/domicile overseas were, as I understand it, two-fold: first, the life tenant would not be liable for United Kingdom income tax on investments outside the United Kingdom, or (more significantly) on the income from gilt-edged securities which were tax exempt; secondly, neither estate duty nor capital transfer tax would be payable on the death of a life tenant in respect of such securities.
The obligation of a trustee is to administer the trust fund impartially, or fairly (I can see no significant difference), having regard to the different interests of beneficiaries. wilberforce J. said in Re Pauling's Settlement Trusts (No.2) [1963] Ch.576 at p.586:
"The new trustees would be under the normal duty of preserving an equitable balance, and if at any time it was shown they were inclining one way or the other, it would not be a difficult matter to bring them to account."
At times it will not be easy to decide what is an equitable balance. A life tenant may be anxious to receive the highest possible income, whilst the remainderman will wish the real value of the trust fund to be preserved. If the life tenant is living in penury and the remainderman already has ample wealth, common sense suggests that a trustee should be able to take that into account, not necessarily by seeking the highest possible income at the expense of capital but by inclining in that direction. However, before adopting that course a trustee should, I think, require some verification of the facts. In this case the trustees did not, so far as I am aware, have any reliable information as to the relative wealth of the life tenants and Miss Nestle. They did send an official to interview Mr John Nestle in Cyprus on one occasion; but the information which they obtained was conflicting and (as it turned out) incomplete.
Similarly I would not regard it as a breach of trust for the trustees to pay some regard to the relationship between Mr George Nestle and Miss Nestle. He was merely her uncle, and she would have received nothing from his share of the fund if he had fathered a child who survived him. The trustees would be entitled, in my view, to incline towards income during his life tenancy and that of his widow, on that ground. Again common sense suggests to me that such a course might be appropriate, and I do not think that it would be a breach of the duty to act fairly, or impartially.
The dominant consideration for the trustees, however, was that George's fund from 1960, and John's from 1969, would not be subject to United Kingdom income tax in so far as it was invested in exempt gilts. That was a factor which the trustees were entitled - and I would say bound - to take into account. A beneficiary who has been left a life interest in a trust fund has an arguable case for saying that he should not be compelled to bear tax on the income if he is not lawfully obliged to do so.
It was no more than a factor for the trustees to bear in mind, and would rarely justify more than a modest degree of preference for income paid gross over capital growth.
A trustee should also bear in mind, as these trustees did, that estate duty or capital transfer tax is likely to be reduced in such a case if part of the fund is invested in tax-exempt gilts. That may provide a compensating benefit for the remainderman. Of course it is by no means certain that the benefit will materialise; the life tenant may return to this country, as happened in the case of Mrs Elsie Nestle. It has been said that nothing in this world is certain except death and taxes. But even the tax benefit was imponderable, since it could not be forecast what rate of tax would be applicable on the death of a life tenant.
It is said that the trustees should have anticipated that Elsie would return to the United Kingdom, or at least have made enquiries as to her intentions. I can see some force in the second part of that argument. It would have been prudent to ask her to let them know if she planned to come back to this country. But this was never put to the Bank's witnesses. And I cannot find that any loss to the trust fund resulted from failure to request information from Elsie. From time to time during her life tenancy there were indications that she might return, but it was only at a late stage that this attained any degree of probability; and I doubt whether even then it would have been right for the trustees to switch investments, thus reducing her income and foregoing any prospect of a saving in capital transfer tax.
I do not consider it necessary to examine separately the balance of the two different funds from 1961 to 1986. From the point of view of Miss Nestle, what mattered was the balance of the fund as a whole. The proportion in ordinary shares varied between 59.55 per cent and 35.9 per cent. On occasion the lower figure may be attributable not to a change in investments but to a fall in the value of equities, for example in 1974 when there was a catastrophic fall. But there can be no doubt that there were other occasions when money was switched from ordinary shares to gilt-edged securities.
The policy of the trustees during this period was to achieve a 50/50 split between equities and fixed-interest. This was not to be an initial division of the kind favoured by Professor Briston, which would have resulted in a much higher proportion of equities by 1986; it was to be a division that was re-balanced from time to time, as envisaged by Professor Brealey. Whilst I much prefer Professor Briston's method in general for trust funds during this period, I consider that the circumstances of this trust, and in particular the overseas life tenants, justified the policy which the trustees adopted. They did not fail to act fairly or impartially by adopting it.
But it is said that the trustees failed to implement their own policy: the proportion of ordinary shares fell on one occasion to 35.9 per cent, and in six years it was below 40 per cent. In my judgment the trustees were not obliged to re-balance the fund annually, still less at more frequent intervals. It would have been questionable to switch immediately into equities when they fell through the floor in 1974, merely because the ordinary shares then held were only 36.37 per cent of the fund. There was evidence that it is not a wise policy for trustees to be changing investments continually; and whilst I would not regard that as a justification for sheer inertia, I accept that an ordinary fund manager who has no special expertise should not busy himself with constant changes. The equity content started as 59.55 per cent in 1961 and ended as 51.31 per cent in 1986. Over those 26 years the average, according to my arithmetic, was 44.56 per cent. I would not regard that as revealing a serious departure from the trustees' policy, or a failure to act fairly and impartially. But I should add that, if I had found a breach of trust in this respect, I would have been reluctant to accept that compensation should be measured by the difference between the actual performance of the fund and the very least that a prudent trustee might have achieved. There is said to be nineteenth-century authority to that effect; but I would be inclined to prefer a comparison with what a prudent trustee was likely to have achieved - in other words, the average performance of ordinary shares during the period.
Diversification
The complaint here is that there was undue emphasis on the shares of banks and insurance companies during the period from 1922 to 1960. Indeed the equities in the annuity fund when it was set up in 1922 were entirely of that description.
However, there was evidence from the experts on both sides that bank and insurance shares were regarded as safest in the earlier period of this trust, "a low risk portfolio". I am inclined to agree with Professor Briston that there should have been diversification in the fifties, rather than from 1960 onwards. But I cannot accept that failure to diversify in that decade was a course which no prudent trustee would have followed.
The 1959 transaction
I have left this until last, because it presents the greatest difficulty. The proceeds of sale of the house and contents came to €4947, which became part of the annuity fund. The broker whom the Bank consulted recommended the purchase of Shell and EMI or Reyrolle shares. The trustees rejected that advice, and bought Conversion 5.25 per cent and Edinburgh Corporation five per cent. Whether they did so because they misunderstood their powers of investment, or for some other reason, does not appear.
On any view there must be some doubt as to the wisdom of this transaction. The securities that were in fact bought had achieved a value of only C5444 in 1986, we were told.
Investments in ordinary shares would at first sight have been much more profitable. But there then arises the question whether more tax would have been payable on the deaths of George, Elsie and John Nestle. I do not think that it can be answered by considering a calculation only at the death of George Nestle. If ordinary shares are assumed to have been bought in 1959, we are asked to assume that they would have remained in the fund until 1986.
That last assumption is one that I cannot make. In a year or two after 1959 Mrs Barbara Nestle had died, the annuity fund had been divided between the two brothers, and the process of maintaining a high proportion of fixed interest securities in the George Nestle fund had begun. A similar trend, albeit less marked, is to be found in the John Nestle fund from 1969 onwards. I see no reason to believe that equities bought in 1959 with the proceeds of the house and contents would have remained exempt from the trustees' general policy, of according some preference to income from tax-exempt gilts, and maintaining roughly speaking proportions of 50/50 overall. So I do not find that there is a prima facie case of loss to the trust from the 1959 transaction.
I would dismiss the appeal. The judge took the view that
"the Bank had acted conscientiously, fairly and carefully throughout the administration of [the] trust."
I cannot join in that accolade. But it is not shown that there was loss arising from a breach of trust for which the trustees ought to compensate the trust fund.
LORD JUSTICE LEGGATT: When trusts came into their own in Victorian times they were no doubt intended to preserve capital while assuring beneficiaries of a steady, if conservative, income.
Little was demanded of a trustee beyond the safeguarding of the trust fund by refraining from improvident investment. This process was no doubt also intended to save beneficiaries from trouble and anxiety, or what is now called 'hassle'. But during the 64 years for which the trust set up by the appellant's grandfather endured, the contentment of his descendants declined. The appellant's uncle and father conducted with the respondent Bank vigorous campaigns designed to improve their respective incomes, which, if the Bank had not resisted them, would have worked to the ultimate detriment of the appellant, while the appellant herself is now locked in mortal financial combat with the Bank.
George and John Nestle saw the Bank, or said they saw the Bank, as unfairly looking out for the appellant at their expense. In fact John turns out to have had a fortune of his own, which was invested in equities. So to the extent that he was successful in getting the Bank to invest in gilts he was achieving a balance between his funds. The appellant, on the other hand, with whom her father was latterly at odds, has become obsessed with the idea that the Bank over the years has failed to look after her interests. She claims that the sum of C269,203 which she inherited should have been larger than it was. It will not be of any consolation to her to reflect that, if since 1986 she had in that period done for the fund what she claims that the Bank ought to have done for it previously, and it had grown at the same rate as the cost of living, it would probably now be worth over C400,000.
There is no dispute about the nature of the Bank's duty. It was, as Lindley L.J. has expressed it, a duty "to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide": in Re Whiteley (1886) XXXIII Ch.D. 347 at page 355. The trustee must have regard "not only to the interests of those who are entitled to the income, but to the interests of those who will take in future": ibid per Cotton L.J. at page 350. "A trustee must not choose investments other than those which the terms of his trust permit": Speight v. Gaunt (1883) IX App.Cas.l per Lord Blackburn at page 19. So confined, the trustee must also "avoid all investments of that class that are attended with hazard": Learoyd v. Whiteley (1887) XII App. Cas. 727 per Lord Watson at page 733. The power of investment "must be exercised so as to yield the best return for the beneficiaries, judged in relation to the risks of the investments in question; and the prospects of the yield of income and capital appreciation both have to be considered in judging the return from the investment": Cowan v. Scargill [1985] Ch.270 at page 287A. Since the Trustee Investments Act 1961 came into force a trustee has been required by section 6(1) to have regard in the exercise of his powers of investment "to the need for diversification of investments of the trust, in so far as appropriate to the circumstances of the trust". It is common ground that a trustee with a power of investment must undertake periodic reviews of the investments held by the trust. In relation to this trust, that would have meant a review carried out at least annually, and whenever else a reappraisal of the trust portfolio was requested or was otherwise requisite. It must also be borne in mind that, as expressed by the report of the Radcliffe Committee on the Powers and Duties of Trustees (Cmnd.8733) at paragraph 2.15, "Professional trustees, such as banks, are under a special duty to display expertise in every aspect of their administration of the trust".
The appellant alleges that the Bank is in breach of trust because over the years since her grandfather set up the trust the Bank has supposed that its power of investment was more limited than it was; has failed to carry out periodic reviews of the portfolio, and to maintain a proper balance between equities and gilts, and to diversify the equity investments; and has unduly favoured the interests of her father and her uncle as life-tenants at the expense of her own interest as remainderman. She says that in consequence the trust fund was worth less in 1986 than it should have been.
The essence of the Bank's duty was to take such steps as a prudent businessman would have taken to maintain and increase the value of the trust fund. Unless it failed to do so, it was not in breach of trust. A breach of duty will not be actionable, and therefore will be immaterial, if it does not cause loss. In this context I would endorse the concession of Mr Nugee Q.C. for the Bank that 'loss' will be incurred by a trust fund when it makes a gain less than would have been made by a prudent businessman. A claimant will therefore fail who cannot prove a loss in this sense caused by breach of duty. So here in order to make a case for an inquiry, the appellant must show that loss was caused by breach of duty on the part of the Bank.
On the appellant's behalf Mr Lyndon-Stanford Q.C. seeks to rely on a presumption against a wrongdoing trustee. He invokes Brightman L.J.'s dictum in Bartlett v. Barclays Trust Co.(No.2) [1980] Ch.515 at page 545, that "The trustee's obligation is to restore to the trust estate the assets of which he has deprived it". But that presupposes deprivation.
The appellant alleges, and I am content to assume, that the Bank was at all material times under a misapprehension about the meaning of the investment clause in the will, with the result that the Bank believed that the scope of its powers of investment was more confined than it was. I also regard it as unlikely that the Bank conducted any reviews of the portfolio between 1922 and 1959. If any were conducted, they were unplanned, sporadic and indecisive. Mr Lyndon-Stanford argues that it should be presumed that, had there been a better balance between gilts and equities and had the equity investment been more diversified, the fund would ultimately have been worth more than it was. The fallacy is that it does not follow from the fact that a wider power of investment was available to the Bank than it realised either that it would have been exercised or that, if it had been, the exercise of it would have produced a result more beneficial to the Bank than actually was produced. Loss cannot be presumed, if none would necessarily have resulted. Until it was proved that there was a loss, no attempt could be made to assess the amount of it.
In Guerin v. R [1984] 13 D.L.R. (4th) 321 the Crown leased to a golf club land belonging to an Indian band to which the Crown owned a fiduciary duty. Since the terms of the lease were unsatisfactory and the lease for 85 years was irrevocable, the court had to evaluate the loss to the band, and did so by presuming against the Crown that the band would have made the most profitable use of the land by letting it for residential development. That loss had been suffered by the letting to the golf club was obvious: the presumption applied in proving the extent of the loss by relieving the band from the need to prove that they would have let the land for development.
In my judgment either there was a loss in the present case or there was not. Unless there was a loss, there was no cause of action. It was for the appellant to prove on balance of probabilities that there was, or must have been, a loss. If proved, the court would then have had to assess the amount of it, and for the purpose of doing so might have had recourse to presumptions against the Bank. In short, if it were shown that a loss was caused by breach of trust, such a presumption might avail the appellant in quantifying the loss. The appellant's difficulty is in reaching that stage.
The appellant therefore had to prove that a prudent trustee, knowing of the scope of the Bank's investment power and conducting regular reviews, would so have invested the trust funds as to make it worth more than it was worth when the appellant inherited it. That was a matter for expert evidence. In the result there was evidence which the judge was entitled to accept and did accept that the Bank did no less than expected of it up to the death of the testator's widow in 1960.
The proportion of the fund already invested in equities at the time when Winterbourne was sold makes it impossible in my judgment to impugn the decision to put the proceeds of sale into conversion stock.
After 1960 investment of the trust funds preponderantly in tax-exempt gilts for the benefit of life-tenants resident abroad is not shown to have produced a less satisfactory result for the remainderman than an investment in equities after taking into account savings in estate duty and capital transfer tax, because this policy had the effect of preserving the capital. By the time that John Nestle died the equities to replace the tax-exempt gilts would have had to be worth more than twice as much as the gilts in order to achieve the same benefit net of tax.
It is true that the calculations upon which the Bank relied in making these comparisons were based on the assumptions that the whole fund was subject to estate duty, and that the Bank did not contemplate that it might be able to take advantage of a late switch into gilts, especially in relation to Mrs Elsie Nestle. But even if a less favourable assumption were made in relation to estate duty, the result would not have been so inferior as to demonstrate failure to look out for the remainderman amounting to a breach of trust. Similarly, although the fact that Mrs Elsie Nestle returned to live in this country now indicates that it might have been advantageous if a switch into equities had been made after George's death, the Bank cannot in my judgment be reproached for failing to anticipate that she would outlive her husband by 10 years, and that she would destroy the benefit of investment in tax-exempt gilts by resuming her domicile in England. Had she not done so, it would have been impossible for the Bank to assess with any accuracy the timing of a switch back into gilts. In any event, without having pleaded any defect in the management of Mrs Elsie Nestle's fund, the appellant cannot now rely on this argument.
No testator, in the light of this example, would choose this Bank for the effective management of his investment. But the Bank's engagement was as a trustee; and as such, it is to be judged not so much by success as by absence of proven default. The importance of preservation of a trust fund will always outweigh success in its advancement. Inevitably, a trustee in the Bank's position wears a complacent air, because the virtue of safety will in practice put a premium on inactivity. Until the 1950's active management of the portfolio might have been seen as speculative, and even in these days such dealing would have to be notably successful before the expense would be justified. The very process of attempting to achieve a balance, or (if that be old-fashioned) fairness, as between the interests of life-tenants and those of a remainderman inevitably means that each can complain of being less well served than he or she ought to have been. But by the undemanding standard of prudence the Bank is not shown to have committed any breach of trust resulting in loss.
I am therefore constrained to agree that the appeal must be dismissed.
Order: Appeal dismissed with costs; order for costs between 23rd October 1990 and 4th January 1991 not to be enforced without leave of the court; application for leave to appeal to the House of Lords refused.
