The Law Commission

PART I

INTRODUCTION

The expansion of trustee powers

1.1      The traditional means of controlling trustees, and hence protecting beneficiaries, have been to restrict their powers and to impose strict duties. In recent years, it has become clear that a restrictive approach to trustees' powers can be detrimental to the interests of beneficiaries. Thus in 1999 the Law Commission stated:

...the law governing the powers and duties of trustees has not kept pace with the evolving economic and social nature of trusts- indeed the default powers which trustees have under the present law are generally regarded as seriously restrictive. The nature of trusts and the assets that are characteristically held by them are now very different from what they were when the present legislative provisions were enacted. Those provisions no longer give trustees the powers they need to administer a trust effectively and, unless the instrument creating the trust confers wider powers, make it very difficult for trustees to comply with their paramount duty to act in the best interests of the trust.^[1]

1.2      The Law Commission recommended the removal of many of these restrictions to facilitate the administration of the modern trust, and the Trustee Act 2000 was enacted to give effect to those recommendations.^[2] It adopts what may be described as a permissive approach, conferring wider powers on trustees, and controlling their conduct by means of the imposition of a statutory duty of care.
1.3      The statutory duty of care (which is applied only when the trustee is exercising certain powers)^[3] expects those trustees who have, or hold themselves out as having, any special knowledge or experience, or who are acting in the course of a business or profession, to attain standards commensurate to the knowledge or experience which they have or purport to have and which it is reasonable to expect a person acting in the particular business or profession to have.^[4] This nuanced approach to the definition of duty distinguishes between different categories of trustee, who we shall refer to, in broad terms, as the lay trustee and the professional trustee.^[5]
1.4      The Trustee Act 2000 does not, however, make any attempt to regulate the use of trustee exemption clauses, the inclusion of which in trust instruments has become more common in recent years. Indeed, the Trustee Act 2000 expressly states that the statutory duty of care does not apply:

if or in so far as it appears from the trust instrument that the duty is not meant to apply.^[6]

Trustee exemption clauses

1.5      English law does not at present provide a readily available means for beneficiaries to claim that a trustee exemption clause should not be invoked by a trustee and, as a result, trustees have considerable scope to protect themselves from liability for breach of trust. The question arises whether reliance on trustee exemption clauses is seriously endangering the interests of those whom the trust relationship is directed to promote.
1.6      The present law governing trustee exemption clauses has been criticised on a number of grounds. In the leading case, Armitage v Nurse,^[7] Millett LJ, as he then was, noted that:

the view is widely held that these clauses have gone too far, and that trustees who charge for their services and who, as professional men, would not dream of excluding liability for ordinary professional negligence should not be able to rely on a trustee exemption clause excluding liability for gross negligence.^[8]

1.7      In June 1999, the Trust Law Committee issued a Consultation Paper in which it provisionally recommended that the law should provide that a trustee remunerated for his services as trustee may not rely on an exemption clause excluding liability for breach of trust arising from negligence (and worse), in all cases where the trustee cannot prove that prior independent advice was given to the settlor. The Committee stated:

There is much to be said for trust corporations and professional individuals paid for their services as trustees, (like solicitors, barristers and accountants) to accept the price of liability for negligence in acting as a paid trustee and to insure against such risk, with the premiums being reflected in the fees for the services provided.^[9]

1.8      One of the most important developments of the common law in the twentieth century was the development and incremental extension of the tort of negligence.^[10] This has had a profound impact on many areas of legal liability, none more so than the liability of professional persons, not only to their clients but also to others who may be affected by their negligent acts or omissions. The effect of this development has been, unsurprisingly, to increase litigation and to incite professional persons, with the encouragement and sometimes by the direction of their regulatory bodies, to take out indemnity insurance for their own protection. It has also led to a general public awareness that professional persons are responsible for their mistakes and are expected to compensate those who suffer loss as a consequence. It is against this background that discontent with the widespread use of a device, such as an exemption clause, which seeks to eliminate, for the most part, the prospect of successful claims being made against professional trustees for breach of trust has led to the current reference being made to the Law Commission.
1.9      During debates in the House of Lords on the Trustee Bill, concerns were raised by Lord Goodhart^[11] that the measure did nothing to restrict the inclusion of trustee exemption clauses in trust instruments:

In their usual form, trustee exemption clauses protect trustees from any liability for anything except personal and individual fraud in an action by the trust beneficiaries claiming damages against the trustees for breach of trust. However negligent, lazy or misguided the trustees may have been, they cannot be held liable for the loss that they have caused to the trust fund...there can be no justification, save in the most exceptional circumstances, for extending such an exemption to a paid professional trustee.^[12]

1.10      He contended that:

...a paid professional trustee, or a corporation providing trustee services as part of its business, should be entitled to rely on an exemption clause only where it satisfies the test of reasonableness under sections 4 and 11 of the Unfair Contract Terms Act.^[13]

1.11      In reply to Lord Goodhart's concerns, the Lord Chancellor gave an undertaking to refer the matter formally to the Law Commission for thorough examination. The terms of the reference, made in January 2001, were to:

examine the law governing clauses which restrict the liabilities of trustees either by excluding liability for breach of their duties or by limiting the duties to which the trustees are subject.

1.12      At the same time, two other matters were referred by the Lord Chancellor to the Law Commission:

(1) The rules of apportionment concerning:

(a) the circumstances in which trustees may or must make apportionments beween the income and the capital of the trust fund;

(b) the rights and duties of charity trustees in relation to investment returns on a charity's permanent endowment; and

(c) the circumstances in which trustees must convert and re-invest trust property; and the rules which determine whether money or other property received by trustees is to be treated as income or capital.

(2) The rights of creditors against trust funds: to examine the law governing the rights of creditors against trustees and the trust fund for liabilities incurred by the trustees on behalf of the trust.

It is our intention to publish separate consultation papers dealing with these issues in due course.

1.13      We realise that the regulation of trustee exemption clauses may have a considerable impact on the use of trusts and that any reform of the law must take account of the potential economic implications. The major concerns are as follows:

(1) regulation may result in significantly higher charges being made for the work of professional trustees;

(2) lay trustees may be deterred from assuming the responsibility of trusteeship if they consider themselves exposed to greater liability from which they cannot secure protection; and

(3) regulation may encourage professional trustees to move their operations to jurisdictions which have less restrictive controls and settlors may decide to transfer their trust funds out of England and Wales.

1.14      We are aware that there is some element of competition between trust jurisdictions and that any reform of trust law creates a potential risk to the jurisdiction which it affects. We are also aware that the range of trusts which are currently governed by English law is vast, and that certain trusts are more sensitive to change than others.
1.15      We commenced this project by distributing a preliminary questionnaire to trusts practitioners^[14] to ascertain views as to whether there were in practice real concerns to be addressed in this area of the law. The majority of those who responded were dissatisfied with the current law. They considered it unacceptable that trustees were permitted to exclude liability for gross negligence and that reform of the law in this area was required. A majority, whilst acknowledging the possible difficulties, thought that a distinction should be made between lay and professional trustees, with the former being more leniently treated.
1.16      We then instructed Dr Alison Dunn, of the University of Newcastle-upon-Tyne, to conduct socio-economic research on the use of trustee exemption clauses, addressing in particular the concerns we have mentioned above.

The Consultation Paper

1.17      In this Consultation Paper, we intend to explore the current law and practice of trustee exemption clauses in England and Wales and to consider the case for reform. In doing so we shall be drawing upon the experience of other jurisdictions, some of which have introduced legislation regulating the use of such clauses, and some of which are actively considering the case for legislative regulation.
1.18      Part II considers the current law of trustee exemption clauses.
1.19      Part III considers the economic implications of regulating trustee exemption clauses.
1.20      Part IV sets out the options for reform and seeks the views of consultees.
1.21      Part V summarises the questions for consultation.
1.22      We should emphasise that the nature of the trust- as an institution of private law- makes it extremely difficult to predict accurately the impact of regulation. We would therefore be particularly grateful for any comments which consultees may have on the factual background to the use of trustee exemption clauses.

Acknowledgements

1.23      We are very grateful to Dr Alison Dunn and her research assistant, Mrs Ann Sinclair, for the socio-economic research which they have conducted on our behalf. We are also very grateful to the Trust Law Committee, in particular Professor David Hayton, Mr John Dilger and Mr Simon Jennings, for its assistance in this project. As always, the Society of Trusts and Estate Practitioners has been extremely supportive- in this case in eliciting the views of its members by distribution of our preliminary questionnaire. We also express our gratitude to Mr Reg Brown, a recent former president of the Chartered Insurance Institute, for his advice on matters pertaining to trustee liability insurance.

Note 1   Trustees’ Powers and Duties (1999) Law Com No 260; Scot Law Com No 172, para 1.1.    [Back]

Note 2   The Trustee Act 2000 came into force on 1 February 2001.    [Back]

Note 3   Trustee Act 2000, s 2, Sched 1.    [Back]

Note 4   Trustee Act 2000, s 1(1).    [Back]

Note 5   See para 4.33 for further discussion of this distinction.    [Back]

Note 6   Trustee Act 2000, Sched 1, para 7.    [Back]

Note 7   [1998] Ch 241.    [Back]

Note 8   Ibid, at p 256.    [Back]

Note 9   TLC Report (1999) para 7.8.    [Back]

Note 10   A thorough account of this development can be found in Jackson & Powell on Professional Negligence (5th ed 2002) paras 2- 013 to 2- 124. The main cases include: Donoghue v Stevenson [1932] AC 562; Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465; Dorset Yacht Co v Home Office [1970] AC 1004; Anns v Merton LBC [1978] AC 728; Smith v Eric S Bush [1990] 1 AC 831; Caparo Industries plc v Dickman [1990] 2 AC 605; Murphy v Brentwood DC [1991] 1 AC 398; and White v Jones [1995] 2 AC 207.    [Back]

Note 11   A member of the Trust Law Committee, Lord Goodhart has written two prominent articles on the subject matter of trustee exemption clauses: “Trustee Exemption Clauses and the Unfair Contract Terms Act 1977” [1980] Conv 333; “Trust Law for the Twenty-first Century” (1996) 10 TLI 38.    [Back]

Note 12   Hansard (HL) 14 April 2000, vol 612, col 383.     [Back]

Note 13   Ibid.    [Back]

Note 14   With the assistance of the Society of Trust and Estate Practitioners.    [Back]