The Law Commission

PART II

THE CURRENT LAW

The nature of the problem

2.1      The wide and relatively unrestricted nature of trustees' liability for breach of trust has resulted in the use of common form clauses in trust instruments purporting to exclude or restrict that liability. The terms of such clauses in the early trust instruments were relatively narrow and were strictly construed against trustees.^[1] However, the changed nature of trust assets, the use of the trust for purposes never before envisaged, the endowment of increased powers on trustees and the fear of increasingly litigious beneficiaries has led to the inclusion of ever wider exemption clauses in trust instruments.^[2]
2.2      It is now relatively common to find express provisions in modern trust instruments inserted to protect trustees from their liabilities in respect of acts or omissions that would normally be regarded as breaches of trust. As the powers of trustees have increased as a result both of express provisions in trust instruments and by legislation, so has the breadth of trustee exemption clauses. When coupled with the less restrictive approach recently adopted by the courts to the construction of exemption clauses, it can be strongly argued that the protection offered to beneficiaries, one of the prime concerns of trust law, is weaker than in the past.
2.3      In this project, we are concerned with the extent to which trustees can exclude or modify their liability to the beneficiaries for breach of trust. In the words of Sir Arthur Underhill:

A trust is an equitable obligation, binding a person (who is called a trustee) to deal with property over which he has control (which is called the trust property), for the benefit of persons (who are called the beneficiaries or cestuis que trust), of whom he may himself be one, and any one of whom may enforce the obligation.^[3]

2.4      Trustees may seek protection from liability for actions and omissions that would normally be regarded as a breach of trust by terms in the trust instrument which exclude their liability. An exemption clause therefore typically provides that a trustee shall not be liable for loss to the trust resulting from a breach of trust (other than for fraud or wilful default).^[4]
2.5      But that is only one means of restricting the exposure of trustees to legal accountability. Another approach may be to seek to limit the duties to which the trustee would normally be subject. By narrowing the scope of the obligations owed by the trustee to the beneficiaries, the same result can be achieved as by invocation of a trustee exemption clause which excludes liability for breach of trust. Where a duty exclusion clause is contained in the trust instrument, it will obviously be more difficult for a beneficiary to establish that the trustee is in breach of duty.^[5]
2.6      Yet another possibility is for the trust instrument to confer wider powers on the trustees, expressly authorising the trustees to do acts which would normally be proscribed. For example it may be provided that the trustees may acquire wasting assets or assets which yield little or no income for investment purposes.^[6] Such clauses may be termed extended powers clauses or authorisation clauses.
2.7      Finally, the trust may contain a provision entitling the trustee to an indemnity out of the trust fund in respect not only (as one might expect) of costs and expenses incurred in the proper administration of the trust but also for any liability for breach of trust (save perhaps for liability arising out of the trustee's individual fraud). Such an indemnity clause is not as effective a protection for the individual trustee as a clause exempting his or her liability as its efficacy is dependent on the continuing solvency of the trust, but it can nevertheless operate to the prejudice of beneficiaries.
2.8      Any attempt to control the use of trustee exemption clauses must confront the argument that the trust, as an institution of private law, derives its terms from the directions of the settlor. It is for the settlor to decide whether the trustees should be granted exemption from liability in certain circumstances, whether the trustees' powers should be wider than is the norm, whether the trustees' duties should be rendered less onerous, and whether, and in what circumstances, the trustees should be entitled to indemnity from the trust funds. Any statutory regulation of the content of the trust instrument which might be proposed is susceptible to attack on the ground that it restricts the autonomy of the settlor to dictate the obligations which are to be imposed on the trustees in whom the trust property has been vested.
2.9      However, it is already recognised that there is some control over the settlor's freedom of action. If the terms of the instrument do not impose sufficiently stringent obligations on the persons referred to as trustees, it may be that the instrument cannot be accurately described as a trust at all. In the absence of such obligations, the disposition by the settlor will fail as a trust. It will take effect either as an out- and- out gift to the persons named as trustees, or the property will be held on resulting trust for the settlor.
2.10      This important concept is sometimes explained by reference to the principle that there is a minimum "core content" of a trust.^[7] In its absence, no trust will be held to have been created. In Armitage v Nurse, the leading English decision on the efficacy of trustee exemption clauses, Millett LJ accepted that there is an "irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust".^[8] However, the core obligations did not include the duties of skill and care, or of prudence and diligence:

The duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts, but in my opinion it is sufficient.^[9]

2.11      As we shall explain in this Part, the current English law allows settlors considerable latitude in restricting the potential liabilities of their trustees, in conferring wide powers and in imposing narrow duties on them. The question to which we shall return in Part IV is whether it is justifiable to control the autonomy of settlors in this respect.
2.12      We are concerned in this project with one potential liability- liability for breach of trust. It is important, before we consider the current law on trustee exemption clauses, to explain what we mean by breach of trust. For, as has recently been observed:

To say that trustees are liable for breach of trust is not all that meaningful unless we can also say what they are liable to do.^[10]

Breach of trust

2.13      A breach of trust is a breach of any obligation owed by the trustee. Such obligations may be imposed expressly by the trust instrument or impliedly by law. As Millett LJ explains in Armitage v Nurse:

Breaches of trust are of many different kinds. A breach of trust may be deliberate or inadvertent; it may consist of an actual misappropriation or misapplication of the trust property or merely of an investment or other dealing which is outside the trustees' powers; it may consist of a failure to carry out a positive obligation of the trustees or merely of a want of skill and care on their part in the management of the trust property; it may be injurious to the interests of the beneficiaries or be actually to their benefit.^[11]

Breach of fiduciary duty

2.14      Trustees stand in a fiduciary relationship with their beneficiaries and as such are subject to the fiduciary obligation of loyalty. From the fundamental obligation of loyalty there have evolved specific duties which trustees must observe. These duties are that trustees:

(a) must act in good faith;^[12]

(b) must not make an unauthorised profit from their trust;^[13]

(c) must not place themselves in a position where their duty and interest conflict;^[14] and

(d) must not act for their own benefit or for the benefit of a third party, without the informed consent of the beneficiaries of the trust.^[15]

Breach of duty of care

2.15      The most common breach of duty occurs where a trustee breaches his or her duty to act with care and skill in the administration of the trust, which causes loss to the trust fund.^[16] This duty of care may be imposed by statute, or by common law. The duty of care is not a fiduciary duty as such and should therefore be distinguished from those duties, peculiar to fiduciaries, which are mentioned above.^[17]
2.16      The Trustee Act 2000 introduced a statutory duty of care which applies to the exercise of powers and the performance of duties conferred or imposed by that Act, as well as to certain powers conferred by other statutes and powers conferred by the terms of the trust.^[18] It is not, however, of general application. The duty of care "under the general law" applies therefore to those powers and duties that are not expressly covered by the 2000 Act.

Duty of care under the general law

2.17      Under the general law, at least three standards of care may be imposed upon a trustee:

(1) First, a trustee is generally required to take all those precautions which an ordinary prudent man of business would take in managing similar affairs of his own.^[19] This is an objective test. It does not require the court to consider the standard which the individual has in fact adopted in relation to his own affairs.^[20]

(2) This duty has however never applied to the exercise by trustees of their powers of investment. In such circumstances, the duty under the general law 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.^[21]

(3) Finally, where the individual is a specialist, for example a trust corporation carrying on the business of trust management, the standard which it will be expected to achieve when exercising any power will be higher.^[22]

Statutory duty of care

2.18      The statutory duty of care requires the trustee to exercise such care and skill as is reasonable in the circumstances, having regard in particular to any special care and knowledge or experience that he has or holds himself out as having. If he acts as trustee in the course of a business or profession, regard must also be had to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession. The higher standard which is expected of so- called professional trustees replicates the way in which the general law developed the duty of care by reference to the type of trustee.

Negligence not necessary

2.19      It is important to emphasise that liability for breach of trust is not restricted to acts or omissions which can be characterised as negligent. Where the trustee acts outside the powers conferred upon him or her (ultra vires), it is not necessary for the claimant beneficiary to prove negligence. As has been stated by one commentator, there is as a result in the law of trusts:

...a strong element of strict liability in the sense of liability which is not dependent on showing negligence or unreasonableness on the part of the trustee.^[23]

The nature of trustees' liability

2.20      Where the loss to a trust fund is caused by a breach of trust, the trustees of the fund are liable to restore the lost property, or to pay compensation for the loss.^[24] When assessing the loss to the trust fund following a breach of duty, the court does not apply the common law rules of causation, foreseeability and remoteness. This is because the trustees' liability is to restore the trust property.^[25] Even if the immediate cause of the loss to the trust fund is the dishonesty or failure of a third party, the trustees are liable to make good that loss if it would not have occurred had there been no breach of trust.
2.21      The position was summarised as follows in the case of Caffrey v Darby:^[26]

...if they have been already guilty of negligence, they must be responsible for any loss in any way to that property: for whatever may be the immediate cause, the property would not have been in a situation to sustain that loss, if it had not been for their negligence...If the loss had happened by fire, lightning, or any other accident, that would not be an excuse for them, if guilty of previous negligence. That was their fault.^[27]

The scope of exemption clauses at common law

The nineteenth century cases^[28]

2.22      Until the recent decision in Armitage v Nurse^[29] there were doubts as to whether liability for gross negligence could ever be validly excluded by the terms of the trust, some academics and practitioners taking the view that the exclusion of gross negligence was void as being repugnant to the nature of a trust or contrary to public policy.^[30] This view was based on the nineteenth century English decisions in Wilkins v Hogg^[31] and Pass v Dundas,^[32] and a number of Scottish cases decided in the House of Lords.

The Scottish cases

2.23      In Seton v Dawson,^[33] the exemption clause (which was in terms almost identical to those in all the other cases) provided that the trustees:

...shall not be liable for omissions, neglect of diligence, of any kind, nor singuli in solidum, but each only for his own actual intromissions... .

2.24      The trustees in this case allowed one of their number to control the management of the trust funds. The managing trustee was permitted to receive trust money and no meeting took place between them for over eight years. The managing trustee became bankrupt indebted to the trust. The court held the trustees guilty of gross negligence. The majority of the judges took the view that:

...the general principle of our law is that neither the protecting clause which occurs in this particular deed, nor any of the usual clauses framed for the same object, can be held to liberate trustees from the consequences of negligence as amount to culpa lata.^[34]

2.25      In Knox v Mackinnon,^[35] the trustees of a family trust lent substantial funds on inadequate security to a family member whom they ought to have known would be unable to repay the loan. The trustees were held to have been grossly negligent and liable for the loss to the trust. After quoting the exemption clause in the trust instrument, Lord Watson said:

...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... .^[36]

2.26      In Rae v Meek,^[37] the trustees speculatively loaned trust money on the security of houses being built without an independent valuation or personal inspection of the building. The standard form exemption clause in this case was extended to provide that "the trustees shall not be answerable...for the insufficiency of securities insolvency of debtors, or depreciation in the value of purchases...". Notwithstanding this, the House of Lords held the trustees to be grossly negligent and that they were not protected by the exemption clause. A finding of gross negligence on the part of trustees, for which they were held liable despite the inclusion of the standard form exemption clause, was reached in a number of subsequent Scottish cases.^[38]

The English cases

2.27      The two nineteenth century English authorities in this area were both concerned with duty exclusion clauses. In Wilkins v Hogg,^[39] the trustees permitted one of their number to receive and retain trust money without ascertaining that the funds had been properly invested. The trustee misappropriated the funds he received. The innocent trustees were held not liable for the loss to the trust. The clause was in standard form for its time, but it went on to provide:

that any trustee who shall pay over to his co- trustee, or shall do or concur in any act enabling his co- trustee to receive any monies for the general purposes of my will, or for any definite purpose authorized by my will, shall not be obliged to see to the due application thereof.

1. 28 It was reported that the Lord Chancellor, Lord Westbury:

...would have been glad to find any principle upon which it could be decided that where a general duty was imposed, and then directions were given generally repugnant to that duty and contradictory, the words which followed should be discarded. But he doubted whether public policy would justify this. The testatrix was at liberty to say, "Your duty shall require no more of you than this". The Court could not extend the office, or invest it with greater obligation.^[40]

2.29      In Pass v Dundas,^[41] the testator authorised his two trustees to carry on his business. The business was carried on by one of the trustees with the consent of the beneficiaries. The trustees authorised the bank to honour cheques signed by the trustee managing the business. Under this mandate the trustee withdrew substantial sums of money which he then misappropriated for his own purpose. The court had to construe an exemption clause phrased in similar terms to the one in Wilkins v Hogg.^[42] Bacon VC, applying Wilkins v Hogg, held that in the absence of gross negligence or personal misconduct the indemnity clause protected the trustees from liability.
2.30      The cases considered above were interpreted by some commentators to the effect that a trustee exemption clause could never be invoked so as to exclude the trustee from liability for gross negligence (as well as fraud).^[43] Subject to this, it was a matter of construction in each case whether the particular clause covered the particular activities, conduct or omissions of the trustees.

The late twentieth century

2.31      By the time the issue of trustee exemption clauses came before the courts once more in the final decade of the twentieth century, there had been a highly significant development which cannot go unremarked- the advent and proliferation of the paid trustee. Whereas the cases considered above all concerned, so far as can be ascertained, the propriety of the conduct of amateur trustees, who were not being remunerated for their services, the cases which follow were to delineate the liability of the professional.^[44]
2.32      In 1996, the Jersey Court of Appeal heard Midland Bank Trustee (Jersey) Ltd v Federated Pension Services Ltd.^[45] In a judgment subsequently described as "masterly" by the English Court of Appeal,^[46] Sir Godfray Le Quesne QC, having reviewed the nineteenth century authorities, denied that their combined effect was to prohibit the exclusion of liability for gross negligence:

The suggestion that there is a rule of law to that effect, which cannot be overridden by an exculpatory or duty- defining clause however widely drawn, is in our judgment not supported by the authorities we have cited, except that liability for fraud cannot be excluded. Otherwise all turns on the true construction of the exculpatory clause in its proper context... .^[47]

Midland Bank Trustee (Jersey) Ltd v Federated Pension Services Ltd^[48]

2.33      The defendant, Federated Pension Services (FPS) was the sole trustee of an occupational pension scheme. Rule 27 of its trust instrument gave FPS a wide power to invest the fund. Rule 29 contained an indemnity and exclusion clause in the following terms:

The Trustee shall be indemnified against all liabilities incurred by it in the execution of the trusts hereof and the management and administration of the Scheme and shall have a lien on the fund for such indemnity and the Trustee shall not be liable for anything whatever other than a breach of trust knowingly and wilfully committed.

2.34      FPS and Hambros agreed that with effect from December 1988 Hambros would act as investment manager of the Scheme. However, following encashment of the scheme's investments, FPS failed to transfer the fund (amounting to over £12 million) to Hambros as agreed. FPS erroneously believed that, in order to comply with the Investment Management Regulatory Organisation requirements it was necessary to have in place a customer agreement with the pension provider (the States) before the transfer could be made. FPS did not take legal advice on this issue or warn the States or Hambros of any perceived problem of proceeding without a customer agreement despite the potentially serious consequences of a failure to transfer. As a result of that failure, Hambros was unable to start the process of investment in a market which was rising in the early part of 1989. This caused a loss of over £793,000 to the scheme.
2.35      FPS accepted that it was in breach of trust for failing to transfer the Scheme fund to Hambros as agreed, but on a claim for compensation FPS sought relief from liability under the indemnity and exclusion clause in Rule 29 of the deed.
2.36      The Jersey Court of Appeal considered the main Scottish, English, Canadian and New Zealand cases on trustee exemption clauses and concluded that they did not establish a rule of law preventing the exemption of a trustee from liability for gross negligence. The court took the view that at common law all turns on the true construction of the exemption clause in its context after applying as restrictive an interpretation of the exemption clause as is permissible and appropriate. The court accepted the contention that the scope of duties imposed on trustees and the performance of those duties must vary according to the category of trustee concerned.
2.37      As a matter of construction, the court decided that the effect of Rule 29 was to deny exclusion of liability for acts which were knowingly and wilfully committed and amounted to a breach of trust. It was not necessary for those acts to be known to the trustees to constitute a breach of trust.
2.38      The court held that FPS had failed to establish that it did not commit the breach "knowingly and wilfully" so as to come within the scope of Rule 29. FPS had taken a deliberate and intentional decision on the basis of a mistaken understanding of the legal position. The decision was taken with full knowledge of the potential consequences in terms of loss to the Scheme, though not of the legal implications for FPS. Rule 29 did not therefore afford FPS a defence to the claim for breach of trust.
2.39      In so far as Rule 29 purported to protect the trustee from liability for all forms of negligence, the court held that the amended Article 26(9) Trusts (Jersey) Law 1984^[49] was applicable. The Article provides:

Nothing in the terms of a trust shall relieve, release or exonerate a trustee from liability for breach of trust arising from his own fraud, wilful misconduct or gross negligence.

2.40      The court held FPS to be guilty of gross negligence for the purposes of the amended Article 26(9). FPS's failure to transfer the trust moneys was considered to constitute a serious, unusual and marked departure from the normal standard of conduct of a paid professional trustee, which amounted to "gross negligence" within the meaning of the statute.
2.41      Accordingly, FPS was held liable for the loss to the trust fund and was not protected by the exemption clause in the trust deed. Although FPS took active steps to seek leave to appeal to the Judicial Committee of the Privy Council, the appeal was compromised.

Armitage v Nurse^[50]

2.42      The English Court of Appeal in Armitage v Nurse held that in English law trustee exemption clauses can validly exempt trustees from liability for all breaches of trust except fraud.
2.43      Armitage v Nurse concerned a marriage settlement which was varied by order of the court in 1984 under the Variation of Trusts Act 1958.^[51] The settled property consisted largely of land farmed by a company, the directors of which were the mother and grandmother of Paula, the claimant beneficiary. Following a substantial fall in the value of the land between 1984 and 1987, Paula claimed that the trustees were in breach of trust as regards the management and investment of the fund, as a result of which substantial loss had been caused.
2.44      Clause 15 of the settlement provided:

No trustee shall be liable for any loss or damage which may happen to Paula's fund or any part thereof or the income thereof at any time or from any cause whatsoever unless such loss or damage shall be caused by his own actual fraud... .

2.45      The court held that clause 15 exempted the trustee from liability for loss or damage to the trust property "no matter how indolent, imprudent, lacking in diligence, negligent or wilful he may have been, so long as he has not acted dishonestly".^[52] It was contended by Paula that the word "fraud" in clause 15 included "equitable fraud", in other words any breach of duty to which equity had attached its sanction.^[53] However, this contention was rejected by the court. Construing clause 15, Millett LJ considered that the word "actual" had been deliberately used to exclude equitable fraud.^[54] He held that "actual fraud" required proof of dishonesty, and he accepted a formulation put forward by counsel for the trustees to the effect that fraud in this context:

...connotes at the minimum an intention on the part of the trustee to pursue a particular course of action, either knowing that it is contrary to the interests of the beneficiaries or being recklessly indifferent whether it is contrary to their interests or not.^[55]

2.46      The beneficiary claimed that clause 15 was void for repugnancy or contrary to public policy. Reviewing the nineteenth century authorities which, it was contended, underpinned this argument, Millett LJ held that Wilkins v Hogg^[56] had decided that an appropriately worded clause could limit the scope of the trustee liability in any way the settlor chose. He also held that the statement of Bacon V-C in Pass v Dundas^[57] that an exemption clause only protected trustees from liability unless gross negligence was established was merely obiter. Of the Scottish authorities he concluded that:

...none of them are authority for the proposition that it is contrary to public policy to exclude liability for gross negligence by an appropriate clause clearly worded to have that effect.^[58]

The construction approach

2.47      The approach advocated by Millett LJ requires the court to construe the words of the exemption clause in the light of the conduct complained of and to decide whether any potential liability has been effectively excluded by the terms of the trust. In carrying out this exercise, while the court should construe the clause restrictively, it must do so fairly, according to the natural meaning of the words used.^[59] Thus, liability can be excluded only by clear, unequivocal and unambiguous terms.^[60] However, it should be borne in mind that the trust instrument has been created by the settlor, not by the trustees acting as such. Accordingly, a strict contra proferentem approach is not justified.^[61]
2.48      In Wight v Olswang (No 2),^[62] the trust contained two exemption clauses which were inconsistent. One clause was limited in its application to trustees not charging remuneration for acting; the other was not. It was held that the inconsistent clauses created an ambiguity and the trustees were not protected from liability by either of them.
2.49      In Bogg v Raper^[63] the Court of Appeal considered whether these principles of construction were applicable where the trustees seeking exemption from liability had been involved in the creation of the settlement containing the trustee exemption clause. The trust fund comprised shares which represented a controlling interest in a private limited company. Beneficiaries claimed that the trustees failed to exercise proper control over the business and the activities of the company thereby causing loss to the trust. However, the trustees successfully argued that they were protected by the exemption in clause 12 of the will, which provided:

In the professed execution of the trusts and powers hereof, no trustees (other than a trust corporation) shall be liable for any loss to the trust premises arising by reason of any improper investment made in good faith...or by reason of any mistake or omission made in good faith...by any trustee hereof or by reason of any other matter or thing except wilful or individual fraud or wrongdoing on the part of the trustee who is sought to be made liable.

2.50      The trustees, being the testator's solicitor and accountant, were responsible for the inclusion of the exemption clause in the will. However, that did not prevent them from relying on it on the basis that they would be deriving a benefit arising out of a breach of their fiduciary duty to the testator (not to put themselves in a position of conflict of interest and duty). Millett LJ held that such an exemption clause did not confer a benefit on the trustees but simply defined the extent of their liability. In so far as a benefit was conferred, it was a benefit which could be enjoyed by any person assuming the role of trustee in relation to the trust and was not exclusive to those who had participated in the preparation of the testator's will.^[64]
2.51      This aspect of Bogg v Rape has been criticised on the ground that the solicitor did obtain a benefit in saving the expense of insurance premiums which would otherwise have been payable to protect him from liability.^[65]

The fraud exclusion

2.52      Although Armitage v Nurse gives considerable latitude to the use of trustee exemption clauses, the line is drawn at actual fraud, on the basis that to permit a trustee to act dishonestly would be to derogate from the "irreducible core of obligations" of honesty and good faith. A trust instrument which allowed the trustee to act fraudulently without giving the beneficiaries any recourse would fail as a trust.^[66]
2.53      Further consideration of the meaning of 'fraud' was given in Walker v Stones.^[67] Where a solicitor- trustee honestly believed that he was acting in the best interests of the trust, his actions could nevertheless be held to be fraudulent if no reasonable solicitor- trustee would have thought that what was done was for the benefit of the beneficiaries. In such circumstances the trustee would not be protected by a trustee exemption clause.^[68] It may be that the courts will extend this stricter approach to the effect of trustee exemption clauses to other paid professional trustees. Permission to appeal the decision in Walker v Stones to the House of Lords has been given.

The effect of Armitage v Nurse

2.54      It must be admitted that the authority of Armitage v Nurse (as a decision of the Court of Appeal not the House of Lords) is not entirely free from doubt. The view taken of the nineteenth century Scottish cases does not accord with the understanding of these decisions north of the border, where it is generally believed that trustees cannot invoke an exemption clause to escape liability for gross negligence, or, as it is there termed, culpa lata.^[69] While there is no reason why the English and Scottish law should be identical in this respect, the reliance placed by Millett LJ on the Scottish cases was clearly an important part of his reasoning, and should that reliance be shown to have been misplaced, the authority of the decision may thereby be called into question.
2.55      The English Court of Appeal was influenced by the decision of the Jersey Court of Appeal in Midland Bank Trustee (Jersey) Ltd v Federated Pension Services Ltd, where Sir Godfray Le Quesne QC, having considered the Scottish authorities, adopted a construction approach to trustee exemption clauses. This was not necessary for the decision in the case, as Jersey's legislative regulation of such clauses operated to deny the trustees recourse to the clause.

The scope of trustee exemption clauses under English statutes

2.56      There are no current statutory provisions which are directed specifically at all kinds of trustee exemption clause.

The Unfair Contract Terms Act 1977

2.57      The Unfair Contract Terms Act 1977 restricts the extent to which civil liability for breach of contract, negligence or other breach of duty can be avoided by means of contract terms. The Act prevents a person from excluding or restricting his liability for negligence "by reference to any contract term or to a notice", unless the term or notice "satisfies the requirement of reasonableness".^[70]
2.58      The reasonableness test differs according to whether the term is a contract term or a notice which has no contractual effect:

(1) Where it is a contract term, it must have been "a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made".^[71]

(2) Where it is a notice, the question is whether "it should be fair and reasonable to allow reliance on it, having regard to all the circumstances obtaining when the liability arose or (but for the notice) would have arisen".^[72]

2.59      Schedule 2 to the 1977 Act sets out "guidelines" to which regard must be had where the reasonableness test is applied to certain contracts.^[73] These include the relative strengths of the parties' bargaining positions, any inducement made to the customer to agree to the term and the extent of the customer's knowledge of the term.
2.60      It seems that a trustee exemption clause is not a contract because it is extremely unlikely that an English court would consider a trust instrument containing a trustee exemption clause to be a "contract". The appointment of the trustees is consensual, the trust instrument a form of contract under seal. But while it must be conceded that there are some similarities between a contract and a trust, the contract derives its enforceability from the vital factors of agreement and consideration, whereas the trust is based firmly on the grant of property. Although the terms of the trust may in certain circumstances be negotiated and agreed between the settlor and the trustees, and the trustees may be remunerated for the services which they provide, these are not necessary components of the trust relationship.
2.61      Moreover, the trust has a proprietary impact which transcends the ordinary principles of contract law. This can indeed be exemplified by reference to the trustee exemption clause which is intended to benefit not only those persons who assume the obligation of trusteeship immediately following execution of the trust, but also their successors.
2.62      While there may be a stronger argument that a trustee exemption clause is a form of "notice", this may also be somewhat speculative in that it would seem that "notice" within the 1977 Act is primarily intended to cover attempts to exclude liability by reference to a sign outside the confines of a formal legal document.
2.63      Another difficulty for those seeking to invite the court to strike down trustee exemption clauses by reference to the 1977 Act is the nature of the liability which is being asserted. The Act controls the use of contract terms or notices which seek to exclude liability for negligence, as defined in the Act. While this includes, by section 1(1)(b) of the Act, "any common law duty to take reasonable care or exercise reasonable skill", it is not by any means clear that these words cover breach of trust. The duty of which the trustee is in breach is not a common law duty, but an equitable duty. Although in recent cases there has been some judicial acknowledgement of concurrent liability for negligence in tort and equity,^[74] this line of argument has never been taken in any of the recent cases on trustee exemption clauses. This may be attributed to the traditional position in English law that equitable wrongdoing should not be assimilated to the law of tort.
2.64      The Unfair Terms in Consumer Contracts Directive 1993/13 of the European Economic Community implemented by the Unfair Terms in Consumer Contracts Regulations 1994^[75] strikes down any unfair terms in consumer contracts of sale and supply of services. While it has been suggested^[76] that the European Court might take an autonomous view of the meaning of "contract" such as to include some trust relationships, we consider that this is but a remote possibility.

Specific statutory controls

2.65      There are three sets of statutory provisions, dealing respectively with companies, financial services and pensions, which may have an impact on certain types of trustee exemption clause.
2.66      Two provisions of the Companies Act 1985 have the effect of restricting the use of trustee exemption clauses. Any provision contained in a trust deed for securing an issue of debentures (or in any contract with debenture holders secured by a trust deed) is void in so far as it would have the effect of exempting a trustee from (or indemnifying him against) liability for breach of trust where he fails to show the degree of care and diligence required of him as trustee.^[77] Any provision contained in a company's articles or in any contract with the company or otherwise for exempting any officer or person employed as auditor from (or indemnifying him against) liability in respect of inter alia breach of trust in relation to the company is void.^[78]
2.67      Financial services legislation has since 1986 rendered void any provision of a trust deed of an authorised unit trust scheme in so far as it would have the effect of exempting the manager or trustee from liability for failure to exercise due care and diligence in the discharge of his functions in respect of the scheme.^[79]
2.68      Liability for breach of any obligation (under any rule of law) to take care or exercise skill in the performance of any investment functions, where the function is exercisable by a trustee of a pension trust scheme or by a person to whom the function has been delegated, cannot be excluded or restricted by any instrument or agreement.^[80]

Trustee exemption clauses in charitable trusts

2.69      It is becoming increasingly common for modern charitable trust instruments to contain an exemption clause exempting trustees from liability for wilful default or gross negligence, or an indemnity clause providing that the trustees are to be indemnified from the trust assets against personal liability for breach of trust. The general law relating to the scope and validity of exemption clauses applies equally to charitable trusts, and therefore an exemption clause similar to that upheld in Armitage v Nurse^[81] could in principle be included in the governing instrument of a charity.^[82]
2.70      There are however considerations which have specific relevance to charities arising from the different range of powers enjoyed, and duties owed, by charitable trustees, and the role of the Charity Commission in policing the charities sector. We shall discuss these considerations prior to examining the impact of trustee exemption clauses in relation to charitable trustees.
2.71      The powers of charity trustees are to be found in their trust instrument, the general trust law and statutes, notably the Trustee Acts of 1925 and 2000. However, the exercise of some of these powers (such as the power to deal with land, and to amalgamate or alter the trust) are strictly circumscribed by the Charities Acts of 1992 and 1993. The duties of charity trustees are more or less the same as trustees of private non-charitable funds.^[83] The primary duty of a trustee of a charitable fund, as with other trustees, is to carry out the trust in accordance with the terms of its governing instrument. Charitable trustees must act in the best interests of the fund and ensure that the assets are applied exclusively for its charitable purposes. However, trustees of charitable funds have additional duties and administrative controls imposed by the Charities Acts of 1992 and 1993, such as the duty to apply for registration as a charity,^[84] to prepare and submit annual returns to the Charity Commission,^[85] to retain accounting records for at least six years^[86] and generally to comply with the rules for the preparation of annual accounts and their submission to the Charity Commission.
2.72      The liabilities of charitable trustees differ in some respects from those of trustees of private funds as a relatively lenient approach may be taken. In the words of Lord Eldon LC:

With respect to the general principle on which the court deals with the trustees of a charity, though it holds a strict hand over them when there is wilful misapplication, it will not press severely upon them, where it sees nothing but mistake...If the administration of the funds, though mistaken, has been honest, and unconnected with any corrupt purpose, the Court, while it directs for the future, refuses to visit with punishment what has been done in time past. To act on any other principle would be to deter all prudent persons from becoming trustees of charities.^[87]

Consequently, slight irregularities will not attract punishment where there exists no corrupt motive.^[88] The scope of trustees' liability is effectively reduced to actions or omissions falling somewhere between those which can be excused as honest and reasonable mistakes^[89] and those omissions which amount to deliberate or reckless breaches of trust.^[90] In the absence of evidence to the contrary it is presumed that charitable trustees have faithfully discharged their duty.^[91]

2.73      Notwithstanding the more lenient treatment by the court of charity trustees, so that historically they have rarely been called upon personally to restore losses to the trust fund, in recent years the actions of charity trustees have become more vulnerable to legal challenge. One commentator from the charity sector^[92] has observed that there has been a considerable number of claim notifications (to insurers) resulting from a variety of circumstances such as:

(1) corporate donors asking for their donations back when a charity ceased to operate due to financial difficulties;

(2) an ex- member of a charity alleging that actions of certain trustees had been responsible for the failure of his business; and

(3) the Charity Commission requiring the trustees personally to reimburse the charity for a considerable sum, as they had allowed the charity to undertake an action which the Charity Commission considered was outside the objects of the charity so that the trustees were in breach of trust.

In such cases the assets of the charity could not be used to reduce the liability of the trustees.

2.74      Although the possibility of charity trustees being held personally to account following a breach of trust is relatively remote, any prospect of such liability being incurred is of great concern to charity trustees, and is claimed to comprise a major discouragement to assuming the office of trusteeship in relation to a charity.^[93] The risk of personal liability for a charitable trustee varies not only according to the kind of charitable activity but also according to the type of the charitable structure, namely whether the individual is a trustee of a charitable trust, a director of a charitable company or a manager of an unincorporated association.

Incorporated charities

2.75      Many charities are established as limited companies. These may take one of two forms: those limited by guarantee or those limited by shares, the first being far more prevalent than the second. One of the principal reasons for establishing a charity as a company is that it is considered to give protection to those running the charity from personal liability to creditors and other third parties. Nonetheless the duties which are imposed on such persons as trustees by the general law and by the Charities Acts are fully binding and unaffected by any limited liability which that incorporation may otherwise incur.^[94]
2.76      The choice between a limited company or trust structure is largely dependent on the function of the charity, a consideration of the required levels of flexibility^[95] and the applicable formality requirements.^[96] In general, a company limited by guarantee is the most effective machinery for a large "functional" national charity which owns property, whereas a trust is far more appropriate for a charity whose main activity is the making of grants, where the trustees have an endowment fund the capital of which they invest, distributing the income in accordance with the requirements of the trust.
2.77      Section 310 of the Companies Act 1985 has particular significance in relation to trustees of an incorporated charity. It renders ineffective any provision contained in the company's articles or in any contract with the company or otherwise for exempting, among other things, any officer of the company from, or indemnifying him against, any liability which by virtue of any rule of law would otherwise attach to him in respect of any negligence, default, breach of duty, or breach of trust of which he may be guilty in relation to the company.
2.78      One effect of section 310 is to create an inequality between those charities which are incorporated and those which are not. In the latter case, trustee exemption clauses are only constrained by the requirements of good faith and honesty expounded by Millett LJ in Armitage v Nurse.^[97] This inequality is tempered by the fact that companies are able to purchase indemnity insurance against loss occasioned by a director's negligence, default, breach of duty or breach of trust.^[98]
2.79      The effect of the different legal rules does not appear to be based on any rational policy choice, as trustee exemption clauses do not affect relationships external to the trust. The way in which a particular charity is constituted should not matter when it comes to defining the capacity of the founder to modify the normal standards of care applicable to the administration of the charity.

Control by the Charity Commission

2.80      The Charity Commission adopts a rigorous approach to trustee exemption clauses. In its 1989 Report, it stated that any attempt to limit the liability of trustees in receipt of remuneration would be scrutinised very closely on the basis that such clauses would in effect permit the application of charitable funds for non-charitable purposes.^[99] Any reduction in the standard of care to be expected of a trustee would therefore be antithetical to the purposes of charity.
2.81      It is therefore open to argument that a clause in a charitable trust which satisfies the general Armitage v Nurse criteria might nevertheless fail as being incompatible with the requirement of exclusively charitable purposes because of the private benefit which it confers on trustees. However, such argument may fail if the court were to adopt the approach of Millett LJ in Bogg v Raper,^[100] that they are to be considered not as conferring a benefit on the trustees, but merely as laying down the extent of their potential liability.
2.82      It is understood from the Charity Commission that a wide "duty exclusion" clause of the type considered in Hayim v Citibank NA,^[101] is rarely encountered in practice, although the duty to have regard to the need for diversification of investments is sometimes excluded. More common are clauses which prescribe a lower standard of care for charity trustees than that which would otherwise be applied by the general law. There is no decided case which considers the compatibility of such clauses with the principle that a charity has to be established for exclusively charitable purposes, nor have the Charity Commissioners explicitly considered the point.
2.83      Prior to 1991, the Charity Commission was reluctant to authorise charity trustees to purchase indemnity insurance out of the funds of the charity, as it was perceived that this would benefit the trustees and not the trust fund. However, the Commission's policy has now changed, and an order under section 26 of the Charities Act 1993 is now often granted for this purpose.^[102]
2.84      The pro forma section 26 order authorising the purchase of indemnity insurance is expressed as follows:

(1) Being satisfied that it is expedient in the interests of the charity that the trustees should do so, the Commissioners authorise the trustees to provide indemnity insurance for themselves out of the funds of the charity.

(2) The Commissioners direct that the insurance must not extend to

(a) any claim arising from any act or omission which:

(i) the trustees knew to be a breach of trust or breach of duty; or

(ii) was committed by the trustees in reckless disregard of whether or not it was a breach of trust or breach of duty; and

(b) the costs of an unsuccessful defence to a criminal prosecution brought against the trustees in their capacity as trustees of the charity.

2.85      Under section 29 of the Charities Act 1993, charity trustees may apply in writing to the Charity Commissioners for advice on any matters affecting their duties. If the trustees act in accordance with the advice given they will be protected from claims for breach of trust. The section is helpful where the trustees are unclear as to whether their proposed course of action is within the terms of their trust instrument.

Conclusion

2.86      Control of trustees is crucial to ensure that the purposes of the trust are properly carried out, and therefore trust law and statute impose wide ranging liability on trustees for breach of trust. Despite the fact that the court adopts a more lenient approach to charity trustees compared with ordinary trustees, it remains possible for charity trustees to be personally liable for an unlimited amount.
2.87      The protection of an exemption clause or the availability of trustee liability insurance has therefore increasingly become a pre- requisite to the acceptance of the trusteeship of a charitable trust. The Charity Commission has seen the undesirability of extensive use of exemption clauses in charitable trusts, and has sought to prevent their expansion. It has at the same time imaginatively presented incentives to those considering whether to assume trusteeship by changing its policy so as to facilitate the purchase of indemnity insurance.
2.88      Regulation of trustee exemption clauses would not therefore have as significant an impact on the charities sector as in relation to private trusts. If regulation were to be restricted to professional trustees,^[103] its impact on charity trustees would be further restricted as the majority of charity trustees are not remunerated.

Summary

2.89      Unless or until the efficacy of trustee exemption clauses is argued before the House of Lords, the current English law is to be found in the judgment of Millett LJ in Armitage v Nurse. A trustee exemption clause may exempt a trustee from liability for all acts, omissions or breaches of trust save where the trustee has committed actual fraud. It is therefore possible for a settlor to create an effective trust which does not impose on the trustee a duty to take reasonable care. Even gross negligence on the part of the trustee may not result in legal liability in the event of a widely drawn exemption clause. Only if the instrument seeks to free the trustees from the core obligations of honesty and good faith will it fail as a trust.
2.90      Although Scots law may appear to adopt a similar position, its recognition of the civil law maxim culpa lata dolo quiparatur means that liability for gross negligence, being treated as equivalent to fraud, cannot be effectively excluded by provision in the trust instrument.^[104] The Scots law is therefore stricter in its control of trustee exemption clauses.
2.91      Some jurisdictions have already enacted legislation to restrict the invocation of trustee exemption clauses. Most notably, the Jersey trusts law has provided, since 1989, that the terms of a trust cannot relieve, release or exonerate a trustee from liability arising from his own fraud, wilful misconduct or gross negligence. This position, which applies irrespective of whether the trustee is a professional or lay trustee, has been replicated in Guernsey.^[105] The current position, therefore, is that the trust law of England and Wales accords greater latitude to its trustees, and hence confers more restricted rights on its beneficiaries, than those jurisdictions which are often considered the most attractive in which to establish trusts.^[106]
2.92      The remainder of this Paper will consider the case for reform of the law of England and Wales. In Part III, we shall consider the economic implications of introducing statutory regulation of trustee exemption clauses. In Part IV, we shall consider whether reform is necessary or desirable, and we shall set out the various options for reform.

Note 1   For an example, see Seton v Dawson (1841) 4 D 310, considered below at para 2.23.    [Back]

Note 2   See, for instance, the clause in Armitage v Nurse [1998] Ch 241, considered below at para 2.42et seq.    [Back]

Note 3   Underhill & Hayton, Law Relating to Trusts and Trustees (15th ed 1995) p 3.    [Back]

Note 4   In Re Vickery [1931] 1 Ch 572, it was held that wilful default connotes a deliberate breach of trust. To be guilty of wilful default the trustee must be conscious that, in doing the act complained of or in omitting to do the act which it is said he ought to have done, he is committing a breach of his duty, or is recklessly careless whether it is a breach of his duty or not.     [Back]

Note 5   See, for example, the clause in Wilkins v Hogg (1861) 31 LJ Ch 41. The testator declared “that such trustee shall be answerable only for losses arising from his own defaults, and not for involuntary acts, or for the acts or defaults of his co-trustees or trustee, and, particularly, that any trustee who shall pay over to his co-trustee, or shall do or concur in any act enabling his co-trustee to receive any monies for the general purposes of my will, or for any definite purpose authorized by my will, shall not be obliged to see to the due application thereof, nor shall such trustee be subsequently rendered responsible by an express notice or intimation of the actual misapplication of the same monies; but this clause shall not restrict the power of any trustee to require from his co-trustee an account of the application of monies in his hands, or to insist on his replacing monies misapplied by him”. See also the somewhat unusual clause in Hayim v Citibank NA [1987] AC 730 where the testator’s will provided (in relation to a property situated in Hong Kong) that his American trustee “...shall have no responsibility or duty with respect to such property...and [the] executor’s and trustee’s only duty and responsibility with respect thereto shall arise upon its receipt of the proceeds of said residence...”.    [Back]

Note 6   See, for example, the clause in Bartlett v Barclays Bank Trust Co Ltd (Nos 1 & 2) [1980] Ch 515 entitling the trustee to “act in relation to the Bartlett Trust Ltd or any other company and the shares securities and properties thereof in such way as it shall think best calculated to benefit the trust premises and as if it was the absolute owner of such shares, securities and property.”    [Back]

Note 7   See D Hayton, “The Irreducible Core Content of Trusteeship” in A J Oakley (ed), Trends in Contemporary Trust Law (1996) p 47.    [Back]

Note 8   [1998] Ch 241, 253.    [Back]

Note 9   Ibid.    [Back]

Note 10   R Chambers, “Liability” in P Birks & A Pretto (eds), Breach of Trust (2002) p 1.    [Back]

Note 11   [1998] Ch 241, 251.    [Back]

Note 12   Re Second East Dulwich (1899) 68 LJ Ch 196.    [Back]

Note 13   Bray v Ford [1896] AC 44.    [Back]

Note 14   Keech v Sandford (1726) 2 Eq Cas Abr 741.    [Back]

Note 15   Boardman v Phipps [1967] 2 AC 46.    [Back]

Note 16   Bartlett v Barclays Bank Trust Co Ltd (Nos 1 & 2) [1980] Ch 515. For the statutory duty of care, see Trustee Act 2000, s 1.    [Back]

Note 17   Lewin on Trusts (17th ed 2000) para 34- 01.    [Back]

Note 18   For the cases where the statutory duty applies, see Trustee Act 2000, s 2, Sched 1; Lewin on Trusts (17th ed 2000) para 34- 01F.    [Back]

Note 19   Speight v Gaunt (1883) 22 Ch D 727.    [Back]

Note 20   Lewin on Trusts (17 ed 2000) para 34- 01A.    [Back]

Note 21   Re Whiteley (1886) 33 Ch D 347, 355, per Lindley LJ.    [Back]

Note 22   Bartlett v Barclays Bank Trust Co Ltd (Nos 1 & 2) [1980] Ch 515, 534, per Brightman J.    [Back]

Note 23   R Ham QC, “Trustees’ Liability” (1995) 9 TLI 21, 21.    [Back]

Note 24   Caffrey v Darby (1801) 6 Ves 488; Target Holdings Ltd v Redferns [1996] AC 421. R Chambers, “Liability” in P Birks & A Pretto, Breach of Trust (2002) pp 1- 40.    [Back]

Note 25   Bartlett v Barclays Bank Trust Co Ltd (Nos 1 & 2) [1980] Ch 515, 545 per Brightman LJ; Target Holdings Ltd v Redferns [1996] AC 421, 434, per Lord Browne-Wilkinson.    [Back]

Note 26   (1801) 6 Ves 488, where trustees were charged with neglect in failing to recover possession of part of the trust asset. The asset was lost and it was argued by the trustee that the loss was not attributable to their neglect.    [Back]

Note 27   Ibid, at p 495.    [Back]

Note 28   This is a term of convenience, referring to the older series of decisions culminating in Clarke v Clarke’s Trustees [1925] SC 693.    [Back]

Note 29   [1998] Ch 241.    [Back]

Note 30   See A Kenny, “Living up to Expectations” (1996) 146 NLJ 348, 349; P Matthews, “The Efficacy of Trustee Exemption Clauses in English Law” [1989] Conv 42; Hanbury & Martin Modern Equity (14th ed 1993) pp 473- 474; Underhill and Hayton, Law of Trusts and Trustees (14th ed 1987) p 792.    [Back]

Note 31   (1861) 31 LJ Ch 41.    [Back]

Note 32   (1880) 43 LT 665.    [Back]

Note 33   (1841) 4 D 310.    [Back]

Note 34   Ibid, at p 316.    [Back]

Note 35   (1888) 13 App Cas 753.    [Back]

Note 36   Ibid, at p 765.    [Back]

Note 37   (1889) 14 App Cas 558.    [Back]

Note 38   Carruthers v Carruthers [1896] AC 659; Wyman v Paterson [1900] AC 271; Clarke v Clarke’s Trustees [1925] SC 693.     [Back]

Note 39   (1861) 31 LJ Ch 41.    [Back]

Note 40   Ibid, at p 43.    [Back]

Note 41   (1880) 43 LT 665.    [Back]

Note 42   (1861) 31 LJ Ch 41.    [Back]

Note 43   See in particular P Matthews, “The Efficacy of Trustee Exemption Clauses in English Law” [1989] Conv 42.    [Back]

Note 44   This point is noted by Sir Godfray Le Quesne QC in Midland Bank Trustee (Jersey) Ltd v Federated Pension Services Ltd [1996] PLR 179, 193.    [Back]

Note 45   [1996] PLR 179.    [Back]

Note 46   Armitage v Nurse [1998] Ch 241, 254, per Millett LJ.    [Back]

Note 47   [1996] PLR 179, 196.    [Back]

Note 48   [1996] PLR 179.    [Back]

Note 49   Added by Trusts (Amendment)(Jersey) Law 1989, Article 5.    [Back]

Note 50   [1998] Ch 241.    [Back]

Note 51   Thus there could be no suggestion of impropriety. The principal beneficiary was legally represented and the settlement containing the trustee exemption clause was sanctioned by a judge of the High Court.    [Back]

Note 52   [1998] Ch 241, 251.    [Back]

Note 53   Nocton v Lord Ashburton [1914] AC 932, 953, per Viscount Haldane LC.    [Back]

Note 54   [1998] Ch 241, 250.    [Back]

Note 55   [1998] Ch 241, 251.    [Back]

Note 56   (1861) 31 LJ Ch 41.    [Back]

Note 57   (1880) 43 LT 665.     [Back]

Note 58   [1998] Ch 241, 256.    [Back]

Note 59   Bogg v Raper (1998/99) 1 ITELR 267, 281.    [Back]

Note 60   Midland Bank Trustee (Jersey) Ltd v Federated Pension Services Ltd [1996] PLR 179, 192; Armitage v Nurse [1998] Ch 241, 255; Bogg v Raper (1998/99) 1 ITELR 267, 280; and Wight v Olswang (No 2) (1999/2000) 2 ITELR 689.     [Back]

Note 61   Bogg v Raper (1998/99) 1 ITELR 267, 281. See also the discussion of this issue by the Jersey Court of Appeal in Midland Bank Trustee (Jersey) Ltd v Federated Pension Services Ltd [1996] PLR 179, 192.    [Back]

Note 62   (1999/2000) 2 ITELR 689.    [Back]

Note 63   (1998/99) 1 ITELR 267.    [Back]

Note 64   Ibid, at p 285. It would have been open to the claimant to have challenged probate on the basis that the testator did not “know and approve” of the contents of the will, thereby putting the solicitor to proof that advantage had not been taken of their position of influence:ibid; and Wintle v Nye [1959] 1 WLR 284.    [Back]

Note 65   Hayton & Marshall, The Law of Trusts and Equitable Remedies (11th ed 2001) para 9- 311. See also cases cited at para 9- 310: Baskerville v Thurgood (1992) 100 Sask LR 214; and Rutanen v Ballard (1997) 424 Mass 723, 733.    [Back]

Note 66   See further paras 2.9 and 2.42 above.    [Back]

Note 67   [2001] QB 902.    [Back]

Note 68   Armitage v Nurse [1998] Ch 241.    [Back]

Note 69   Lutea Trustees Ltd v Orbis Trustees Guernsey Ltd 1998 SLT 471.    [Back]

Note 70   1977 Act, ss 2(2), 3(2), 4(1), 6(3), 7(3), 7(4).    [Back]

Note 71   1977 Act, s 11(1). See further s 24(1).    [Back]

Note 72   1977 Act, s 11(3). See further s 24(2A).    [Back]

Note 73   Those contracts governed by ss 6(3) and 7(3) only: see s 11(2).    [Back]

Note 74   Henderson v Merrett Syndicates Ltd [1995] 2 AC 145; and Bristol and West Building Society v Mothew [1996] 4 All ER 698.    [Back]

Note 75   Now revoked and replaced by the Unfair Terms in Consumer Contracts Regulations 1999.    [Back]

Note 76   Chitty on Contracts (28th ed 1999) para 15- 020.    [Back]

Note 77   Companies Act 1985, s 192(1). Regard is to be had to the provisions of the trust deed conferring on the trustee any powers, authorities or discretions.    [Back]

Note 78   Companies Act 1985, s 310. For exceptions, see s 310(3).    [Back]

Note 79   Financial Services and Markets Act 2000, s 253, replacing the almost identical s 84 of the Financial Services Act 1986.    [Back]

Note 80   Pensions Act 1995, s 33(1).    [Back]

Note 81   [1998] Ch 241.The clause in this private trust, which was held to be valid by the Court of Appeal, exempted the trustee from liability for loss or damage to the trust fund or its income from any cause whatsoever unless such loss or damage shall be caused by his own actual fraud.     [Back]

Note 82   An example of the type of exclusion clause used in charitable trust deeds can be found in Butterworth’s Encyclopaedia of Forms & Precedent (5th ed 2001 Reissue) vol 6(2), p 115: In the execution of the trusts and powers of this Deed no Trustee shall be liable for any loss to the Charity arising by reason of any improper investment made in good faith (so long as he shall have sought professional advice before making such investment) or any mistake or omission made in good faith by him or any other Trustee or any other matter other than wilful default and individual fraud wrongdoing omission on the part of the Trustee who is sought to be made liable.    [Back]

Note 83   See Tudor on Charities (8th ed 1995) p 244.    [Back]

Note 84   Charities Act 1993, s 3(7).    [Back]

Note 85   Charities Act 1993, s 48.    [Back]

Note 86   Charities Act 1993, s 41(3). This does not apply to exempt charities, on which see Charities Act 1993, s 46.    [Back]

Note 87   A-G v Exeter Corporation [1826] 2 Russ 45, 54.    [Back]

Note 88   A-G v Joliffe (1822) 2 Coop Temp Cott 229.    [Back]

Note 89   See Benett v Wyndham (1862) 4 De GF & J 259 and Re Raybould [1900] 1 Ch 199, where it was held that the trustees were entitled to be indemnified from the charitable funds for loss resulting from their actions which were found to be diligent and reasonable.    [Back]

Note 90   See A-G Brandreth (1842) 1 Y & C Ch cas 200; and Re St John the Evangelist; D’Aungre’s Charity (1888) 59 LT 617 where the trustees diverted funds intended for a charitable object to another and were held liable to reimburse the trust fund.     [Back]

Note 91   A-G v Earl of Stamford (1843) 1 Ph 737, per Lord Cottenham LC.    [Back]

Note 92   Roger Jenkinson, director of Stuart Alexander St Olaf and risk manager of the NSPCC.    [Back]

Note 93   See C Cornforth, Recent Trends in Charity Governance and Trusteeship (2001) p 9.    [Back]

Note 94   In Re The French Protestant Hospital [1951] Ch 567, 571, Danckwerts J said: ...[directors] who are already in the same position of trustees, and therefore so far as they exercise their powers at all, bound to exercise them in a fiduciary manner on behalf of the charitable trusts for which they act... .    [Back]

Note 95   The Memorandum and Articles of Association of a company are far more flexible than the terms and provisions of a Trust Deed. Frequently in a charitable company the members will be the same as the directors. However there are possibilities within the format of a company’s Memorandum and Articles of Association for structuring the powers rights and obligations of these two groups and their relationship to one another that are not available to a trust.    [Back]

Note 96   There are seven different formalities required of a charitable company as opposed to only two which apply to an unincorporated charity.    [Back]

Note 97   Leaving aside the exclusively charitable considerations.    [Back]

Note 98   Companies Act 1985, s 310(3).    [Back]

Note 99   [1989] Ch Com Rep 25, para 90.    [Back]

Note 100   (1998/99) 1 ITELR 267.    [Back]

Note 101   [1987] 1 AC 730.     [Back]

Note 102   This provision confers power on the Charity Commissioners to authorise any transaction (subject to certain limitations) whether or not it is within the terms of the trust if they consider it to be expedient in the interests of the charity. Charity trustees who act in accordance with such an order will be deemed to have acted properly and within the scope of their powers. In 1995, 324 orders to this effect were made.    [Back]

Note 103   For the distinction between professional and lay trustees, see paras 4.33 to 4.39 below.    [Back]

Note 104   Lutea Trustees Ltd v Orbis Trustees Guernsey Ltd 1998 SLT 471.    [Back]

Note 105   See further para 4.56 below,et seq.    [Back]

Note 106   Legislation has also been enacted in Belize, the Turks and Caicos Islands, and various states in the USA, most notably New York. Legislation has been proposed in Ontario (albeit in 1984) and, very recently, New Zealand and British Columbia (both in 2002): see further paras 4.54 and 4.58 respectively below.    [Back]