Scottish Court of Session Decisions

George Penrose Kennedy, an architect in Glasgow, married Sophia Henderson Steele in 1858. By an antenuptial contract of marriage Miss Steele conveyed and made over to herself and husband in conjunct liferent during the subsistence of the marriage, and in liferent to the survivor, all the property which should be acquired by her during the marriage, and further, the spouses conveyed to the children of the marriage the fee of the said property. This contract of marriage contained a declaration that execution might pass thereon at the instance of certain trustees, including Robert Douie, John Eugene Kennedy, and George Fyffe Christie. The property was not conveyed to these trustees. On the death of her father Mrs Kennedy became entitled to certain property. She invested £1500 in a bond and disposition in security granted in her favour over subjects in Rutherglen by William Dalgleish & Sons, and interest on this sum was regularly paid to her during her lifetime upon her receipt. She died in 1869 leaving four children, all of whom were in pupillarity, and her husband continued to receive interest on the £1500 on his own receipt. Mr G. P. Kennedy was desirous that the sum contained in the bond should be administered by trustees for behoof of his children, and it was thought proper that the. gentlemen named in the contract of marriage should assume the administration of Mrs Kennedy's property portion with the view of protecting it against the consequences of any business misfortune which might befall Mr G. P. Kennedy. Mr John E. Kennedy, his brother, and who resided and carried on business as a land-agent in Lon don, was asked, but was unwilling to accept the trust, on the ground that his non-residence in Glasgow was a practical disqualification for the performance of his duties, but at his brother's request he was induced to accept, on the understanding that he only undertook to give such assistance as could be given through correspondence, The other trustees were Mr Robert Douie, who was a relative of Mrs Kennedy, his two sons (who never acted), and Mr Christie. The legal business of the trust was left to the care of Mr Robert Douie, who was a practising writer in Glasgow, and who undertook the business gratuitously. A writ of acknowledgment was executed by the borrowers of the £1500, by which they acknowledged these gentlemen as trustees for behoof of the children, the trustees also subscribing a minute of acceptance of the trust. The loan having been repaid the trustees endeavoured to obtain an investment for the £1500, and did so on the 19th May 1875 on a bond and disposition in security over certain subjects, granted by Peter Jardine Hamilton. The latter on 15th February 1877 repaid to the trustees a sum of £600, and on 15th August following, in consideration of the sum of £900, then paid to them by Simpson, Kirk, & Donaldson, writers in Glasgow, the trustees executed an assignation whereby they disponed to the partners of that firm the bond by Hamilton, but only to the extent of £900. A correspondence now ensued with reference to the investment of the funds. Mr George Kennedy and Mr Christie wished to know how the £600 had been invested by Mr Douie as the agent, and having some difficulty about asking Douie themselves, they got Mr John E. Kennedy to write on the subject to him. He on receipt of the letter seemed to have thought that Mr John E. Kennedy was showing an excess of zeal, but at the same time answered the letter fully. This letter was misdirected, and did not reach its destination till some time after. Then followed a somewhat angry correspondence between Mr Douie and Mr John E. Kennedy, but eventually matters were amicably arranged, and these gentlemen agreed to continue acting together as trustees. Mr Douie had previously, by letter dated on 9th February 1877, informed Mr John E. Kennedy that £600 of the trust-money was arranged to be lent on a second bond over property having such a margin of value which he considered a good security, and in the last letter (1st March 1877) of this correspondence which took place at this period Mr John E. Kennedy wrote to Mr Douie as follows—“I understand from your letter of yesterday that you are willing to remain a trustee with myself and Mr Christie on behalf of my brother George and his children by his former wife. I should wish to make one or two observations about this trusteeship. In the first place, I think we should only take the best security—that is to say, what you allude to as a first bond. If we cannot get 5 per cent., then we must take

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4 1 2 or even 4 per cent., which is a very fair rate of interest for trust-money. Next, if the money is lent on house property, my brother George should be asked to look at it and approve of the money being lent on it. And again I must protest against your taking offence at my asking questions relative to this trusteeship, or thinking that I mean a personal affront to you. It adds to your trouble, it is true; at the same time, it divides your responsibility. And lastly, you call me a stranger. Surely I am nearer related to my brother George and his children than you are, and having children of your own he could never look to you if he incurred further losses, as he would naturally do to his own relations. It is true that I have done nothing for him, but I have known that he has always had enough to supply his necessities, and his father ready to his hand. Having said this much, I may add that I am willing to continue a trustee.” This letter was not answered.

About the same time when this correspondence was going on—the spring of 1877—Mr G. P. Kennedy had expressed a wish himself to become a trustee. Mr John E. Kennedy, however, was averse to the proposal and it was not carried out.

On 13th August 1877 Mr Douie wrote to Mr J. E. Kennedy a letter, in which he said—“I have the pleasure of sending to you herewith enclosed assignation, subscribed by Mr Christie and myself, of the balance of bond for £1500, being £900, to be granted by us in favour of Messrs Simpson, Kirk, & Donaldson, of this city. This assignation will be delivered by us in exchange for the money, and is in lieu of a discharge…. For the £1500 I have been offered a satisfactory investment to yield 5 per cent. on a good and high class property in Roselea Drive, Dennistoun, Glasgow, which I have explained to your brother George, but will take him to see the property, and be guided by him before laying matters finally before you. The rental of the property, after providing interest and feu-duty (on a first bond), will give a gross remainder of £350 yearly.” On 15 th August 1877 Mr J. E. Kennedy replied—“Your letter of the 13th inst. has been forwarded to me here, with the assignation in favour of Simpson, Kirk, & Donaldson, p. £900, which I have now signed before two witnesses, and return herewith. If my brother George approves of the investment you propose, and Mr Christie, I will sign also.”

On 23d August Mr Douie wrote—“I duly received your favour, returning assignation subscribed by you. With regard to relending of the £1500, I shall be guided by your brother and Mr Christie's advice. Personally, I think the security a high class one. Your brother inspected the property along with me, and we were both much pleased with it as an eligible security.”

On 30th August Mr J. E. Kennedy wrote to his brother G. P. Kennedy—“I had a letter from Mr Douie a little time ago about the payment of £600, the balance of amount due upon mortgage bond, and about re-investing the £1500 now in hand upon other property. I have agreed to do so, provided you and Mr Christie approve, and Mr Douie tells me that you have already seen and approve of the security.” To this Mr Kennedy replied on 2d October—-“I have seen the property at Roselea, Dennistoun, just out of Glasgow, a suburb, where the bond for the £1500 is placed.”

Thereupon, on 27th September 1877, the £1500 was lent to Thomas Mitchell Henderson who granted a bond and disposition in security over the subjects at Roselea Drive. On the 15th November 1879 Henderson became bankrupt, and interest ceased to be paid. Before making the loan Mr Douie had never consulted Mr Christie at all, as Mr John E. Kennedy had stipulated for. He (John E. Kennedy) had not made further inquiry as to whether Christie approved. He did not know that he had not been consulted till the next year (1878). He came to know in January 1879 that Christie and his brother (G. P. Kennedy) were very anxious to see the bond. They could not get it from Douie till March 1879.

It was then ascertained that Mr Douie's representations were untrue. The security was not a second bond, but a fourth or fifth bond. There was no surplus rental of £350, the property was unlet, and the estimated rental was not a just or reasonable estimate. There was therefore no margin of rental on which the trustees could rely for payment of interest. The property was not of the class which Mr Douie's description indicated, and Mr Douie concealed the fact that the owner of the subjects was a client of his own with whom he had arranged to take up the property as a speculation.

Douie became bankrupt in 1879. He died in 1883. Christie died in 1881. His estates were thereafter sequestrated.

This action was raised by the children of the marriage of Mr and Mrs G. P. Kennedy, with their father's consent and concurrence, and by him for his own interest, against John E. Kennedy, the trustees of Mr Douie, and the trustee on the estate of Mr Christie, for an accounting for the sum of £1500 so lent, and to have the sum replaced, and failing the sum being replaced for £2000 as damages. The pursuers averred that the trustees in lending the money on such security acted recklessly and negligently, and without ordinary care and prudence.

They pleaded—“(1) The said trustees having intromitted with the capital sum of the said estate, the defenders are bound to exhibit and produce an account of their intromissions, and the pursuers are entitled to have decree for the balance of said account as ascertained in the course of the process, with interest and expenses. (2) Failing the production by the defenders of the account called for, the pursuers are entitled to decree in terms of the alternative conclusions of the libel. (3) The said trustees having recklessly, and without exercising ordinary care and prudence, invested the funds entrusted to them upon insufficient security, they or their representatives are liable for any loss arising thereby.”

The action was ultimately defended only by John E. Kennedy, who, besides a plea of no jurisdiction, which the Lord Ordinary repelled, as previously reported (21 Scot. Law Rep. p. 274), pleaded—“(6) The pursuer G. P. Kennedy is barred by his own actings and by acquiescence from calling in question the investment complained of, and from insisting in the present action. (7) The defender is entitled to absolvitor, in respect (1st) that the investment complained of was not made by him or by his authority, (2d) that he is only liable for his own acts and not for those of his co-trustees, and (3d) that he has not been guilty of negligence. (8) The investment

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complained of haying been made under the advice of, and upon the representations of, the duly qualified law-agent of the trustees, on whom the defender was entitled to rely, and with the pursuers' consent, the defender has incurred no personal liability in respect thereof.”

A proof was led, the import of which very fully appears in the Lord Ordinary's note and in the opinions of the Lord Justice-Clerk and Lord Young.

The Lord Ordinary ( M'Laren) pronounced this interlocutor—“Finds that the loss arising from the funds of the trust being invested in the security libelled was not caused by the negligence or breach of trust of the defender John E. Kennedy: Therefore assoilzies him from the conclusions of the action, &c.

“ Opinion.—In this action the pursuers, who are beneficiaries under a marriage-contract trust, seek to make the defenders responsible for the loss of £1500 of trust money alleged to have been lost through an improper investment.

The pursuer Mr Kennedy is one of the parties to the contract of marriage, and is interested as a liferenter in the fund referred to, which came from his wife's father. The other pursuers are the children of Mr and Mrs Kennedy, and they would be entitled to the fee of the fund in question were it now extant.

Owing to deaths and bankruptcy, the defender Mr J. E. Kennedy (a brother of the principal pursuer) is the only trustee who is able to defend; and in relation to this case the question I have to consider is whether the fund was lost through his negligence or breach of trust—a different question from the general one raised by the summons, whether the fund was lost through the negligence of any of the trustees.

On a careful consideration of the evidence (including a large mass of correspondence), I have come to the conclusion that the fund was lost in consequence of the negligent and wrongful investment of the money on worthless security by Mr Robert Douie, one of the trustees, and that the pursuer was participant in the investment of the trust money on insufficient security in the design of obtaining a larger income than could be got from first-class security, although he was not aware that this particular security was so bad as it proved to be.

I further find that the defender Mr J. E. Kennedy did not contribute to the loss of this money in any way; that he is not chargeable with negligent administration or wrongful administration; and, on the contrary, that his intervention in the affairs of the trust (which was entirely by correspondence) is marked by uniform care, intelligence, integrity, and business-like attention to his duty as a trustee.

It will be necessary that I should in a few sentences go back to the constitution of this trust. Under the contract of marriage the trustees appointed were only trustees for execution. But after the death of Mrs Kennedy's father, followed by the death of Mrs Kennedy herself, it was thought proper that the gentlemen named in the contract should assume the administration of Mrs Kennedy's portion with the view of protecting it against the consequences of any misfortune which might befall Mr Kennedy. Mr. J. E. Kennedy, who was then, and continues to be a land agent in London, expressed unwilling ness to accept the trust, on the ground that his non-residence was a practical disqualification for the performance of its duties, but at his brother's request, conveyed to him and urged with some anxiety by Mr Christie (one of the trustees), he was induced to accept. The trustees were Mr Robert Douie, his two sons, Mr Christie, and the defender.

The legal business of the trust was left to the care of Mr Robert Douie, who was a practising writer in Glasgow, and by whom this business (as he more than once mentions in correspondence) was undertaken gratuitously. To this proceeding I think no exception can justly be taken. There is no rule that a trustee professionally qualified shall not undertake the legal business of the trust. The rule is that he shall not be remunerated for his services, because whatever duty a trustee undertakes he i sheld to undertake it gratuitously, Mr Douie was related to the deceased Mrs Kennedy; it is not disputed that he was in good credit and repute as an agent and conveyancer; and seeing that he was willing to perform the law business of this small trust gratuitously, I consider that his co-trustees were fully justified in leaving it in his hands. This, of course, would not release the other trustees either from the obligation of consulting with Mr Douie as to the investment of the trust funds, or from the responsibility which attaches to a trustee for the consequences of an improper investment to which he gives his consent.

There is another general consideration to which I may here advert. Mr J. E. Kennedy was a non-resident trustee, and only undertook to give such assistance in the performance of the trust as could be given through correspondence. If exception is taken to such a limitation of the functions of a trustee, it may be answered that it is a limitation which exists in a very large number, probably much the larger number, of all the trusts of the country. There is no rule of law which requires that all the trustees of a given trust shall reside in the same town or place, and it would be extremely inconvenient if such a rule were established by implication, because the truster's most trusted friends may be resident in different parts of the kingdom, and the law ought not to create technical obstacles to his obtaining their services. I am not now speaking of the case of a trustee who is resident in a colony or foreign country.

Then, it being a necessity that there should be non-resident trustees, I am not to be understood as saying or implying that it is not the duty of such trustees on proper occasions, and even at some inconvenience to themselves, to attend a meeting or meetings of trustees at the place where the securities and papers of the trust are kept. But it will depend on the nature of the business to be transacted whether the trustee is to undertake a long journey for the purpose of assisting at its transaction. If the matter in hand is only the investing of a fund of £1500 on heritable security, that fund being a source of income to a family in straitened circumstances, I think it would be a great abuse that a trustee in London should go down to Glasgow at the expense of the trust to confer with his co-trustees as to the suitability of the investment. There is no doubt a certain disadvantage in non-residence—the trustee may be more easily imposed upon; but in such matters a trustee is only to exercise reasonable

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supervision, and the beneficiary must submit to unavoidable disadvantages. Business could not go on if a trustee were at every step to act as if his colleagues or his agent were going to involve him in the consequences of a breach of trust.

Before coming to the critical part of this case, I must further notice that the pursuers, Mr Kennedy and Mr Christie, through what I may term an indiscretion, put the defender in a position which latterly made it somewhat more difficult for him to perform his duty as a trustee.

They wanted to know how the £1500 had in the first instance been invested, but instead of applying in a direct and straightforward way to Mr Douie they wrote to the defender to get him to make the inquiry for them. The defender complied, and Mr Douie on receiving this letter of inquiry seems to have thought that the defender was showing an excess of zeal, and that the inquiry might very well have been left to the resident trustees. However, he answers the letter fully. Unfortunately, Mr Douie's letter of explanation was misdirected, and did not reach the defender until long after, and meanwhile the defender found himself involved in a personal difference with Mr Douie, from which he extricated himself with good temper and tact, but with the result that his relations with Mr Douie were strained, and that he could not after this occurrence write to Mr Douie with the same freedom as he might otherwise have written. Yet in the last letter of this unpleasant correspondence the defender takes the opportunity of communicating to Mr Douie his views on the subject of the trust administration, and insists (1) that in future transactions only the best security should be taken, and that if 5 per cent. cannot be obtained the trustees should be content with 4 1 2 or even with 4 per cent.; (2) that in such cases, his brother, the pursuer, should be asked to look at the house or subject of security with the view of giving his opinion or approval of the loan; and (3) that Mr Douie should not take offence at any inquiries which he (the writer) in his capacity of trustee might find it his duty to make with the view of taking his share of responsibility in the administration. [Letter, J. E. Kennedy to R. Douie, 1st March 1877.] Mr Douie had previously informed the defender that £600 of the trust money was lent under a second bond, which, however, in the circumstances, he considered to be a good security, and the defender in this letter intimated his wish that in future only first-class security should be taken by the trustees. No answer was given to this letter, and the defender's observations did not call for an immediate answer if they were concurred in; because they were only the expression of views of trust administration, which are generally admitted and acted on. As Mr Douie expressed no dissent, I think that the defender was entitled to expect that Mr Douie would comply with his instructions and wishes, or at least that he would not act directly contrary to them in every particular, without apprising him of the divergence of opinion and action which such conduct would indicate.

Now, the next communication which the defender received from Mr Douie is a letter dated 13th August 1877, and as this letter is, in my judgment, the important and determining part in the case, I shall quote the passage I refer to. It is this—‘For the £1500 I have been offered a satisfactory investment to yield 5 per cent. on a good and high class property in Roselea Drive, Dennistoun, Glasgow, which I have explained to your brother George, but will take him to see it, and be guided by him before laying matters finally before you. The rental of the property, after providing interest and feu-duty on a first bond, will give a gross remainder of £350 yearly.’

This letter certainly indicated that there was a previous mortgage on the property, but it also indicated that Mr Douie had inquired into the matter, and that he considered the security satisfactory. If it had been true that there was a surplus rental of £350 (equivalent to a surplus capital value of £7000) the property would, in the opinion of most persons, be considered a good and safe security for a second loan of £1500. Then it is to be observed that Mr Kennedy had already stated his preference as a trustee for a first bond, even with the drawback of diminished interest. But Mr Douie was also a trustee, and the letter from which I have quoted contains expressions which imply that he had been giving consideration to Mr Kennedy's opinion. I am not prepared to say that it was necessarily Mr Kennedy's duty to separate himself from his co-trustees on the point of objecting to a second bond: What he actually writes is this—‘If my brother George approves of the investment you propose, and Mr Christie, I will sign also.’ It is difficult to see how the defender could have acted otherwise than he did. The information given to him was satisfactory, subject only to this remark, that the security was a second bond. The defender wished the matter to be referred also to his co-trustees and to the beneficiary, not being in a position to make an independent inquiry. He had already the opinion of Mr Douie that this was a good security, and if that was supported by the opinions of the resident trustee and of the principal beneficiary he was willing to give his concurrence to the loan.

It has now been ascertained that the representations on which Mr Douie obtained the qualified consent of the defender to the loan were untrue. The security was not a second bond, but a fourth or fifth bond. The surplus rental of £350 was purely imaginary; the property was unlet, and the estimated rental was not a just or reasonable estimate, consequently the margin of rental which constituted the security for payment of interest on the loan had no real existence. The property was not of the class which Mr Douie's description indicated, and Mr Douie concealed from the defender the circumstance that the owner of the property was a client of his own, with whom he had arranged to take up the property as a speculation.

These are the facts, and the question is, Am I to hold the defender responsible for negligence because he gave his consent to the investment on false representations made by his agent and cotrustee? Negligence, like the cognate ground of liability, fraud, is matter of fact. It may be inferred from circumstances, but the inference must be a legitimate one, and I cannot hold a defender to be responsible for negligence unless he has been really negligent in the performance of his duties. In the present case I think the defender did all that a non-resident trustee could do to protect the interest of the trust. The information given to him by the trustee who had undertaken the professional duties incident to

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the trusteeship was satisfactory, and I do not think that according to the ordinary course of business in such matters it was the defender's duty either to go to Glasgow and make personal inquiries, or to employ a separate agent to examine into the accuracy of Mr Douie's representations, and virtually to supersede him. Such a course is never taken unless grave suspicion attaches to the agent or legal manager of the trust business. But I see no evidence of any occurrence which would have justified suspicion of Mr Douie. Mr Douie had written an intemperate letter to the defender, but that letter was quite consistent with his being an honest man, and it was so regarded by the defender. I therefore come to the conclusion that the defender in consenting to the loan acted on the best information, that he omitted no precaution which a non-resident trustee ought to take, and that he was deceived by his co-trustee. A trustee does not guarantee the trust investment; he only undertakes that he shall take reasonable care, and be guided by the rules of trust administration. If he signs a receipt for trust-money, he is chargeable with it until it is invested. In the present case the money was invested; there was no embezzlement or misappropriation. It was invested by the trustees as a body, and was so invested under circumstances which in my opinion exonerate the defender from personal responsibility.”

The pursuers reclaimed; argued for them—A consideration of the proof disclosed very gross negligence of the trust affairs on the part of the defender. He had been extremely lax in his attention to them. He had good reason for suspecting that Mr Douie was speculating with the money of the trust and was not an honest man, but he involved himself in a personal quarrel with Douie and then washed his hands of the whole business, leaving the trust management entirely in Douie's hands. He was not entitled to trust alone to the statement of a valuator. But whether he was himself negligent or not, he was responsible for the negligent actings of Douie, his agent and co-trustee, and was liable for the loss arising therefrom. A trustee who gives his solicitor power to lose trust money is liable to make up the loss, on the well-settled principle that where of two innocent parties one must suffer by a fraud, he by whose means the fraud is made possible will be made the sufferer. The law of Scotland only contained three cases which were in point, which were— Forsyth, January 28, 1853, 15 D. 345; Murray v. Murray, May 30, 1833, 11 S. 663; Gordon's Trustees v. Gordon, March 18, 1882, 19 S.L.R. 549. There was, however, ample authority to be found in the law of England. In Bostock v. Floyer, November 21, 1865, 1 L.R. Ch. Oases, 26, it was held that a trustee was liable for the loss of a trust fund caused by the fraud of his solicitor, although in employing such solicitor he might have exercised ordinary care and discretion. This was also the import of the decisions in Hopgood v. Parkin (1870), 11 L. R. Eq. 75; Sutton v. Wilders (1871), 12 L. R. Eq. 377. In Budge v. Gummow (1872), L. R. 7 Oh. App. 719, trustees were found liable for loss of an investment on a security which was valued by a valuator but ultimately turned out insufficient. Douie was also a co-trustee, and in the following cases co-trustees were found liable for the neglect of a brother trustee— Hanbury v. Kirkland, November 26, 1829, 3 Sim. 265; Mendes v. Guedalla, 1862, 2 Johnson and Hemming, 259; Thompson v. Finch, April 1856, 22 Beavan, 316; Lewis v. Nobbs, May 9, 1878, L. R. 8 Ch. Div. 591; and Sutton v. Wilders, sup. cit., proceeded on the view that a solicitor employed by a trustee is his servant for whom he is responsible.

The defender replied—The Lord Ordinary had decided rightly that in consenting to the loan he had acted on the best information, that he had omitted no precaution which a non-resident trustee ought to take, but had been deceived by his co-trustee. It was incorrect to say that there was no Scotch authority applicable to the present case. From the time of Lord Stair the law had been that a gratuitous trustee such as the defender was was only liable for culpa lata or supine neglect, or, in other words, for the want of such ordinary care as a reasonable man of business would give to the conduct of his own affairs—Stair, i. 12, 10; Home v. Menzies, July 10, 1845, 7 D. 1010; Thompson v. Campbell, February 16, 1838, 16 S. 560; Ainslie v. Henderson's Trustees, February 6, 1835, 13 S. 417; Horne v. Pringle, June 22, 1841, 2 Robinson's App. Cases, 384. The case of Murray v. Murray (sup. cit.) was inapplicable, as it was the case of gross negligence on the part of a trustee. The case of Gordon's Trustees v. Gordon (sup. cit.) showed that it required in the law of Scotland culpa lata to make a trustee liable. Many of the English cases founded on on other side were not law in Scotland, because they were not cases of culpa lata. Hanbury v. Kirkland (sup. cit.) was no doubt law in Scotland, because it was a case of gross neglect. The law was now practically settled by the recent case of Speight v. Gaunt in re Speight, January 1883, L. R. 22 Ch. Div. 727, affd. November 26, 1883, 9 L. R. App. Ca. (H. L.) 1. In this case the rule was settled that a trustee is bound to conduct the business of the trust in the same way in which an ordinary prudent man of business conducts his own, and has no further obligation. In this case Bostock v. Floyer was explained and Hopgood v. Parkin questioned. The same doctrine was given effect to in the case in re Godfrey-Godfrey v. Faulkner, May 25, 1883, L. R. 23 Ch. Div. 483. The test of liability, then, when applied to the defender's actings, entitled him to be assoilzied from the conclusions of the action.

At advising—