United Kingdom House of Lords Decisions

The House took time for consideration.

Aug. 1

LORD HALSBURY L.C. :-

My Lords, in this case trust funds have been lost by an investment on insufficient security.

Some doubt has been expressed as to whether Bacon V.C. did not intend to decide that the security upon which the money was invested was not a real security at all and therefore not within the powers of the trustees. In my opinion Bacon V.C. did not intend so to decide: what he said was - what I think is accurate - that although the ten acres of land upon which this money was invested was in a certain sense real security because it was land, the substantial value upon which the money was advanced was a brickmaking concern. The trade has ceased to exist and the substantial part of the security, which represented £3500 or £3000 - for I do not think it is material to consider the question of £500 - has ceased to exist.

No one either at the Bar or in either of the Courts in which this matter has been litigated has doubted that the trustees intended to do what was right, and no imputation can certainly be made against them that they were actuated by any other motive than that of procuring the highest amount of interest that they could for their cestui que trust. But the goodness of their motives cannot justify the propriety of the investment. A trustee must use ordinary care and caution, and although it is impossible to lay down an absolute rule - and indeed it cannot be contended that the ordinary practice of Courts of Equity has the force of law - yet there are some limits beyond which it is manifest no trustee is authorized in going.

It is of course true that it is not because the money has been lost that the trustees are necessarily liable. But as the money has been lost by the insufficiency of the security it is necessary to see what precautions were taken by the trustees in conducting the business of the trust.

I think it is quite clear that a trustee is entitled to rely upon skilled persons in matters in which he cannot be expected to be experienced. He may perhaps rely upon a lawyer on some matters of law, and in this case I do not deny that he would be entitled to rely on a valuer upon a pure question of valuation. But unless one examines with reference to what question the skilled person gives advice it is possible to confuse the reliance which may be properly placed upon the skill of a skilled person with the judgment which the trustee himself is bound to form on the subject of the performance of his trust. I do not think it is true to say that one is entitled to consider the special qualities or degree of intelligence of the particular trustee. Persons who accept that office must be supposed to accept it with the responsibility at all events for the possession of ordinary care and prudence.

In applying the principles that I have indicated to this particular case it is obvious to remark that the trustees not only relied upon the skilled persons for the possession by those persons of skill in their own business, but appear to have adopted without sufficient care what those skilled persons said.

As to the propriety or impropriety of the investment looked at not merely as a question of value but as a question of the due performance of the trust, is it true to say the trustees have been misled by an erroneous statement as to what was the value of the land? I think not. I should think they might well be able to defend themselves from responsibility on the ground that they had selected a reasonably careful person and acted upon the skilled advice that they had received upon such a question - but that is what they did not do.

Assuming in their favour that they sufficiently understood and analysed the valuers' report - though I doubt whether that assumption is accurate - they acted on advice not that these ten acres of land were as land a sufficient security for the sum they invested, but whether they, the trustees, were justified in investing upon the security of a speculative trading adventure. The forming a judgment on such a question was the duty of the trustees themselves - a duty which they could not delegate to others.

I only wish to add that I am unable to follow or adopt some observations of the Court of Appeal which seem to point to a different degree of care in regard to the conduct of the business of a trust according to whether there are persons to take in the future, or whether the trust fund is to be created £or one beneficiary absolutely. The question must be the due care of the capital sum. Whether that capital sum is one in which there is a life estate only, or absolutely for the use of the beneficiary, seems to me to bear no relation to the question of the due caution which a trustee is bound to exercise in respect of the investment of the trust fund.

I agree with Cotton L.J. that the tenant for life during the time the money was invested received the income she was entitled to receive, and that the trustees were right in paying her the interest, as it was in truth and in fact the interest received from the trust fund whereof she was tenant for life. But it seems quite an untenable proposition to contend that she is therefore bound to bring into account the interest that she has received upon the investment, because that investment has turned out to be an insecure one and the trustees are called upon to make good the deficiency that has arisen.

I am of opinion that the judgment of the Court of Appeal was right, and I move your Lordships that this appeal be dismissed with costs.

LORD WATSON :-

My Lords, I also am of opinion that the order of the Court of Appeal must be affirmed.

As a general rule the law requires of a trustee no higher degree of diligence in the execution of his office than a man of ordinary prudence would exercise in the management of his own private affairs. Yet he is not allowed the same discretion in investing the moneys of the trust as if he were a person sui juris dealing with his own estate. Business men of ordinary prudence may, and frequently do, select investments which are more or less of a speculative character; but it is the duty of a trustee to confine himself to the class of investments which are permitted by the trust, and likewise to avoid all investments of that class which are attended with hazard. So, so long as he acts in the honest observance of these limitations, the general rule already stated will apply.

The Courts of Equity in England have indicated and given effect to certain general principles for the guidance of trustees in lending money upon the security of real estate. Thus it has been laid down that in the case of ordinary agricultural land the margin ought not to be less than one-third of its value; whereas in cases where the subject of the security derives its value from buildings erected upon the land, or its use for trade purposes, the margin ought not to be less than one-half. I do not think these have been laid down as hard and fast limits up to which trustees will be invariably safe, and beyond which they can never be in safety to lend, but as indicating the lowest margins which in ordinary circumstances a careful investor of trust funds ought to accept. It is manifest that in cases where the subjects of the security are exclusively or mainly used for the purposes of trade, no prudent investor can be in a position to judge of the amount of margin necessary to make a loan for a term of years reasonably secure, until he has ascertained not only their present market price, but their intrinsic value, apart from those trading considerations which give them a speculative and it may be a temporary value.

Upon the general law applicable to this case I have only to observe further that whilst trustees cannot delegate the execution of the trust, they may, as was held by this House in Speight v. Gaunt⁽¹⁾, avail themselves of the services of others wherever such employment is according to the usual course of business. If they employ a person of competent skill to value a real security, they may, so long as they act in good faith, safely rely upon the correctness of his valuation. But the ordinary course of business does not justify the employment of a valuator for any other purpose than obtaining the data necessary in order to enable the trustees to judge of the sufficiency of the security offered. They are not in safety to rely upon his bare assurance that the security is sufficient, in the absence of detailed information which would enable them to form, and without forming, an opinion for themselves. At all events if they choose to place reliance upon his opinion without the means of testing its soundness they cannot, should the security prove defective, escape from personal liability, unless they prove that the security was such as would have been accepted by a trustee of ordinary prudence, fully informed of its character, and having in view the principles to which I have already adverted.

By the terms of Benjamin Whiteley's will his trustees are authorized to invest trust moneys upon real securities in England and Wales. It is not disputed that in lending £3500 upon the security of Barstow & Hartley's brickfield, in terms of the mortgage of the 12th of January 1878, the appellants acted in good faith. Of that sum £3000 only belonged to Whiteley's

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trust, a circumstance which does not alter the character of the security, because it has not been shewn that the trust money was made a charge in priority to the balance of £500.

The course which was followed by the appellants in entering into the transaction of January 1878 is very compendiously stated by Mr. Learoyd, in whose evidence, so far as it related to matters within his personal knowledge, Mr. Carter generally concurred. In his examination in chief Mr. Learoyd was referred to a report by Messrs. Uttley & Gray, dated the 8th of October 1877, and interrogated: "( Q .) Did you and Mr. Carter on that report form an opinion that it was a proper security for the investment? - ( A .) We did after further inquiries." Being interrogated in cross-examination: "( Q .) What other inquiries did you make about the brick properties? - ( A .) I instructed our solicitor to make inquiries respecting the respectability of the parties."

It plainly appears from these answers that the appellants had no information regarding the subjects mortgaged except what was contained in the report of their valuators.

In my opinion the report of Uttley & Gray is not such a document as a lender of ordinary prudence would have ventured to act upon. It discloses the fact that there were only ten acres of land, and that a not inconsiderable portion of the subjects consisted of buildings and fixed machinery used for brickmaking. But it does not state either the cumulo value of the subjects or the separate values of the land, the buildings, and the machinery. It does, no doubt, contain the statement that the valuators thought the land, premises, and freehold fixtures would afford good security for £3500; but trustees who choose to act upon such an opinion must take the risk of the security proving insufficient.

In these circumstances, I think it has been established that, at the time of taking the security, the appellants altogether failed to exercise that ordinary amount of care which the law required of them. Notwithstanding such failure, they would still have had a good answer to the respondents' claim had they been able to shew that if they had made full inquiries, and had obtained all necessary particulars from their valuators, they would have been justified as men of ordinary prudence in accepting the security. Unfortunately the evidence led by the appellants themselves appears to me to negative any inference of that kind. Their witness and valuator, Mr. Uttley, states that in 1877 he valued the subjects as a going brick-work at £7200, of which £2000 was for the land, and the remaining £5200 for buildings and machinery. He did not in 1877 form any estimate of their value upon a sale by the mortgagees, and not as a going concern. Being asked on cross-examination what difference that would have made on his estimate he said, "I should say 10 per cent. would represent the difference not as a going concern. Everything was in order." The answer is by no means satisfactory. It assumes that the works would be kept in the same good order; and it leaves out of account the possibility of depression in the brick-making trade, a factor which I do not think a prudent valuator would omit from his calculations. But, taking his estimate as he gave it, a deduction of 10 per cent. leaves a margin of £520 below the minimum amount which ought to be allowed in order to cover the possible depreciation of subjects affected, to the extent of five-sevenths of their value, by the fluctuations of trade.

Upon the question of interest I agree with the reasoning of Cotton L.J. I do not think the tenant for life can now be required to repay or give credit for any part of the sums paid to her before August 1884, as the actual income of the trust estate.

LORD FITZGERALD :-

My Lords, I concur with my noble and learned friends in opinion that the decision of the Court of Appeal should be affirmed.

There was no controversy in the Court below or at your Lordships' Bar as to the rule which in such a case as the present governs the duties and liabilities of trustees, and I am satisfied to accept in substance the exposition of Cotton L.J. at p. 350, of 33 Ch. D., though it may be open to some verbal criticism.

The rest of the case relates to the proper view of the facts, and I am compelled to take the same view as my noble and learned friends, viz., that the trustees did not exercise ordinary care in investing the money intrusted to them. They invested the trust fund on a very insufficient security and without due or proper inquiry. It may well be described as a loan on a security the sufficiency of which depended on the prosperity of a hazardous manufacture carried on by the mortgagors on the mortgaged premises.

I concur with my noble and learned friends in affirming the decision of the Court of Appeal. I do so with that regret which the judge feels in every case where his decision fixes liability on trustees who have acted honestly but erroneously and to some extent negligently in not requiring more full and precise information than they received from the valuators they employed. In my opinion the trustees in selecting and adopting the security in question did not exercise the care or foresight which a man of ordinary prudence ought to exercise and would probably exercise in making such an investment. I am not disposed however to say that the fact that the investment was one for the benefit of the tenant for life and after her decease then for her children, is to be entirely left out of consideration. It was not to be a temporary investment but one to last for many years if not called in or paid off.

Lopes, L.J., thus accurately describes the security which the trustees accepted: "Its value mainly depends on the success of a speculative and fluctuating business, a business for which it is difficult to find customers" (i.e. purchasers), "a business largely dependent on the energy and solvency of those working it, - a business of necessity of precarious duration, and which cannot be carried on without such an excavation and destruction of the soil as must eventually leave what remains nearly useless for agricultural and other purposes;" and, I may add, a security of a peculiarly hazardous character, and in reference to which it has been properly observed that the value of the buildings and fixed machinery depended entirely on the mortgagees being able to find a purchaser for it as a going concern for the manufacture of bricks.

Upon the minor point in the case I also concur with my noble and learned friends.

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