Recent Developments In The Law Relating To Trustee Exoneration Clauses

Exoneration clauses are used in trustee documentation in order to restrict a trustee's liability for loss or damage to the trust fund. In England, the settled law is that trustees can validly restrict liability for loss or damage which results from their own negligence, and even from their own gross negligence, but cannot restrict liability for loss which is caused by their own fraud or dishonesty. Under Jersey and Guernsey law, trustees are also prohibited from restricting liability for gross negligence.

The benefit of such clauses is that they encourage trustees who would not otherwise be prepared to accept the risky position of trustee to do so, and allow them to make decisions with appropriate speed and without undue caution—in short they provide protection for trustees in an increasingly uncertain and hostile climate. On the other hand, where beneficiaries can prove negligence on the part of the trustees, they will often be left without a remedy.

The recent English case of Walbrook v Fattal1 and the Guernsey case of Spread Trustee v Hutcheson2 (on appeal to the Privy Council) were attacks on standard exoneration clauses and on the relief of professional trustees, and both failed. In this DechertOnPoint, these developments are considered in more detail.

BACKGROUND

It is often said that the role of trustee imposes onerous responsibilities and is not to be undertaken lightly. The fundamental core of trusteeship is to act in good faith and in the best interests of the beneficiaries, within the "four corners" of the trust deed, so trustees may find themselves in breach of trust even if they have done their honest best to carry out their duties but have acted ultra vires3 and accordingly would be liable to their beneficiaries. While trustees are entitled to an indemnity out of the trust fund for costs, liabilities and expenses properly incurred, they are not generally entitled to be excused from the consequences of a breach of trust.

Exoneration clauses were a19th century innovation to protect innocent trustees from liability provided that the trustee had acted in good faith, the House of Lords recognising in 18614 that "a testator could define the duty of his trustees, and point out the extent of their liability, and the court could not extend their responsibility"—and that a clause purporting to relieve trustees of liability for failing to perform their duties was not repugnant to the notion of trusteeship.

Trust instruments may contain a variety of clauses purporting to protect trustees, including "duty exclusion clauses" (which modify the scope of duties which the trustees would otherwise owe), "extended power clauses" (authorising the trustee to do what would otherwise have been unauthorised, for instance, investment in wasting assets) and clauses indemnifying the trustee from the trust fund ("indemnity clauses")5. These clauses ensure that provided the trustee acts honestly, prudently, with care and within the terms of the authority conferred on him, he is not committing a breach—in contrast to exoneration clauses, which excludes liability for a breach of trust6.

ARMITAGE V NURSE

The case of Armitage v Nurse7 is recognised as the settled law on exoneration clauses. The trust instrument contained what is now a common exemption clause, which stated that:

"[no] trustee shall be liable for any loss or damage which may happen to [the trust] fund or any part thereof or the income thereof at any time or any cause whatsoever unless such loss or damage shall be caused by his own actual fraud"8.

Millett LJ found that a trustee who has a suitably worded exemption clause can exempt himself from all liability for breaches arising from any of his actions except his own actual fraud or dishonesty9. Thus, if a trustee has been negligent—even grossly negligent—he will be protected "no matter how indolent, imprudent, lacking in diligence, negligent or wilful he may have been, so long as he has not acted dishonestly".

A trustee cannot, however, exclude liability for fraud or wilful wrongdoing. The rationale is that the "irreducible core" of a trust is the trustee's obligation to act honestly in the best interests of the beneficiaries. A trust in which the beneficiaries cannot enforce this obligation is not a trust. However, the irreducible core does not extend to the equitable duty to exercise due care, skill, prudence and diligence in managing trust assets. "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 trust, but in my opinion it is sufficient"10.

To show "actual fraud" requires proof of dishonesty; 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". (Thus, Millett LJ declined to construe the word fraud "more widely than its common law sense of dishonesty or conscious wrongdoing [to] include breach of fiduciary duty, fraud on the power, undue influence and unconscionable bargains – the broader concepts known collectively as 'equitable fraud', and in which dishonesty is not a necessary factor"11).

Armitage v Nurse thus remains the law, though the finer points were ironed out in subsequent judgements, which limited somewhat the protection offered by such clauses.

Draftsmen Beware

The case of Bogg v Raper12, in which the trustees were sued under the principles of Bartlett v Barclays Bank13 for failure to properly supervise the activities of the underlying business held by the trust, established that where there is any uncertainty as to construction, an exoneration clause will be construed restrictively in the manner which is least favourable to the trustee who purports to rely upon it (analogous to the principle of contra proferentem14).

In Wight v Olswang15 a trust instrument contained two different exoneration clauses. One of the clauses provided that no trustee would be liable for any loss to the Trust Fund by reason of any action except wilful and individual fraud and wrong doing on the part of the trustee; while a second provided that "no trustee (other than a Trustee charging remuneration for so acting) would be liable for anything save wilful misconduct or wilful breach of trust. Gibson LJ found that the presence of both clauses created ambiguity, and the effect was that the trustees could not rely on either clause to exclude liability for breaches of trust or negligence by a trustee there should be clear and unambiguous words in the settlement.

Settlor Awareness

Nevertheless, a clearly worded exoneration clause is capable of excluding liability for negligence or gross negligence. In Bogg v Raper, Mr Raper, one of the trustees, was the solicitor who had drafted the trust instrument. Lord Millett had to rule on whether the solicitor had therefore improperly derived a benefit from his fiduciary position (which...