Trustee Exemption Clauses: Redundant Or Required?

Article by Archie J. Rabinowitz, B.A., L.L.B.*

1. Introduction

Many testamentary instruments include clauses which are intended to relieve trustees from liability in the execution of their duties. Such exemption clauses, as they will be referred to in this paper, take a variety of forms but are generally quite broad so as to relieve the trustee from consequences stemming from negligence so long as the conduct does not amount to fraud or intentional wrongdoing. As noted by the Ontario Law Reform Commission ("OLRC") in its Report on the Law of Trusts, "trust instruments drawn in this Province, whether testamentary or inter vivos, very often exonerate the trustee from liability for any loss arising from the administration of the trust, if the trustee has acted in good faith".1

While thecommonlaw has not dealt with this issue to a great extent in Canada, other jurisdictions have dealt with the issue of exemption clauses to a much greater degree. This paper will examine these approaches in an attempt to discern what the future approach of the Canadian courts may be. This paper will also examine the impact of the provisions in the Trustee Act2 which also address the issue of trustee liability. While clauses which purport to relive trustees of liability have become commonplace in the creation of testamentary and trust instruments, such clauses may have little utility in light of the detailed and comprehensive statutory provisions and the approach likely to be taken by the courts.

2. Types of Exemption Clauses

The typical exemption clause, found in a trust instrument, is one which excludes the liability of the trustee for having committed an unintentional breach of trust. The reasoning upon which these clauses are based is that a duty exists, that duty has been breached, and, were it not for the clause, liability would be alleged by the beneficiaries. The exemption clause, however, operates to remove, mitigate, or reduce such liability. An example of a boilerplate exemption clause used in Ontario is the following:

I declare that my Trustees shall not be liable for any loss that may happen to my estate or be suffered by any beneficiary of my estate resulting from the exercise by my Trustees of any discretion given to them in this Will which is exercised honestly and in good faith.

In addition to the exemption clause which alters the liability of the trustee, some exclusion clauses may also operate to remove or reduce the duty owed by the trustee to the beneficiaries.3 This paper will be primarily concerned with the first type of exemption clause, although many of the factors are equally applicable to both.

The terms of exemption clauses, of either type, often specify the level of culpability required before a trustee will be held liable for a breach of trust. These levels range from fraud and recklessness to gross negligence and general negligence. Clauses may specify which type of behaviour is acceptable in the face of a breach of trust.

3. Validity of Exemption Clauses

(1) Canada

Canadian courts have not, at an appellate level, laid out a position regarding the effectiveness of exemption clauses in relieving trustees from liability for losses caused by their negligence. The Alberta case of Poche v. Poche Estate4 is the only case to substantively address this issue. In that case, a clause in a will purported to relieve the executrix and trustee for those losses not attributable to her own dishonesty or to acts which she knew to be a breach of trust. The specific exemption clause examined in that case stated:

8. I declare that the Trustee of this my Will shall not be liable for any loss not attributable:

(a) To her own dishonesty, or (b) To a wilful commission by her of any act known by her to be a breach of trust.5

The court held that, although the trustee's conduct was not dishonest or wilful, it amounted to gross negligence and thus she could not be relieved of liability. In drawing from a line of Scottish cases, the court stated that "a trustee must be held responsible for any loss resulting from his gross negligence, regardless of any provision in the trust instrument relieving him from such liability".6

It is important that the exclusion clause be narrow enough to be properly interpreted by the court as valid and binding. As stated by Waters, the more general an exemption clause is, the more likely the courts will conclude that the settlor did not intend to relieve the trustee from liability.7 Thus, the general boilerplate exemption provisions may be of little utility to trustees as terms such as "good faith", which are often used in such clauses, are quite uncertain and can be interpreted in various ways. Notwithstanding Professor Waters' comments, the English Court of Appeal has held that an executor or trustee who drafts the trust of a settlor can properly benefit from a very broad exemption clause as long as the clause and its effect are properly brought to the attention of the settlor.8 Presumably, the Canadian courts would be more comfortable with this if the settlor is sent for independent legal advice on this point.

(2) Great Britain

Courts in England and Scotland have dealt with the issue of exemption clauses in trust instruments for...