Professional Trustees: Use of Trustee Exoneration Clauses
In a measure that will be welcomed by all professional trustees, and by their professional indemnity insurers, the Government has signalled approval of the continued use of this important layer of protection for trustees. A trustee "exoneration" clause (or trustee "exemption clause") seeks to limit or exclude a trustee's liability for negligence and/or breach of trust. When a trust contains such a clause it controls the risk faced by trustees and keep costs down, encouraging prospective trustees to take office. However, these clauses have been under the spotlight for many years. They have attracted criticism for giving too much protection to trustees who are paid to perform their duties. The high watermark of this was reached when the Law Commission suggested that professional trustees should not be able to rely on any clause excluding liability for breach of trust arising from negligence (see Trustee Exemption Clauses (2003) Law Com Consultation Paper No 171). The contrary argument is that restricting exoneration clauses in this way would lead to increased professional indemnity premiums, defensive trusteeship, an increase in speculative litigation for breach of trust, and even a possible reluctance to accept trusteeship.
Government approval
Professional trustees will therefore breathe a collective sigh of relief at the news that the Government has accepted revised recommendations to maintain the use of these clauses, but with certain safeguards. Mr Jonathan Djanogly, the Parliamentary Under-Secretary of State for Justice, has announced acceptance of recommendations by the Law Commission (see Trustee Exemption Clauses (2006) Law Com Consultation Paper 301) that:-
Exoneration clauses may still be included in trust documents. Professional trustees, and those drafting the trust documents (who may be different), must, however, take reasonable steps to ensure that the settlor is aware of the meaning and effect of the clause. A breach of this rule, which will be adopted not by means of legislation, but by a practice-based approach by professional bodies, will leave the trustee open to disciplinary measures by the relevant governing body, and although the Law Commission believe that a breach of this rule in itself will not give rise to liability in damages, it remains to be seen how the courts would treat such a breach. It is worth noting that a number of professional bodies, including the Solicitors Regulatory Authority and the Institute of...
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