Trustee Liability For Investment Losses

• Published date: 14 May 2020
• Author: Mr Zachary Rogers and Richard T. Weiland
• Subject Matter: Corporate/Commercial Law, Coronavirus (COVID-19), Trusts, Financing, Operational Impacts and Strategy
• Law Firm: Clark Wilson LLP

The COVID-19 pandemic has had a significant impact on global trade and the world's economies. Each of North America's major stock markets have experienced their worst first quarters since at least the 2008 housing market crash, and investment portfolios have suffered accordingly. This dramatic downturn could be significant for trustees who hold and invest assets on behalf of beneficiaries of trusts or estates. What steps should a trustee take and how can they minimize risk of liability in a time of volatile markets?

Trustee Liability for Investment Losses

In Fales v. Canada Permanent Trust Co., [1977] 2 S.C.R. 302, the Supreme Court of Canada held that the primary duty of a trustee is to preserve trust assets. The failure to do so could be considered a breach of duty if the trustee's conduct did not meet the requisite standard of care. If a trustee is found by a Court to have breached a duty owed to the beneficiaries of the trust, the trustee can be held personally liable for the losses incurred by the trust and/or can be removed as a trustee.

Given that a trustee can face personal liability for investment losses, a trustee might seek to avoid risk by keeping trust assets in cash or in secure, low-return investments such as guaranteed investment certificates. However, at common law, trustees have a duty to invest the capital of a trust, and trustees can also face criticism for failing to generate adequate returns for the beneficiaries. Therefore trustees must invest trust assets in a manner appropriate to the circumstances.

In Ermineskin Indian Band and Nation v. Canada, 2009 SCC 9, the Supreme Court of Canada confirmed that there is no duty for a trustee to guarantee against the risk of loss or to guarantee an increase in the trust. Rather, the trustee need only invest prudently.

What is a Trustee's Standard of Care for Investment?

Section 15.2 of British Columbia's Trustee Act sets out the level or standard of care that a Trustee must use when investing: "a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments." Section 15.3 adds that a trustee will not be held liable for an investment loss if the conduct that led to the loss conformed to a plan or strategy for the investment of the trust property, comprising reasonable assessments of risk and return, that a prudent investor would adopt under comparable circumstances.

The "prudent investor" standard is an objective one: all trustees...