Here, Leanne Millhouse and Audrey Serrano of law firm Kennedys provide a brief guide to the duties of care owed by trustees.

The duties of skill and care arise both under common law (judge made law) and under statute. Trustees also owe fiduciary duties.

Common law duty of care

A common law duty of care has been developed over many centuries following decisions made by judges in cases involving trustees.

To comply with the common law duty, a trustee must take all those precautions that an ordinary prudent person of business would take in managing similar affairs of their own. The test is objective, which means it is the standard of a prudent business person, not the standard of the trustee in question. A higher duty will apply to a professional trustee, whose standard would be that of a professional trustee.

The common law duty applies in all cases involving trustees, unless there is an appropriately worded exclusion clause in any trust document, which may limit this liability.

Statutory duty of care

The statutory duty of care is imposed by Section 1(1) of Trustee Act 2000, and only applies in certain cases after 1^st February 2001. The duty requires a trustee to exercise such skill and care as is reasonable in all the circumstances, having regard to:

• Any special knowledge or experience that they have, or hold themselves out as having.
• Any special knowledge or experience that it is reasonable to expect of a person acting as trustee in the course of a business or profession.

The statutory duty of care may be limited or specifically excluded by the trust document. As stated, where the duty does not universally apply, it is limited to the following circumstances:

• Any exercise of powers of investment including the acquisition of land and exercising any powers in relation to such land.
• Insuring property or any exercise of power to insure.
• Entering into arrangements with nominees, custodians and agents and reviewing such arrangements.
• Dealing with reversionary interests and valuing trust assets and any corresponding powers.
• Exercising powers of compromise and any corresponding powers.

What happens if a trustee breaches the duty of care?

If a trustee has fallen short of the required standard when carrying out the duties, the trustee is in breach of trust. The trustee may also have a personal liability to reconstitute the trust fund by making good any damage caused where possible, or by paying compensation for all losses that would not have occurred “but for” the breach.

How can a trustee limit their liability for breach of trust?

There are various steps a trustee can take in an attempt to mitigate a potential claim, namely:

1. Always seek professional assistance when faced with any onerous, unusual or difficult decisions concerning the carrying out of your functions.

2. Ensure that you maintain appropriate insurance cover to provide for legal fees and damages in the event of any claim. A specialist broker will be able to assist you.

3. Familiarise yourself with the trust deed and its requirements.

4. Consider an exclusion clause, limiting or excluding your duty of care in certain cases or to certain classes of beneficiaries.

4.1. A properly worded clause in a trust document may exclude or limit the trustee’s liability under some statutory or common-law duties of care. It will not, however, prevent beneficiaries from restraining the trustees from carrying out certain acts, or from removing trustees. Nor will the exclusion clause limit liability for fraud, or exclude the trustee’s core duty, which is to perform the duty honestly and in good faith for the benefit of the beneficiaries.

We recommend that a trustee always seeks legal advice on any issues they are not familiar with, or where there is discord between the beneficiaries as a whole or a class of beneficiaries.

First published on the Kennedys website.

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