Tag: Legal Matters

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.

Advice and support from ESA Risk

For advice and support in areas from risk management and security to corporate investigations and digital forensics, contact us at advice@esarisk.com, on +44 (0)343 515 8686 or via our contact form.

Many trustees appointed under wills by the testator are lay trustees, not fully appreciating what the role involves. Here, Leanne Millhouse and Audrey Serrano of law firm Kennedys provide an introduction to the fiduciary duties of a trustee.

What is a fiduciary duty?

The relationship between trustees and beneficiaries is known as a fiduciary relationship, and has at its core an obligation of loyalty, trust and confidence, with no conflict and no profit rules on the part of the trustee. There is also a general duty of good faith (to act openly and honestly).

The beneficiary is entitled to the trustee’s single-minded loyalty. The overarching theme is that trustees are not permitted to use their positions for their own private advantage and are required to act unselfishly in what they perceive to be the best interests of the beneficiaries.

The obligation to exercise reasonable care and skill, whether under the common law or statute, is not a fiduciary duty, but a separate and additional duty for the trustees.

The fiduciary duty continues for as long as the relationship continues. So, as long as the trustee remains a trustee, they owe the duties.

How does one comply with the fiduciary duties?

Trustees must ensure they abide with the following basic rules:

• Only act in the interests of the beneficiaries as a whole.
• To not put themselves in a position where their personal interest conflicts, or where there is a real possibility of conflict, with their fiduciary duties, or the beneficiaries interests.
• To not adversely affect the beneficiaries’ interests.
• To subordinate any personal interests they have to that of the beneficiaries.
• To not favour one beneficiary (or class of beneficiaries) over another.
• To not, without authority, make a profit from the use (whether directly or indirectly) of property subject to the trust. If they do, they must account for that profit to the trust. The beneficiary does not have to show any bad faith on the part of the trustee.
• To not make a profit from their role (as distinct from authorised remuneration under the trust document or as agreed with the beneficiaries).

Can trustees be paid for their role?

If trustees are seeking remuneration for their work, they must ensure that this falls within the remit of the trust instrument, or is agreed by the beneficiaries.

How can I exclude or limit my fiduciary duty?

The following are commonly used to in an attempt to mitigate exposure to personal liability for breach of duty:

• The use of exclusion clauses and duty-defining provisions: a well drafted clause should set out the scope and content of the fiduciary duty, and may seek to limit or exclude this duty. The court may uphold such a clause if it is clear, unambiguous and reasonable, but each case is very much determined on its own facts
• Disclosure and consent: the beneficiaries may, up to a point, agree to relax, or forego, the requirement to fulfil fiduciary duties. If a beneficiary is to do this, their consent must be fully informed. The burden of proof is on the trustee
• The court can approve a transaction that would otherwise have been a breach of fiduciary duty.

We also recommend that trustees enquire about appropriate insurance cover in the event of any claim. A specialist broker will be able to assist you.

What happens if one is in breach of their fiduciary duties?

Trustees can leave themselves open to the following actions:

• A claim for damages.
• Order to account for any profits the trustee has made.
• Rescission – The decision made by the trustee may be overturned and set aside.
• Injunction to either prevent the trustee from taking a course of action, or requiring the trustee to take a course of action.
• Removal as a trustee.

A complex area of law

Fiduciary duties are a complex area of law, with several leading cases setting out the scope of the duties. However, each case is very much determined on its own facts.

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.

Advice and support from ESA Risk

For advice and support in areas from risk management and security to corporate investigations and digital forensics, contact us at advice@esarisk.com, on +44 (0)343 515 8686 or via our contact form.