Clements, Bringing Trusts into the Twenty-First Century, [2004] 2 Web JCLI
http://webjcli.ncl.ac.uk/2004/issue2/clements2.html

Bringing Trusts into the Twenty-First Century
L. M. Clements, B.A, LL.M, 
Lecturer in Law, University of Hull.

L.M.Clements@hull.ac.uk

Summary
This article looks at the impact of the Trustee Act, 2000 on the law of trusts in the twenty-first century and addresses the issue of whether the law of trusts has been brought sufficiently up-to-date to enable it to cope with the challenges it now faces. The article discusses the reasons behind the introduction of the Trustee Act, 2000 and critically examines the changes that have been made to the law of trusts as a result of its introduction. The Article also assesses the impact of the legislation in the light of post - 2000 Act economic experience and focuses in particular on the effect of the legislation in the specific contexts of Investment, Remuneration of Trustees and the Exclusion of Liability of Professional Trustees.

Contents
Introduction
Background to the Trustee Act, 2000.
The Provisions of the Trustee Act, 2000
1. The Duty of Care
General application
Collective Delegation
1. In what circumstances should Trustees be able to delegate to an agent?
2. In what circumstances may trustees be held liable for the acts of its agents?
Delegation under the Trustee Act 2000
Individual delegation: Powers of Attorney:
Exclusion of Liability
The Position in Other Jurisdictions
English Trust Law Committee - ‘Trustee Exemption Clauses’: The Contract Analogy.
Policy Arguments in favour of the Application of the Unfair Contract Terms Act, 1977, to Trustee Exemption Clauses
Agents and limitation clauses.
Remuneration of Trustees
Conclusion
Bibliography

Introduction

Unknown to many of those people whose lives are actually affected by it in some way, trust law has far more significant impact than is often imagined. Its breadth of application extends beyond the family context, applying to the spheres of charities, investment funds, commerce and even pension funds. One major criticism of the law of trusts, however, has been that it has failed to keep abreast of the changes that have taken place in the social and economic contexts in which trusts are expected to work. That failure had become more acute because of those significant changes that took place in investment business and on the London Stock Exchange towards the end of the twentieth century. This had especially been the case since the introduction of the CREST system (Computer based system for electronic transfer and settlement of trades in securities) in relation to the latter. It had been apparent for some time that what was required was a change in the law  - a change that would bring trusts law into the twenty-first century. This is what the Trustee Act, 2000, together with the Trustee Delegation Act, 1999, were supposed to achieve. 

This Article is intended to address the issue of whether the law of trusts has been sufficiently brought up-to-date to enable it to cope with the challenges it now faces in the Twenty-First Century. Such a task inevitably necessitates, inter alia, an analysis and critique of the two pieces of legislation mentioned above. This Article discusses the reasons behind the introduction of the Trustee Act, 2000, in particular and critically examines the changes that have been made to the law of trusts as a result of its introduction. The Article will also assesses the impact of the legislation on the role of trusteeship as a whole and whether the stated objectives are likely to be fulfilled in the light of post - 2000 Act experience. There will be focus in particular on the effect of this legislation in the specific contexts of Investment, Remuneration of Trustees and the Exclusion of Liability of Professional Trustees.

Background to the Trustee Act, 2000.

The Trustee Act, 2000 largely implemented the recommendations made by the Law Commission and the Scottish Law Commission in the Report ‘Trustees' Powers and Duties Law Com. This Report followed on from a long history of other reports and proposals in the area, going back to 1982.  In its 1999 Report, the Law Commission recommended that there should be reforms to the law of trusts in respect of five principal areas:-

investment;
collective delegation;
duty of care upon trustees; 
the power for trustees to acquire land; and
remuneration of Trustees.

The main impetus for these proposals had been the alleged failure of the law of trusts to keep pace with the numerous changes that had taken place in the nature of both trusts and investments since the passing of the 1925 legislation and the Trustee Investment Act, 1961. As Charles Harpum, Law Commissioner, stated in launching the Law Commission's Consultation Paper: Trustees' Powers and Duties : Giving Trustees the Powers they Need,’ 30th September,1997.:

The old picture of the family trust with an avuncular trustee who had lots of spare time to devote to the running of the trust, and a range of trustee investments that consisted only of government stocks and mortgages, is long dead, The modern trustee needs professional help to steer the trust through the thicket of modern investment practice and to ensure that it is properly managed to secure the best returns for the beneficiaries or purposes of the trust. 

With this in view, the Trustee Act, 2000 was ‘intended to facilitate the administration of trusts and to ensure better returns for the persons and purposes which benefit from the trusts.’  Is the 2000 Act likely to achieve that objective in the light of the economic circumstances and changes that have already taken place in the twenty-first century?

The Provisions of the Trustee Act, 2000

1. The Duty of Care

General application

Part I of the Trustee 2000 Act was aimed at implementing the recommendations contained in Part III of the Law Commission's Report, No. 260 ( July, 1999). Sections 1 and 2 of the 2000 Act were intended to create a new statutory duty of care which then applies to trustees whilst carrying out certain of their trust functions that are outlined in Schedule 1. This statutory duty of care is not only intended to bring certainty and consistency into the law of trusteeship but is intended to provide a trade-off safeguard to beneficiaries for the wider powers which the Act also gave to trustees. The statutory duty applies in addition to other general, fundamental duties of trustees, such as to act in the best interests of the beneficiaries and to carry out the terms of the trust, but at the same time it replaced any previously existing duty of care applicable to trustees arising under the common law. However, the statutory duty may be either modified or excluded by the express terms of the particular trust, and this possibility can be argued to detract from the effectiveness of including the duty of care through the 2000 Act in the first place. Unless excluded, the duty of care applies not only to the initial exercise of any power of investment but also to the review of trust investments and the taking of investment advice.

Whilst the statutory duty of care applies (if not excluded) to the manner of the exercise of a discretionary power, it does not apply to the initial decision of the trustees whether or not to exercise that power. It does apply, however, to the requirement that discretionary trustees must keep under review the range and type of investments.

The statutory duty of care is itself framed in context-sensitive terms. It is partly subjective in that a trustee is expected to show such care and skill as is reasonable in the circumstances, taking into account in particular:-

(a) ..any special knowledge or experience that he has or holds himself out as having; and

(b) if he acts in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession.

Hence, the standard expected varies according to the degree of knowledge or professionalism professed or possessed by the particular type of trustee. A higher standard in relation to investment is therefore be expected of an investment banker acting as a trustee in the course of such banking business than is to be expected of a trustee who is either a non-professional/layman, such as family member or family friend, or who is a solicitor/ trustee carrying out his/her trustee investment duties. The Law Commission were of the view that this is merely a codification of a modern ‘prudent man of business’ standard.  Section 1 of the 2000 Act, however, also, in effect, put into statutory form the principles established in the case of Bartlett v Barclays Bank Trust Company. [1980] 1 All ER 139. In the Bartlett case, Barclays Bank Trust Company was sued by a beneficiary for failing to exercise proper supervision over the management of a company in which the trust had a controlling shareholding. The trustees' failure to supervise the activities of the company had led to the latter losing a large sum of money in a disastrous property speculation. Brightman J refused to lay down any general rule as to how trustees who had a controlling interest in a company should act. Nevertheless, he did say that they should ensure that they received a sufficient flow of information in time to enable them to make use of their controlling interest, should this become necessary for the protection of the trust asset. In his view, the Bank, acting as a professional trustee, had a higher standard placed upon it than the ordinary lay trustee; and, in failing to ensure that it did receive a sufficient flow of information which would have enabled it to put a stop to the property speculation, had breached that higher standard:

A trust corporation holds itself out in its advertising literature as being above ordinary mortals…The trust corporation holds itself out…as capable of providing an expertise that it would be unrealistic to expect and unjust to demand from the ordinary man or woman who accepts, probably unpaid and reluctantly from a sense of family duty, the burden of trusteeship.( per Brightman J at page 152).

This decision led to some degree of uncertainty in the law, particularly as to the expectations placed on professional trustees in different kinds of circumstance; it is this uncertainty that the 2000 Act sought to remove. It would appear that Section 1 of the Trustee Act 2000 has been effective in that it has both simplified and clarified the position regarding the degree of care that can be expected of different categories of trustee in specified contexts. Viewed from this perspective, Section 1 represents a welcome improvement on the old law.

Investment 
Until the passing of the Trustee Act, 2000, the statutory powers and duties of trustees were largely defined in the 1961 Trustee Investment Act, together with the Trustee Act, 1925. The Law Commission in 1999 highlighted the problems in the existing law and made recommendations for change which involved removal of some of the restrictions on trustee investments contained in the 1961 Act. The 1961 Act, had, for example, prevented the use of trust funds to invest in companies with less than a five year dividend record. Another restriction was that the Trust fund had to be split into two parts comprising narrow and wide-range investments, in a maximum 25%/75% split. These restrictions were removed by the 2000 Act, which introduced a new power of investment to replace that contained in the 1961 Act. The 2000 Act gives much wider investment powers to trustees, including trustees of pension funds. Trustees may now make any kind of investment with the exception of certain types of land. The general power of investment contained in section 3 of the 2000 Act enables trustees to invest in anything that they could have invested in if they were the absolute owner of the funds. It is now possible, for example, for trustees to invest in newly privatised utilities, which would not have conformed to the requirements of the 1961 Act, and there is no longer any requirement to divide the fund into equities and gilts. In addition to the general statutory power, there may be express powers of investment given to the trustees in the Trust Instrument itself. 

It is necessary for trustees to review, on a regular basis, the investment decisions which they make and to obtain appropriate advice before making a particular form of investment. The 2000 Act does not specify the regularity with which investments should be reviewed, but it has been suggested by Martyn Frost, a Manager with Barclays Bank Trust Company, that such review should be at least annually (Frost, 2001). 

Trustees are expected to diversify funds so as to spread the risk naturally involved in making any type of investment. They do have to decide, however, whether a chosen asset comes within the concept of ‘investment’, which the 2000 Act unfortunately failed to define. Where there is any doubt as to whether a particular asset counts as an ‘investment’, legal and financial advice may therefore need to be sought. Clearly, company shares come within the concept of ‘investment,’ as there is an expectation that the shares will some day increase in value to the benefit of the shareholders. There may be areas of grey, however, where it is not so obvious whether a particular asset will be considered as an ‘investment.’ For example, trustees may need to ask whether a work of art, or antique, whose value depends on what a potential purchaser is prepared to pay for it in a changing market, may be considered as an ‘investment.’ This inevitably leads on to a consideration of the meaning of investment in the context of the 2000 Act.

What is meant by ‘Investment’?
As noted above, the Trustee Act, 2000, did not itself provide any definition of ‘Investment.’ The case usually cited as an authority on the meaning of investment is re Power [1947] 1 Ch. 572., in which Jenkins J stated that :

there is a distinction between purchasing freehold property for the sake of the income one is going to get from it and purchasing freehold property for the sake of occupying it or permitting someone else to occupy it. In the former case, the purchase is, in common parlance, and I think also in legal parlance, accurately described as an investment. In the latter case, it is not necessarily an investment, for it is a purchase for some other purpose than the receipt of income. ([1947] 1 Ch 572 at 575. See also Buckley J in Re Peczenik’s Settlement [1964] 1 WLR 720; cf Megarry V-C in Cowan v Scargill [1985] Ch 270 at 287 and Nicholls V-C in Harries v Church Commissioners [1992] 1 WLR 12431 at 1246.) 

It has been argued by Hicks, however, that:

Re Power is a weak authority due not only to its ambiguity but also to the historical context in which it was decided’ and that there is evidence which suggests that ‘the concept of investment has evolved to encompass a much broader meaning than the purchase of an asset for the purpose of income production (Hicks, 2001)

Hicks argues that there are a number of modern investments which are potentially valuable to the management of trust funds even though they do not produce an income. The meaning of investment, he suggests, has recently been seen as a changing concept in the modern financial world, in particular in the context of taxation cases. Hicks cites the case of Marson ( Inspector of Taxes) v Morton [1986] 1 WLR 1343 as an example of where a wider meaning was given to ‘investment’ than in the context of trust law under Re Power.

Does the general power of investment contained in the 2000 Act refer only to assets that are expected, in the normal course of events, to produce an income and/or to increase the value of the capital? Or is the duty to invest contained in the 2000 Act to be seen in the light of  ‘an evolving meaning of investment that shifts in line with commonly accepted investment practices’ as Hicks suggests (Hicks, 2001, p 212)? The Law Commission, in its 1999 Report, did not wish to define ‘investment’, which was said to be an evolving concept; but the Law Commission did point out that capital appreciation, as opposed to income yield alone, could be included in the concept of ‘profit,’ a meaning attributed to ‘investment’ in the Shorter Oxford English Dictionary. The Explanatory Notes to the Trustee Act, 2000, merely state that the general power of investment contained in Section 3(1) would allow investment in a way which is expected to produce either an income or capital appreciation. However, the Charity Commission has taken a narrower view of ‘investment’, suggesting that the purchase of non income-earning paintings or antiques would be speculative trading, rather than ‘investment.’

Additionally, trustees will also often have to consider and weigh in the balance the interests of different categories of beneficiary, namely, beneficiaries with a life interest and those who are remaindermen, who are essentially interested in the capital and its appreciation. Clearly, therefore,  ‘investment,’ in the context of the 2000 Act, must extend to capital appreciation in some circumstances, but the particular ‘investments’ chosen would then also need to produce an income for the benefit of any tenant for life. This would, as the Charity Commission has suggested, rule out the purchase in such circumstances of antiques, as these produce no income, their only value lying in capital appreciation. Where, however, there is only the one category of beneficiary, interested in both the capital and the income, there is no need to balance income against capital. Furthermore, trustees are also given the powers of an absolute owner, who would not normally be concerned with such complex balancing issues (section 3(1) Trustee Act 2000). It is therefore arguable that in such circumstances, a purchase which produces capital appreciation only would be an allowable ‘investment’. 

Where the beneficiary is interested in the income only and the trustees have no discretionary powers concerning either income or capital, the problem of what constitutes ‘investment’ becomes more acute. It could be argued that, for example, it should be possible to make use of non-income earning assets, such as life insurance single premium investment bonds, but this is by no means certain and would obviously not be suitable in the latter case mentioned above, where the beneficiary’s only interest is in the income. The advantages of using such assets is that they save time and money in trust administration, and they comprise some flexible forms of  asset, ( e.g. risk-graded, with profits funds and specialised investment funds) which would suit many trustees, but the current financial market is unstable, following the fall in the stock market post the events of September 11th, 2001. It may therefore be necessary for new trust documents expressly to permit the use of trust funds in a way which does not fall within the traditional concept of ‘investment,’ as discussed previously. As far as existing trusts, established before the 2000 Act came into force, are concerned, these should also be reviewed regularly post the Trustee Act, 2000, to ensure that the trustee’s actions concerning investment comply with the terms of that Act. 

Restrictions on the new power of investment
Trustees do not have an unfettered discretion concerning investments under the 2000 Act. The fundamental duties of trustees, such as to act in the best interests of the beneficiaries and the self-dealing rule, continue to apply under the general law of trusteeship. In addition, the duty of care contained in Section 1 of the 2000 Act, also applies to decisions on investment. There is the additional requirement, contained in Sections 4 and 5, to have regard to the need for diversification and suitability of the investments chosen ( referred to as ‘the standard investment criteria’); and, where appropriate, to obtain and consider proper advice. ‘Suitability’ in this context means both as to the kind or type of investment and also as to the specific investment as an investment of that kind (e.g. shares in general as an investment type and shares in the particular company chosen). The newer power of investment is also a ‘default’ provision, in that it can be excluded or modified by the express terms of the trust instrument, or, indeed, by either primary or subordinate legislation. Unless excluded, however, (either by an express power of investment or by Part II of the 2000 Act itself), the power of investment applies to those trusts already in existence when the legislation first came into effect and all trusts arising on intestacy. In the case of trust deeds dated prior to 3rd August, 1961, however, the general power of investment does not replace all the express powers given by the settlor. Instead, it prevents such a trust from restricting the newer statutory power from operating, but it still preserves any wider powers contained in the trust deed itself. Some change of investment behaviour for trustees whose trusteeship arose before the 2000 Act came into force may therefore be required.

Where the statutory power of investment does apply, Trustees, whether new or pre-existing, need to consider not just the risk involved in choosing a particular investment but also the need, across a spectrum of investments, to produce sufficient income whilst maintaining capital growth. This leads on to a consideration of portfolio theory in the context of investments.

Diversification and Portfolio Theory
As J Getzler points out:

an important policy plank of the 2000 Act, as set out in the Law Commission reports, is acceptance of portfolio investment theory. (Getzler, 2002, p9, para 2) 

Portfolio theory was introduced into US trusts law in the 1970’s by Posner and Langbein, where it was used as a micro-economic basis for maximising return on trust investments. More recently, however, the theory has come under attack from economists such as Shiller (2000) and Shleifer (2000).  Hence, the 2000 Act, in using portfolio theory as its basis, has, as Getzler puts it, used ‘controversial economics to justify supposedly technical and non-contentious law reform.’ (Getzler, 2002, p 10, para 1).
The 2000 Trustee Act uses the test of standard investment criteria. These criteria are defined in Section 4(3) of the Trustee Act, 2000, and are similar to those formerly contained in the 1961 Act. The standard investment criteria are said to be in accordance with modern portfolio theory. The latter is claimed to demonstrate the advantages of diversification (see Lee, 2001, p 10). Portfolio theory suggests that the element of risk involved in investment cannot properly be understood by looking at each investment in isolation to others contained within the portfolio. The basic principle behind the idea of a portfolio of investments is to minimise both the risk and the administrative costs involved. Diversification of investments averages out profits and losses, with profits coming out on the winning side, whilst expensive enquiries with a view to predicting price movements are largely avoided. An investment which would, in isolation, possibly be regarded as a bit risky may, when combined with other investments, form part of a portfolio in which the overall degree of risk may be reduced to an acceptable level. Whether a loss in one investment within the portfolio should attract liability upon the trustees should then be determined, not by looking at that investment in isolation, but in relation to the overall risk embarked upon in the context of the portfolio as a whole.   

A diversified portfolio of investments in, say, shares, can be index-linked and mirror the market; changes in the market can then be reflected by further purchases and sales of shares. Some shares that are falling in value are therefore sold to pay for the purchase of other shares which are increasing in value, thus ‘playing the market’ by trading (Brearley, 1983).

The question arises whether modern trustees are, in general, allowed to ‘play the market’ in this way under the powers contained in the Trustee Act, 2000, without risking a successful action for breach of trust. Lee has argued, in relation to similar powers contained in legislation from Australian jurisdictions, that trustees can play the market only if ‘that is the purpose of the trust, or if the needs and circumstances of the beneficiaries require it (Lee, 2001 at p 11).’  Lee suggests that it is difficult in general for trustees to justify selling an investment if it is done solely for the purpose of raising funds to purchase another asset at the same value, even though the trustees may honestly believe that the value of the asset sold will fall and that of the purchased asset will rise. Lee points out that swapping investments is often incompatible with efficient financial management, in that the costs of sale and purchase of investments, where purchases are often ‘commission -driven,’ may outweigh any long-term benefits of swapping investments. Lee concludes that a sale or purchase by trustees has to be done for some other reason than some imagined benefit to be gained from trading. Can the same be argued in relation to the powers contained in the Trustee Act, 2000?  Is it necessary for settlors to play safe and provide for wider express powers of investment in the trust tnstrument in order to enable trustees to ‘play the market’ in shares? It is suggested that the general requirement for trustees to act in the best interests of the beneficiaries and the statutory duty of care may both militate against ‘playing the market.’ Trustees are expected to monitor the trust investments regularly, but a fine balance may have to be worked out between the costs of ‘playing the market’ and the long-term anticipated benefit to the beneficiaries from doing so, especially at times when shares on the stock exchange are falling generally. Asset switching of this kind may be a dangerous game to play and could lead to liability for breach of trust under the newer statutory duty of care. Settlors who wish to give their trustees the power to play the market and swap investments at a similar value should therefore be advised to ‘play safe’ by including such wider express powers than that which the 2000 Act itself seems to provide. 

The Economic context in the Twenty first century
In 2000, the global picture on the stock markets was showing signs of a downturn; and, whilst there has been some recovery since then, the market has been volatile. The beginning of the Gulf War in 2003 caused further panic in the market but its end brought some relief as equity investors begun to believe that an economic recovery was on its way. The improvement in the global economy was led by the United States of America, with Asian economies, particularly the Chinese, also assisting in the broad road to economic recovery. In the United Kingdom, strong economic growth, aided by government spending and relatively low interest rates, has assisted the housing market and consumer spending during 2003. Against this background, the UK equity market has performed well in relative terms, outstripping property investments, bonds and returns on cash deposits in the UK. Nevertheless, the UK equity market underperformed as against other major equity markets and the trend has therefore been for UK equity holdings to be reduced in favour of other asset classes. A continuation of this trend could lead to a situation where the UK equity market struggles as against other equity markets, but it does present the opportunity for long-term investment where UK equities can be bought at reasonable values with the prospect of an improvement in their value in the long-run, although this is of course a risk which investors holding trust assets need to consider very carefully.

Compared to the UK, economic growth in Europe in the same period (2000-2003) had been weak. Germany experienced a recession, whilst other European countries did not perform well. Whereas the UK  increased government spending and decreased interest rates in the period, many European countries did not follow this path. The result has been low growth; this, together with the strength of the Euro, has hindered exports of manufactured goods to the rest of the world for a large part of the period under scrutiny. However, some recovery in the EU economy was becoming apparent at the end of 2003 and a degree of business optimism helped to lift share prices, which currently offer reasonable value for investors.

In contrast, the US equity market has shown its strength. This can be attributed partly to the end of the Gulf War, but also to the cost-cutting exercises undertaken by many American corporations, including lower levels of employment and decreased investment spending. Growth in productivity, despite lower staff levels, combined with the weakness of the dollar in 2003 to improve profitability for American corporations.

Japan also saw an improvement in corporate profitability and the signs for the future are looking good, whilst in the Pacific Basin region, an increasing demand for IT - related products has meant that this area is also improving economically with consequent increase in share values for those companies involved. Despite the SARS outbreak in China, and the current threat from Red Chicken Flu, this country has been a major beneficiary of the growth in consumption in America.

For those who would normally invest in Government Bonds, the factors which tend to move against them include high interest rates and high government bond issuance. In 2004, the US Government is committed to re-building Iraq after the Gulf War and this will mean an expansion of Government borrowing. In the UK, the economy is predicted to be weaker in 2004 than was predicted by the Treasury and this may well result in a greater issue of Government bonds to cover the shortfall of income from taxation. On the positive side, however, is the fact that, whilst interest rates have risen marginally in the last year, they are still relatively low in the UK - a factor which should assist in the continued attraction of both Government and Corporate bonds. 

As regards investments in property in the UK, commercial property continues to be a reasonable risk, with sustained demand from both private and institutional investors, especially in relation to property suitable for retail trade. Although there is some weakness in market rents, rental incomes are expected to rise, although much will depend on whether interest rates continue to rise much above the current level of 4.0% (as at February, 2004, increase by 0.5% in total in a year). If interest rates do rise significantly, which is not expected to happen, then a fall in property prices, especially of occupational property, could result, mirroring the movements that were seen in the market in the 1980’s and early 1990’s. This would make property cheaper to buy, but the rental income from such properties may also be lower, making it less attractive for investors. As a longer-term investment, a recovery in the occupational market could lead to capital growth on properties that were bought whilst prices remain relatively low. It is expected, however, that the Government will not wish a return to the problems of the 1980’s and 1990’s, that any rise in interest rates in the UK in 2004 are likely to be modest and that this should result in some stability in the property market.

In the light of this economic background, trustees need to exercise a regular review of trust investments in order to ensure that they are carrying out their duties appropriately under the terms of the Trustee Act, 2000.

In a typical Portfolio, the sort of investments that would currently appear to be acceptable within the confines of the Trustee Act, 2000 are some or all of the following: 

UK Equity
European Equity
UK Equity Income
UK Growth Blue chip Tracking
International Index Tracking 
Corporate Bonds
Government Bonds
Preference Shares
US Growth
World Leaders, especially from America and the Far East
Sustainable Future Global Growth
Sustainable Future Managed
Higher Income Plus
Monthly Income plus
Managed Higher Income; and 
Sustainable Future Corporate Bond.

The above pay either dividends on distribution or interest distributions, which, in the case of a trust where there is an income beneficiary, produce the necessary income to which that beneficiary is entitled. 

An investment portfolio requires liquidity, stability and growth. The liquid (cash) part of the portfolio is maintained in order to provide for immediate needs or emergencies; it is often 5% to 10% of the value of the trust fund and is usually placed in either a bank deposit or other similar short term cash deposit. The element of stability is provided by the fixed interest investments, such as Government Stocks, Eurobonds and Treasury Bills, and can range from between 20% to 60% of the value of the trust fund. Growth, however, is the most difficult part of the investment portfolio and it is particularly here that a financial expert’s advice and recommendations become very important, even though the trustees ultimately retain the responsibility for investment decisions. Most of the part of the investment portfolio allocated to growth will normally be in shares in market leaders, rather than the smaller companies, but an asset model allocation can be agreed between the advisor and trustees that will enable changes to be made in the allocation as the stock market alters. There always remains the risk, however, that the stock market may crash once again, sending the value of shares generally tumbling downwards --a non-diversifiable risk that cannot be adequately catered for in a portfolio of investments. Nevertheless, when the market does eventually recover, the smaller companies that have been undervalued should see a greater share price increase than the blue-chip stocks. The latter, regarded as ‘the safer bets,’ still tend to be the investors’ favourite in times of economic uncertainty. Investing in a range of smaller Companies, on the other hand, involves a much higher risk, as well as a willingness to tie up capital long term. This type of investment on its own may not be suitable for trust funds where access to capital in the shorter term may be required, or where the element of risk involved is considered too high; but, as part of a portfolio, there may be some attractiveness in including some smaller companies within the ‘growth’ element. In addition, the 2000 Act requires diversification, so that not all the ‘growth’ element of the portfolio of investments should be placed in one or two market leaders in any event. Hence, the need for expert financial advice for trustees when drawing up a portfolio of investments which adequately caters for both growth and stability.

The Acquisition of Land
Until 2000, trustees of personal property had no general power of purchasing land unless expressly authorised by the trust instrument to do so. Since 1996, however, trustees of land and Settled Land Act trustees have had the power to purchase land under the terms of the Trusts of Land and Appointment of Trustees Act, 1996. The general power of investment contained in the 2000 Act did not make provision for the purchase of land; hence Section 8 was added to make separate provision in relation to the acquisition of land.

Section 8 of the 2000 Act enables trustees of any form of property to acquire land (whether freehold or leasehold) anywhere in the United Kingdom. This extends to the purchase of land either as an investment, for the provision of a home for a beneficiary of the trust or for any other purpose (such as, for example, in the context of a charity, purchasing land to be used for the furtherance of the charity's purposes). This wide power compares with that contained in Section 6 (3) and (4) of the Trusts of Land and Appointment of Trustees Act, 1996, where trustees of land are empowered to purchase a legal estate in land for the same purposes and may now do so anywhere in the UK.  In effect, Section 8 of the 2000 Act has superseded the power contained in the 1996 Act. In both contexts, the trustees will now be subject to the statutory duty of care set out in Section 1 of the 2000 Act in just the same way as when performing other trustee functions (see Schedule 1, paragraph 2 of the Trustee Act, 2000). 

Whilst Section 8 of the 2000 Act does not specifically refer to the obligation of a trustee, in considering the purchase of land, to have regard to the best interests of the beneficiaries, such a duty continues to apply as part of the general duties of trusteeship. Where land is being purchased or retained as an ‘investment’, the ‘standard investment criteria’ and duty to review investments, as well as the duty to obtain advice (which applies unless it is reasonably concluded that it is unnecessary or inappropriate to do so) also apply.

The power to acquire land is a default provision in that it is subject to any exclusion contained in the trust instrument or in any legislative provision; it is also retrospective in that it applies to any trust, whenever created, with the exception of 1925 Settled Land Act settlements and trusts subject to the Universities and Colleges Act, 1925.

Trustees who do wish to acquire land are given the powers of an absolute owner in relation to land and will therefore have powers of sale, leasing and mortgaging; they are able to own land jointly with others and to grant rights over the land. 

There is also power, contained in Section 34 of the 2000 Act, to insure trust property against the risk of damage or loss. This power is not limited, unlike that contained in the old version of Section 19 of the Trustee Act, 1925, but is a general power to insure the property as if the trustees were the absolute owners of that property. This will be particularly important where the trust property partly consists of land. When exercising the power to insure land against loss or damage, the trustees are under the statutory duty of care contained in Section 1 of the 2000 Act. This duty then applies both as to the identity of the insurer and as to the precise terms upon which the insurance policy is taken out. Insurance premiums may be paid for out of either the capital or income from the trust fund, but any insurance monies received by the trustees on the policy will become part of the capital fund.

In the case of a ‘bare trust’, however, (i.e. where the beneficiary is, or beneficiaries together are, of full age and capacity and can bring the trust to an end under the rule in Saunders v Vautier ((1841) 4 Beav. 115, 49 ER 282.),) a different position applies in relation to insurance. In this case, the trustees must comply with any directions on insurance given by the beneficiary or beneficiaries; and, if any such direction is given, the power to insure becomes non-delegable (see Section 19(4), Trustee Act, 1925, as amended by the Trustee Act, 2000, Section 34).

Collective Delegation 

There are two main questions which arise from the issue of collective delegation by trustees:-

1.In what circumstances is delegation to be permitted?

2. In what circumstances may trustees become liable for losses caused by the acts of agents?

1. In what circumstances should Trustees be able to delegate to an agent?

Previous law - a summary
Delegation at Common Law

Equity traditionally would not allow a trustee to delegate his powers to an agent on the grounds that the settlor had placed his confidence in the person chosen to be the trustee (see Turner v Corney (1841) 5 Beav. 515). This general principle of non-delegation has been enshrined in the Latin maxim ‘delegatus non potest delegare,’ but this has not universally prevented delegation by trustees. In Pilkington v IRC [1964] AC 612, HL., Lord Radcliffe summarised the modern position at that time when he stated that: 

the law is not that trustees cannot delegate: it is that trustees cannot delegate unless they have authority to do so. (at page 639).

Some trusts have always expressly incorporated wide powers for the trustees to delegate their investment and management functions to agents. However, where this has not been done, the trustees themselves, with the assistance of professional advice, have had to make the investment decisions. They have been unable to delegate the task of investment to a specialist discretionary fund manager, who would be more able to make speedy and effective decisions to assist in successful investment. 

Since 1925, trustees have been able to delegate their ministerial functions (i.e. those acts not requiring an exercise of discretion on the part of the trustees), even where there is no necessity to do so: see Re Vickery [1931] 1 Ch. 572 and also Trustee Act, 1925, section 23(1); see also discussion of this area below. Trustees have not, however, been able to delegate to beneficiaries their dispositive duties to distribute the trust fund , nor their fiduciary functions. These limitations on the trustees' powers of delegation were considered by the Law Commission to be a ‘serious impediment to the administration of trusts.’(Law Commission, 1999, para 4.6).  The task of trusteeship has undoubtedly changed considerably since 1925, so much so as to require professional skills not possessed by the average lay trustee. The traditional classification of powers of investment and some powers of management as ‘fiduciary’ (and therefore non-delegable in the absence of express permission) had clearly become outmoded in today's financial climate and modern types of investment.

The Law Commission's Recommendations
As already mentioned, one consequence of the above classification had been the inability (in the absence of express powers) for trustees to appoint a discretionary fund manager. However, where a particular trust has substantial investments, the employment of a discretionary fund manager has become increasingly necessary.  Hence, with the overall aim of facilitating investment and the better management of trusts, the Law Commission recommended that trustees should have wider powers of delegation so that they could employ discretionary fund managers and delegate their functions (Law Commission, 1999, para 4.9). This would leave trustees' powers and duties to distribute the trust fund to beneficiaries as non-delegable. The Law Commission therefore recommended that the distinction between ministerial acts and fiduciary powers be abandoned and that there should in future be a distinction merely as between powers of administration (in general, delegable) and dispositive powers to distribute trust property to the beneficiaries of the trust ( non-delegable). However, the Law Commission also recommended that the specific power to appoint or replace trustees should not be delegable to agents. In addition, the Law Commission recommended that, for the protection of beneficiaries, the power to employ agents should be subject to the same statutory duty of care discussed earlier and that delegation of any asset management function should be made or evidenced in writing. Trustees wishing to delegate the latter would also be required to formulate and keep under review a policy statement; this would provide guidance on how the asset management functions should be exercised by the agent. Trustees would then be required to secure the agreement of the agent to act in accordance with this policy statement and be authorised to pay no more than reasonable fees for the services of such agent. As will be discussed later, the Trustee Act, 2000, aimed to put into effect many of these recommendations.

2. In what circumstances may trustees be held liable for the acts of its agents?

The Trustee Act, 1925 was also intended to deal with the issue of when a trustee will be held liable for the acts of an agent. However, there are two aspects to this question which need to be considered separately. First of all, what standard of behaviour should apply to the trustee(s) on appointment of an agent? Secondly, should there be a duty upon the trustee(s) to supervise such agent after appointment and, if so, to what degree? 

a) Appointment: 
Until the Trustee Act, 2000, the general rule at common law was that trustees had to act personally and not delegate unless authorised to do so. Nevertheless, sections 23 and 30 of the Trustee Act, 1925 had enabled trustees to employ agents to conduct the day-to-day work on their behalf. Accordingly, a trustee under these provisions was only liable for his own breaches of trust and not liable for the acts of co-trustees unless himself guilty of ‘wilful default’, nor the defaults of certain types of agent, provided that the latter were employed ‘in good faith.’ These provisions thus enabled trustees to employ agents such as, inter alia, solicitors, bankers or stockbrokers, to do certain jobs on behalf of the trust. The old case-law contained in Speight v Gaunt ((1883) 9 App Cas. 1). and Learoyd v Whiteley (Re Whiteley) ((1887) 12 App Cas. 727.) no longer restricted trustees to delegating only where it was reasonably necessary to do so or where it was in accordance with ordinary business practice; trustees could henceforth delegate even where there was no real need to do so. However, only a trustee's ministerial functions could be delegated, not his dispositive nor fiduciary functions. Nevertheless, because of the decision in Re Vickery [1931] 1 Ch. 572. the true effect of the statutory power of delegation contained in Section 23 of the Trustee Act, 1925, was in some doubt. In Re Vickery, a solicitor was employed by an executor to wind up a small estate. Unknown to the executor, the solicitor had been suspended from practice twice before and the beneficiaries of the estate therefore objected to the solicitor's appointment. The beneficiaries blamed the executor when the solicitor absconded with money from the estate, but Mr Justice Maughan ruled that the executor was not liable. Basing his decision, inter alia, on Section 23 of the Trustee Act, 1925, Maughan J stated:

it ( i.e. Section 23) revolutionises the position of a trustee or an executor as regards the employment of agents. He is no longer required to do any actual work himself, but he may employ a solicitor or other agent to do it, whether there is any real necessity for the employment or not. No doubt he should use his discretion in selecting an agent, and should employ him only to do acts within the scope of the usual business of the agent. ([1932] 1 Ch 572 at p    )

Section 30 was also discussed at length in the context of the meaning of ‘wilful default.’ This phrase was interpreted by Maughan J as meaning ‘either a consciousness of negligence or a breach of duty, or a recklessness in the performance of a duty.’ (at page 581)  The narrower meaning of lack of due care (i.e. negligence) was disappointingly not attributed to the phrase ‘wilful default.’

It can be, and has been, argued that Section 30 was really concerned with relieving trustees from their vicarious liability for the acts of agents and co-trustees, but was not intended to relieve a trustee from his own personal liability. The latter for example, might continue to cover the trustee's own breach of trust in his failure to get the trust funds under his own control or in not taking proper care of them, or in failing to keep an eye on the conduct of his co-trustees or agents.

The decision in Re Vickery nevertheless appeared to enable a trustee to escape liability for the acts of an agent, provided that the trustee had acted in subjective good faith in the original appointment -  i.e. had the trustee appointed someone whom he honestly thought was the right person for the appointment? However, the case of Re Lucking [1968] 1 WLR 866. suggested that something more than subjective good faith in the original appointment might be required of the trustee, namely a duty to supervise the acts of the agent.

b) Supervision
It was suggested in Re Lucking that there may be a need for supervision of an agent even after the initial appointment was made in good faith. In Re Lucking, Mr Lucking was a trustee of a trust, the assets of which consisted of a majority shareholding in a private family company. Mr Lucking appointed an old and trusted friend, Mr Dewar, to be Managing Director of the company, but the latter appropriated much of the funds before being declared bankrupt. Although the initial appointment had been made in good faith, Mr Lucking was still held liable because of his failure adequately to supervise the activities of Mr Dewar in connection with financial matters. It was in this failure that the trustee had become personally liable for breach of trust.

Delegation under the Trustee Act 2000

It is in the light of this background that the relevant provisions of the Trustee Act, 2000 now need to be addressed.

The standard of care required in the selection and employment of agents.
Part IV of the Trustee Act, 2000 contains, in Sections 11-15 and Sections 21-23, newer provisions for the appointment of agents and the trustees' liability for their agent's activities. Sections 23 and 30 of the Trustee Act, 1925, under which both Re Vickery and Re Lucking were decided, have thus been repealed and replaced by broader powers of delegation, whilst the liability of trustees for the acts of agents has been changed. The relevant provisions of the 2000 Act are retrospective in this regard in that they apply irrespective of when the trust was created. It continues to be possible for Settlors to add even wider powers of delegation than are given under the Act, or to restrict or exclude the newer statutory powers of delegation.

Section 11 of the 2000 Act provides that trustees may authorise any person to exercise any or all of their ‘delegable functions’ as agent for the trust, but then draws a distinction between ‘Charitable’ and ‘Non-Charitable’ trusts for this purpose. In the case of non-charitable trusts, Section 11(4) establishes four sub-groups of functions that are ‘non-delegable’: -

any function relating to whether, or in what way, any assets belonging to the trust should be distributed;

any power to decide whether any fees, payments etc, to be made out of the trust fund, should be paid out of capital or income;

any power to appoint a person to become a trustee of the trust: and 

any other power which allows the trustees to delegate their functions or to appoint a person to act as a nominee or custodian.

Such functions as mentioned above are precisely those that one might expect to be retained by trustees because they are really fundamental to the notion of the office of trusteeship. Trustees are thus not able to delegate such functions as choosing who, from the named class of beneficiaries, may benefit from a discretionary trust, but they are able to delegate decisions on investment by employing an investment fund manager.

There are also (under the 2000 Act) some restrictions imposed on whom the trustees may appoint to become an agent. Excluded from appointment is any beneficiary, even if also a trustee. Nor are the trustees able to authorise two or more persons to exercise the same function(s) as agent unless they are to do so jointly: see ss 12(2) and (3) of the 2000 Act. The trustees may, however, appoint any one or more of their number to act as agent for the trust and may also authorise a person to be an agent even though that person is also a nominee or custodian for the trust: see ss 12 (1) and (4) of the 2000 Act.

The statutory duty of care contained in Section 1 of the 2000 Act replaced, in relation to collective delegation and the selection of agents, the unsatisfactory provisions formerly contained in Sections 23 and 30 of the Trustee Act, 1925, discussed earlier. Individual delegation is currently dealt with by the Trustee Delegation Act, 1999, under powers of attorney; such powers are additional to those of collective delegation contained in the 2000 Act. 

The liability of the trustees for the actions of the agent is now to be determined in accordance with Section 23 of the Trustee Act, 2000, but the agent himself, however, continues to be subject to the ordinary law of agency in regard to his liability to the trust for those actions. 

Trustees are currently entitled to reimburse their agents from out of trust funds for any expenses the latter may properly have incurred on behalf of the trust, but remuneration of agents will depend on the terms of the appointment. There are some restrictions on this, however, contained in the 2000 Act. As a general rule, trustees are able to determine for themselves, in conjunction with the agent, the exact terms upon which the agent is to be both appointed and remunerated, but there are certain restrictions placed on the content of ‘agency agreements’: see ss 14(2) and (3), Trustee Act, 2000.  These relate to allowing the agent to appoint a substitute to act on his behalf, terms restricting the agent's liability to the trust and terms enabling the agent to act in a situation where there may arise a conflict of duty and self - interest. In all such cases, the term is only be allowed to be included if it is ‘reasonably necessary’ to include it.

Special restrictions apply where trustees delegate their ‘asset management’ functions: the authority delegating such functions has to be made or evidenced in writing. In addition, trustees must prepare a ‘policy statement,’ giving guidance as to how the functions of asset management should be exercised by the agent, with a view to ensuring that those functions are exercised in the best interests of the trust. Such a statement is not required where the trustees obtain advice on investment from a person qualified to give it, but then make the final decisions on investment for themselves. Asset managers are required to give their assurance that they will act in accordance with the policy statement. The above requirements are in line with the recommendations of the Law Commission in its 1999 Report, discussed earlier.

Liability for acts of agents
Once they have appointed an agent, trustees are obliged to keep under review the arrangements for both the appointment and operation of that agent. They must therefore keep under review whether the agent is really a suitable person to act as agent for the trust, whether the terms upon which he/she was appointed continue to be appropriate and whether the agent is properly performing his/her functions. Hence, there is a duty of continuing supervision over the activities of the agent, similar to that imposed in Re Lucking. Trustees are expected to intervene and take back functions which they have delegated when it proves necessary to do so, but trustees are not liable for the misdeeds of the agent, provided that the trustees exercised their statutory ‘duty of care’ when both appointing, and reviewing, the activities of, that agent: see ss\23 and 1 and Schedule 1, paragraph 2 of the Trustee Act, 2000.

Individual delegation: Powers of Attorney:

Individual delegation, which is not covered by the 2000 Act, may now be done by an enduring power of attorney. Section 25 of the Trustee Act, 1925 only enabled a trustee to delegate all of his functions by power of attorney for a period of 12 months. The latter thus enabled temporary delegation in situations, for instance, when the trustee would be away abroad for up to a year but was intending to take up his position as trustee again upon his return. However, the supervening mental incapacity of the donor of the power automatically revoked that power. Until 1985, when the Enduring Powers of Attorney Act was passed, a power of attorney did not survive the mental incapacity of the donor, but the latter Act permitted the creation of a power which would survive such mental incapacity. Unfortunately, this resulted in inconsistency between the two pieces of legislation, which led the Law Commission, in its Report Delegation by Individual Trustees, to suggest reform. This reform is now embodied in the Trustee Delegation Act, 1999, which draws a distinction between those trustees who also have a beneficial interest under the trust and those who do not. Where the trustee has a beneficial interest, the 1999 Act allows individual delegation, by an enduring power of attorney, of the trustee's duties and powers in relation to land. The aim here is to assist co-owners of land who, in the matrimonial or quasi-matrimonial context, are often both trustees and beneficiaries and where one of them may be working abroad for a period of time. However, the ‘two- trustee’ rule for overreaching of beneficial interests held under a trust of land cannot be circumvented by payment to one of the trustees plus a delegate holding a power of attorney; the two-trustee rule continues to apply and another trustee may therefore need to be appointed. The donor/trustee remains liable for the actions of the person to whom the delegation has been made, although not for making him a delegate in the first place.

Trustees who do not have a beneficial interest in the property may only delegate trustee functions within the powers given under Section 25 of the Trustee Act, 1925, as amended by the 1999 Act. Section 25 has more safeguards than apply to a trustee who is a co-owner of land, but individual delegation may, however, likewise now be effected by an enduring power of attorney.

Exclusion of Liability

Exculpatory clauses relieving trustees from liability for negligence are quite often used in conventional family trusts, testamentary trusts and commercial trusts alike. They strike at the very heart of trusteeship and remove much of the protection otherwise afforded to beneficiaries.

Before the passing of the Unfair Contract Terms Act, 1977, professional trustees were able to rely upon exemption or limitation clauses contained in the agreement appointing them as trustees. Exemption clauses in favour of trustees have generally been upheld, provided that the scope of the individual clause is not such as to remove the irreducible core of the nature of the trustee's obligations, turning the arrangement into a sham. These core obligations are, however, fairly minimal i.e. the duties to perform the trust honestly and in good faith. In Armitage v Nurse [1998] Ch. 241; [1997] 2 All ER 705, the Court of Appeal ruled that a clause which purported to exempt a trustee from liability in the absence of ‘actual fraud’, could be effective provided that the trustee concerned had not acted dishonestly. In other words, exempting from liability for negligence would be allowable if the terms of the clause purporting to do so were sufficiently and clearly drafted: see below.  There was, it was considered, no authority that suggested that such an outcome was either contrary to public policy or contrary to the very nature of trusteeship. This may be true of current English Trusts Law, but it ignores the effect of the Unfair Contract Terms Act, 1977.  It is also interesting to compare English law in this area with both American and Canadian law, where some useful lessons may be learned.

Since the decision in Armitage v Nurse, it has become clear that the courts will give effect to clauses which unambiguously relieve a trustee from liability for gross or any other level of negligence (consideration of the Unfair Contract Terms Act, 1977 apart)The courts will, however, construe an exculpatory clause restrictively such that ‘anything not clearly within it should be treated as falling outside it.’: Bogg v Raper (1998) Times Law Report, April 22nd. It should be noted, nevertheless, that the Unfair Contract Terms Act, 1977 was not pleaded in Armitage v Nurse and that, had it been pleaded, there might well have been a different outcome to this case.

Many of the cases concerning trustees and exemption clauses have involved issues of construction and whether there has been any ambiguity in the drafting of the clause: see, for example, Wight and Another v Olswang and Another, The Times Law, 18th May, 1999. There has, however, also been some academic debate on the effectiveness of trustee exemption clauses under the Unfair Contract Terms Act, 1977. This Act requires that, in the business context, exemption/limitation clauses, which seek to exclude or limit liability for negligence, be subjected to a requirement of ‘reasonableness’ (s 2) This is an issue which requires the court to consider whether the term is a fair and reasonable one to have been included in the light of the circumstances which were known or which ought to have been known to the parties at the time of contracting: see ss 2, 11 and 12. The 1977 Act clearly has no application to the ‘lay’ trustee, who does not act in the course of a business, but there is a possibility of its application in relation to professional trustees. Nevertheless, in the case of Bogg v Raper, it was suggested that an exemption clause applying to a professional trustee would not be invalidated by the Unfair Contract Terms Act, 1977. The argument, however, against its application is a weak one. It seems to be generally accepted at present that ‘an exclusion clause is valid in respect of conduct or performance other than that which destroys the core’ of trusteeship (Goldsworth,  ). As long as the core remains intact and the trust therefore persists, the exclusion of liability then becomes merely a matter for the construction of that which was negotiated between the particular settlor and professional trustee. Exemption clauses, it is said, ought to be allowed to protect professional trustees from the consequences of bad luck or bad judgement and even from basic negligence. Market conditions, it is argued, plus the very nature of the trust assets themselves, may make the trust susceptible to loss beyond the protection that a trustee can legitimately be expected to provide. Competition between professional trustees also results in differential rates of charging clause and then the saying that ‘you get what you pay for’ becomes appropriate to the level of responsibility that can in practice be expected from the trustee. However, appointment to trusteeship after negotiations that are more appropriate to commercial contracts is neither good trust practice nor, ultimately, to anyone's advantage and therefore the current legal position regarding trustee exemption clauses is not one that should be encouraged.

The Position in Other Jurisdictions

1. The Canadian Legal Position
It has been suggested in Canada that a legislative statement concerning the status of exemption clauses is desirable, due to the current state of uncertainty in Canadian Law.  It has also been suggested in Canada that an exemption clause contained in an instrument creating a trust should not be effective to relieve a trustee for liability for breach of trust. Something along the lines of Section 96 of the British Columbia Trustee Act ( comparable with Section 61 of the English Trustee Act, 1925), it has been suggested, should be the sole source of relief for trustees. This would provide a flexible approach which ultimately leaves the allocation of risks to the court, rather than to the person in the stronger bargaining position. This approach has some attraction; it would also not be dissimilar in its effect to that which would be achieved by applying a test of ‘reasonableness,’ as under the Unfair Contract Terms Act, 1977, in that, ultimately, it would be an issue for the court to decide. This approach would therefore provide some protection to beneficiaries against those who are often in the stronger bargaining position who insist on exclusionary clauses as a pre-condition of their professional trusteeship.

2. The American Legal Position
In general, exculpatory clauses have no effect under American Law in three situations:

i.	where, on a strict interpretation ( as in English Law), the clause does not apply to the particular situation;
ii.	where the clause is against public policy (cf the English position under Armitage v Nurse); or
iii.	if the clause was improperly inserted into the trust instrument e.g. where such insertion constitutes an abuse of a fiduciary or confidential relation to the settlor (see British Columbia Law Institute, 2000).

The second category (i.e. where it is against public policy to relieve from liability), covers four situations:

i.	breaches committed in bad faith;
ii.	intentional breaches;
iii.	breaches committed through reckless indifference to the interests of beneficiaries;
iv.	breaches through which the trustee personally profits (see British Columbia Law Institute, 2000, Appendix B).

None of these four situations, however, deals with a mere breach of a duty of care, which is now one of the tests for liability of trustees under the English Trustee Act, 2000. Arguably, then, it is not against public policy, whether in America, Canada or in England, to exclude liability in a trust context for mere negligence. If, however, the Unfair Contract Terms Act, 1977 is also not applicable to Trustee Exemption Clauses in England, then the conclusion that can be drawn is that the Trustee Act, 2000 has, in short, been a waste of time and effort in the professional trustee context, at least as far as the beneficiaries' protection is concerned. Exemption Clauses can and will continue to be used by Professional Trustees to avoid liability for negligence; and the beneficiaries’ buffer against the additional powers for trustees granted by the 2000 Act will have been in practice negated. Should this outcome be allowed to continue when the Trustee Act, 2000 has imposed a higher duty of care upon professional trustees than on the lay trustee? Are there any arguments in favour of the application of the Unfair Contract Terms Act, 1977, to trustee exemption/limitation clauses?

English Trust Law Committee - ‘Trustee Exemption Clauses’: The Contract Analogy.

In its Consultation Paper, Trustee Exemption Clauses’, April, 1999, the Trust Law Committee pointed out that there are two different varieties of ‘exemption clause,’ namely, those which exclude liability for a breach of trust that has arisen and those which exclude the duty in the first place, so that no issue of breach arises. Both types of clause work at two different levels: e.g. excluding liability/duty altogether or excluding liability/duty in relation to specific degrees of seriousness, such as negligence/recklessness/fraud. The Trust Law Committee also pointed out that in common law jurisdictions, as well as in civilian legal systems, there has been a tendency to analyse from contract law to trusts in arguments about whether principles and rules of contract law, such as the 1977 Unfair Contract Terms Act, can or should apply to trusts. The Committee considered that this analogy can be misleading, for two main reasons. First of all, the trust relationship is a property relationship, not a contractual one. Secondly, a trust results in a fiduciary as opposed to a commercial relationship. The property relationship marks the trust out from the contractual relationship because of the former's potential impact on third parties, whilst the fiduciary nature of trusteeship involves, not a commercial relationship, but a relationship of both honesty and loyalty between trustee and beneficiary. Are, however, these differences between contracts and trusts sufficient to prevent the application of such protective legislation as the Unfair Contract Terms Act, 1977, to Trustee Exemption Clauses?

Policy Arguments in favour of the Application of the Unfair Contract Terms Act, 1977, to Trustee Exemption Clauses

It may be argued, as the Trust Law Committee has suggested, that a trust is so different from the normal contractual situation that the Unfair Contract Terms Act, 1977 cannot and should not apply to limit the impact of exclusionary clauses contained in the Trust Instrument. Nevertheless, when the relationships established within a professional trust are more closely examined, there is indeed an argument for the application of the 1977 Act to such trusts. One argument is based on ‘agency’ principles, namely, that the settlor, in entering into the contractual relationship with a professional trustee, is also acting as an agent for both the beneficiaries and trustee. Hence, a contractual relationship expressed in a trust deed (which does not therefore require consideration moving from the beneficiaries) also arises between the trustee on the one hand and the beneficiaries on the other hand. It is this contractual relationship which then attracts the application of the Unfair Contract Terms Act, 1977 when the beneficiaries, wishing to sue the trustee, are confronted with the exclusionary/limitation clause contained in the trust deed itself. This agency argument works to the benefit of the trustee as much as to the beneficiaries’ potential benefit because, without the agency principle, the trustee could not rely on the exclusionary/limitation clause vis a vis the beneficiaries. 

Another argument in favour of the application of the Unfair Contract Terms Act, 1977, is that, without its application, professional trusteeship would remain exactly the same in practice vis a vis exclusion as it was before the Trustee Act, 2000 came into effect. Hence, the duty of care imposed by Section 1 of the 2000 Act would, in practice, be rendered largely otiose, even though exemption clauses are more strictly construed against professional trustees than lay trustees: see Walker v Stones [2001] 2 WLR 623.

Professional Trusteeship also arises from a contract for the provision of services- i.e between the settlor and the professional trustee - and, whilst leading to a tripartite relationship with proprietary as well as contractual implications, it still has as its base the initial contract for the employment of professional services. Unless, therefore, there are strong counter policy arguments for treating this particular business relationship differently from any other business relationships, then the Unfair Contract Terms Act, 1977, should in principle be made applicable to limit the effect of exculpatory clauses contained in a trust deed.  Leaving the area of exclusion /limitation of liability to the issue of construction of individual clauses, it is suggested, may not be the best way to protect beneficiaries from the wider powers given to trustees under the Trustee Act, 2000. Nevertheless, the issue of whether exemption clauses in trust instruments should be explicitly made subject to the Unfair Contract Terms Act, 1977, was referred back to the Law Commission, which is expected to make further recommendations in this area after publishing its Consultation Paper, Trustee Exemption Clauses,  in 2002. In that Consultation Paper, the Law Commission took the view that there should not be an absolute prohibition on all trustee exemption clauses; such a move would deny to settlors the ability to modify or restrict the extent of the trustees’ obligations and liabilities and hence also remove the benefit of the trust’s inherent flexibility and adaptability to changing circumstances. Nevertheless, the Law Commission was persuaded that there is a strong case for regulation of some kind and that this should take the form of drawing a distinction between the ‘professional’ and the ‘lay’ trustee, as suggested above. The former would comprise trust corporations and any one else ‘acting in a professional capacity.’ Professional trustees would not be allowed to shelter behind exclusion clauses which protected them for a breach of trust arising from negligence. In determining whether a trustee had been negligent, the court would be given the power to ignore clauses which would be inconsistent with the overall purposes of the trust and where reliance on a clause to exempt from liability would be unreasonable in all the circumstances. 

Since its publication in 2002, there has been some response to the Law Commission’s Consultation Paper. The Association of Corporate Treasurers, for example, whilst agreeing that there is a strong case for some regulation of trustee exemption clauses, has asked that it should itself be exempt from any such proposed changes. The Association points out that trusts are widely used in corporate funding deals, particularly in relation to the issuing of bonds:

The type of trust we are concerned about here is worlds apart from the normal settlor/beneficiary, or charitable trust…..Securitisations, of which London has a very important share, and other forms of structured finance, to say nothing of secured sterling issues…would be impossible without the trust structure. Nothing should be done to prejudice this (Tait, 2003).

The Association of Private Client Investment Managers and Stockbrokers, (APCIMS, the trade association representing firms which provide stockbroking and investment management services to private customers) whilst being against an absolute prohibition, similarly considers that there is a case for some regulation of exemption clauses as used by professional trustees, but points out that trusts often have both professional and lay trustees together and that any exemption clause in the Trust Deed would currently apply to both types of trustee. APCIMS suggests that the Law Commission’s proposed description of ‘professional trustee’ be made clearer, because it is currently too vague and even circular:

It is… unclear whether the definition would include a professional trustee who acts on behalf of only one trust.

APCIMS also considers that a test of ‘reasonableness’ of an exemption clause used by a professional trustee should not be restricted by a list of considerations to be taken into account, but should remain as flexible as possible in order to be able to adapt it to changing circumstances. 

One of the important consequences for professional trustees, if the Law Commission’s suggestions are put into effect, will be the issue of insurance cover. If professional trustees can no longer exempt themselves from liability when it would be unreasonable to do so, then they may need extra insurance to cover the potential for increased liability. According to APCIMS, many financial services institutions are already finding it more difficult to obtain satisfactory levels of insurance cover at an affordable cost. The knock-on effect must be that the cost of the services which these institutions provide may in the future have to increase, an increase that will inevitably be passed on to the ‘consumer.’ Nevertheless, this may be a cost which is worth paying in return for the extra protection for trust beneficiaries. It is therefore considered that the Law Commission’s proposals concerning professional trustees and exemption clauses are to be welcomed.

Agents and limitation clauses.

In the case of the employment of agents by trustees, the Trustee Act 2000 itself has provided that a term restricting the liability of the agent to either the trustee or a beneficiary will not be allowed unless such a term is ‘reasonably necessary’(see Section 14(2) and (3)(b), Trustee Act, 2000). This is in essence no different from the test of ‘reasonableness’ to be applied under the Unfair Contract Terms Act, 1977. It is therefore to be expected that the same issues as have already been discussed earlier will apply in relation to such clauses also. There may, however, be some disagreement as to whether ‘reasonable’ and ‘reasonably necessary’ have the same meaning in this context, since it may be argued that those considerations which could apply to the trustee purporting to exempt/limit his/her liability do not necessarily apply to an employed agent (acting on the trustees' behalf) who wishes to limit liability.

Remuneration of Trustees

Part V of the 2000 Act deals with professional charging clauses and reimbursement of expenses incurred by trustees in conducting the business of the trust. The previous law on charging and reimbursement was that trustees should, in the absence of express or statutory provision or court authorisation, provide their services for free, but could claim for out-of-pocket expenses. The old law stemmed from the principle that, subject to authorisation, trustees should not derive any benefit from the trust and must not be allowed to put themselves in a position where there might be a conflict of duty with self-interest. This rule, however, has only really applied in practice to non-professional trustees, due to the widespread use of professional charging clauses in trust instruments. Nevertheless, there have been problems with express professional charging clauses, particularly as regards their construction: such clauses are construed strictly against the professional trustee. 

The Trustee Act, 2000, however, provides for remuneration in two situations: (a) where the trust instrument itself authorises remuneration; and (b) where there is no authority whatsoever from any source outside the Trustee Act, 2000 itself for remuneration to be claimed.

Where the trust instrument itself authorises remuneration, Section 28 of the 2000 Act entitles a professional trustee to claim payment even if the service provided could have equally been provided by a lay trustee. Where, however, there is no provision in the trust instrument itself for the remuneration of the trustees, Section 29 of the 2000 Act enables payment of ‘reasonable remuneration’ for services provided by a trust corporation which is not also a charity trustee. There is similar provision made for a professional trustee who is neither a sole trustee nor a trust corporation, but in this case the written consent of the other trustees of the trust to the remuneration is required. The power to consent in writing to the remuneration of a professional co-trustee may be exercised only if it is in the interests of the beneficiaries as a whole (as opposed to being in the personal interests of the trustees themselves). Trustees must continue to avoid a conflict of self-interest over their duty to the beneficiaries, which now includes the statutory duty of care. Sole trustees are not covered by Section 29, because there is not the same safeguard here of other trustees overseeing the remuneration, so as to avoid or reduce the possibility of fraud.

There is also provision made in Section 31 for the indemnity of trustees for any expenses properly incurred by them when acting on behalf of the trust.

Conclusion

 The Trustee Act, 2000, together with the Trustee Delegation Act, 1999, has gone a long way towards modernising English Trust Law and making the task of trusteeship more bearable, but at the same time the legislation has widened the gap between the professional and the ‘lay’ trustee. This is particularly important in the context of exclusion of liability, where there is still currently the opportunity for the professional trustee to exclude or limit his/her liability to the beneficiaries. Stronger powers for trustees have not entirely been matched with protection for the beneficiaries. It is therefore to be hoped that the Law Commission will follow through its recommendations, thereby correcting the imbalance that currently exists.

On balance, the task of trusteeship is much more attractive in the twenty-first century than it has ever been in the past. Trustees are now given a more modern framework of investment, which is compatible with the current market in stocks and shares, aided by computerised systems and the use of discretionary fund managers to assist them in their task. 

However, some areas of uncertainty or difficulty, that this Article has sought to identify, appear to remain, and the role of the settlor in defining his or her trustees’ powers will therefore continue to be an important one well into the twenty- first century.

Bibliography

Brealey (1983) An Introduction to Risk and Return from Common Stocks, (2nd Edition,  Blackwell).

British Columbia Law Institute (2000): Consultation Paper on Exculpation Clauses in Trust Instruments, October 2000, http://www.bcli.org/pages/projects/trustee/consultation6/Exculp.CP.html

Frost (2001): The Trustee Act 2000 isn’t just about default powers, TACT, The Association of Corporate Trustees, Issue 16, July 2001.

Getzler (2002) ‘Legislative incursions into modern trusts doctrine in England: The Trustee Act 2000 and the Contracts ( Rights of Third Parties) Act, 1999’,  Volume 2, Issue 2, Article 2 , Global Jurist Topics, page 9, paragraph 2.

Goldsworth, ‘Exemption or discretionary mercy’, Trusts and Trustees, Volume 5, Issue 4, http://www.trusts-and-trustees.com/opinion/v514.htm .

Goodhart (1980) ‘Trustee Exemption Clauses and The Unfair Contract Terms Act 1977’, Volume 44, The Conveyancer and Property Lawyer, page 333

Ham (1995)’Trustees’ liability’ Volume 9 Trust Law International  21.

Hicks (2001), ‘The Trustee Act 2000 and the modern meaning of ‘investment’.’ Trust Law International, Volume 15, No. 4, , 203.

Jones (1959) ‘Delegation by trustees: a reappraisal’ 22 Modern Law Review 382

Law Commission (1999) Report No. 260, Scot No, 172, Trustees' Powers and Duties Law Com."

Law Commission (1994) Report No 222Delegation by Individual Trustees, Law Commission 

Law Commission (2002) Consultation Paper No. 171.Trustee Exemption Clauses

Lee (2001) ‘Trustee Investing: Homes and Hedges’, Volume 1, No. 1, Queensland University of Technology Law and Justice Journal, 3

Matthews (1989) ‘The Efficacy of Trustee Exemption Clauses in English Law’, Volume 53, The Conveyancer and Property Lawyer, 42 .

Shiller (2000) Irrational Exuberance, Princeton UP, Princeton, 2000.

Shleifer (2000) Inefficient Markets: An Introduction to Behavioural Finance, Oxford University Press, 2000.

Stannard (1979) ‘Wilful default’ Volume 43 The Conveyancer and Property Lawyer,  345

Tait (2003) Trust law review ‘could hit City’s ability to raise cash,’ National News, July 22 2003.