Trustees' Duties

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Fiduciary Obligations

Introduction

A fiduciary relationship is, in essence, a relationship of trust and loyalty

  • It is an obligation owed by the fiduciary to the other party, and not vice versa

A fiduciary duty is a duty to act in the best interests of another, if necessary in preference to one’s own interests: Wollenberg case 2011 (Lewison J)

“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence” → Bristol and West Building Society v Mothew [1998]

Established fiduciary relationships

There are a number of well established fiduciary duties

The following are some established examples where a fiduciary relationship was found:

  • Trustee and Beneficiary
  • Director and Company
  • Solicitor and Client
  • Partner and Partner
  • Agent and Principal
  • Crown servants (see below)
  • Self-appointed agent (see below)

Crown Servants

In Reading v Attorney General [1951] an army sergeant was involved in a smuggling operation. It was held that he had breached his fiduciary duty to the Crown; so the Crown could recover payments from him

In Attorney General for Hong Kong v Reid [1994], Mr Reid was the Acting Director of Public Prosecutions for Hong Kong. He took bribes to stop the prosecution of criminals and used this money to buy some land in New Zealand

  • The Privy Council held that there was a fiduciary relationship with the Hong Kong government, so property could be recovered.

In Attorney General v Blake [2001], Blake (ex-MI6) signed an agreement not to disclose any information about his work. He later wrote a book about his work and was found to be in breach of his fiduciary duty to the Crown.

Self-appointed agent

In English v Dedham Vale Properties [1978] a couple sought to sell land and were negotiating with Dedham. Dedham applied for planning permission on the land, which was granted, and therefore made the land more valuable. Dedham did not tell the couple this and bought the land at its original value. The couple subsquently sued.

  • It was held that Dedham had appointed themselves as agents of the couple in applying for planning permission so there was a fiduciary duty (which includes a duty to disclose any conflicts of interest); so Dedham had to account for the profits made on the transaction

In O’Sullivan v Management Agency and Music Ltd [1985] a singer entered into an excluive management deal with a promoter, who induced him to sign contracts which were disadvantageous. It was held that there was a fiduciary relationship and the promoter should account for the profits he made

Non-fiduciary Relationships

Employer and Employee:

It is usually held that there is not a general fiduciary relationship between employee and employer: University of Nottingham v Fishel [2000]. However, the particular circumstances of a specific role may impose fiduciary duties

Senior employees may also be in a fiduciary relationship to the company e.g. in Tesco Stores Ltd v Pook [2003], Pook had liability for acquiring land for the development of new stores. In breach of his fiduciary duty to Tesco he took bribes and concocted false invoices

Doctor and patient:

In Sidaway v Bethlem Royal Hospital Governors [1985], the claimant tried to establish that the doctor in question (who had performed an operation) owed the patient a fiduciary duty. Lord Scarman said that this attempt fails as there “is no comparison to be made between the relationship of doctor and patient with that of solicitor and client”

Specific Duties owed by fiduciaries, other than trustees

In addition to the duties imposed by the court, people in fiduciary relationships may have additional/specific duties under statute

Directors

The cases of Industrial Development v Cooley [1972] and Guinness v Saunders [1990] both said that where a director takes advantage of their position and makes a personal profit, those profits are to be held on behalf of the company on a constructive trust

The duties owed by directors to their company are now in the Companies Act 2006, Part 1

Agent

“No man can in this Court, acting as an agent, be allowed to put himself into a position in which his interest and his duty will be in conflict” → Parker v McKenna (1874) (Lord Cairns)

Partners

Duties owed by partners to each other are set out in the Partnership Act 1890 s30-32

Fiduciary Duties

Bristol and West Building Society v Mothew [1998] listed some defining characteristics of the fiduciary duty, including good faith, not making a profit, and avoid conflicts of interest

To make a claim for breach of a fiduciary duty, there must be a relationship between the fiduciary relationship and the act which founds the claim

  • Re Coomber; Coomber v Coomber [1911]: a court will not find a breach of a fiduciary duty if the breach is not fiduciary in nature (i.e. not a breach of trust and confidence)
  • Bristol and West Building Society v Mothew [1998]: negligence and incompetence is not a breach of a fiduciary duty, but may give rise to a remedy in tort

So what are these fiduciary duties?...

Making a Profit

A person in a fiduciary relationship may not make a profit from the relationship; but they are entitled to remuneration (i.e. fair pay for a job)

  • For example, your solicitor owes you a fiduciary duty and also charges you → so being paid as a fiduciary is fine but making a profit is not fine without the informed consent of the beneficiary

See the following cases:

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CONTENT

Act in Good Faith

Fiduciaries also have a duty to act in good faith

  • In other words, trustees are required to act in good conscience and without dishonesty, at the most basic level

See the case of Odyssey Entertainment Ltd v Kamp [2012]

Conflict of Interest

A conflict of interest will be held to arise where a fiduciary has a personal financial interest in a transaction affecting the person/company to whom they owe the duty.

  • Trustee must not grant or sell trust property to himself (the rule against self-dealing), and, if he purchases an equitable interest in the trust property from a beneficiary, the onus is on the trustee to prove that the purchase was fair and that he took no advantage of his position (the fair dealing rule)

Failure to declare such a conflict by a director is now a criminal offence: Companies Act 2006 s182-183

See the case of Isaac and others v Isaac [2005]

Acting for Third Party

In general, where a fiduciary is acting on behalf of one person, they cannot act on behalf of another in relation to the same issue without the informed consent of the beneficiary

  • This doesn't mean a trustee cannot be the trustee for more than one trust, and it doesn't mean that a solicitor cannot be a solicitor for more than one client
  • But it does mean a solicitor cannot represent more than one client in relation to the same affair e.g. a solicitor cannot act for both the claimant and the defendant and, another example, the solicitor cannot act for both the buyer and the seller → they must have separate legal representation generally

The case of Hilton v Barker Booth (a firm) [2005] listed two circumstances where a fiduciary may act on behalf of 2+ people in respect of the same matter:

  • Where the person has given informed consent and the parties' interest does not conflict; or
  • Where the circumstances are such that acting on behalf of other parties is an implied term of the relationship (i.e. it is common practice)

Also see the case of Kelly v Cooper [1993]

Duties of Trustees

Intoduction

As well fiduciary duties, the trustees may also owe some other, non-fiduciary, duties

  • So although there are some fiduciary obligations that the trustee will owe (which will give rise to a fiduciary breach if breached) there are other duties of the trustee that are more wide reaching (but will NOT amount to a fiduciary breach if breached, but just a mere breach of their duty)

There is no defined list of trustee duties. However, some duties are defined by statute, in particular under the Trustee Act 2000.

Duty to familiarise themselves with the trust instrument

Once a trustee accepts the office of trustee, that trustee is bound by all of the obligations in the trust instrument → so the general responsibilities are for the trustees to familiarise herself with the terms of the trust, the nature of the property involved, the range of objects within the contemplation of the trust, the identity of the other trustees, to consult all of the documentation connected to the trust and to familiarise herself with any other info pertinent to the management of the trust which is not recorded in documentary fashion

  • Failure to obey the terms of the trust will constitute a breach of trust (Clough v Bond 1838)

This duty is affirmed in the case of Hallows v Lloyd (1888): a trustee cannot just sit there without investigating the nature and extent of her obligations as trustee; a trustee will be liable for any matters of which she could be expected to have knowledge

Also see the case of Nestle v National Westminster Bank [1994]

To exercise their discretion and consider their powers

Where trustees have a discretion, they must exercise that discretion.

  • A failure to carry out an action required by the trust or the performance of an unauthorised action will constitute a breach of trust

In McPhail v Doulton [1971], Lord Guest said that if the trustees fail to exercise their discretion, the court can compel them to exercise the trust

In Re Locker's Settlement Trusts [1978], there was a discretion in the trust to distribute income annually. The settlor of the trust, regardless of this discretion, gave instructions not to make distributions for 3 years. It was held that the trustees should have ignored the settlor and obeyed the trust instrument

In the case of mere powers, where there is no obligation to exercise the power, the trustees are still obliged to consider whether to exercise the power: Re Hay’s Settlement Trust [1981]

  • So even though there is no obligation to exercise its power, the trustees must consider its exercise

Also see the case of Turner v Turner [1984]

To take care when dealing with the trust property

There is a general duty to preserve the trust property: this includes the duty to ensure that money is invested suitably; and that any chattels and real property are looked after.

Trustees are liable if trust property is lost or destroyed by their failure to take custody of it; but if they act with reasonable care, they are not accountable for losses caused by their agents/servants: See Jobson v Palmer [1893] and see also Trustee Act 2000 s.23

  • So, the duty of safeguarding the trust property is fundamental to the notion of trusteeship and to the operation of trusts
  • Consequently, it can easily be understood that the trustees are responsible for ensuring that no harm comes to any property which they hold on trust

See the following cases:

Duty of care in investing the trust property

The classic statement of the duty of care is set out in Speight v Gaunt (1882) as the standard, when dealing with the trust property, of an ordinary man of business

  • So the duty of care required of the trustee when dealing with the trust property used to be that “of an ordinary man of business”

This was amended in In re Whiteley (1886): the duty of care now required of the trustee is the care that “an ordinary prudent man would take if he were indeed to memke an investment for the benefit of other people for whom he felt morally bound to provide”

Case law principles have been displaced in part by sectionn 1 of the Trustee Act 2000

S.1 of the Trustee Act 2000 provides a statutory level of care: '...such skill and care as is reasonable in the circumstances, having regard -

  • (a) to any special knowledge/experience that he has or holds himself as having,
  • (b) if he acts as trustee 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.'

The test is subjective in the sense that it is reactive to the trustee’s own knowledge and experience, and the standard of care that is required will be a standard of care which is reasonable for someone with that knowledge or experience

This statutory duty of care may be excluded by trust instrument (TA 2000 sch 1 para 7)

The principle effect of the TA 2000 has been to shift the ordinary obligations of trustees from a requirement that they act prudently to a requirement that they act reasonably → a subtle but significant shift! Prudence requires caution, whereas reasonableness may not

To take professional advice when required

There is a duty on the trustee to take professional advice when required

  • “That duty includes the duty to seek advice on matters which the trustee does not understand, such as the making of investments, and on receiving that advice to act with the same degree of prudence." (Cowan v Scargill [1985])

See the case of Cowan v Scargill [1985]

The duty to take advice is now statutory

  • The Trustee Act 2000, section 5, requires trustees to "obtain and consider proper advice" (not necessarily follow such advice) about the way in whcih the trust property should be invested
  • There is an exception for when the trustee reasonably (objectively) considers that advice is unnecessary. This means that trustees must take professional investment advice, unless the amount at issue is too small to be worth the cost, or the trust instrument requires that the property is kept in a particular form (such as property or shares in a family company), or if the trustees reasonably believe that they have the requisite skill.

To avoid conflict of interests

A conflict of interest will be held to arise where a fiduciary has a personal financial interest in a transaction affecting the person/company to whom they owe the duty.

See the cases of Keech v Sandford (1726) and Boardman v Phipps [1967]

To avoid dealing with the trust property on their own account

“A trustee undertakes not to manage [the trust] for the benefit and advantage of himself” (Ex parte Lacey, per Lord Eldon)

  • A trustee must not grant or sell trust property to himself (this is the rule against self-dealing)

There is authority that a trustee may, with full disclosure and for a fair price, buy the beneficial interest of the property from the beneficiaries (the fair dealing rule)

Tito v Waddell (No 2): where a trustee deals with the beneficial interest or acquires it, there will be an obligation to demonstrate fair dealing (Megarry VC) i.e. there is a burden of proof on the trustee to demonstrate no advantage was taken of the beneficiary and the beneficiary had full disclosure of nature of the transaction (if not, it will be set aside: Hill v Langley 1988)

Holder v Holder [1968]: in this case, someone was an an executor of a will and he bought some of the property. The court did not allow him to do this

To act without remuneration, except as allowed by the trust instrument or by law

Generally, trustees cannot be paid for acting as trustees, except as provided in the trust instrument: Bray v Ford

  • Although a trustee acting in a professional capacity is entitled to receive such remuneration as is reasonable in the circumstances → see the Trustee Act 2000 below

In Re Duke of Norfolk's Settlement Trusts [1982]: Although trustees must usually act for free as a general rule, the court has an inherent jurisdiction to authorise payment to the trustees even if there is no such provision in the trust instrument, but this jurisdiction is only exercised in exception circumstances e.g. where management of the trust was more burdensome than anticipated (as happened here: trustee had to do extra work involving Capital Transfer Tax)

However, the Trustee Act 2000 provides that trustees who are acting in the course of their profession, or trust corporations, may be paid for acting as a trustee. This does not override the trust instrument (See ss.28-29 TA 2000) e.g. solicitors

As a general rule, trustees of charities cannot be paid

In Boardman v Phipps [1967] the solicitor was entitled to a fair payment for his services

Trustee is obliged to act impartially as between beneficiaries

A trustee is expected to act impartially between beneficiaries and between life tenants and the remainderman. See Nestle v National Westminster Bank [1994]

  • So trustees must treat each member of the same class of objects in the same way on the basis that each has identical rights
  • The trustees are also required to act impartially between different classes of beneficiary and not simply between beneficiaries of the same class
  • However, even treatment need not mean that each object of a trust receives the same property under discretionary trust: rather each of them is entitled to equally impartial consideration

However, “the trustees have a wide discretion” meaning that if you have property left for children for life, then remainder to grandchildren, you can (within limits) favour the life tenant at the expense of the remaindermen (Nestle v National Westminster Bank)

To consider relevant matters and disregard irrelevant matters when making decisions

In re Hastings-Bass (decd); Hastings-Bass v IRC [1975] (Buckley LJ) (now overruled)

If a trustee made a decision with adverse tax consequences for the trust (i.e. failed to consider the consequences) this would be a breach of trust. Therefore, in such a situation, the trustee could go to court for failure to consider a relevant matter to get the transaction void (thus avoiding the tax liability). The Court of Appeal overturned this rule in 2011

  • The rule in Hastings-Bass has been described by Gordon as a ‘magical morning-after pill for trustees suffering post-transaction remorse’

Pitt v Holt; Futter v Futter [2013]

In this case the Court of Appeal overturned (or more accurately, explained) the rule in Hastings-Bass

As a result, trustees may no longer rely on the Hastings-Bass rule where they have acted within their powers and in accordance with professional advice, even if that advice prspanves to have been erroneous; If a trustee takes a decision in breach of this duty the transaction is voidable, not void → this means the transaction will remain valid until it is voided and any tax liability before it is voided remains

To provide information and an account to beneficiaries

The trustees must keep accounts (i.e. keep information on the trust) and be able to produce them to beneficiaries (i.e. indicate to the beneficiaries the financial position of the trust)

Pearse v Green (1819): only beneficiaries with a right to the income of the trust are entitled to see all the accounts while, strictly speaking, a person with a remainder interest is only entitled to see accounts relating to their interest in the trust.

  • However, an alternative approach has been mooted by the Privy Council (Schmidt v Rosewood 2003) which recognises the court’s general discretion to supervise trusts and so to order access to info in favour of an applicant whenever it sees fit

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