sinels’ sixth annual channel islands trusts law conference 2010
TRANSCRIPT
SINELS’ SIXTH ANNUAL
CHANNEL ISLANDS
TRUSTS LAW CONFERENCE 2010
2
TRUSTS
AND THE OPERATION OF THE NO
REFLECTIVE LOSS PRINCIPLE
by
Victor Joffe QC
33
What if the Trustee acts in Breach of Trust or Breach of Fiduciary Duty?
1. Removal as Trustee?
2. Personal Liability : Art 30(1)
3. Equitable compensation – the restoration of the Trust
Fund : Art 30(2)
4. Litigation
44
How can Trustee liability be avoided or mitigated?
1. Exemption and anti-Bartlett clauses (Art 30(10) saving for
trustee’s fraud, wilful misconduct or gross negligence)
2. Release or indemnity by beneficiary: Art 30(6) and (7)
3. Relief by Court: Art 45
4. Prescription: Art 57
55
Reflective loss – Another Way to Avoid Liability?
The paradigm fact situation:
1. Trustee: X Trust Co Limited
2. Holds shares in ABC Limited
3. Whose directors Mr D and Ms E cause ABC to enter into a transaction
4. Which causes loss to ABC
5. Which in turn causes value of Trust’s shares in ABC to fall in value
66
What is reflective loss?
1. G Limited is a company owned by H, its shares worth £250,000.
2. It buys a piece of land for £100,000 to build on, but its Advocate
negligently fails to notice a covenant prohibiting development
3. Land is in fact worth only £10,000 – G Limited suffers loss
4. Consequently, shares in G Limited worth only £160,000 and it
can no longer pay dividends to H.
5. H’s loss reflects that of G Limited
77
General Rule: Shareholder cannot sue the wrongdoer for reflective
loss – ONLY the company can sue: Johnson v Gore Wood & Co [2002] 2 AC 1
Exceptions:
1. Company has no cause of action
2. Shareholder suffers separate and distinct loss caused
by breach of duty owed to him independently
3. [Quaere] Wrongdoer disables company from suing
88
Why a Rule Preventing Recovery of Reflective Loss?
1. To prevent double recovery: protection of the Defendant
2. To protect the company’s creditors: protection against the
Plaintiff extracting value from the company
99
Position where Shares are Held by Trustees of Trust
Exactly the same as the General Rule:
The Trustee (as shareholder), director (even if he is the Trustee or is appointed by the Trustee) and the beneficiary cannot sue for the loss suffered by the Company – ONLY the Company can sue
1010
Where the Trustee is the Wrongdoer
Example: Trustee/director of Trust-owned company causes it to enter improvident transaction.
The conventional position: Gardner v Parker [2004] 2 BCLC 554, 565:
“…it appears clearly to have been determined in [Shaker v Al-Bedrawi [2003] 1 BCLC 157] that, even when the claim is brought by a beneficiary against a trustee for breach of fiduciary duty, it can be barred by the [no reflective loss principle]. ”
11
Trustee Failure to Supervise the Directors of Trust-Owned Companies
Example: Trustee fails to prevent directors of trust-owned company from misusing company’s assets or diverting them to third parties
Position in England:
Walker v Stones [2001] QB 902: Beneficiary can sue Trustee where1. He can establish Trustee’s conduct has constituted a breach of
some legal duty owed to him personally;2. The breach of duty has caused Beneficiary personal loss, separate
and distinct from any loss that may have been occasioned to any corporate body in which he may be financially interested.
12
Is Jersey any Different?
Freeman v Ansbacher Trustees (Jersey) Ltd [2009] JLR 1
The facts:
Assets of a discretionary trust held by a company, SDR, the shares in which were all held by the Trustee. The plaintiff beneficiaries alleged Trustee failed to supervise SDR in respect of three transactions which caused it loss.
Trustee sought to have the claim struck out, relying on the no reflective loss principle. The Royal Court proceeded on the basis that the claims raised were reflective of SDR’s losses, and held at that the principle formed part of the law of Jersey.
13
Does the No Reflective Loss Principle Apply to a Jersey Discretionary Trust?
Birt DB:
“I accept that, if the [no reflective loss] principle applies to the present case, the order of justice should be struck out. However, I am by no means convinced that the principle should necessarily be applied to a situation such as the present involving a discretionary trust. I think it is not entirely clear that the principle would necessarily be applied in England; but even if it were, I consider that there are strong grounds for believing that Jersey law should follow a different path…”
14
Possible Bases of Action against Jersey Trustee
1. Beneficiaries ask Trustee to replace directors so new directors can cause company to sue former directors
2. If Trustee refuses to replace directors, beneficiaries bring action against it for new breach of trust
3. Derivative action by beneficiaries
15
The DB’s Solution?
Where Plaintiff seeks reconstitution of the trust fund, the remedy is at the discretion of the court: the court could arguably direct the Trustee to reimburse or refinance the trust-owned company.
Thus the company would no longer have suffered any loss and could not bring any claim against its directors, thereby removing the danger of double recovery.
16
The Lesson to be Learned?
1. The no reflective loss principle may not protect a Trustee from action where it has failed properly to supervise the directors of a trust-owned company.
2. The Trustee should check its PI policy.
17
Stephen Whale
Director - Private Wealth
Qualifications: FCA, FCCA
T: +44 (0) 1534 816 275F: +44 (0) 1534 700 007E: [email protected]
Channel Islands Trusts Law Conference 2010
Trusts and the operation of the no
reflective loss principle: commentary
Advocate Paul Tracey
25 November 2010
What is the English position?
• Walker v Stones [2001] QB 902 at 927:
- defendants’ conduct breached a duty owed to
plaintiff personally
- that breach caused plaintiff loss separate and
distinct from any loss suffered by company in
which plaintiff has an interest
- what is meant by a separate loss?
What is the English position?
• But see now:
Shaker v Al-Bedrawi [2003] Ch 350;
Gardner v Parker [2004] 2 BCLC 554;
Barnes v Tomlinson [2007] WTLR 377;
Ellis v Property Leeds (UK) Limited [2002] EWCA
Civ
What is the English position?
All following Johnson v Gore-Wood & Co [2002] 2 AC 1 and
authorities for the propositions that, first, “[t]he fact that the
beneficiaries‘ claim may be a claim for breach of fiduciary
duty is not a reason why the reflective loss principle should
not apply” (Lewin at para 39-38) and “… the reflective loss
principle normally does prevent the beneficiaries from
recovering the diminution in the value of the trusts
shareholding in a breach of trust action caused by a breach
of duty by the trustee as a director of the company
concerned for which the company has a claim against the
director” (ibid; emphasis mine)
What is the English position?
• But see also:
Giles v Rhind [2003] Ch 618:
Reflective loss principle does not apply if the
defendant’s/s’ actions have stripped the relevant company of
funds such that the company is unable to pursue action
against the directors
• and cf.
Waddington Limited v Chan [2008] HKLR 1381
What is the nascent Jersey position?
• Freeman v Ansbacher [2009] JLR 1
• The case’s facts:
- “at all material times the shares in [the company] SDR
were the sole significant asset of the Trust and all the
underlying assets were owned by SDR or its
subsidiaries.”
(id at 8)
- application to strike out an order of justice on ground,
in part, “that the losses claimed … were merely reflective
of the losses suffered by SDR and were not therefore
recoverable at the instance of the beneficiaries”
(id at 28)
What is the nascent Jersey position?
• The Bailiff’s judgment and reasons:
“None of the English cases has had to consider the position where
there is a discretionary trust. It seems to me strongly arguable that
the two reasons for the principle may have no application in a case
such as the present. …. [The plaintiff] is merely seeking
reconstitution of the trust fund. It seems to me strongly arguable that
the remedy, were breaches of trust on Ansbacher’s part proved, is at
the discretion of the court and, being an equitable remedy, may be
moulded to suit the circumstances of the case. Thus, in the event of
the breaches of trust being proved, the court could arguably order
Ansbacher to reconstitute the trust fund exactly by reimbursing that
particular part of the
What is the nascent Jersey position?
trust fund which had been primarily affected by the breach of trust.
Thus, the court could order Ansbacher to reimburse SDR from where
the funds had been lost in the first place. Alternatively, if it was felt
that the court could only order Ansbacher to reimburse the trust fund
itself by putting the appropriate moneys into the trust fund, it seems
to me arguable that the court could nevertheless direct as a term of
such relief that the funds be used to acquire new shares in SDR, so
that the funds eventually find their way in to SDR. This would have
the effect of exactly reconstituting the trust fund because it would
take the value of the shares in SDR back to what they had been
previously and the financial position of SDR back to what it had been.
Such remedies may not be available in all cases but it seems to
me strongly arguable that they are available where the company
in question is wholly owned by a discretionary trust.” (id at 37-8)
What is the nascent Jersey position?
Further:
“It is of the first importance that beneficiaries of a trust
whose assets have been mismanaged should have a simple
and effective remedy available to them, whether such assets
are held directly by the trustee or through a wholly-
owned company. I consider that it is strongly arguable
that the law of Jersey provides this simple and effective
remedy in a case such as the present by enabling the court to
order the defaulting trustee to reconstitute the trust fund by
reimbursing the company for its losses, thereby
removing both reasons for the application of the
Prudential principle.” (id at 42)
Should Jersey follow England here?
• Lewin: “… it is necessary to consider whether the reasons
for exclusion of recovery of reflective loss outside of a trust
context apply also in the trust context” (para 39-40)
• Trust investments and/or trading all but invariably carried
out through companies
• Obvious injustice arises from rigid and unbending
application of principle
• Any justification for not applying principle or applying it
with greater discrimination where there is also loss to a trust
estate?
Should Jersey follow England here?
• Mischief at which principle directed can be prevented
otherwise in a trust context (at least, where relevant
company’s shares wholly owned on the trust)
• How convincing is the Bailiff’s reasoning in Freeman v
Ansbacher?
• How much weight do the English authorities have in Jersey
compared with the Bailiff’s decision in Freeman v Ansbacher?
• Where in English authorities is the reasoning for an
unbending application of the principle in a discretionary trust
context?
Channel Islands Trusts Law Conference 2010
Identifying and assessing the remedial
consequences of a Jersey trustee’s liability
for breach of duty to exercise reasonable care
Advocate Paul Tracey
25 November 2010
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
1 The questions
2 The statutory provisions in Jersey and England
3 The content of the duty
4 The fiduciary nature of the duty
5 Breach of duty and its remedial consequences
6 Limiting liability
7 Conclusions and checklist
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
1 The questions
• What is breach of trust under Jersey law? and what do we
mean when we use that phrase?
• What are the duties of a trustee under Jersey law?
• Does a Jersey trustee have a duty to exercise reasonable
care and skill in carrying out his or her office?
• Is a breach of duty by a Jersey trustee always a breach of
trust?
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
2 The statutory provisions in Jersey and England
• art.1(1), Trusts (Jersey) Law 1984 (“TJL”):
“ ‘breach of trust’ means a breach of any duty
imposed on a trustee by this Law or
by the terms of the trust”
• art.1(2) TJL:
“This Law shall not be construed as a codification of
laws regarding trusts, trustees and persons
interested under trust.”
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
2 The statutory provisions in Jersey and England
• What is a Jersey trustee liable to do? See art.21(1), TJL:
“A trustee shall in the execution of his or her duties
and in the exercise of his or her powers and
discretions –
(a) act –
(i) with due diligence,
(ii) as would a prudent person,
(iii) to the best of the trustee's ability and skill; and
(b) observe the utmost good faith.”
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
2 The statutory provisions in Jersey and England
• art.21(3), TJL:
“Subject to the terms of the trust, a trustee shall
–
(a) so far as is reasonable preserve the value
of the trust property;
(b) so far as is reasonable enhance the value
of the trust property.”
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
2 The statutory provisions in Jersey and England
• What do the English equivalent provisions say?
• s.1, Trustee Act 2000:
“(1) Whenever the duty under this subsection
applies to a trustee, he must exercise such
care and skill as is reasonable in the
circumstances, having regard in particular –
(a) to any special knowledge or experience that he
has or holds himself out as having, and
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
2 The statutory provisions in Jersey and England
(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.
(2) In this Act, the duty under subsection (1) is
called ‘the duty of care’.”
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
2 The statutory provisions in Jersey and England
• s.4,Trustee Act 2000:
“(1) In exercising any power of investment, whether
arising under this Part or otherwise, a trustee must have
regard to the standard investment criteria.
(2) A trustee must from time to time review the
investments of the trust and consider
whether, having regard to the standard
investment criteria, they should be varied.”
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
2 The statutory provisions in Jersey and England
“(3) The standard investment criteria in relation
to a trust, are –
(a) the suitability to the trust of investment of the
same kind as any particular investment proposed to be
made or retained and of that particular investment
as an investment of that kind, and
(b) the need for diversification of investments of the
trust, in so far as is appropriate to the
circumstances of the trust.”
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
2 The statutory provisions in Jersey and England
• s.5,Trustee Act 2000:
“(1) Before exercising any power of investment,
whether arising under this Part or
otherwise, a trustee must (unless the
exception applies) obtain and consider proper
advice about the way in which, having regard to the
standard investment criteria, the power should
be exercised.
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
2 The statutory provisions in Jersey and England
(2) When reviewing the investments of the trust, a
trustee must (unless the exception applies)
obtain and consider proper advice about
whether, having regard to the standard
investment criteria, the investments should be
varied.
(3) The exception is that a trustee need not obtain
such advice if he reasonably concludes that in all
the circumstances it is unnecessary or
inappropriate to do so.
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
2 The statutory provisions in Jersey and England
(4) Proper advice is the advice of a person who is
reasonably believed by the trustee to
be qualified to give it by his ability in
and practical experience of financial and other
matters relating to the proposed investment.”
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
3 The content of the duty
• a professional trust company? See Midland Bank Trust
Co (Jersey) Ltd v. Federated Pension Services [1994] JLR
276 at 290:
“There is, in our view, a higher duty imposed on those
who … claim a long and detailed expertise in the
field in which they practise.”
• contexts: trust investments (funds, bonds, listed shares
etc.), wholly owned private companies, partially owned
private companies
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care3 The content of the duty
• general investment power a usual provision in trust powers; trustee
will also usually be empowered to trade, to borrow, to give guarantees
and indemnities, to give security and to exercise voting rights
• The classic statement:
“[W]hat is the liability of a trustee who undertakes an office which requires him to make
an investment on behalf of his cestui que trust[?] It seems to me that on general
principles a trustee ought to conduct the business of the trust in the same
manner that an ordinary prudent man of business would conduct his own, and
that beyond that there is no liability or obligation on the trustee. In other words, a
trustee is not bound because he is a trustee to conduct business in other than the ordinary
and usual way in which similar business is conducted by mankind in transactions of their
own. It never could be reasonable to make a trustee adopt further and better precautions
than an ordinary prudent man of business would adopt, or to conduct the business in any
other way. If it were otherwise, no one would be trustee at all”: Speight v Gaunt (1883) 2
Ch 727, 739-40 per Jessell MR
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care3 The content of duty
• An objective, external standard independent of the trustee’s
personal special skill and prudence?
• What would a reasonably prudent and careful person have
done in like circumstances? Trustees’ behaviour tested by
this standard or else “[i]n every case where neglect of duty is
imputed to a body of trustees, it would necessitate an
exhaustive inquiry into the private transactions of each
individual member, - the interest of the trustee being to show that
he was a stupid fellow, careless in money matters: and that of
his opponents to prove that he was a man of superior intelligence
and exceptional shrewdness.”: Knox v Mackinnon (1888) 13 App
Cas 753 per Ld Watson at 766-767
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
3 The content of duty
• Past performance of trustees judged by standards of the
relevant period and not judged by “what the trustee
then did or failed to do by the light of later events that could
not then have been surely foreseen. They are relevant in
determining what loss resulted from the breach if there was
one. They do not help to determine whether or not there
was one”: Elder’s Trustee and Executor Co Ltd v Higgins
(1963) 113 CLR 426 at 448; see also Re Hurst (1892) 67 LT
96 at 99 and Nestle v National Westminster Bank [1994] 1 All
ER 118 per Staughton J at 134: “the trustees’
performance must not be judged with hindsight”.
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
3 The content of duty
• a duty to act positively?: trading trusts or where
active management of trust assets needed
• a duty of supervision?: investment managers, agents,
private companies in which the trustee has an interest
(possibly a controlling interest)
• a duty to provide trading and financial information to
the beneficiaries? See now The Cats’ Protection
League v Deans & Anor [2010] NZHC 130
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care3 The content of duty
• a duty of supervision: the particular position of a controlling
interest in a private company: see Re Lucking’s Will Trusts
[1967] 3 All ER 726 per Cross J at 733:
“Now what steps, if any, does a reasonably prudent man who finds himself a
majority shareholder in a private company take with regard to the management of the
company's affairs? He does not content himself with such information as to the
management of the company's affairs as he is entitled to as shareholder, but
ensures that he is represented on the board. He may be prepared to
run the business himself as managing director or, at least, to become a
non-executive director while having the business managed by someone else.
Alternatively, he may find someone who will act as his nominee on the board and
report to him from time to time as to the company's affairs. In the same way
trustees holding a controlled interest ought to ensure so far as they can
that they have such information as to the progress of the company's affairs
as directors would have. If they sit back and allow the company to be run by
the minority shareholder and receive no more information than
shareholders are entitled to, they do so at their risk if things go wrong.”
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care3 The content of duty
• a duty of supervision: the particular position of a controlling interest in a private company:
see also Bartlett v Barclays Bank Trust Co Ltd [1980] Ch 515 per Brightman J at 533-534:
“[Cross J] was merely outlining convenient methods by which a prudent man of
business (as also a trustee) with a controlling interest in a private company can place himself
in a position to make an informed decision whether any action is appropriate to be taken
for the protection of his asset … Alternatives which spring to mind are the receipt of
copies of the agenda and minutes of board meetings, the receipt of monthly
management accounts in the case of a trading concern or quarterly
reports. Every case will depend on its own facts … The purpose to be
achieved is not that of monitoring every move of the directors, but of making it
reasonably probable … that the trustees or one of them will receive an adequate
flow of information in time to enable the trustees to make use of their controlling
shareholding should this be necessary for the protection of their trust asset, namely the
shareholding … It was not proper for the bank to confine itself to the receipt of the annual
balance sheet and profit and loss account, detailed annual financial statements and the
chairman's report and statement, and to attendance at the annual general meetings
and the luncheons that followed, which were the limits of the bank's regular sources of
information. Had the bank been in receipt of more frequent information it would have
been able to step in and stop, and ought to have stopped the board embarking on the
Old Bailey project.”
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
3 The content of duty
• a duty of supervision
judged by performance of portfolio overall or by reference to individual component parts? (see Nestle v National Westminster Bank (1993) 1 WLR 1260)
Remember art 30(3), TJL: “[w]here there are 2 or more breaches of trust, a trustee shall not set off a gain from one breach of trust against a loss resulting from another breach of trust.”
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care3 The content of duty
• Do we have any conclusions as to the content of the Jersey trustee’s duty
to exercise reasonable care? What should a trustee do to discharge
this duty?
• Remember the absolute key words: “due diligence”, “a prudent person”,
“to the best of the trustee’s skill and ability”, “the utmost good faith”
• What else?: “[s]ubject to the terms of the trust … so far as reasonable
preserve … [and] enhance the value of the trust property”
• But, it remains the case that “[e]ssentially, to succeed in a claim that
negligent or unfair investment of the trustees caused loss, a claimant
beneficiary has to prove that no trustee, acting with the requisite
minimum care and skill and suffering from the bad luck that can affect
investors, could possible have ended up with a trust fund of the
complained-of value.”: Underhill & Hayton, 17th ed’n at para. 53.71
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
4 The fiduciary nature of the duty
• Is the duty a fiduciary duty/trust duty?
• That is, is a breach of the duty a breach of trust? (cf. a
fiduciary's breach of duty not necessarily a breach of
fiduciary duty)
• Are a trustee's duties in Jersey all necessarily duties of trust?
• If not a breach of trust, what sort or kind of duty has been
breached?
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
4 The fiduciary nature of the duty
• the content of a trustee’s duty to exercise reasonable care in
common law (and England?) compared with the Jersey statutory
formulation; a duty outside equity’s exclusive jurisdiction or not?
• In Jersey, a trustee’s breach of any duty imposed upon him by art
21, TJL, the trust or by common law) constitutes, by reason of art
1(1), a breach of trust. By comparison, it is contended in England
that not all breaches of duty by a trustee are breaches of trust:
see Tito v Waddell [1977] Ch 106 per Megarry V-C at 247-50
and Millett LJ in Bristol and West Building Society v Motthew
[1998] Ch 1 at 16-17.
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
4 The fiduciary nature of the duty
• The answer in Jersey? Remember art.1(1), TJL:
“ ‘breach of trust’ means a breach of any duty
imposed on a trustee by this Law or by the
terms of the trust”.
• Elsewhere, no explanation in the cases why a duty owed
by a trustee is not a fiduciary duty; linked to attempts to
limit equitable compensation by common law analogy
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
4 The fiduciary nature of the duty
• why it matters that the duty is a trusts duty (or, better
put, that breach of the duty is a breach of trust)
• causation and remoteness limits for compensation;
limitation and (conceivably) proprietary remedies
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care5 Breach of duty and its remedial consequences
• Having defined what the trustee was required to do, the next question is: did the
trustee fail to do what he was required to do?
• First, consider the definition of when a trustee shall be liable for breach of trust in
Jersey.
• See art.30(1), TJL:
“Subject to this Law and to the terms of the trust, a trustee shall be
liable for a breach of trust committed by the trustee or in which the trustee
has concurred.”
• Remember - a breach of trust is a breach of any duty imposed on a trustee by the
TJL or by the terms of the trust: art 1(1) TJL.
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
5 Breach of duty and its remedial consequences
• Next, consider the consequences of being liable for breach of trust in
Jersey.
• See art.30(2), TJL:
“A trustee who is liable for a breach of trust shall be liable for –
(a) the loss or depreciation in value of the trust property
resulting from such breach; and
(b) the profit, if any, which would have accrued to the trust
property if there had been no such breach.”
• Relevant causation test: would the loss have occurred or would a
profit have been made if there had been no breach?
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
5 Breach of duty and its remedial consequences
• Last, art. 30(3), TJL:
“Where there are 2 or more breaches of trust, a trustee shall not
set off a gain from one breach of trust against a loss resulting from
another breach of trust.”
• Cases show some difficulty in applying this principle
• Breach of trust is a breach of an equitable obligation and creates a
liability to make good the loss of trust property caused by the
wrongful act or omission; that is, an obligation to put the trust estate
in the same position as if the breach of trust had not been
committed.
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
5 Breach of duty and its remedial consequences
• Consider of the nature of equitable compensation; as to
this remedy, the fundamental rule is a simple one:
“The obligation of a defaulting trustee is essentially one
of effecting restitution to the estate. The obligation is of a
personal character and its extent is not to be limited
by common law principles governing remoteness of
damage.”: Re Dawson; Union Fidelity Trustee Co Ltd
v Perpetual Trustee Co Ltd [1966] 2 NSWR 211 per
Street J at 214
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
5 Breach of duty and its remedial consequences
• The defaulting trustee’s obligation, is “to place the trust estate in the
position as it would have been in if no breach had been committed”: id
at 215.
• It is an “obligation to restore to the estate the assets of which he deprived
it…. tantamount to an obligation to effect restitution in specie”. Thus,
“[t]he form of relief is couched in terms appropriate to require the
defaulting trustee to restore to the estate the assets of which he
deprived it” and “[t]he obligation to restore to the estate the assets
of which [the defaulting trustee] deprived it necessarily connotes that,
where monetary compensation is to be paid in lieu of restoring assets,
that compensation is to be assessed by reference to the value of the
assets at the date of restoration and not at the date of deprivation”: ibid.
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
5 Breach of duty and its remedial consequences
• The House of Lords has confirmed this reasoning in terms that:
“The basic right of a beneficiary is to have the trust duly administered in
accordance with the provisions of the trust instrument, if any, and the
general law. Thus, in relation to a traditional trust where the fund is held in
trust for a number of beneficiaries having different, usually successive,
equitable interests, (e.g. A for life with remainder to B), the right of each
beneficiary is to have the whole fund vested in the trustees so as to be
available to satisfy his equitable interest when, and if, it falls into
possession. Accordingly, in the case of a breach of such a trust involving the
wrongful paying away of trust assets, the liability of the trustee is to
restore to the trust fund, often called ‘the trust estate’, what ought to have
been there.” : Target Holdings v Redferns [1996] 1 AC 421 per Ld Browne-
Wilkinson at 434
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care5 Breach of duty and its remedial consequences
• His Lordship continued:
“The equitable rules of compensation for breach of trust have been largely
developed in relation to such traditional trusts, where the only way in which
all the beneficiaries' rights can be protected is to restore to the trust fund what
ought to be there. In such the basic rule is that a trustee in breach of trust must
restore or pay to the trust estate either the assets which have been lost to the
estate by reason of the breach or compensation for such loss. Courts of Equity
did not award damages but, acting in personam, ordered the defaulting
trustee to restore the trust estate: see Nocton v. Lord Ashburton [1914] A.C. 932,
952, 958, per Viscount Haldane L.C. If specific restitution of the trust
property is not possible, then the liability of the trustee is to pay sufficient
compensation to the trust estate to put it back to what it would have been
had the breach not been committed: Caffrey v. Darby (1801) 6 Ves.488;
Clough v. Bond (1838) 3 M. & C. 490. Even if the immediate cause of the loss is the
dishonesty or failure of a third party, the trustee is liable to make good that loss
to the trust estate if, but for the breach, such loss would not have occurred.”
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care:
5 Breach of duty and its remedial consequences
• “[c]onsiderations of causation, foreseeability and
remoteness do not readily enter into the matter”: Re Dawson
at 214
• “ … the common law rules of remoteness of damage and
causation do not apply. However there does have to be some
causal connection between the breach of trust and the loss to
the trust estate for which compensation is recoverable, viz.
the fact that the loss would not have occurred but for
the breach”: Target Holdings at 434
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care:
5 Breach of duty and its remedial consequences
• But compare:
“Equitable compensation for breach of the duty of
skill and care resembles common law damages in that it
is awarded by way of compensation to the plaintiff
for his loss. There is no reason why the common law
rules of causation, remoteness of damage and measure
of damage should not be applied in such a case”: Bristol
& West Building Society v Mothew [1998] Ch 1 at 18
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care:5 Breach of duty and its remedial consequences
• There is very good reason for distinguishing between the rules for
compensation for breach of a common law obligation and the rules for
compensation for breach of trust (or, for that matter, breach of some other
fiduciary duty).
• Given TJL provisions, no reason in Jersey not to make the distinction; see
also Australian cases which support this position – Youyang P/L v Minter Ellison
Morris Fletcher (2003) 212 CLR 484 and Maguire v Makaronis (1997) 188 CLR
449:
“… there must be a real question whether the unique foundation and
goals of equity, which has the institution of the trust at its heart,
warrant any assimilation … with the measure
of compensatory damages in tort and contract. It may be thought
strange to decide that the precept that trustees are to be kept by
courts of equity up to their duty has an application limited to the
observance by trustees of some only of their duties to beneficiaries in dealing
with trust funds.”
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
6 Limiting liability
• art.30(1), TJL:
“Nothing in the terms of a trust shall relieve,
release or exonerate a trustee from
liability for breach of trust arising from the
trustee's own fraud, wilful misconduct or gross
negligence.”
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
6 Limiting liability
• What are the usual provisions in trust deeds limiting
liability?
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
6 Limiting liability
• An example:
“In the purported execution of this trust no Trustee or delegate of or
person connected with a Trustee shall be liable for any loss or loss
of profit to the Trust Fund arising in consequence of the failure
depreciation or loss of any investments made or retained in good
faith or any failure to enhance or preserve the value of the Trust
Fund or any part thereof or by reason of any act or omission
made in good faith or of any other matter or thing except fraud
wilful misconduct or gross negligence on the part of the Trustee or
delegate of or person connected with a Trustee who is sought to be made
liable and in the case of a corporate Trustee or corporate delegate of or
corporate person connected with a Trustee all references in
this clause thereto shall include the directors officers
and employees thereof.”
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
6 Limiting liability
• exclusion of liability clause to be restrictively construed,
particularly if trustee is professional trustee company;
trustee to show case falls within ambit of clause; and,
doubts and unclear expression resolved against trustee:
Midland Bank Trust Co. (Jersey) Ltd. v. Federated
Pension Servs [1995] JLR 352
• explanation/notification of relevant clauses in trust
declaration to settlor or beneficiaries? cf proposed position
in English law
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care6 Limiting liability
• what does “gross negligence” mean?
• a serious or flagrant degree of negligence beyond ordinary
negligence (whatever that is for a professional trustee);
questions of intentional or reckless behavior irrelevant:
Midland Bank Trust Co. (Jersey) Ltd. v. Federated Pension
Servs [1995] JLR 352
• not a separate cause of action from negligence but merely a label
for the degree of culpability (therefore plaintiff pleading negligence
[sic] by trustee may amend to plead gross negligence on the same
facts, even if this defeats a defence based on prescription/
time limitation, because such an amendment is not pleading new
cause of action): Freeman v. Ansbacher Trustees (Jersey)
Ltd. [2009] JLR 1
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
6 Limiting liability
• “anti-Bartlett” clauses
• Bartlett v Barclays Bank Trust Co Ltd (Nos. 1 and 2) [1980] 1 All
ER 139; [1980] 2 All ER 92: trustees held nearly all the shares in a
company although never had a representative on the board
of directors; company had sent totally inadequate reports to the
trustees who never sought any further information; company
entered disastrous property speculations and trustees held liable
to account for failure to monitor adequately the company’s
activities (and implicitly failure to take action)
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
6 Limiting liability
• An example (seeking to limit liability of company directors,
officers and employees):
“Without prejudice to the generality of the foregoing provisions
of this clause [ ] and without prejudice to any other provisions of this
trust for the purposes of this clause [ ] any director officer or
employee of a trustee who acts as a director
officer or employee of any company or body any of
whose shares or securities directly or indirectly form part
of the Trust Fund shall be deemed to be a person connected
with a Trustee and in respect of acts or omissions made in
connection with such company or body:
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
6 Limiting liability
shall (mutatis mutandis) have the benefit of the
exemptions from liability contained in the
foregoing provisions of this clause [ ]; and
shall be entitled to be indemnified out of the trust
fund to the extent not prohibited by the constitution
of the relevant company or body or the governing
law of such company or body (in each case from time to
time) in respect of all other liabilities other than
those arising out of fraud or wilful misconduct incurred
in connection with the relevant company or body.”
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care6 Limiting liability
• And attempting to restrict the scope of the trustee’s duty:
“If the trust fund shall include any shares or other interests in
a company the ownership of which gives to the Trustees the
right in any circumstances to control the affairs of the
company or of any of its subsidiaries the trustees shall
be under no liability or duty to appoint any
representative to the Board of the said company or
any of its subsidiaries and further shall have no responsibility
to enquire into oversee or take part in the management
or affairs or business of the company or any of its
subsidiaries.”
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
6 Limiting liability
• “no duty to balance or diversify investments”? For example:
“The Trustees shall not be bound to maintain a balance between
income and capital nor shall they be under any obligation
to diversify the investments in the Trust Fund.”
• Are the more specific clauses purporting to limit liability or restrict duty
more effective than the general limitation of liability clause? Any purported
restriction of duty has a similar effect on a trustee’s potential liability
and, so, will be subject too to art 30(1)’s minimum standard.
• What if the trustee involves itself formally or otherwise with the
company’s/ies’ affairs notwithstanding an “anti-Bartlett” clause?
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
6 Limiting liability
• the role of the no reflective loss principle?:
Freeman v. Ansbacher [2009] JLR 1
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
7 Conclusions and checklist
• Conclusions
- A breach of any duty owed by a Jersey trustee is a
breach of trust: art 1 (1) TJL
- A Jersey trustee is liable if he/she commits or concurs in the breach: art 30(1) TJL
- A Jersey trustee is liable to restore the trust to the position it would have been in if no breach had occurred: art: 30(2) TJL)
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care7 Conclusions and checklist
• When these governing principles are expressed in these simple
terms, the serious issue of breach of trust becomes a deceptively
simple one.
• When these issues arise in practice, there will ordinarily be a
company involved and the trust deed will contain the usual well
drafted protective provisions.
• That being so, invariably the trustee will confidently point to his
anti- Bartlett clauses, his indemnity clauses, his exoneration clauses
and, perhaps a little more rarely, the reflective loss principle to
assist him in saying that there has been no breach of duty.
• The reality is that it is far from clear that the trustee will be able to
rely on these provisions.
Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care
7 Conclusions and checklist
• A checklist for trustees (look at from other side if a beneficiary):
Identify beneficiaries’ goals/ wishes for the trust estate (and reconcile them to reality)
Records! In writing!
Independent appointments of managers and agents on merit
Regular reviews and monitoring (again, in writing)
If there is a problem, do something (useful)
If you think your duty to your beneficiaries conflicts with other legal obligations (e.g. to prevent money laundering), nothing could be simpler than to seek the directions of the Court
Don’t be afraid to communicate with beneficiaries and involve them, where sensible, in decision making (remember art 30(6), TJL which confirms beneficiaries may relieve or indemnify you for breach of trust)
79
Stephen Whale
Director - Private Wealth
Stephen joined Jersey Trust Company in July 2010 and is head of our Private Wealth Division. Previously, Stephen held the position of Managing Director at Caversham Fiduciary Services, where he worked for over 17 years. He is a Chartered Accountant and has extensive commercial experience as well as specific expertise in wealth planning for clients based in East Africa and non-UK domiciliaries living and investing in the UK.
Qualifications: FCA, FCCA
Philip Sinel Commentary
Channel Islands Trusts Law Conference 2010
Trustees’ agents and delegates and
responsibility for loss to a trust estate
Advocate Paul Tracey
25 November 2010
1 The statutory provisions in Jersey and England
2 Distinguishing agency and delegation
3 Breach of trust and trustees’ agents and delegates
4 Two recent Jersey cases
5 Conclusions and checklist
Trustees’ agents and delegates and responsibility for loss to a trust estate:
Trustees’ agents and delegates and responsibility for loss to a trust estate
1 The statutory provisions in Jersey and England
• art.25(1), Trusts (Jersey) Law 1984 (“TJL”):
“Subject to the terms of the trust, a trustee may
delegate the execution or exercise of any of
his or her trusts or powers (both
administrative and dispositive) and any delegate
may further so delegate any such trusts or powers.”
Trustees’ agents and delegates and responsibility for loss to a trust estate
1 The statutory provisions in Jersey and England
• art.25(2), TJL:
“Except where the terms of the trust specifically
provide to the contrary, a trustee –
(a) may delegate management of trust property
to and employ investment managers whom the
trustee reasonably considers competent
and qualified to manage the
investment of trust property; and
Trustees’ agents and delegates and responsibility for loss to a trust estate
1 The statutory provisions in Jersey and England
(b) may employ accountants, advocates, attorneys,
bankers, brokers, custodians, investment
advisers, nominees, property agents,
solicitors and other professional agents or
persons to act in relation to any of the affairs of the
trust or to hold any of the trust property.”
Trustees’ agents and delegates and responsibility for loss to a trust estate
1 The statutory provisions in Jersey and England
• art.25(3), TJL:
“A trustee shall not be liable for any loss to the trust
arising from a delegation or appointment under this
Article who, in good faith and without
neglect, makes such delegation or appointment or
permits the continuation thereof.”
• Protection given only if any loss resulting from a delegation
or appointment is not through the trustee’s own wilful default
or neglect whether on appointment or any time following.
Trustees’ agents and delegates and responsibility for loss to a trust estate
1 The statutory provisions in Jersey and England
• What do the English equivalent provisions say?
• s.11(1), Trustee Act 2000 (“TA”):
“Subject to the provisions of this Part, the trustee of
a trust may authorise any person to exercise any
or all of their delegable functions as their
agent.”
Trustees’ agents and delegates and responsibility for loss to a trust estate
1 The statutory provisions in Jersey and England
• s.11(2), TA:
“In the case of a trust other than a charitable trust,
the trustees' delegable functions consist of any
function other than –
(a) any function relating to whether or in what way
any assets of the trust should be distributed,
(b) any power to decide whether any fees or other
payment due to be made out of the trust funds
should be made out of income or capital,
Trustees’ agents and delegates and responsibility for loss to a trust estate
1 The statutory provisions in Jersey and England
(c) any power to appoint a person to be a trustee of
the trust, or
(d) any power conferred by any other enactment or
the trust instrument which permits the
trustees to delegate any of their
functions or to appoint a person to act as a nominee
or custodian.”
• see also ss.16 and 17, TA (powers to appoint
“nominees” and “custodians”)
Trustees’ agents and delegates and responsibility for loss to a trust estate
1 The statutory provisions in Jersey and England
• s.22(1), TA:
“While the agent, nominee or custodian continues to act for the
trust, the trustees –
(a) must keep under review the arrangements under which the
agent, nominee or custodian acts and how these
arrangements are being put into effect,
(b) if circumstances make it appropriate to do so, must consider
whether there is a need to exercise any power of intervention
that they have, and
(c) if they consider that there is a need to exercise such a power,
must do so.”
Trustees’ agents and delegates and responsibility for loss to a trust estate
1 The statutory provisions in Jersey and England
• s.22(2), TA:
“If the agent has been authorised to exercise asset
management functions, the duty under subsection (1)
includes, in particular –
(a) a duty to consider whether there is any need to revise or
replace the policy statement made for the purposes
of section 15,
(b) if they consider that there is a need to revise or replace
the policy statement, a duty to do so, and
(c) a duty to assess whether the policy statement (as it has
effect for the time being) is being complied with.”
Trustees’ agents and delegates and responsibility for loss to a trust estate
1 The statutory provisions in Jersey and England
• s.23(1), TA:
“If a trustee has agreed a term under which the agent,
nominee of custodian is permitted to appoint a substitute,
the trustee is not liable for any act or default of the
substitute unless he has failed to comply with the
duty of care applicable to him … -
(a) when agreeing that term, or
(b) when carrying out his duties under section 22 in so
far as they relate to the use of the substitute.”
Trustees’ agents and delegates and responsibility for loss to a trust estate
1 The statutory provisions in Jersey and England
• The traditional position: not to delegate duties or
powers
• Now, delegation allowed where specifically permitted
by the trust instrument or statute
• Is there a distinction between agency and delegation?
Should you care?
• Consider standard trust terms in respect of appointing
agents and delegates
Trustees’ agents and delegates and responsibility for loss to a trust estate
2 Distinguishing agency and delegation
• First:
“Any Trustee may from time to time delegate to any
person for any period and upon any terms
whatsoever the execution or
exercise of all or any trusts and powers
(both administrative and dispositive) vested in him in
connection with this trust and (without limiting the
foregoing) unless prohibited under the terms of the
delegation any delegate may further so
delegate all or any such trusts and powers.”
Trustees’ agents and delegates and responsibility for loss to a trust estate
2 Distinguishing agency and delegation
• Second:
“The Trustees may employ and pay at the expense of
the Trust Fund or any income thereof any
agent in any part of the world and whether a
solicitor advocate attorney banker accountant
stock-broker or other agent to transact any
business or do any act required to be transacted or
done in the execution of this trust including
without prejudice to the generality of the
foregoing the receipt and payment of money
and the execution of documents.”
Trustees’ agents and delegates and responsibility for loss to a trust estate
2 Distinguishing agency and delegation
• Third:
“The Trustees may invest or hold or allow to
remain in the name or under the control
of some or one only of the Trustees or of any
person or corporation as nominee of the
Trustees the whole or such part of the Trust Fund
as the Trustees shall in their discretion think fit.”
Trustees’ agents and delegates and responsibility for loss to a trust estate
2 Distinguishing agency and delegation
• Fourth:
“The Trustees may appoint or employ investment
advisers and managers and may delegate to any
such advisers or managers (for such periods to such
extent and generally on such terms and in
such manner as the Trustees may from
time to time think fit) all or any of the
Trustees' powers and discretions with
regard to making retaining varying or transposing
investments.”
Trustees’ agents and delegates and responsibility for loss to a trust estate
2 Distinguishing agency and delegation
• Delegation:
“[a] trustee’s delegate attends meetings of the trustees
in the place of the absent, delegating trustee and
participates in the decisions of the trustees as one
of their number. A delegate is therefore concerned
with the administration of the trust as such, as well as
with all the other business that the trustees must
transact in the management of the trust property.”: Lee,
“Purifying the dialect of equity”, (2009) 7 TQR 12 at 12
Trustees’ agents and delegates and responsibility for loss to a trust estate
2 Distinguishing agency and delegation
• Agency:
“An agent … simply performs the tasks imposed upon
it by the trustees. It is concerned with
implementing decisions of the trustees relative to
the management of the trust property. An
agent rarely if ever attends meetings of the trustees and
cannot participate in any of the decisions of the
trustees relating to the administration of the
trust as such.”: Lee, ibid.
Trustees’ agents and delegates and responsibility for loss to a trust estate
3 Breach of trust and trustees’ agents and delegates
• Confusion between delegation and agency in statute and
trust deeds
• The words seem now to be used interchangeably when
there are two clear and different concepts
• It ought to matter as part of proper trusts’ administration;
it must also matter when liability for breach of trust or
breach of duty causing loss to the trust estate is in issue
Trustees’ agents and delegates and responsibility for loss to a trust estate
3 Breach of trust and trustees’ agents and
delegates
• contemporary trusts practice
• again, consider typical provisions in modern trust
deeds purporting to limit liability which might arise out
of the appointment of an agent or a delegate
Trustees’ agents and delegates and responsibility for loss to a trust estate
3 Breach of trust and trustees’ agents and delegates
• Let's try to limit liability! First:
“In the purported execution of this trust no Trustee or delegate of
or person connected with a Trustee shall be liable for any loss or
loss of profit to the Trust Fund arising in consequence of the failure
depreciation or loss of any investments made or retained in good
faith or any failure to enhance or preserve the value of the Trust
Fund or any part thereof or by reason of any act or omission made in
good faith or of any other matter or thing except fraud wilful
misconduct or gross negligence on the part of the Trustee or
delegate of or person connected with a Trustee who is sought to
be made liable and in the case of a corporate Trustee or corporate
person connected with a Trustee all references in this clause thereto
shall include the directors officers and employees thereof.”
Trustees’ agents and delegates and responsibility for loss to a trust estate
3 Breach of trust and trustees’ agents and delegates
• Second:
“Without prejudice to the generality of clause [ ] neither the Trustee nor
any person connected with any Trustee shall incur any liability
whatsoever arising from: the negligence or fraud of any delegate or
agent appointed or employed by the Trustees or any of them in
good faith although the appointment or employment of such
delegate or agent was not strictly necessary or expedient; or
anything done or omitted in conformity with any advice given or
purporting to have been given by any investment adviser or
manager appointed or employed by the Trustees or any of them in
connection with this trust or the delegation to any such adviser or
manager of all or any of the Trustees' powers and discretions with
regard to making retaining varying or transposing investments … .”
Trustees’ agents and delegates and responsibility for loss to a trust estate
3 Breach of trust and trustees’ agents and delegates
• The question: how successfully do these sort of trusts
provisions limit liability in the teeth of the Jersey statutory
provisions that define the minimum standard of trustee skill
and care and define the consequences of breach of that
standard?
• Purporting to limit the trustee’s liability to the beneficiaries
• Purporting to limit the liability of agents and delegates to
both trustee and beneficiaries
Trustees’ agents and delegates and responsibility for loss to a trust estate
3 Breach of trust and trustees’ agents and delegates
• Some further particular points as to trustees’ agents:
Trustees must ensure that a suitable agent is employed
Appointing an agent with a conflict of duty and interest or duty and duty
is not to appoint a suitable agent
Agent employed should be employed within the scope of the agent’s
business
In all questions requiring exercise of trustee’s discretion or power, the
decision has to be that of the trustee, not the agent, even if in making
that decision the trustee is guided by the advice of others; cf where
delegation of powers has actually taken place
Trustees must be diligent in ensuring that the task or responsibility
given to the agent has been or is being duly performed or discharged
Trustees’ agents and delegates and responsibility for loss to a trust estate
4 Two recent Jersey cases
• Chvetsov v. BNP Paribas Jersey Trust Corporation Limited &
anor [2009] JLR 217; [2009] JCA 157: House in north London owned on trust and occupied by
plaintiff beneficiary and his family The house was “held by MA [the second defendant] as
nominee for BNP [the trustee] and … MA executed a declaration of trust to that effect in favour of BNP as trustee of the trust”: see at 220
House renovated with considerable cost overruns causing substantial loss to trust estate; MA had entered the relevant building contract “as nominee on behalf of BNP”: ibid
Both BNP and MA sued to which MA responded arguing no proper cause of action had been pleaded against it: does a beneficiary of a discretionary trust have a claim “against an agent or delegate appointed by … [the] trustee of the trust”?: id at 221
Trustees’ agents and delegates and responsibility for loss to a trust estate
4 Two recent Jersey cases
• Chvetsov v. BNP Paribas Jersey Trust Corporation Limited &
anor “The legal position is that MA was simply an agent or delegate
appointed by BNP in its capacity as trustee of the trust. If MA were to act negligently or beyond its authority in connection with that agency or delegation, the remedy would lie with BNP as trustee of the trust. Any duties owed by MA in connection with its appointment were owed to BNP as trustee of the trust, not to the beneficiaries. It would be similar in the case of an investment manager appointed by a trustee to manage the investments of a trust. If that investment manager were to be negligent in the performance of his duties, the cause of action would lie with the trustee, not with any beneficiaries.”: per Birt, B. at 221-222
“MA held the property on bare trust for BNP, as trustee of the trust, and the remedy for any breach of that bare trust lies only with BNP, which, in its capacity as trustee of the trust, was the sole beneficiary of the bare trust. The fact that MA was acting as nominee for BNP cannot possibly mean that, simply as a result of so acting, MA thereby assumed the obligations of a trustee towards the beneficiaries of the trust”: id at 222
Trustees’ agents and delegates and responsibility for loss to a trust estate
4 Two recent Jersey cases
• Chvetsov v. BNP Paribas Jersey Trust Corporation Limited & anor:
“ … the trustee would have a cause of action against the defaulting agent
and would therefore be able to obtain restitution of any loss to the trust
fund. In the event of a trustee failing to enforce that right, the
beneficiaries would have a remedy either by way of an administrative
action to force the trustee to take action against the agent or by way of a
derivative action.”: id at 223
As to the claim in tort, “[a]n agent or delegate of a trustee owes a duty in
contract (and possibly tort) to his principal (in this case BNP as trustee of
the trust) but, in the absence of particular factors, he owes no duty of care
towards the beneficiaries of the trust” (id at 224) but “[t]his is not to say
that there may not be circumstances in which beneficiaries may have a
claim against an agent of a trustee for economic loss suffered by the
beneficiaries” (id at 226) where there is reliance by a beneficiary known to
an agent or an assumption of responsibility by an agent towards the
beneficiaries.
Trustees’ agents and delegates and responsibility for loss to a trust estate
4 Two recent Jersey cases
• Cunningham v. Cunningham & ors [2009] JLR 227: The background to the amendments sought: a purported use of
protector’s power and subsequent purported exercises of purported new trustee’s power to remove a beneficiary from the trust; all trust assets then subsequently “lent” out to remaining beneficiary
SI the purported trustee but then says it has been refused PI cover; amendment sought to allege SG trustee de son tort (amendments also sought to allege dishonest assistance against SG and relevant director of SI)
Why go after SG?:
“ … in January 2009, the plaintiff [beneficiary] was informed that [SI]’s insurers were not maintaining cover. … it is [SG] which is the main company of the … Group, with employees, property, etc., whereas [SI] merely acts as a trustee. The plaintiff is therefore concerned as to whether, even if successful, he will necessarily recover all financial loss to the trust from [SI].”: Birt, B. at 246
Trustees’ agents and delegates and responsibility for loss to a trust estate
4 Two recent Jersey cases
• Cunningham v. Cunningham & ors [2009] JLR 227 at 240:
“ … of critical importance … is that, to be a trustee de son tort, a person who
intermeddles in a trust must be one ‘ … not having authority from a trustee’ or who
‘takes it upon himself’ to act as a trustee. If a duly appointed trustee delegates
functions to a person, that person derives his authority from the trustee and is
entitled to act within the confines of the authority conferred on him by the
trustee without himself becoming a trustee.”
“ … where a duly constituted trustee appoints a person to act as his agent but
such actions cause loss to the trust fund, the beneficiaries will have a remedy for
breach of trust against the trustee, who may or may not in turn have a remedy
against the agent for any wrongdoing. However, the interests of the beneficiaries
are protected because of the strict liability of the trustee for breach of trust. In
those circumstances, there is no justification for imposing the liability of a
trustee upon an agent or deeming him to be a trustee.”
Trustees’ agents and delegates and responsibility for loss to a trust estate
4 Two recent Jersey cases
• Cunningham v. Cunningham & ors [2009] JLR 227:
“The response of [SG] was straightforward. … [SG] is the main trading or operational
company in Gibraltar of the Group. It rents office premises and employs over 50
people. It is the service company within the Sovereign Group which provides various
services, such as preparing accounts and financial statements, opening bank accounts,
legal and documentary services and administrative services, to other entities within
the Sovereign Group which act as trustees of trusts. There is power under the trust
deed of the trust to delegate and, in effect, [SI] as trustee delegated many of
its functions to [SG].”: id at 241
“[SG] submitted that it was commonplace in the trust industry for the
administration of a trust to be carried out largely by another company within
the same group of companies as the corporate trustee. … it would be very
surprising if such a company were to find itself designated as a trustee de son tort.” id
at 242
Trustees’ agents and delegates and responsibility for loss to a trust estate
4 Two recent Jersey cases
• Cunningham v. Cunningham & ors [2009] JLR 227:
“… an agent or a delegate acting with the authority of a duly appointed trustee
is not committing any ‘wrong’ by acting within the scope of his delegation and is
not ‘intermeddling’ in the trust so as to constitute him a trustee de son tort. He is
acting in the capacity in which he has been authorised to act. In those
circumstances, it is the trustee who has made the delegation that is
acting as trustee of the trust, not the agent or delegate.”: ibid
“However, if the plaintiff is successful in his claim that the purported
appointment of [SI] as trustee … is void, [SG] will not have been acting under the
authority of the trustee, because [SI] itself will not have been the duly appointed
trustee of the trust. In these circumstances, given the degree of involvement
alleged by the plaintiff, it does not seem to me that the claim that [SG] was acting
as a trustee de son tort is so hopeless as to be doomed to failure and therefore
liable to be struck out.”: id at 242-3
Trustees’ agents and delegates and responsibility for loss to a trust estate
5 Conclusions and checklist
• Conclusions:
Confusion between what a delegate is (or should be) and what an agent is (or should be); the offices are completely different (or should be) and the questions to be asked where there has been loss to the trust estate should be completely different depending upon whether you are looking at a delegate or an agent
“Modern” trusts practice and the risk of a trustee being a man of straw: what if the “administrative” agent or delegate [sic] has caused or been involved in the actions causing loss to the trust estate
What does it now mean to be a trustee?
Any right of action against an agent or nominee is an asset of the trust which a trustee should seek to realise: is the trustee happy to sue any agent he or she has appointed? If not, why not?
Trustees’ agents and delegates and responsibility for loss to a trust estate
5 Conclusions and checklist
• A trustee may delegate trusts’ powers to an agent so
making an agent a delegate also but delegates are not
necessarily agents nor vice versa.
• The distinction between agents and delegates is
hopelessly muddled and we ought to be clear about
whether we are dealing with an agent or a delegate
(even if these two offices, so to speak, are held by the one
person) because the duties of the two offices are not co-
extensive and an consequent questions of liability for breach
causing loss to the trust estate must also be different.
Trustees’ agents and delegates and responsibility for loss to a trust estate
5 Conclusions and checklist
• In Cunningham and Chvetsov, the then Deputy Bailiff
used the terms interchangeably where he stated “agent
or delegate” suggesting that there was no difference
between the two.
• Unfortunately, the then Deputy Bailiff also used the terms
“agent” and “nominee” (which term is, in itself, the
Devil’s work) interchangeably; that only serves to muddy
the waters of liability for loss to a trust estate further.
Trustees’ agents and delegates and responsibility for loss to a trust estate
5 Conclusions and checklist
• Agents’ or delegates’ liability towards the trustee?
- a direct relationship where the difficulty will be getting the
trustee to sue someone with whom he or she
probably has some kind of relationship
• Agents’ or delegates’ liability towards the beneficiaries?
- an indirect or a direct relationship?
- the difficult question may be establishing standing for the beneficiaries to sue the agent or the delegate
Trustees’ agents and delegates and responsibility for loss to a trust estate
5 Conclusions and checklist
• Is it consistent with a trustee’s duties to his or her
beneficiaries for a trustee to purport to limit or
otherwise countenance a purported limitation of
agents’ or delegates’ liability?
Trustees’ agents and delegates and responsibility for loss to a trust estate
5 Conclusions and checklist
• A trustee's checklist for dealing with agents or delegates (read through
looking glass if a beneficiary): What are you doing? Appointing an agent or a delegate? Is the agent or delegate independent? How have you selected them? What purpose is being served by the appointment? Is it for your benefit
or to serve your purposes? Or is the appointment in the interests of the trust as a whole? Can you show the latter?
Is the relevant appointment in writing? Have the adult beneficiaries been made aware of the appointment? Does the relevant appointment define what the agent or delegate is to
do? To what extent does the appointee seek to limit or avoid any liability to
the trust estate? And, if so, is your countenance of such a purported limitation or avoidance of liability consistent with your duty as trustee?
What sort of supervision/ review/monitoring regime is in place? What records would you be able to show of same?
Have you considered intervention/ replacement of appointee at any stage? If so, what records do you have showing the decision you made and the basis/es for same?
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Stephen Whale
Director - Private Wealth
Qualifications: FCA, FCCA
T: +44 (0) 1534 816 275F: +44 (0) 1534 700 007E: [email protected]
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Timothy Collingwood Commentary