TACT THE ASSOCIATION OF CORPORATE TRUSTEES
Home Page Council Committees Members
Martyn Frost FCIB, TEP
Trustee Manager, Barclays Bank Trust
Company Limited
and
Vice-President, The Association of Corporate Trustees
(From Issue 6,January 1999)
Publication of the Court of Appeal
judgement in Bogg v Raper (The Times 22nd
April 1998) has served to focus attention on exoneration clauses again,
following the previous recent review in Armitage v
Nurse (1998) All ER 705`.
Whilst some may take comfort in the
court finding for the executors of the will, the return of this subject does raise awkward
questions for those who are professionally involved with the administration of estates
and trusts and seek the protection of exoneration clauses.
What
happened in Bogg v Raper?
In Bogg v Raper it is reported that the
testator’s estate was sworn for probate at £8m and that some £6m of this was one
private company shareholding (78.3% interest in the company). Within two years of the date of death of the
testator this holding was worthless. Other
private company interests were sworn for probate at over £1.1m but they in turn only
realised in total £83,000. The executors of
the will were a solicitor and an accountant. What
is not known, as the Court of Appeal found it was not necessary to decide on the issue,
was whether or not the loss from the private company interests arose through the
negligence of the executors. The
beneficiaries contended that these losses arose through the negligence of the executors in
that they:-
·
failed to exercise
proper control of the business
·
failed to keep
themselves informed of its financial position
·
failed to take
adequate steps to prevent its value being destroyed
·
failed to appoint a
new chief executive in succession to the testator
·
left the conduct of
the business in the hands of the twenty percent share holder when it was alleged that
there was reason to doubt his honesty
·
lent or guaranteed
substantial sums of money without security to a number of unprofitable or untried
companies resulting in losses of £4m
Allegations such as these inevitably
bring one to Bartlett v Barclays Bank Trust Company
Ltd (1980) All ER 139 and the finding in that case that the professional trust
company involved was liable for its failure to exercise proper control of a company. It will be remembered in that case that Brightman
J was of the opinion that “a higher duty of care is plainly due from someone like a
trust corporation which carries on a specialised business of trust management…”. However, Bartlett
was not an issue for consideration if the contention of the executors was accepted by
the court.
The executors contended that this issue
of negligence could not arise as the will provided that:-
“……no
trustees (other than a trust corporation) shall be liable for any loss to the trust
premises arising by reason of any improper investment made in good faith or for the
negligence or fraud of any agent employed by him or by any other trustee hereof, although
the employment of such agent was not strictly necessary or expedient, or by reason of
any mistake or omission made in good faith by any trustee hereof or by reason of any
other matter or thing except wilful or individual fraud or wrongdoing on the part of the
trustee who is sought to be made liable”. (N.B.
the Court found that “wilful or individual fraud” should have read “wilful
and individual fraud”.)
It was held by the court, both at first
instance and in the Court of Appeal, that this clause was effective to exonerate the
executors and that no consideration of the beneficiaries’ claims of negligence was
necessary.
Issues
arising from exoneration clauses
However for the purposes of this
article let us assume hypothetically that the plaintiff’s allegations were
true and the losses arose through the negligence of the LPRs. Under these circumstances the effect of the
exoneration clause would have been to prevent the beneficiaries’ redress for the loss
of a considerable sum. Given that position,
would it be morally defensible for professionals, who will take fees for their services in
acting as executors, to take shelter behind such a wide-ranging exoneration clause as
was used in Bogg v Raper? Quite clearly the courts currently view it as
being legally defensible for them to do so, but in order to promote the interests of
those professions involved in this work a case can be made for it being morally
indefensible.
James Kessler [Drafting Trusts and Will Trusts A Modern Approach (3rd
edition) p57/8] has put forward the view that exemptions for negligence are wrong in
principle and cites in support of his views precedents recommending that the form should
only be used in “special circumstances
[Prideaux’s `Forms and Precedents in Conveyancing’ (25th edition
1959) p158] or, if used, that they should be restricted to unpaid trustees .[Hallet’s `Conveyancing
Precedents’(Sweet & Maxwell 1965) p801]
The Encyclopaedia of Forms and Precedents 5th
edition volume 4 p512 adopts the same approach and their proposed indemnity clause
does not apply to professional trustees. Williams on Wills 7th edition pp 1450/1 suggests that
while such clauses can be recommended for the unpaid executor or trustee, they are less
appropriate for a professional trustee “who charges for his services and is covered
by insurance and especially inappropriate in the case of a trust corporation”
(Query: why a higher standard for trust corporations than solicitors or accountants?). Interestingly the Encyclopaedia of Forms and Precedents suggests
that a testator or settlor should be made fully aware of how an exoneration clause
operates and agrees to its inclusion.
In contrast to the above references, Trusts & Estates (9 June 1998) suggests that exoneration clauses are
more routinely included in wills and that to suggest otherwise would hardly be
“regarded as satisfactory by those who contribute to the Solicitors’
Indemnity Fund”. The suggestion is
made that such clauses act to protect professionals from “the strict liabilities
which would otherwise be imposed by the general law”.
This can be seen as a one-sided view of the issue if, from the beneficiaries’
point of view, such clauses could save to deny a remedy for negligent or incompetent work. One can see that protection from speculative and
ill-founded claims would be welcome in today’s increasingly litigious world, but does
the current use of such clauses provide a balance between all interests or unduly favour
one party?
Professor Hayton [Underhill & Hayton Law of Trusts and Trustees (15th
edition)] expresses the view that there is “an inner core of obligations owed by
the trustees to the beneficiaries” and questions to what extent these core
obligations can be eroded by exoneration clauses before the trust itself is negated. This was answered to a degree in Armitage v Nurse when the court decided
that although it accepted that there was “an irreductible core of obligations”
that were owed to the beneficiaries and which were enforceable by them, it did not accept
that the core obligations of a trust included the duties of skill and care, prudence and
diligence. The duty of the trustees to
perform the trusts honestly and in good faith for the benefit of the beneficiaries was
the minimum necessary.
So far the comments in this article
have been aimed at paid trustees as there is a fairly general assumption that the use of
exoneration clauses to protect unpaid trustees is reasonable. On balance it probably is reasonable, but even for
unpaid trustees there are awkward questions. Does
a testator or settlor appreciate the risk to his beneficiaries if unpaid trustees are used
and are given this protection? If
the unpaid trustee undertakes a position of trust and through his negligence damages the
beneficiaries inheritance is it reasonable from the beneficiaries view that he is
exonerated? It could be argued that even for
unpaid trustees exoneration clauses tend to disadvantage the beneficiary and weaken the
concept care and diligence on the part of the trustee.
A
presumption involved in Bogg v Raper
In Bogg v Raper the court considered that, as the
will which contained the exoneration provisions had been admitted to probate, the testator
must be presumed to have known and approved the contents of the will. Given that the particular exoneration clause in Bogg v Raper needed to go the Court of Appeal for
its effectiveness to be determined (and indeed on one point to be construed) am I alone in
asking the questions
·
whether or not for
a clause such as this the presumption that the testator must have known and approved of
his will is, in reality as opposed to law, true?
·
to what extent will
a lay person executing such a will truly understands the wide ranging consequences of such
a clause?
· whilst one can accept that there are different ways of explaining the meaning to a testator, would a testator sign the will if he was aware of the true consequences of the clause and the lack of redress that it would provide for the beneficiaries? (Adviser: “By authorising this provision the professional trustees can be completely free from any liability no matter how negligent they are and your beneficiaries will only have redress if the trustee acts fraudulently.” Client: “It seems very reasonable to pay professional charges for such a service although there will be no recourse if trustee fails the trust.”.)
In passing, it
worth noting that the plaintiff in Bogg v Raper also
raised the issue as whether or not such exoneration clauses provided an actual benefit to
the executors and that thereby the preparation of the will gave rise to an unacceptable
conflict of interest if the executor prepared the will.
This claim was not accepted by the court and the court found that the clause
defined the potential liability by defining their position and protect them from loss, but
did not confer any profit from their position.
It is also worth drawing attention to
question of whether or not the increasing lack of protection for beneficiaries which
results from a wider use of these clauses be reconciled with the courts’ current
concern for increased protection for beneficiaries from other negligence in will
preparation (see Esterhuizen v Allied Dunbar [FLR 668]and Carr-Glyn v Frearsons (1998) All ER 225.)
Reform
Millett LJ (as he then was) in Armitage v Nurse commented on
exoneration clauses:-
“It must be acknowledged
that the view is widely held that these clauses have gone to far, and that trustees who
charge for their services and who, as professional men, would not dream of excluding
liability for ordinary professional negligence, should not be able to rely on a trustee
exemption clause excluding liability for gross negligence……..If clauses such
as clause 15 of the settlement are to be denied effect, then in my opinion this should
be done by Parliament which will have the advantage of wide consultation with interested
bodies and the advice of the Trust Law Committee….”.
The question of
Parliamentary intervention to resolve the issue is indeed the answer. However, if the perception of Parliament is that
exoneration clauses work against the “consumers’” interests there must be a
real possibility that the solution will not be one that is welcome to professional
trustees. At present it seems easier to
displace liability for remunerated trustee work than it is to displace liability for goods
sold in the high street.
The issue has been thoroughly examined
by the Trust Law Committee’s most recent working party and publication of its
consultation paper is imminent. Their
proposals focus on the use of these clauses by remunerated trustees and favour statutory
provision to prevent such a trustee from relying on a clause that excludes liability for
a breach of trust arising from negligence. This
contribution to the progress of this issue is very welcome and copies of the consultation
paper will be available shortly.
Recent limitation on the interpretation of exoneration clauses
In Wight and another v Olswang and another (The Times 17th
September 1998) it was decided that where there was doubt whether a trustee would be
exempted from liability for a breach of trust under an exoneration clause, such doubt
should be resolved against the trustee. In
this case, the settlement deed contain two exoneration clauses, one of which (cl.11)
applied to all trustees, whereas the other (cl.18) applied only to unpaid trustees. The court felt that the conflict between the two
clauses was such that it could not be ignored and that clause 11 must be construed as
providing no exemption to paid trustees because, if it did, it would be repugnant to
clause 18.
I do not pretend that I know the
answers to the questions that I have posed above as their intention, at this stage, is
to promote debate rather than provide answers. There
are however some uncomfortable aspects to exoneration clauses and as wide a debate as
possible is needed.
© Martyn Frost, FCIB TEP 1999
Barclays Bank Trust Company Limited
Home Page Council Committees Members