The relationship between trustee and beneficiary is a fiduciary relationship. Beneficiaries rely upon the trustee to act at all times exclusively in the best interests of the trust and to fully engage in any decisions that relate to the trust. The trustees must at all times act with honesty, integrity, loyalty and good faith towards the beneficiaries.
In addition to their fiduciary duty, trustees owe a general duty of skill and care when administering trusts together with a separate duty of care under the Trustee Act 2000 (“TA 2000”) when performing particular functions.
The common law duty of care
A trustee must take all precautions that an ordinary, prudent man of business would take in managing similar affairs of their own. It is not what the ordinary prudent man of business would do if they only had themselves to consider, but what they would do if they had a moral obligation to provide for others. For instance an individual may be willing to invest in a speculative venture, however, this would not be appropriate where that person has a moral obligation to provide for others.
The test is objective. A trustee will not be able to argue that they were doing their incompetent best. They will be held to the standard of the “ordinary prudent man of business”.
The statutory duty of care
Section 1(1) of the TA 2000 requires a trustee to exercise such care and skill as is reasonable in the circumstances having regard in particular:
- To any special knowledge or experience that they have or hold themselves out as having; and
- 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.
Contrary to the common law, the TA 2000 requires all circumstances to be taken into account. There is no minimum “ordinary prudent” or “reasonably diligent” requirement. This means that it is open to the Court to apply a standard below the common law duty for example to a lay trustee who relied on professional co-trustees even if a prudent man of business would not have done so.
Conversely a higher standard of care is likely to be expected from solicitors who act as trustees and hold themselves out as having particular expertise in the sphere of trusts than upon solicitors who act as trustees in the course of their general practice.
When do the common law and statutory duties of care apply?
Subsequent to 1 February 2001, the TA 2000 will generally apply, subject to a number of exclusions and only applies to the functions specifically referred to within Schedule 1 of the TA 2000, namely:
- Investments – including acquisition of land;
- Insuring property;
- Entering into arrangements with nominees, custodians and agents;
- Dealing with reversionary interests and valuing trust assets;
- Exercising powers of compromise.
It should be noted that paragraph 7 of Schedule 1 stipulates that the “duty of care does not apply if or insofar as it appears from the trust instrument that the duty is not meant to apply”.
Application of the statutory duty of care in respect of investment, insurance and delegation
Section 3 of the TA 2000 gives trustees the power to make any kind of investment that they could have made if they were absolutely entitled to the assets of the Trust.
However, there are two notable exceptions to this apparently broad-ranging power:
- Trustees can only invest in land by making loans secured on land or acquiring land;
- The trustees must meet the standard imposed by the statutory duty of care. This means that the trustee is required to act on the basis that they have a moral obligation to provide for others.
It is notable that the trustees’ power of investment will be subject to any restriction or exclusion contained within the trust deed.
The TA 2000 sets out additional duties when investments are made and these are:
- The trustees must have regard to the standard investment criteria i.e. they must consider the type of investment (for example shares) and the particular investment (for example shares in a specific entity); and
- The trustees are required to obtain proper advice in respect of investments i.e. from someone whom the trustees reasonably believe is qualified to give such advice.
- The trustees must have regard to the requirement for diversification meaning that Trusts should have a range of investments in order that poor performance of one kind of investment may be set off against good performance of another kind. Consideration will be given to the overall risk of the entire portfolio rather than assessing each individual investment.
- Trustees additionally have an ongoing duty to review investments and must take advice and comply with the statutory duty of care when carrying out this duty.
- There are further particular obligations imposed upon trustees when investing in land or acquiring a controlling interest in a company.
Power to insure
The common law duty of care will apply to a trustee’s decision on whether or not to insure the property. When the trustee is actually exercising the power to insure, then they must comply with the TA 2000.
Powers of delegation
Again, when considering whether to exercise the power of delegation, the common law duty of care will apply. When the powers are actually being exercised, the TA 2000 will apply.
Allowing trustees to delegate opens up an increased range of investments to trustees. It means that they can take advantage of modern methods of investment such as the use of discretionary fund managers.
Trustees can only delegate administrative powers and must do so collectively. To ensure the protection of beneficiaries, the TA 2000 provides that:
- The statutory duty of care applies to the selection of the agent, custodian or nominee.
- When deciding the terms upon which an agent is to act, the statutory duty of care will also apply.
- Where an agent is appointed to carry out asset management functions, this must be by way of a written agreement and the trustees are required to prepare a policy statement stipulating how the asset management functions will be exercised.
- Once an agent has been appointed, the trustees are required to review the arrangements in place and where necessary to intervene.
- Where there were restrictions upon the trustees’ powers, any agent appointed will be subject to those same restrictions.
Where an agent acts improperly a trustee will only be liable if they have failed to comply with the statutory duty of care with regard to the selection of the agent, the agreement of the terms of appointment or in respect of the obligation to continue to review the arrangement.
What happens if a trustee breaches a duty of care?
Where a trustee acts in breach of their duties, they will have a personal liability to restore the Trust Fund or to pay equitable compensation for all losses that would not have occurred “but for” the breach of trust.
If the loss would have occurred regardless of the actions of the trustee, then there is no right to compensation. However, trustees cannot hide behind losses not being reasonably foreseeable and would still be liable to compensate the trust.
The application of exclusion clauses
It may be that the trust deed excludes the application of the statutory and common law duties of care. Such clauses protect the trustees from personal liability, however, they do not prevent beneficiaries from taking steps to prevent further breaches of duty or to remove the trustees. Further, it is not possible to exclude liability for fraud or where a trustee has acted dishonestly.
If you are a trustee threatened with a claim or a beneficiary with concerns as to the actions taken by a trustee, then please contact us on 01926 880 798 for an initial ‘no obligation’ conversation.