There is as yet no judicial pronouncement in England that an exculpatory clause in a trust is to be interpreted in the same manner as a contract. Instead, it has been assumed in all trusts texts that there are trust obligations which can never be excluded as a matter of law. This will be the position of a trustee of a non-authorized unit trust. A trustee of an authorized unit trust will also be subject to section 84 of the Financial Services Act 1986.

Equity’s Position

In theory a settlor can insert whatever provisions he or she wishes, including one that excludes any action against the trustee for breach of trust. Courts are, however, reluctant to uphold the literal wording of a widely drawn exemption clause at its face value. It is not surprising that exemption clauses are construed strictly against trustees relying on them. Ultimately, the court must resolve the reach and scope of such clauses. Academic commentators are not entirely in agreement regarding the general principles to be deduced.

FundsAs a broad proposition, it has been said that `[t]he position so far as English law is concerned is . . . that an express exculpation clause may relieve a trustee from liability where it is relied upon for a purpose within the settlor’s contemplation provided the loss was not occasioned by intentional wrongdoing, gross negligence or fraud on the trustee’s pare.’ Thus, under this view, an exemption clause is inoperative not only where there is deliberate misconduct by the trustee but where there is gross negligence.

Arguably, this view is supported by three Scottish appeals to the House of Lords. These cases are Knox v. Mackinnon, Rae v. Meek, and Clarke v. Clarke’s Trustee. In the first case, Lord Watson said:

It is settled in the law of Scotland that such a clause is ineffectual to protect a trustee against the consequences of culpa lata, or gross negligence on his part or any conduct which is inconsistent with bona fides. I think it is equally clear that the clause will afford no protection to trustees, who from motives however laudable in themselves act in plain violation of the duty which they owe to the individuals beneficially interested in the funds which they administer.

Lord Watson’s statement was adopted by Lord Herschell in Rae v. Meek. In the third case, Lord President Clyde stated:

It is difficult to imagine that any clause of indemnity in a trust settlement could be capable of being construed to mean that the trustees might with impunity neglect to execute their duty as trustees, in other words, that they were licensed to perform their duty carelessly.However, both Knox and Rae are cited as authorities for a narrower proposition by Underhill and Hayton in their discussion of liability for acts of co-trustees:

. . . it would seem that an exculpatory clause cannot protect a trustee who commits a breach of trust in bad faith or intentionally or with reckless indifference to the beneficiaries’ interests.

This proposition apparently does not see exemption clauses as ineffective to exempt liabilities for negligence or ‘gross negligence‘. Interestingly, the rationale is supplied by the learned editor of the ninth edition of Hayton and Marshall:

Some cases like Wyman v. Paterson’ and Re Poche suggest an exemption clause cannot excuse gross negligence falling short of reckless indifference but it is difficult to justify this. Indeed, the Re Vickery view that ‘wilful default’ in the statutory exemption clause in Trustee Act 1925, s. 30(1) extends only to deliberate or reckless conduct means that s. 30(1) can excuse gross negligence. Only where a trustee has mens rea (a guilty mind) should he be prevented from relying on an exemption clause.

Thus, Re Vickery provides the authority for the position of Underhill and Hayton. Further, in a recent Court of Appeal decision in Jersey, Midland Bank Trustee (Jersey) Ltd. v. Federated Pension Services Ltd. , the court reviewed the three Scottish decisions and came to the conclusion that the comments cited above were ‘clearly reached as a matter of construction’ and that the judges could not be ‘taken to be expressing the view that no trustee could ever be permitted to exclude liability for negligence or gross negligence‘. The court concluded that `[t]here is no general principle .. . preventing a trustee from protecting himself against liability for breach of trust by clear words, save in the case of fraud‘ and that clauses relied on by trustees as exculpating them from liability for breach of trust are to be construed narrowly and strictly. Thus, under this view, apart from fraud, an exemption clause will be given effect to. However, it is not entirely clear if ‘fraud‘ in this formulation carries the same meaning as ‘wilful default’ in the Vickery sense.

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