The Midland Bank Trustee case therefore is a clear rejection of the wider proposition that intentional wrong, gross negligence, and fraud of a trustee cannot be excluded or modified. Before accepting this narrower formulation or the wider proposition or indeed either of the two propositions one must question the theoretical basis of each of these propositions.

It seems that even under the narrower view, an exemption clause cannot effectively exclude wilful default. The difference between the two views is a question of degree. Both views seem to be premised on the idea that the fiduciary character of a trustee and the right of the beneficiary against the trustee for due administration cannot be taken away; otherwise, the relationship is not a trust relationship at all. If this idea is correct—and there is no reason to suggest otherwise—it should follow that if an exemption clause denies all duties incident to a trust, the proper conclusion is not that the exemption clause is invalid but that on construction the intention is not to create a trust relationship. In the unit trust situation, if the conclusion in respect of a clause is that it exempts the trustee from all duties of a trustee, the court should hold that the relationship is one of creditor-debtor and the unit trust deed is merely a contract. The clause should be given effect to, rather than ruled invalid. In any event, a distinction can be drawn between trustees’ loyalty duties and duties to exercise skill and care. In respect of the latter, a clause that exempts a trustee’s liability to perform such duties will not strip the trustee of its essential character as a trustee.

FundsAnother justification given is public policy. But it is acknowledged that a settlor has a right to determine the level of loyalty expected of its trustee. A settlor may, for example, permit the trustee to profit from its position or to place itself in a position where its duty and interest may conflict. It may, likewise, determine the level of care and ski11. There is no public policy reason for saying that a settlor cannot make such decisions. Logically, there is no public policy reason for denying a settlor the right to make a decision for excluding all duties of fidelity and skill and care, if that is the true wish of the settlor. The true question is, ‘What is the wish of the settlor?’ This is a question of interpretation and depends upon the precise meaning of the words used by the settlor read in the context and circumstances. It is not for the court to say whether the settlor can exempt the trustee from liabilities in question; the proper question for a court is whether the settlor has done so. Of course it is improbable that in normal circumstances a settlor would desire a clause that expressly excludes the liability of the trustee for fraud, bad faith or gross misconduct. At best, this can raise a presumption, but it cannot be a matter of law that a settlor cannot exclude such liabilities.

The argument against a public policy justification is surely stronger for unit trusts. Here, the trust is created by a contract and a contract, by nature, involves mutuality of rights. There is no policy reason why the court should adopt an approach different from contractual construction. It is not for the court to say that a unit trust beneficiary may not contract out of the right of recourse against the trustee for due administration; the question is whether the beneficiaries have done so.

Whatever may be the position in relation to other types of trust, two conclusions regarding unit trusts can be drawn from the above discussion. First, it seems difficult to support a rule of equity that an exemption clause will be invalid if it excludes liability for gross negligence. Secondly, it is also illogical that a unit trust deed cannot exclude some or all trustees’ liabilities. This is particularly so since the unit trust deed is a contract. It must be a question of construction whether a particular breach is exempted. If this second conclusion is not accepted by the court, the position of the trustee and the manager as regards exemption clauses will be different.

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