Trustees’ Non-Fiduciary Duties and Powers
Chapter 9
Trustees’ Non-Fiduciary Duties and Powers
Chapter Contents
Fiduciary Duties, Non-Fiduciary Duties and Powers
Duty of Care and Skill Required of a Trustee
Chapter 8 introduced the trustee: How a trustee may be appointed and how their trusteeship may be ended. This chapter builds upon Chapter 8 and moves forward to address a trustee’s non-fiduciary duties. It also considers the powers that a trustee enjoys in administering the trust.
As You Read
Look out for the following:
the types of non-fiduciary duties that a trustee is subject to;
the types of power that a trustee enjoys; and
the standard of care and skill that a trustee should use when exercising his duties and powers.
Fiduciary Duties, Non-Fiduciary Duties and Powers
As was seen in Chapter 8, a trustee is a type of fiduciary who is subject to a number of duties of both a fiduciary and non-fiduciary nature. The trustee also possesses a number of powers. As a reminder, these duties and powers are set out in the table in Figure 9.1.
Non-Fiduciary Duties
Breach of a non-fiduciary duty generally means that the trustee will be liable to pay equitable compensation to the trust for the loss it has sustained. Of course, the trustee will only be liable
to pay compensation providing a true loss can be shown1 to have been sustained by the trust and the trustee’s liability for such loss has not been successfully excluded or limited by a trustee exemption clause. Both of these issues are considered further in Chapter 12.
Duties upon appointment as a truste
The trustee is subject to various duties when he is appointed to be a trustee. These duties were outlined by Kekewich J in Hallows v Lloyd.2 He said that the trustees must:
ascertain what the trust property is;
ascertain the terms of the trust which they are required to administer; and
read the trust documents to see what, if any, incumbrances affect the trust.
Kekewich J’s comments are logical. The trustee’s duties should, as a matter of basic principle, include understanding the terms of the trust which he is bound to administer. This will include making himself familiar with the beneficiaries and the terms of the trust and seeing what, if any, specific duties the settlor has placed upon him and what powers he enjoys. The trustee must also ascertain what incumbrances (obligations) bind the trust so that he can comply with them.
The trustee must own an interest in the trust property if he is to administer the trust. The settlor must, consequently, constitute the trust.3 Provided a deed has been used to appoint him, s 40 of the Trustee Act 1925 provides that the trust property will be vested in the trustee automatically upon his appointment.
The additional duty of the trustee to collect in the trust assets if he is not appointed by deed — forcefully if necessary — was spelt out by the Court of Appeal in Re Brogden.4
The facts concerned trusts established by John Brogden. He left £10,000 in his will to each of his two daughters and one of his sons. During his life, he worked in partnership with his three sons in a colliery business. After his death, one of his daughters, Mary Jane Billing, wanted her share of the money to be appropriated to her benefit under the trust. The trustee was reluctant to do so as to do so would have resulted in the trustee obtaining the money from the business which Mr Brogden’s three sons continued to run. In correspondence with Mary, the trustee thought to press for the money would have put him ‘in a very unpleasant position with your brothers’. Ultimately, the colliery business became insolvent. The issue for the Court of Appeal was what, if any, liability was to be borne by the trustee for not pressing for the money to be transferred to the trust.
Cotton LJ believed that the trustee’s duty was to demand the payment of the money due to the trust and, if the money was not paid by the business, to take ‘reasonable means’5 to enforce the payment. The trustee should have acted far more forcefully than he did. If needed, he should have taken legal action against the business to recover the money for the trust. His action fell far short of this. He did not demand the payment due and was willing to enter into negotiations with the partnership over what types of assets the business would give to the trust to satisfy the debt owed to the trust. Consequently, the trustee was personally responsible for the loss to the trust fund. Only if the trustee could show that the trust would not have recovered the money from the business could he be excused from liability. The trustee could not show that here.
The case illustrates that the duty of the trustee upon taking office is to secure the trust assets, taking legal action if necessary. It also shows the serious consequence for the trustee if such assets are not secured: the trustee will have to make good the loss to the trust from his own personal assets. Fry LJ described the trustee’s duty as ‘the duty — the dominant duty, the guiding duty — of recovering, securing, and duly applying the trust fund’.6
Breach of the duty does not depend on the trustee acting with bad faith or dishonestly. On the contrary, the Court of Appeal accepted that the trustee had behaved honourably throughout. That was irrelevant, however. The task for the trustee was to collect in the trust assets which he had failed to do.
Duty to act unanimously and personally
At common law, the trustee was obliged to administer the trust personally. In the case of more than one trustee, this means that all of the trustees have to become involved in the administration of the trust. As Cross J pointed out in Re LuckingsWill Trusts,7 a passive trustee will be responsible for decisions which cause loss to the trust fund if he simply allows an active co-trustee to make decisions on his own. There is, therefore, a disincentive for a trustee to stand by and let his fellow trustees make decisions in administering the trust.
The liability of two or more trustees is joint and several.8
Glossary: Joint and several liability
Joint and several liability can only apply where two or more people are acting together. ‘Joint’ means that they are together responsible for their actions. ‘Several’, however, means their liability can attach just to one of them. For example, if two trustees breached a trust, it would be open to a beneficiary to take legal action against them both — for they are both jointly liable for the breach — or just one of them to recover the entire loss sustained by the trust.
Exceptions can occur when trustees do not have to act unanimously. One such exception concerns small charitable trusts (with an income of less than £10,000 in the previous financial year) where two-thirds of their trustees may decide under s 268 of the Charities Act 2011 to exercise a range of powers, for example, to transfer trust property to another charitable trust.
The duty to act personally was founded on the Latin maxim delegates non potest delegare — the person to whom something has been delegated cannot himself then delegate his task. The logic behind it is self-explanatory: the settlor has deliberately chosen someone to administer his trust and had he wanted the trustee to delegate their functions to another person, the settlor would have chosen that second person himself. This duty could be altered in the terms of the trust deed if the settlor so wished. But the duty of personal service had an exception, as Viscount Radcliffe explained in Pilkington v IRC,9 ‘[t]he law is not that trustees cannot delegate: it is that trustees cannot delegate unless they have authority to do so’.10
The functions that a trustee may delegate
Trustees now enjoy a wide ability to delegate their powers. This ability is set out in Part IV of the Trustee Act 2000.
The Trustee Act 2000 greatly enhanced the trustee’s ability to delegate their functions. In non-charitable trusts, s 11(2) provides that a trustee may delegate any of their functions apart from what may be termed their ‘core’ duties. The functions that a trustee cannot delegate are those related to:
[a] whether and how the assets of the trust may be distributed;
[b] whether and how any payments owed by the trust should come out of capital or income funds;
[c] any power to appoint a new trustee; and
[d] any power that the trustee otherwise enjoys to delegate one of their functions.
The people to whom a trustee may delegate functions
Trustees may appoint agents, nominees and custodians to whom they may delegate their functions.
 ANALYSING THE LAW |
Suppose Scott declares a trust appointing Thomas as his trustee. The trust property is £100,000. Thomas has no knowledge of investment opportunities that may exist and realises he needs some assistance in deciding what type of investments to make.
Thomas can appoint an agent to advise him what type of investment to make. An obvious example might be that if he decided that he wanted to invest in shares, he might appoint a stockbroker to advise him which companies were performing well and worthy of investment. He might instruct the stockbroker to buy shares suitable for the trust. If the stockbroker is appointed as an agent, the actual contract for the purchase of the shares is made between the trustee and the company selling the shares. The agent is not part of the transaction.
A nominee is a slightly different concept. A nominee is someone in whose name property might be registered, but who is not the true owner. Thomas might appoint a nominee if he wished to keep an investment secret from the outside world. Alternatively, nominees are often used to purchase shares in a speedy manner. It is quicker for the nominee to buy the shares in its name rather than advising the trustee to purchase shares for the trust and then waiting for that transaction to take place.
A custodian receives assets for safe-keeping. A trustee might decide to place trust assets into the hands of a custodian where they will remain until the trustee collects them. Custodians are often used by charities for them to retain the legal title to a charity’s property whilst the trustees administer the trust.
Under s 12 of the Trustee Act 2000, the trustees may appoint one of themselves to be an agent for the trust. A beneficiary cannot, however, be appointed as an agent.11 The trustees have the capacity to decide the terms of the agent’s appointment.12 Special rules exist under s 15 for agents appointed to exercise asset management functions. These include that the agreement under which such an agent is appointed must be in writing13 and the trustees must prepare a written policy statement guiding the agent as to how the trust assets should be managed.14 This statement must be kept under constant review.15
A nominee may be appointed by the trustees under s16 of the Trustee Act 2000. Such appointments must be in writing16 and can be in relation to any of the trust’s assets, except for settled land.
Trustees may also appoint a custodian of the trust’s assets under s 17 of the Trustee Act 2000. Such appointment must again be in writing.17 A custodian is defined in s 17(2) as:
For the purposes of this Act a person is a custodian in relation to assets if he undertakes the safe appointment of the assets or of any documents or records concerning the assets.
Under s 19 of the Trustee Act 2000, nominees and custodians must either be people who carry on businesses as professional nominees, or custodians, or a corporate body, which is controlled by the trustees. Provided this condition is met, agents, nominees and custodians can all be one and the same person.18 The trustees may decide the terms of appointment of any nominee or custodian.19
Steps that trustees must take when delegating their functions
(a) Choose prudently
Whoever the trustees choose, the trustees must exercise their choice prudently, as illustrated by Fry v Tapson.20 If they do not, they are liable for his errors.
Two trustees were appointed by the will of John Dunn to invest trust monies either by lending the money as mortgages over property in Tasmania or Great Britain or by investing the money in shares in public companies in the UK. The trustees decided to invest £5,000 by advancing it over a property in Liverpool. The money was to be secured by a mortgage, which was to earn the trust interest at 4.5 per cent. The solicitor of the trustees recommended a surveyor to value the property and the trustees accepted that recommendation. The problem was that the surveyor was based in London and there was no evidence that he even went to Liverpool to value the house. It was valued at £7,000-£8,000 and the mortgage was duly entered into.
The borrower failed to repay the mortgage and went bankrupt. Developments had taken place adjacent to the house which meant that its value had fallen and was worth less than the amount due under the mortgage (this is known as ‘negative equity’ although this has nothing to do with the courts of equity). One of the beneficiaries brought an action against the trustees for breach of trust. Evidence showed that the house, even when the mortgage was created, was worth barely enough to cover the amount advanced.
Kay J described the appointment of a London surveyor to value a property in Liverpool as a ‘most incautious act’.21 He had no local knowledge of either that particular house, or the general property market in Liverpool. His report was written to generate interest in the house. Kay J acknowledged that, if an agent was properly employed by a trustee, the trustee would not be responsible for the agent’s faults. But the agent was not properly employed here. He was employed ‘out of the ordinary scope of his business’22 as he was not familiar with the Liverpool property market. By failing to choose their agent prudently, the trustees were liable for his faults.
(b) Review performance
If an agent, nominee or custodian is appointed, the trustees’ task does not end upon that appointment. Section 22 of the Trustee Act 2000 makes it clear that the trustees must keep the appointment under constant review. Trustees must, if necessary, consider whether to intervene in the appointment and exercise any power that they may have.23 Section 22(4) specifies that an intervention may take the form of the trustees giving directions to their agent, nominee or custodian or even going so far as to revoke the appointment entirely. What is clear is that, once appointed, the trustees cannot sit back and let their appointee run the trust in their place. This was shown in Re Lucking’s Will Trust.24
Here, a trust was set up which consisted of a majority shareholding in Stephen Lucking Ltd, a small business which had a factory in Chester. Profits in the business were falling. The trustee (who was also a director of the company) appointed Mr Peter Dewar to be a director and the new manager of the business. The company had a bank account on which cheques could be drawn, but the cheques needed the signature of two directors. A practice developed whereby the trustee would sign blank cheques and send them to Peter for him to complete the amounts and also sign them. Peter lived in Scotland and had considerable commuting expenses, which he settled using the ‘blank cheque system’ of payment. Peter then borrowed money from the company without the trustee’s knowledge, simply recording the borrowing as a ‘loan to a director’. Whilst the trustee accepted Peter’s explanation for this, again the loan was facilitated using the blank cheque payment method. Over a few years, Peter’s indebtedness to the company increased to over £15,800. Peter went bankrupt, owing the company this money.
One of the beneficiaries brought an action against the trustee for failing to supervise Peter. She alleged that she had been caused a loss because the company had itself suffered a loss which could have been distributed to her as effectively a shareholder in the company.
Cross J held that the trustee was liable for breach of trust for part of the loss suffered by the trust. The trustee was not liable for breach of trust simply by signing blank cheques, even though such action was described by Cross J as inherently ‘notoriously dangerous’.25 Further, the trustee was not liable for the period of time that he had no reason to suspect Peter was abusing the confidence that the trustee had placed in him. This changed, however, when Peter began withdrawing excessive amounts from the company, in addition to his salary and expenses. At that point, the trustee should have noticed that Peter was abusing his position. The trustee would only have seen this if he had kept a closer eye on Peter’s dealings. Failure to do so meant that the trustee was liable for that loss sustained by the trust fund.
Duty to account to the beneficiaries with relevant information about the trust
It might be assumed that, because the beneficiaries have an interest in the trust property, they are entitled to be kept fully and entirely up-to-date with accurate information about the trust. For example, beneficiaries might wish to know how the trust property is being invested, how those investments are performing and to what extent any of their number has enjoyed any of the trust property.
Over the last century, the courts have narrowed the circumstances when beneficiaries are entitled to see information about the trust.
In O’Rourke v Darbishire,26 the House of Lords gave beneficiaries a wide entitlement to see information concerning the trust. The facts concerned a disputed winding up of the estate of Sir Joseph Whitworth. The claimant’s case was that he was entitled to part of the estate of Sir Joseph. To pursue his claim successfully, he needed to have sight of certain documents.
Lord Wrenbury agreed with the decisions of the Court of Appeal and the High Court in the case in that a beneficiary had a proprietary right to see trust documents, explaining, ‘[t]he beneficiary is entitled to see all trust documents because they are trust documents and because he is a beneficiary. They are in this sense his own’.27
A beneficiary did not need to take court action to enjoy this right. It was a proprietary right he enjoyed.
Lord Wrenbury said the beneficiary’s right was not to be confused with the legal process of discovery (now called ‘disclosure’). In a civil action, this is the stage of legal proceedings where each party reveals to the other relevant documents which either help or hinder their case.28 The beneficiary did not enjoy his right under this process as discovery was, and disclosure remains, the right to see another party’s documents. The beneficiary’s right was a proprietary one which he enjoyed as a beneficiary. It was entirely separate to this process.
On the facts of the case, the claimant was not a beneficiary and had, therefore, to establish an entitlement to see the disputed documents through the process of discovery. The claimant was partly successful in obtaining an order to see certain documents. What is important is that beneficiaries were recognised to have a proprietary right to have sight of all trust documents.
This issue was considered again by the Court of Appeal in Re Londonderry’s Settlement29 where its members curtailed a beneficiary’s right to see documents relating to the trust.
The facts concerned a discretionary trust of shares in Londonderry Collieries Ltd declared by the Seventh Marquess of Londonderry in 1934. The trustees, together with people referred to as ‘appointers’, were to decide who was to benefit from the defined class from the capital and income of the trust fund. One of the settlor’s daughters, Lady Helen Walsh, was a member of the class.
In 1962, the trustees decided to distribute the capital and thus bring the trust to an end. Lady Helen wanted more money than she had been given by the trustees. She asked the trustees to supply her with various documents but the trustees supplied only copies of documents detailing people whom they had chosen to benefit from the trust together with the trust’s annual accounts. Lady Helen’s motive in seeking these documents was to scrutinise the trustees’ reasons for preferring other beneficiaries over her. The trustees, to prevent family discord, decided not to supply any further documents detailing either the agendas or minutes of their meetings, or their correspondence with the appointers and other beneficiaries. The trustees brought an action for directions to the court, asking which documents they were bound to supply to Lady Helen.
In giving the leading judgment of the Court of Appeal, Harman LJ reminded the court that the trustees had never been under a duty to disclose to beneficiaries their reasons for reaching a decision over which they enjoyed a discretion. The reasoning behind this ensured trustees had some freedom to make decisions without their motives being called into question. If, however, trustees volunteered their reasons, whether or not they were sound could be questioned by the court.30
Harman LJ, with whom Danckwerts LJ agreed, thought that the observations of the House of Lords in O’Rourke v Darbishire over the right that a beneficiary had to inspect ‘trust documents’ were too general and provided little assistance to a beneficiary’s request to see specific documents. Harman LJ held that the minutes of the trustees’ meetings and the agendas prepared for such meetings were not documents that the beneficiary could inspect, because an inspection would immediately reveal the trustees’ motives and the reasons for their decisions. He did not believe that these documents could be described as ‘trust documents’. Even if they could, however, the beneficiary could not see them, because the principle that protected trustees’ deliberations on a matter of exercising their discretion could override the competing principle that the beneficiary was entitled to see all trust documents. The correspondence between the trustees, appointers and beneficiaries were not documents which a beneficiary enjoyed a right to inspect.
Salmon LJ agreed that as long as the trustees exercised their discretion honestly, their reasons for the exercise of that discretion could not be challenged. There was thus no point in disclosing trustees’ reasons to the beneficiaries — even if the reasons were disclosed, they were not open to challenge. Challenging trustees’ reasons would mean that trustees’ decisions would become impossible to make if they felt that such decisions were always open to be criticised in court.
Salmon LJ laid down the characteristics of ‘trust documents’:
Trust documents do … have these characteristics in common: (1) they are documents in the possession of the trustees as trustees; (2) they contain information about the trust which the beneficiaries are entitled to know; (3) the beneficiaries have a proprietary interest in the documents and, accordingly, are entitled to see them.31
He said that if any part of a document contained information which the beneficiaries were not entitled to know — such as trustees’ reasons for making a decision — then the document would not be one that the beneficiaries were entitled to see.
As well as providing information about what constituted a trust document, the decision in this case also placed limits on what beneficiaries were entitled to see. In particular, beneficiaries were not entitled to see the reasons for trustees’ decisions. This was either because, in Harman LJ’s view, non-disclosure of such reasons trumped the beneficiaries’ right to see the trust document or because the document containing the reasons was not a ‘trust document’ as defined by Salmon LJ.
The matter was addressed again in Schmidt v Rosewood Trust Ltd32 where a new approach to the issue of disclosure was given by the Privy Council.
14.6 million which the trustee said was his entitlement under the trusts. Vadim’s case was that his father had been entitled to a larger share of the total of 
105 million that constituted the trust fund. He wanted access to certain documents to assist his claim. The defendant’s defence, inter alia, was that neither Vitali nor Vadim were beneficiaries under either trust, but were mere objects of a power. As such, neither of them had any entitlement to see trust documents.In giving the opinion of the board, Lord Walker did not think that beneficiaries had an absolute proprietary right to see trust documents. Instead:
the more principled and correct approach is to regard the right to seek disclosure of trust documents as one aspect of the court’s inherent jurisdiction to supervise, and if necessary to intervene in, the administration of trusts.33
An applicant did not need a beneficial interest as such in the trust property to avail himself of such a right as ‘[t]he object of a discretion (including a mere power) may also be entitled to protection from a court of equity’.34 Such protection would depend on the court’s discretion to intervene in the administration of a trust.
In exercising that discretion, Lord Walker said that there were three areas which the court would have to consider:
[a] whether a beneficiary (or other applicant, such as an object under a power) should be assisted by the court;
[b] the types of documents which should be disclosed to the applicant and whether they should be disclosed in an edited or unedited form; and
[c] whether any safeguards should be imposed to restrict the use of the disclosed documents (e.g. by stating that the documents could only be inspected at a solicitor’s offices).
The tide in favour of beneficiaries had turned since O’Rourke v Darbishire as Lord Walker stated:
the recent cases also confirm … that no beneficiary … has any entitlement as of right to disclosure of anything which can plausibly be described as a trust document. Especially when there are issues as to personal or commercial confidentiality, the court may have to balance the competing interests of different beneficiaries, the trustees themselves, and third parties. Disclosure may have to be limited and safeguards may have to be put in place.35
On the facts, Vadim’s case was remitted to the High Court in the Isle of Man for determination as to whether he could seek disclosure of documents related to the trust. Lord Walker thought that Vadim’s claims were potentially sound and was therefore entitled to the disclosure that he sought.
 ANALYSING THE LAW |
Lord Walker thought that the three judgments of the Court of Appeal in Re Londonderry’s Settlement were not easy to reconcile. Harman and Danckwerts LJJ had treated the beneficiary’s right to see trust documents as a qualified right, which could be overridden by the competing principle that a trustee’s reasons should be kept confidential. Salmon LJ had preferred to try to define what could and could not amount to a ‘trust document’.
Do you think there is any discernible common thread running through these separate judgments?
Is a wish letter to be treated differently from other documents?
This question concerned the High Court in the more recent case of Breakspear v Ackland.36
The facts concerned three potential beneficiaries’ application for a wish letter to be disclosed to them.
Glossary: A wish letter
A ‘wish letter’ — or, sometimes, a ‘letter of wishes’ — is a document in which a settlor expresses a desire to the trustees to use their powers in a particular way.
Perhaps the most common use for a wish letter is with a discretionary trust. This is where the settlor initially establishes the trust for the benefit of a defined class. That class might be fairly large. The settlor might then attempt to narrow down the field in the class by expressing a wish to his trustees that certain people in the class be chosen as beneficiaries.
Wish letters are not binding on trustees. Yet often, out of courtesy, the trustees will take into account the people the settlor has set out in his wish letter.
Briggs J recognised that the use of a wish letter had two competing interests behind it. On the one hand, a wish letter was a useful device whereby a settlor could communicate sensitive and secret information to his trustees. It was therefore useful if such letters could be seen to be confidential and not subject to disclosure to beneficiaries. On the other hand, as in this case, the sight of a wish letter would often give the potential beneficiaries a solid idea of whether they were likely to benefit from the trust and would therefore prove invaluable to them in planning their lives and those of their children and dependants. Such competing interests had to be balanced by the court.
Briggs J referred to what he described as the ‘Londonderry principle’:
the process of the exercise of discretionary dispositive powers by trustees is inher-ently confidential, and that this confidentiality exists for the benefit of beneficiaries rather than merely for the protection of the trustees.37
After a thorough review of English, Australian and Channel Islands authorities, Briggs J held that the conclusion nowadays was not that the beneficiaries enjoyed any proprietary right to see trust documents but instead any request for the disclosure of a document possessed by the trustees was a request to the court to exercise its discretion. Bound by precedent, he followed the Londonderry principle. He also agreed with the reasoning behind it — that beneficiaries might in fact be protected by not having certain documents disclosed to them. Documents passing between a trustee and a settlor over which beneficiary should be chosen to benefit from a discretionary trust might, for example, reveal that one particular beneficiary was suffering from a life-threatening illness. Trustees had to have the security that their enquiries as to such matters could be kept confidential.
A wish letter in a family trust was written ‘for the sole purpose of serving and facilitating an inherently confidential process’.38 It was therefore appropriate that such a document should, prima facie, be seen to be confidential as between the settlor and trustees and not be disclosed to the beneficiaries. This confidence could be voluntarily overridden by the trustees but Briggs J thought that the trustees should only disclose a wish letter if ‘disclosure is in the sound administration of the trust, and the discharge of their powers and discretions’.39
Briggs J gave guidance for how trustees should manage a beneficiary’s request to them to disclose a wish letter in relation to family discretionary trusts. The trustees are obliged to consider whether they should exercise their discretion to allow the beneficiary sight of the document. The trustees may simply answer ‘yes’ or ‘no’ to the beneficiary’s request and do not have to provide reasons for their decision. Providing reasons is, in some ways, more dangerous for the trustees, as the court can consider whether their reasons are honest.
The trustees may seek the court’s assistance as to whether they should disclose the wish letter. In such a case, the court itself had to have full disclosure of the letter. If disclosure was ordered, Briggs J thought that the safeguards mentioned by Lord Walker in Schmidt v Rosewood Trust Ltd could be employed. Briggs J thought that, as a matter of policy, the courts were not biased towards disclosure.
On the facts, Briggs J held that the wish letter had to be disclosed. That was due to the trustees’ intention to seek the court’s later sanction to their proposed distribution scheme of the trust fund. At that later stage, the contents of the wish letter would be relevant to the proposed distribution and the potential beneficiaries had to be permitted to comment on the scheme. All disclosure of the wish letter would do at this stage would be to give that information to the potential beneficiaries at an earlier stage. Their right to comment on the proposed distribution scheme outweighed any family disharmony that might be suffered due to the disclosure of the wish letter.