by Martyn Frost FCIB, TEP
Trustee Manager, Barclays Bank Trust Company Limited
(From Issue 5,July 1998)
With the substantial recent growth in both numbers and value of professional negligence claims it is not surprising that many professionals have started to look at ways of limiting their potential liabilities for work undertaken. One method is the use of the exoneration or indemnity clause and a second is “capping” of potential liability. Both of these areas are currently coming under scrutiny
- Professional advisers, such as auditors, attempt to limit liability for reports produced
- Professional trustees them-selves seek to limit liability for their actions in acting as trustee.
Potential liabilities for auditors have become a serious matter for the accountancy profession in recent years. Although the headline issues may initially have been the liabilities arising out of Company audits there are increasing signs of them wanting to control the risk for other work undertaken. Audit reports pro-duced for the benefit of a debenture trustee provide an interesting example when they are called upon to confirm the annual income of the charged funds as being sufficient to service the debt. If a trustee accepts an auditor’s report prepared under these circumstances with a cap in the liability the arrangement between the trustee and the auditors is a contractual one and the trustees contract in their personal capacity. If the liability cap is effective the auditors have control of their risk but the burden then of liability for any shortfall could conceivably lie with the trustee for having voluntarily foregone the higher value of the remedy against the auditors. The net effect of this is that al-though the risk may be capped as far as the auditors are concerned the risk can be uncapped as far as the trustee is concerned if in turn the trustee does not seek to limit its liability with an exoneration clause for accepting the agents actions and the agent’s exoneration clause.
The net result of this is that if the trustees can exclude their liability as well as the auditors that the loss will fall upon the beneficiaries of the trust. Some may say that this merely reflects the reality of the commercial world – s.310 Companies Act 1985rendered comparable indemnities for Company Directors as a void.
The issue of exoneration clauses for trustees has recently been reviewed by the Court of Appeal in Bogg and Others v Raper and Others (The Times 22nd April 1998), having previously been considered in Armitage v Nurse (1997) 3WLR 1046. Some exoneration clauses are now being so widely drawn that they will exclude liability for all negligence and default but will stop at fraud.
Both of the issues referred to above, the capping of advisers’ liabilities and exoneration of trustees’ liabilities raise questions of ethics in relation to the conduct of the trust management. The Association is most interested in knowing what its members’ views are on these issues given that there is a real possibility that, if such clauses operate to the disadvantage the beneficiaries of the trusts, of whatever nature, legislators may find the position unacceptable and seek a statutory solution. Obviously the TACT Committees are the usual route for establishing members’ views and it would be very helpful if members could give the relevant Committees some indications as to their views on capping and exoneration clauses and the policies which they think that TACT should follow with regard to them. However, if anyone wishes to make particular views known direct to me, I am more than happy to receive their comments.
© M J Frost, FCIB, TEP 1998