Scots and English Trust Law
Andrew S. Fleming
Partner, Richards Butler, Solicitors
“During the 17th century the trust in Scotland developed. Decisions as to the mode of proof were recorded; the limits of the trustees’ obligations began to be mapped out, the exclusion of conflicts of interest began to be sought. Then came the reception of Roman law and its influence on the development of the Scots trust. After this came the impact of English Chancery learning and practice which played a great part in the refinement and sophistication of the Scots law trust, and it is from this source that the chief influences come today.” (Extract from Thoughts on the Origins of the Trust in Scots Law by Robert Burgess, Juridical Review (1974), page 196.)
The legal historian Maitland, said the development of the trust concept was `the greatest and most distinctive achievement performed by Englishmen in the field of jurisprudence.` The English influence in this area of Scots Law has been strong, though the trust in English law remains conceptually different from the trust in Scots law. It is acknowledged that the law is that of England and Wales but for brevity only it is referred to in this article as “English”. For the limited purposes of this article it has been assumed that the reader has a greater knowledge of English trust law than Scots trust law, simply because England is the larger jurisdiction.
Scotland has a long tradition of an independent legal system founded on Roman law principles. The Scottish legal system was quite distinct from the English common law system.
The essence of the trust concept in England is the separation of legal and beneficial ownership, the property being legally vested in one or more trustees but in equity held for and belonging to others. The obligations involved are equitable and enforceable only in a court of equity. Trusts developed and were recognised and enforced, and the doctrines and principles relevant thereto, elaborated and refined by the Court of Chancery thereafter. Statutes have only to a small extent affected trust law, though the few statutes are important..
In Scotland the law of trusts developed separately; it is based not on the dualism of legal and equitable ownership nor on obligations enforceable in equity, there being no distinction of law and equity in Scotland, but on the principle of property being vested in trustees as legal owners subject to the burden of their holding and administering it for the trust purposes, for the benefit of persons who have claims on the trust estate. There is no Public Trustee in Scotland. In respect of the general principles of the stringent duty of care and diligence incumbent on trustees, the avoidance of conflict between the interests of trustee and beneficiary, and the like similar principles to those of English law have been applied and English analogies have been influential.
There are many differences between the two jurisdictions – for example, there is no law against perpetuities as such in Scotland. While in Scotland there was originally no fundamental objection to a trust continuing in perpetuity, this is now limited by s.5 Trusts (Scotland) Act 1961. s.5 contains restrictions on the accumulation of income. Trust for sale is an English law concept and has no direct equivalent in Scots law.
In England the trust concept was developed to a high degree over a long period in the Court of Chancery and the Chancery Division. The concept is of concurrent ownership, the trustee having nominal and formal ownership recognised at law, but the beneficiary having a concurrent ownership recognised and enforceable only in equity. Scottish trust law, though an indigenous development, has borrowed much from English principles, but it does not regard the trust as an instance of concurrent legal and equitable ownership, but rather of legal ownership qualified by the rights of parties having jura crediti against the subject owned.
Because Scotland has always had a unified system of law and equity, Scots law never adopted the theory of legal and equitable estates, with the result that Scots law never recognised that the beneficiary could have real rights in trust property. This is probably the single most important difference between Scots law and English law on trusts.
The greatest English influence today in the Scots law of trusts is probably in the terminology used. It is not always the same (for example in Scotland `the settlor` is termed `the truster`) but the phrases constructive trust, and cy pres, which originally came from England, are used in Scotland. However, the substantive rules for each of these concepts differ in Scots law and in English law; much of the English law of trusts appears to have a superficial similarity with Scots law, but can in its fundamentals be different.
Trustee Act Provisions
Scots law has its own Trustee Acts (the English statute does not apply) – theTrusts (Scotland) Acts 1921 and 1961. There are however similarities in places between the two sets of legislation. For example, s.1 Trusts (Scotland) Act 1961gives the Court of Session power to vary, revoke or enlarge the trust purposes and the powers of the trustees; it was introduced for the same reasons as, and reproduces in terms applicable to Scotland, s.1 Variation of Trusts Act 1958(England). The Trustee Investments Act 1961 applies in Scotland.
s.4 Trusts (Scotland) Act 1921
s.4 Trusts (Scotland) Act 1921 is headed “General Powers of Trustees”. It provides that in all trusts the trustees shall have power to do the things listed in the Section, where such is not at variance with the terms or purposes of the trust and such acts when done shall be as effectual as if such powers had been contained in the trust deed. Examples of some of the things listed in the section are: borrow money on security of the trust estate, appoint law agents and pay them suitable remuneration and compromise claims connected with the trust estate. s.4 does not include a power to lend money or to invest in heritable property so if one wants these powers they have to be expressly included in the trust deed. s.5 allows the Court of Session to extend to trustees the ability to do things listed in s.4 even if at variance with the terms and purposes of their trust if the court is satisfied that this is in all the circumstances expedient for the execution of the trust.
s.3(b) Trusts (Scotland) Act 1921
s.3(b) Trusts (Scotland) Act 1921 provides that unless the contrary is expressed all trusts are held to include power to the trustees to assume new and further trustees. This power will not be excluded by implication and is additional to any power of appointment conferred by the trust deed.
In pension schemes, normally, it is desirable that the principal company has power to appoint and remove trustees (subject to member trustee requirements) so it is best to expressly exclude the trustees’ power of assumption of new trustees in the trust deed. It is possible to provide that in the event of the liquidation of the principal company, other than for the purposes of reconstruction, the power of the trustees to assume new trustees revives.
In Scotland there are forms set out in the Trusts (Scotland) Act 1921 for wording to be included in deeds of appointment and resignation of trustees. It is best practice to include the statutory wording as it ensures title to the trust assets is vest in the new trustees. For proper continuity of title to all trust assets outgoing trustees are parties to such documents. It is unfortunate but common to find deeds of change of trustee prepared for Scots trusts in short English style omitting the wording in the forms attached to the 1921 Act.
In Scotland failing contrary provisions in the trust deed a trustee must act gratuitously. The trust deed may however authorise a trustee to charge for his services. In the pensions world therefore it is desirable always to include such an authorisation in the trust deed in respect of professional or corporate trustees.
Delegation and related issues
The basic starting point is that in Scotland in administering an ongoing trust the trustees act as a body. There is however statutory provision in s.3(c) Trusts (Scotland) Act 1961 to the effect that unless the contrary is expressed in the trust deed it is implied that a majority of the trustees accepting and surviving shall be a quorum.
While a quorum or majority may act and bind the trust they should do nothing without first consulting their co-trustees giving them the opportunity to attend meetings and information as to the business to be transacted.
On delegation proper the starting point in Scotland is that a trustee must retain the control of the trust and not delegate or surrender it to agents. A trustee may however engage persons of knowledge and skill to advise in technical areas in circumstances where a reasonably prudent man would do so in managing his own affairs.
The trustee must not however subordinate his judgment to their advice but must seek himself to evaluate the advice and himself take the decisions.
Questions of policy must be reserved to the trustees. Technical persons should be properly qualified, employed only within the area of their professional competence and function and be supervised by the trustees so far as is reasonable in the circumstances.
Protection for Trustees
In terms of s.32 Trusts (Scotland) Act 1921 if it appears to the court that a trustees is or may be personally liable for any breach of trust, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust, the court may relieve the trustee either wholly or partly from personal liability for it. This follows the same words as the equivalent English provision.
Honest but negligent conduct is not reasonable nor is failure to comply with a statutory requirement nor unauthorised investment.
The court always has a discretion and must always deem the circumstances to be such the trustee ought fairly to be excused.
It is common to insert in trust deeds clauses purporting to confer on trustees protection, or even immunity, from liability for breach of trust but past cases suggest that such clauses would not protect against the consequences of gross negligence or conduct not in good faith. They afford no protection against a deliberate breach of trust but may protect against an error of judgment.
Limitation of Actions in England
The position is governed by the Limitation Act 1980, coupled with the application of the equitable doctrine of laches (delay in bringing action for so long that by conduct the person wronged is deemed to have waived his claim).
(A) No statutory period of limitation
s.21(1) Limitation Act 1980, provides that there shall be no statutory period of limitation for an action by a beneficiary under a trust if the action is one:-
(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy or,
(b) to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use.
When trustees have committed fraud or retained any of the capital of the trust, there is no question of any defence under the statute.
Where the statute does not apply, the defences of laches may be raised. To establish this defence, it is necessary to show that the beneficiary has known of the breach of trust for a substantial period of time and has acquiesced in it. The essence of the defence is acquiescence on the part of the beneficiary when in full knowledge of the facts.
(B) Defence under the Statute
(a) Generally, in other cases the Limitation Act 1980 applies. s.21(3) of the Act, provides that actions to recover trust property or in respect of breach of trust are to be brought within six years from the date on which the right of action accrued. In the case of breach of trust, this is the date on which the breach occurred, and not when the loss was sustained. If a beneficiary knows that the trustees invest in unauthorised investments and at first the investments do well, but later lead to a loss even though the loss may not be sustained for several years, the limitation period runs from when the unauthorised investment was made.
Although in general no statutory period runs where the trustee has received trust property, a special rule applies where the trustee is also a beneficiary. If the trustee distributed the trust fund honestly and reasonably, but made an over distribution to himself, the statutory period applies to the extent of his own share, and the excess is subject only to laches.
s.21(3) also provides that where a beneficiary has a future interest, for the purposes of the Limitation Act 1980 the right of action is deemed not to have accrued until his interest falls into possession.
(b) Fraud – as has been stated, there is no statutory period of limitation for action in respect of a fraudulent breach of trust, but a non-fraudulent breach of trust may have been committed and subsequently concealed by fraud. Special provision is made, therefore, for actions based on fraud, or actions concealed by fraud. s.32 which is of general application and is not confined to actions for breach of trust, provides that where an action is based upon the fraud of the defendant, or where a right of action is concealed by fraud, “the period of limitation shall not begin to run until the plaintiff has discovered the fraud…… or could with reasonable diligence have discovered it.” For the purposes of this section, “fraud” is wider than the type of conduct which would give rise to an independent action and it has been commented that the fraudulent conduct “may acquire its character as such from the very manner in which that act is performed.”
(C) Actions for an Account
s.23 Limitation Act 1980 provides that “an action for an account shall not be brought after the expiration of any time limit under this Act which is applicable to the claim which is the basis of the duty to account.” All fiduciaries are under a permanent duty to account arising out of their fiduciary relationships; such claims are not subject to any period of limitation under the Act and so there is no time limit to which s.23 could apply in respect of such a claim. It appears that a claim for an account against a fiduciary, based simply on the existence of a fiduciary relationship, can be brought at any time.
Long Negative Prescription in Scotland
This concerns the loss or forfeiture of a right, by the proprietor’s neglecting to exercise or prosecute it during the whole of a long period which the law has declared to infer the loss of it. The doctrine of prescription infers, by operation of the law itself, a presumption of abandonment. Under the Prescription and Limitation (Scotland) Act 1973 the long negative prescription is 20 years, the running of which extinguishes obligations and rights. However, the long negative prescription does not extinguish any obligation specified in Schedule 3 to the 1973 Act as being an imprescriptable obligation.
Schedule 3 lists rights and obligations which are imprescriptable. These include any obligation of a trustee – (1) to produce accounts of the trustee’s intromissions with any property of the trust, (2) to make reparation or restitution in respect of any fraudulent breach of trust to which the trustee was a party or was privy, (3) to make furthcoming to any person entitled thereto any trust property, or the proceeds of any such property, in the possession of the trustee, or to make good the value of any such property previously received by the trustee and appropriated to his own use.
Also listed as an imprescriptable obligation is any obligation of a third party to make furthcoming to any person entitled thereto any trust property received by the third party and in his possession otherwise than in good faith.
For the purposes of (1) above the word “trustee” is widely defined. s.15 of the 1973 Act: “Trustee” includes any person holding property in a fiduciary capacity for another and, without prejudice to that generality, includes a trustee within the meaning of s.2 Trusts (Scotland) Act 1921; and “trust” is construed accordingly.
The obligation to produce accounts – prescription can never bar the claim of beneficiaries to an accounting from trustees.
Turning to (2) above – a fraudulent breach of trust certainly covers a breach done with intention to defraud, but it is questionable if it is confined to that; it may include a breach of trust, even negligent, which has the effect of defrauding a beneficiary of what he is rightly entitled to under the trust. It has been held that trustees cannot by prescription acquire a right to perpetuate a breach of trust.
Turning to (3) above – where trustees sold trust property to themselves it was held that the running of prescription did not protect them against a claim for restitution. Prescription cannot be pleaded against the right of a beneficiary to follow extant trust property (or its identifiable proceeds) into the hands of a trustee or of anyone acquiring from such a trustee, not being a bona fide purchaser for value without notice of the trust.
Short Negative Prescription in Scot land
s.6 of the 1973 Act introduced a new negative prescription period of 5 years. Detail is provided as to which obligations the short negative prescription applies. By s.6(2), Schedule 1 to the Act has effect to define the obligations to which the section applies.
Schedule 1 lists the obligations affected by the prescriptive period of 5 years under s.6 and includes any obligation to pay a sum of money due in respect of a particular period by way of an instalment of an annuity.
Trust law is about to see significant changes following a joint report by the Law Commission and the Scottish Law Commission of 12 May 1999. A draft Trustee Bill has been published including draft clauses for the reform of Scots law.
Law Commission and Scottish Law Commission Report on Trustees’ Powers and Duties
Recommends reform of the law governing trustees’ powers to invest trust funds in default of the inclusion of express powers of investment in the trust instrument. The report also recommendsfor England a range of reforms, intended to facilitate more effective trust administration, on issues including:-
- Collective delegation by trustees.
- The use of nominees and custodians.
- Powers of insurance.
- Remuneration of professional trustees.
The reforms will assist trusts whose trustees have inadequate express investment and other powers. There are many such trusts (particularly charitable trusts) in existence. Consequently, the proposed reforms would:-
- Enable many charitable trusts to acquire and hold investments which are likely to produce a better return for the charity than the investments to which they are presently restricted.
- Facilitate the use of modern investment services by such trusts.
- Lessen the administrative burden and associated costs of maintaining the regime presently required by the Trustee Investments Act 1961.
- Bring similar benefits for many family trusts and wills andin England, trusts arising on intestacy.
The principal recommendations are:-
- The Trustee Investments Act 1961 (which is regarded as outdated and unduly restrictive) should no longer govern trustees’ powers of investment. Instead, trustees should have power to make an investment of any kind as if they were absolutely entitled to the assets of the trust.
- Trustees in England should have wider powers of collective delegation, new powers to employ nominees and custodians and to insure trust property. There should also be better provision for remunerating professional trustees.
- These powers should be subject to appropriate safeguards, including a duty to take proper advice in relation to investments andin England, a statutory duty of care.
Draft Trustee Bill – Scottish Clauses
These clauses implement the recommendation in Parts I and II of the Report in so far as they relate to Scotland. Formal provisions, such as the extent and commencement have been omitted, as the forms of Acts of the Scottish Parliament was not then settled.
Clause 1(1) and (2) are the key provisions. s.4(1) Trusts (Scotland) Act 1921lists powers which all trustees are deemed to have, except insofar as they are at variance with the terms or purposes of the trust. Sub-section 2(b) adds to this list by inserting a new paragraph (ea) into section 4(1) conferring a new general power of investment in very wide terms. The effect is that trustees will generally have the same powers of investment as if they were the beneficial owners of the trust estate. In particular, trustees are to be entitled to invest in land. The definitions of “trust”, “trustee” and “trust deed” in s.2 of the 1921 Act apply automatically. “Land” is defined in Schedule 1 Interpretation Act 1978 as including “buildings and other structures, land covered with water, and any estate, easement, servitude or right in or over land”. The land may be situated anywhere, not just in Scotland.
Sub-section (2)(b) also deals with the acquisition of land for a reason other than investment. This provision inserts a new paragraph (eb) in s.4(1) of the 1921 Act. This wide power supersedes the more specific existing power in s.4(1)(ee)to acquire any interest in residential accommodation as a suitable residence for occupation by a beneficiary.
The new sub-section (1B) disapplies the new general investment power for certain classes of trustees. Pension fund trustees and trustees of authorised unit trusts have statutory investment powers which they are to retain. Other trustees with statutory powers are also to retain them unless the statute is amended.
The new sub-section (1C) continues the policy of the Trustee Investments Act 1961 in relation to pre-existing trust deeds. It provided that no term in a private trust deed made before the passing of the Act on 3 August 1961 was to restrict the investment powers granted to trustees by that Act. The new general power conferred by Clause 1(2) is similarly not to be restricted.
The new sub-section (1D) deals with post-1961 Act trust deeds. Where the investment powers contained in the 1961 Act are conferred the trustees are to enjoy the new general powers. But if the trustees in existing post-1961 Act deeds or future deeds are prohibited from making certain investments (in non-ethical companies for example) then these prohibitions will continue to apply. This is because s.4(1) of the 1921 Act, in which the new general investment power is inserted, authorises only acts that are not at variance with the terms and purposes of the trust.
Clause 2 deals with certain duties of trustees in relation to investments. Trustees exercising their powers of investment are subject to the Scots common law duty of care, which requires them to use the same diligence as people of ordinary prudence would use in relation to their own affairs. Trustees are also required to consider the interests of all categories of beneficiaries and to keep the trust investments under review.
When exercising their powers of investment, either as a result of a review of existing investments or in investing new funds, the trustees have to have regard to the matters mentioned in sub-section (1) of the new section 4A. “Suitability” relates both to the kind of investment proposed and to the particular investment as an investment of that kind. It will include considerations as to the size and risk of the investment and the need to produce an appropriate balance between income and capital growth for the trust.
Sub-sections (2) and (3) of the new Section 4A deal with the trustees’ duty to obtain and consider advice in reviewing investments and making investments. Trustees need not obtain advice if in all the circumstances it would be unnecessary or inappropriate. If the trust has limited funds it could be inappropriate for the trustees to get advice before placing the money in an interest bearing account. Where some of the trustees have investment expertise they may reasonably conclude that independent advice is unnecessary.
Sub-section (4) deals with the selection of providers of advice. The adviser’s expertise should be related to the type of investment under consideration. There is no longer a requirement that the advice be given or confirmed in writing as is the case under s.6(5) Trustee Investments Acts 1961. It is nevertheless prudent for trustees to continue the practice of obtaining written advice for all but the smallest investments.
Andrew S. Fleming, Partner
Richards Butler, Solicitors