Trustee Exoneration Clauses
Martyn Frost FCIB, TEP
Trustee Manager, Barclays Bank Trust Company Limited
and Vice-President, The Association of Corporate Trustees
(From Issue 6,January 1999)
Publication of the Court of Appeal judgement in Bogg v Raper (The Times 22nd April 1998) has served to focus attention on exoneration clauses again, following the previous recent review in Armitage v Nurse (1998) All ER 705`.
Whilst some may take comfort in the court finding for the executors of the will, the return of this subject does raise awkward questions for those who are professionally involved with the administration of estates and trusts and seek the protection of exoneration clauses.
What happened in Bogg v Raper?
In Bogg v Raper it is reported that the testator’s estate was sworn for probate at £8m and that some £6m of this was one private company shareholding (78.3% interest in the company). Within two years of the date of death of the testator this holding was worthless. Other private company interests were sworn for probate at over £1.1m but they in turn only realised in total £83,000. The executors of the will were a solicitor and an accountant. What is not known, as the Court of Appeal found it was not necessary to decide on the issue, was whether or not the loss from the private company interests arose through the negligence of the executors. The beneficiaries contended that these losses arose through the negligence of the executors in that they:-
- failed to exercise proper control of the business
- failed to keep themselves informed of its financial position
- failed to take adequate steps to prevent its value being destroyed
- failed to appoint a new chief executive in succession to the testator
- left the conduct of the business in the hands of the twenty percent share holder when it was alleged that there was reason to doubt his honesty
- lent or guaranteed substantial sums of money without security to a number of unprofitable or untried companies resulting in losses of £4m
Allegations such as these inevitably bring one to Bartlett v Barclays Bank Trust Company Ltd (1980) All ER 139 and the finding in that case that the professional trust company involved was liable for its failure to exercise proper control of a company. It will be remembered in that case that Brightman J was of the opinion that “a higher duty of care is plainly due from someone like a trust corporation which carries on a specialised business of trust management…”. However, Bartlett was not an issue for consideration if the contention of the executors was accepted by the court.
The executors contended that this issue of negligence could not arise as the will provided that:-
“……no trustees (other than a trust corporation) shall be liable for any loss to the trust premises arising by reason of any improper investment made in good faith or for the negligence or fraud of any agent employed by him or by any other trustee hereof, although the employment of such agent was not strictly necessary or expedient, or by reason of any mistake or omission made in good faith by any trustee hereof or by reason of any other matter or thing except wilful or individual fraud or wrongdoing on the part of the trustee who is sought to be made liable”. (N.B. the Court found that “wilful or individual fraud” should have read “wilful and individual fraud”.)
It was held by the court, both at first instance and in the Court of Appeal, that this clause was effective to exonerate the executors and that no consideration of the beneficiaries’ claims of negligence was necessary.
Issues arising from exoneration clauses
However for the purposes of this article let us assume hypothetically that the plaintiff’s allegations were true and the losses arose through the negligence of the LPRs. Under these circumstances the effect of the exoneration clause would have been to prevent the beneficiaries’ redress for the loss of a considerable sum. Given that position, would it be morally defensible for professionals, who will take fees for their services in acting as executors, to take shelter behind such a wide-ranging exoneration clause as was used inBogg v Raper? Quite clearly the courts currently view it as being legally defensible for them to do so, but in order to promote the interests of those professions involved in this work a case can be made for it being morally indefensible.
James Kessler [Drafting Trusts and Will Trusts A Modern Approach (3rd edition) p57/8]has put forward the view that exemptions for negligence are wrong in principle and cites in support of his views precedents recommending that the form should only be used in “special circumstances [Prideaux’s `Forms and Precedents in Conveyancing’ (25thedition 1959) p158] or, if used, that they should be restricted to unpaid trustees .[Hallet’s `Conveyancing Precedents’(Sweet & Maxwell 1965) p801]
The Encyclopaedia of Forms and Precedents 5th edition volume 4 p512 adopts the same approach and their proposed indemnity clause does not apply to professional trustees. Williams on Wills 7th edition pp 1450/1 suggests that while such clauses can be recommended for the unpaid executor or trustee, they are less appropriate for a professional trustee “who charges for his services and is covered by insurance and especially inappropriate in the case of a trust corporation” (Query: why a higher standard for trust corporations than solicitors or accountants?). Interestingly theEncyclopaedia of Forms and Precedents suggests that a testator or settlor should be made fully aware of how an exoneration clause operates and agrees to its inclusion.
In contrast to the above references, Trusts & Estates (9 June 1998) suggests that exoneration clauses are more routinely included in wills and that to suggest otherwise would hardly be “regarded as satisfactory by those who contribute to the Solicitors’ Indemnity Fund”. The suggestion is made that such clauses act to protect professionals from “the strict liabilities which would otherwise be imposed by the general law”. This can be seen as a one-sided view of the issue if, from the beneficiaries’ point of view, such clauses could save to deny a remedy for negligent or incompetent work. One can see that protection from speculative and ill-founded claims would be welcome in today’s increasingly litigious world, but does the current use of such clauses provide a balance between all interests or unduly favour one party?
Professor Hayton [Underhill & Hayton Law of Trusts and Trustees (15th edition)]expresses the view that there is “an inner core of obligations owed by the trustees to the beneficiaries” and questions to what extent these core obligations can be eroded by exoneration clauses before the trust itself is negated. This was answered to a degree inArmitage v Nurse when the court decided that although it accepted that there was “an irreductible core of obligations” that were owed to the beneficiaries and which were enforceable by them, it did not accept that the core obligations of a trust included the duties of skill and care, prudence and diligence. The duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries was the minimum necessary.
So far the comments in this article have been aimed at paid trustees as there is a fairly general assumption that the use of exoneration clauses to protect unpaid trustees is reasonable. On balance it probably is reasonable, but even for unpaid trustees there are awkward questions. Does a testator or settlor appreciate the risk to his beneficiaries if unpaid trustees are used and are given this protection? If the unpaid trustee undertakes a position of trust and through his negligence damages the beneficiaries inheritance is it reasonable from the beneficiaries view that he is exonerated? It could be argued that even for unpaid trustees exoneration clauses tend to disadvantage the beneficiary and weaken the concept care and diligence on the part of the trustee.
A presumption involved in Bogg v Raper
In Bogg v Raper the court considered that, as the will which contained the exoneration provisions had been admitted to probate, the testator must be presumed to have known and approved the contents of the will. Given that the particular exoneration clause inBogg v Raper needed to go the Court of Appeal for its effectiveness to be determined (and indeed on one point to be construed) am I alone in asking the questions
- whether or not for a clause such as this the presumption that the testator must have known and approved of his will is, in reality as opposed to law, true?
- to what extent will a lay person executing such a will truly understands the wide ranging consequences of such a clause?
- whilst one can accept that there are different ways of explaining the meaning to a testator, would a testator sign the will if he was aware of the true consequences of the clause and the lack of redress that it would provide for the beneficiaries?(Adviser: “By authorising this provision the professional trustees can be completely free from any liability no matter how negligent they are and your beneficiaries will only have redress if the trustee acts fraudulently.” Client: “It seems very reasonable to pay professional charges for such a service although there will be no recourse if trustee fails the trust.”.)
In passing, it worth noting that the plaintiff in Bogg v Raper also raised the issue as whether or not such exoneration clauses provided an actual benefit to the executors and that thereby the preparation of the will gave rise to an unacceptable conflict of interest if the executor prepared the will. This claim was not accepted by the court and the court found that the clause defined the potential liability by defining their position and protect them from loss, but did not confer any profit from their position.
It is also worth drawing attention to question of whether or not the increasing lack of protection for beneficiaries which results from a wider use of these clauses be reconciled with the courts’ current concern for increased protection for beneficiaries from other negligence in will preparation (see Esterhuizen v Allied Dunbar [FLR 668]and Carr-Glyn v Frearsons (1998) All ER 225.)
Millett LJ (as he then was) in Armitage v Nurse commented on exoneration clauses:-
“It must be acknowledged that the view is widely held that these clauses have gone to far, and that trustees who charge for their services and who, as professional men, would not dream of excluding liability for ordinary professional negligence, should not be able to rely on a trustee exemption clause excluding liability for gross negligence……..If clauses such as clause 15 of the settlement are to be denied effect, then in my opinion this should be done by Parliament which will have the advantage of wide consultation with interested bodies and the advice of the Trust Law Committee….”.
The question of Parliamentary intervention to resolve the issue is indeed the answer. However, if the perception of Parliament is that exoneration clauses work against the “consumers’” interests there must be a real possibility that the solution will not be one that is welcome to professional trustees. At present it seems easier to displace liability for remunerated trustee work than it is to displace liability for goods sold in the high street.
The issue has been thoroughly examined by the Trust Law Committee’s most recent working party and publication of its consultation paper is imminent. Their proposals focus on the use of these clauses by remunerated trustees and favour statutory provision to prevent such a trustee from relying on a clause that excludes liability for a breach of trust arising from negligence. This contribution to the progress of this issue is very welcome and copies of the consultation paper will be available shortly.
Recent limitation on the interpretation of exoneration clauses
In Wight and another v Olswang and another (The Times 17th September 1998) it was decided that where there was doubt whether a trustee would be exempted from liability for a breach of trust under an exoneration clause, such doubt should be resolved against the trustee. In this case, the settlement deed contain two exoneration clauses, one of which (cl.11) applied to all trustees, whereas the other (cl.18) applied only to unpaid trustees. The court felt that the conflict between the two clauses was such that it could not be ignored and that clause 11 must be construed as providing no exemption to paid trustees because, if it did, it would be repugnant to clause 18.
I do not pretend that I know the answers to the questions that I have posed above as their intention, at this stage, is to promote debate rather than provide answers. There are however some uncomfortable aspects to exoneration clauses and as wide a debate as possible is needed.
© Martyn Frost, FCIB TEP 1999
Barclays Bank Trust Company Limited