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Trusts & Trusts Disputes - Seminar Notes

Mar 08, 2016

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Notes from the final seminar in the Ten Old Square Seminar Season 2012 held on 8th March at the Chancery Court Hotel, Holborn, London.
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Page 1: Trusts & Trusts Disputes - Seminar Notes
Page 2: Trusts & Trusts Disputes - Seminar Notes

THE TEN OLD SQUARE SEMINAR SEASON 2011/2012

TRUSTS AND TRUSTS DISPUTES

Thursday 8th March 2012 from 6.00pm

The Chancery Court Hotel, Holborn, London.

Thank you for attending this evening’s seminar, which is the final seminar in this season’s series of four seminars centred on our core areas of practice.

Ten Old Square is renowned for its private client work and many of you will probably agree that tonight’s panellists need very little by way of introduction, such are their reputations in this significant, technically stimulating area of the chancery law.

Tonight’s panellists will be:-

Simon Taube QC

Simon Taube's practice covers the broad range of Chancery activities in both litigation and advisory work. He also conducts cases abroad in other common law jurisdictions.

His special expertise includes the fields of UK and foreign trusts and estates, tax planning and trust and personal taxation. He also has wide experience in charity, property, securities, partnership, professional negligence and family provision matters.

The Legal 500 2011 describes him as “magisterial and phenomenally clever” and “nothing short of brilliant”. Chambers UK 2012 says his is “outstanding” and he receives praise for his “beguiling, fantastic court presence” when before the bench and for his “excellent bedside manner” with clients.

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Francis Barlow QC

Francis Barlow's practice covers the full spectrum of Chancery matters, both contentious and non-contentious.

As well as having particular expertise in drafting UK and offshore trusts and advising on their construction and effect and associated taxation issues, he has extensive experience in contested trust, probate and succession disputes.

He is the consultant editor of Williams on Wills, a joint editor of the "Wills" and "Executors" titles in the current edition of Halsbury's Laws of England and a contributor to the first and second editions of Thomas and Hudson's Law of Trusts.

He was a member of the "Group of Experts" appointed by the EU Commission to consider proposals for the harmonisation of the laws of succession of Member States.

He is described in The Legal 500 2011 as "second to none" and as an “encyclopaedia of mainstream and obscure trust and probate law” and a ‘brave and compelling advocate’ . Chambers UK says he “is spoken of fondly by market sources as being "approachable, exceedingly knowledgeable and wise”. For many, he is a "first choice for variation of trusts advice” as well as probate and contested estates matters.

Eason Rajah QC

Eason Rajah was called to the Bar of England and Wales in 1989 and appointed Queen’s Counsel in 2011. He was called to the Malaysian Bar in 1991.

His practice is chancery litigation and advisory work in the UK and offshore. This includes domestic, off shore and cross-border trust and will disputes, related tax and professional negligence issues, drafting, structuring and advising in relations to trusts, succession planning and tax and related areas.

He is recommended as a new silk by the current editions of Chambers UK, The Legal 500 and Citywealth Leaders List. Chambers UK say he “owes his richly deserved elevation to the fact that he takes a "clear and decisive" approach when handling contentious trusts and estates cases” and, in relation to Court of Protection work, “it's not hard to see why [he] has taken silk." "Outstanding" in terms of both advice and advocacy, he is "clear on strategy and a very skilled negotiator." One of the best in the land for property and affairs cases, this “silky smooth” barrister also turns his hand to welfare matters.” Previous editions of Chambers and Partners Guide and the Legal 500 described

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him as “a fantastic senior junior, very bright and a first class advocate”, “one of the set's rising stars", "a tough advocate and a clever lawyer", "an exceptionally good advocate", "a clear thinker", "insightful", "flexible", "approachable", "offers practical advice", "rated for disputes" and "a good man for the more complicated matters".

Richard Dew

Richard Dew's practice is focussed on Wills, Estates and Trusts and related professional negligence. His practice is predominantly litigation, and he is becoming increasingly involved in larger and more complex claims, but he also provides expert advice in respect of tax and tax planning (principally capital taxation). He is a member of STEP and ACTAPS. He has experience at all levels of litigation (with two recent cases in the Court of Appeal) and considerable experience in the conduct of mediation and alternative dispute resolution.

Richard is an editor of Tolley's Inheritance Tax Planning and the Trusts and Estate Practitioner's Guide to Mental Capacity. He is a contributor to the recent book on International Trusts Disputes.

Richard lectures regularly on chancery and private client matters. Recent lectures topics include "setting aside trusts" (including fraud, mistake and rectification) and "Insolvent Estates".

We hold our seminars not only to showcase the talent at Ten Old Square, but also to say thank you to those of you who continue to support our Chambers through valued instructions.

Following immediately after the seminar will be a reception with drinks and hot canapés.

You will earn 2 (SRA) CPD points for attending this seminar so please fill out the questionnaire at the back of this folder and let me have it back, at your convenience.

Keith Plowman, Senior Clerk – March 2012.

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Ten Old Square Seminar Season 2012

Trusts and Trusts Disputes

The Gerrard trust is a substantial trust settled by Grandfather Miller in the 1950’s on discretionary trusts for the benefit of his two sons, Whittingham and Johnson and their legitimate issue.

The Miller family is divided and disputes are frequent. After one acrimonious dispute was compromised, the Gerrard trust came to be held on two sub funds, one intended for each son and their legitimate issue. The trustees now consist of a solicitor, Mr. Adams, and the Wereneutral Trust Company. Mr. Adams heads up the private client team at a large firm, Adams & Co, and they are accustomed to advising the trust and dealing with much of the day-to-day administration.

The trust includes an exoneration clause excluding the liability of individual trustees (but not trust companies) for anything other than fraud or wilful misconduct.

The Whittingham sub-fund

A. Since at least 1989 substantial payments have been made from Whittingham’s sub-fund, at Whittingham’s insistence, to Whittingham’s son, Kuyt. The trustees have assumed that Kuyt was a beneficiary. Unbeknownst to Mr. Adam and Wereneutral Trust Company, Kuyt’s parents married shortly after his birth and Kuyt, though now legitimated, was born illegitimate. A proper inspection of the trust documentation and the general law shows that, because Kuyt was born illegitimate and because the trust was established some time ago, he is not within the beneficial class. However, the advances could have been made to him under the power to apply capital for the benefit of his father, Whittingham. Had the trustees been aware of the position, they would have exercised this power.

B. Whittingham was aware that there was an issue as whether Kuyt was a beneficiary because he was born illegitimate, but he would like as much recovered as possible from the trustees or solicitors so that his daughter (Mrs. Villas Boas) may benefit.

The Johnson sub-fund

C. Over the years the trust portfolio became increasingly overweight in property investments. The investment manager instructed by Adams & Co (Mr Downing) had given regular and repeated warnings to Mr. Adams that the trustees should consider diversifying the portfolio in some way. Mr. Adams kept forgetting to mention this at trustee meetings and nothing was done. Those investments have now crashed spectacularly.

Whittingham and Johnson wish to consider claims against the trustees and Adam & Co.

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Trustee Solicitors, Exculpatory clause and claims for Negligence

Overview

1. The Court of Appeal’s decision in Pitt v Holt, Futter v Futter [2011] 3 WLR 19 suggested that

a trustee who is also a solicitor might be in breach of duty as a solicitor for advice given by him

whilst at the same time not in breach of duty as a trustee for following that advice. This paper

explores the implications of that suggestion where the trustee has the benefit of an exoneration

clause.

The duties of a solicitor trustee

2. A solicitor acting as trustee is a common occurrence. Frequently, they are in that position

because of their professional knowledge and experience and in almost all cases have the benefit

of a charging clause entitling them to charge for their, and their firm’s, time in administering

the trust.

3. It goes without saying that in such circumstances the solicitor trustee will owe the full range of

fiduciary duties to his co-trustees and to the beneficiaries, including duties to take care.

Similarly, a solicitor acting in that role will owe a tortious duty of care, assessed according to

the standard of care of a solicitor trustee. If asked about it, many settlors might answer that one

advantage of having a professional trustee is the ability to access both their expertise and their

insurance policy should anything go wrong.

Exoneration clauses

4. The position in England is, without doubt, that liability for a trustees breach of duty can be

excluded for everything other than fraud, see Spread Trustee Co Ltd v Hutcheson [2011] UKPC

13. In Scotland the position is different and in other jurisdictions (including Guernsey) the

legislator has stepped in.

5. Up to now there has been nothing to suggest that a negligent solicitor, who is also a trustee,

could not rely upon such a clause. In Bogg v Raper [1998] 1 ITELR 267 the deceased’s Will

was drafted by his solicitor and included a clause excluding all but fraud. The solicitor was

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appointed as executor and trustee, along with an accountant. As a result of an (alleged) failure

to supervise the investments it was said that substantial losses had been caused to the

estate/trust. The claim was struck out because of the wide exclusion clause. The argument that

the solicitor, who had inserted the clause into the Will, could not himself rely upon that clause

was rejected. It was not suggested that he, as solicitor, owed some separate or different duties to

the trust that were not covered by the exclusion clause.

Pitt v Holt, Futter v Futter

6. The logic used in Pitt v Holt, Futter v Futter was:

(i) Where a trustee acts within the powers conferred by the trust and is not in

breach of duty the exercise by him of those powers cannot be set aside.

(ii) A trustee who considers all relevant matters will not be in breach of duty,

even if it turns out that he was wrong about some of those matters.

(iii) In particular, a trustee will not be in breach of duty if he seeks advice and that

advice later turns out to be wrong.

7. In the Futter case the trustees (Mr Futter and Mr Cutbill) had sought advice. They had obtained

it from one of the trustees (Mr Cutbill) and his firm. Lloyd LJ said:

“In one sense, it is also artificial to draw a distinction between Mr Cutbill acting in

one capacity, as trustee, and in another, as solicitor to the trustees. But that is a

comprehensible distinction which may need to be made for some purposes. It reflects

the fact that, as solicitor, he was part of a team which included Miss Minett and other

members or employees of the firm who played a part in the process of giving relevant

advice, whereas as trustee he was part of a different team, so to speak, consisting of

himself and Mr Mark Futter, who has to act together and unanimously. As a partner

in [the Firm] he might be the recipient of a claim in negligence in respect of the

advice given, but as a trustee I do not see that he could be charged with breach of

trust, any more than Mr Mark Futter could be, for having acted on the advice so

given”

8. If that logic is followed through, then the solicitor can be liable for a mistake in his capacity as

a solicitor, whilst having no liability for the same mistake in his capacity as a trustee.

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Can the solicitor benefit from an exoneration clause?

9. The position is further complicated by an exoneration clause. The logic in Futter v Futter is that

a trustee will not be liable for mistakes made so long as he makes them as a trustee. However,

the same logic distinguishes the position of a solicitor in giving rise to or contributing towards

the same mistake. If the solicitor has a separate liability as solicitor then there is no reason that

he should be able to rely upon the exoneration clause. He can therefore be liable for giving

careless advice to the trustees when wearing his “solicitor hat” notwithstanding that once he

picked up his “trustee hat” and implemented that advice he had the benefit of a full exclusion

clause.

10. The argument is not as easy, though, as it first seems.

11. First, liability in tort is restricted by the limits of the contractual retainer (e.g. Henderson v

Merrett Syndicates Ltd [1995] 2 AC 145). If the solicitor agrees to act as trustee with reference

to the trust documentation, and if his ability to charge is derived from that documentation, why

then is he not also able (for all purposes) to rely upon the exclusion of liability also conferred

by the trust? There are therefore real conceptual problems with a solicitor avoiding liability as

trustee but not as solicitor.

12. Second, there are real practical problems in distinguishing between the solicitor as solicitor and

the solicitor as trustee. A trustee, particularly of a small trust, will not often go through the

formal exercise of taking advice from himself or his firm before acting, as opposed to simply

stating his views to his co-trustees and a decision being taken. That position must be

particularly acute where the firm is a sole practitioner or where the individual is accustomed to

acting alone in administering the trust. Such distinctions have been drawn in the past (see AMP

Insurance v Macalister Todd [2006] WTLR 189) but it is apparent that they are artificial and

unreal.

13. In the problem question that latter difficulty is starkly apparent. First, should Mr Adams have

noticed the position of Kuyt in his capacity as a trustee or as a solicitor? Second, in receiving,

and not passing on, the investment advice, was Mr Adams failing as a trustee or as a solicitor –

or both?

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Conclusion

14. It remains to be seen if any of Lloyd LJ’s logic will survive in the Supreme Court. However, if

it does so this is likely to be an interesting and developing area, as disgruntled beneficiaries

shift from resolving mistakes using Hastings-Bass principles to looking to see who is liable for

those mistakes.

Some thoughts on Limitation

15. For many of the breaches the primary limitation period will have expired. It may be thought

that most problems will be overcome by section 14A Limitation Act 1980, which confers a

three year time limit from the time when the breach should have been or could have been

discovered. However, section 14A starts time running when the Claimant could have had the

relevant knowledge, which includes knowledge that “he might reasonably have been expected

to acquire” (14A(5)).

16. An interesting issue arises on the facts of the problem. The criticism made of the solicitor in

respect of the payments to Kuyt is that he ought to have understood the effect of the trust and

the various legitimacy provisions. Therefore, the foundation of the negligence is his failure to

acquire some particular information. However, throughout the relevant time he was also one of

the trustees, and so one of the persons who would bring the claim. Might it not be argued,

therefore, that section 14A is defeated by the claim itself – since in whatever capacity the

trustee ought to have become aware of the information necessary to bring the claim.

17. The argument is artificial and unattractive. Why, though, is it wrong?

RICHARD DEW

TEN OLD SQUARE

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TEN OLD SQUARE CHAMBERS SEMINAR

TRUSTS AND TRUST DISPUTES

I. Illegitimacy and human rights legislation

II. Cure for defective exercise of powers

Francis Barlow QC

I. Illegitimacy and human rights legislation

A. Prima facie meaning of “child” at common law

1. There is no room for doubt that the presumption at common law is that “child” means a

legitimate child, i.e. a child born in lawful wedlock, and that other words indicating any form of

blood relationship are confined to legitimate persons who claim that relationship exclusively

through legitimate persons. The rule of construction was strict. “No gift, however express, to

unborn illegitimate children is allowed by law”: Hill v Crook (1873) LR 6 HL 265 at 278 per

Lord Chelmsford. (The doctrine that dispositions in favour of future-born illegitimate children

are void as being against public policy fell into desuetude long ago and was finally abolished in

relation to dispositions made on or after 1st January 1970 by section 15(7) of the Family Law Act

1969.)

2. Although the law has been radically reformed, the common law presumption that “child”

means a legitimate child and does not include an illegitimate child remains in full force in

relation to dispositions made before the relevant legislation came into force. As Viscount

Simonds said in Galloway v Galloway [1956] AC 299, HL, at 310-311 in relation to the

construction of a provision deriving from a statute of 1857,

“It was in 1857 (as it is today) a cardinal rule applicable to all written instruments, wills, deeds or Acts of Parliament that “child” prima facie means lawful child and “parent”

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lawful parent. The common law of England did not contemplate illegitimacy and, shutting its eyes to the facts of life, described an illegitimate child as “filius nullius”.”

The House of Lords was divided on the question whether on the particular facts of the case the

prima facie meaning could be displaced, but although Viscount Simonds was in the minority as

regards the actual decision, the basic principle enunciated by him remains the law: see, e.g.

Sydall v Castings Ltd [1967] 1 QB 302, CA, and Minister of Home Affairs v Fisher [1980] AC

319, HL.

3. Changed social conditions and attitudes do not affect the common law rule of

construction that illegitimate children are not included in references to issue in the Gerrard Trust.

As a matter of English law therefore Kuyt is not a member of the beneficial class. But is the

position altered by the combined operation of the Human Rights Act 1998 and the decision of the

European Court of Human Rights on 13 July 2004 in Pla & Puncernau v Andorra (Application

No 69498/01) (“Pla”)?

I. Human rights legislation

4. Pla concerned the construction of the will made in 1939 of a testatrix who died in 1949.

By the will she left her estate on trust (in effect) for her son and heir for life with a provision

requiring him to leave it to “a son or grandson of a lawful and canonical marriage”. The son died

in 1996 leaving the estate to his wife for life and then, by a codicil, to his adopted son. The High

Court of Justice of Andorra held, reversing the first instance tribunal, that in the absence of a

biological tie the adopted son was not eligible to take. His appeal to the Constitutional Court of

Andorra was rejected.

5. The adopted grandson petitioned the European Court of Human Rights complaining that

the decision of the courts of Andorra violated his rights under the European Convention on

Human Rights. The Court held by a majority that the decision of the courts of Andorra was

clearly discriminatory and amounted to an unlawful interference with the adopted grandson’s

rights to family life under Article 8 of the European on Human Rights (Right to respect for

private and family life) taken in conjunction with Article 14 (Prohibition of discrimination). This

remarkable decision was based on the principle that the Convention (which had been not adopted

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by any country either at the date of the will or the death of the testatrix) is a “living instrument”

and that

“interpretation could not be made exclusively in the light of the social conditions existing when the will was made or at the time of the testatrix’s death, namely in 1939 or 1949, particularly where a period of fifty-seven years had elapsed between the date when the will was made and the date on which the estate passed to the heirs. Where such a long period has elapsed, during which profound social, economic and legal changes have occurred, the courts cannot ignore these new realities.” (See para 62 of the Judgment.)

6. The approach to interpretation adopted by the majority of the European Court in Pla is

wholly inconsistent with the English law doctrine that words in a settlement are to be given the

same meaning and interpretation throughout the currency of a settlement as those words and

phrases had when the settlement was made: Shore v Wilson (1842) 90 Cl & Fin 355, HL, at 514-

5, 527-8, 557, 566 and 568.

7. The European Convention was incorporated into English law by the Human Rights Act

1998 section 2(1)(a) of which provides that a court determining a right which has arisen in

connection with a Convention right “must take into account” any decision of the European

Court. But there is no prospect that the approach adopted in Pla would be adopted by the English

courts. In Wilson v First County Trust Ltd (No 2) [2004] 1 AC 816 the House of Lords

unanimously decided that Parliament could not have intended that the 1998 Act should apply

retroactively so as to alter the rights of parties in relation to transactions or events, in that case a

contract, entered into or occurring before the commencement of that Act.

8. Whatever the position might be under the terms of the Convention in an application

before the European Court, First County decides that in English law the Convention cannot be

invoked so as to disturb established rights. It follows that the decision in Pla could not be

invoked to the detriment of the legitimate issue of Whittingham and Johnson by enlarging the

construction of references to issue in the Gerrard Trust so as to include non-legitimate issue.

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II. Cure for defective exercise of powers

A. Intention to exercise power

1. The question is whether the defective exercise of a power of appointment in favour of a

non-object can be upheld as an exercise, albeit unwitting, of a power to apply capital for the

benefit of the appointee’s father.

2. The classic statement of the principles governing the exercise of powers is to be found in

Re Ackerley [1913] 1 Ch 510 in which Sargant J said (at 515) that

“in order to exercise a special power there must be a sufficient expression or indication of intention in the will or other instrument alleged to exercise it; and that either a reference to the power or a reference to the property subject to the power constitutes a sufficient indication for the purpose.”

This statement was cited and applied in Re Holford’s Settlement [1945] Ch 21, Re Knight decd

[1957] Ch 441, CA, and Re Lawrence’s Will Trusts [1972] Ch 418. Although Sargant J’s

observations were directed specifically to the exercise of special powers of appointment, they

apply in relation to the exercise of dispositive and administrative powers generally: see Lewin on

Trusts, 18th Edn (2008), paras 29-172 ff.

3. The authorities establish that the requisite intention to exercise a power is the intention to

do the relevant act and that it is not necessary to prove a specific intention to exercise the

relevant power enabling that act to be done. An intention to exercise a power may thus be

inferred in the absence of any reference, however oblique, to the relevant power or any conscious

intention to exercise the power or even any awareness that the power actually exists.

3. In Re Morgan (1857) 7 IR Ch R 18 a testator had power under a settlement to charge land

in favour of his children; he had given one of his sons a bond but on his death left no estate to

satisfy the bond. However, a statement in his will that he had made provision for that son was

held by a majority of the Irish Privy Council to have operated as an execution by the testator of

his power under the settlement and that he had impliedly exercised that power by charging the

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land to secure his liability to his son under the bond. Monahan CJ (at p 50) expressed the

relevant principle of construction in the following terms :

“The question which we have to consider is – what is the true rule of law as to the construction of instruments executing a power? I deny altogether that it is necessary to deduce from the instrument an intention that the power should be executed. All that is necessary is, to deduce from the instrument an intention to do the act, which act can only be done by an execution of the power; and that when we once come to the conclusion that the intention is clear to do the act, and that the act cannot be done except by executing the power, and cannot be done by means of any estate which the party possessed, the law will consider such act an execution of the power.” (Emphasis supplied.)

4. To similar effect is the decision in Cowlishaw v Hardy (1857) 25 Beav 169 which

concerned a conveyance by a settlor of property which he had previously settled on the trusts of

a settlement reserving a power of revocation to him; the conveyance was executed with all the

formalities required for a revocation of the settlement but contained no reference to the power of

revocation and did not profess to be an exercise of that power. Romilly MR held that the

conveyance was effective as a revocation pro tanto of the settlement saying of the deed (at pp

172-173) :

“[The conveyance] does not profess to be a revocation of [the settlement], but I do not think that material, if, in point of fact, it specifically and in terms disposed of the property included in [the settlement] … I should be of opinion that [the settlor] having specifically disposed of that property in a particular manner, by a deed which, though not professing to be a revocation, actually did dispose of it, it could not afterwards be treated as passing … under [the settlement].”

5. Perhaps the most striking example of the doctrine is provided by the decision in

Mogridge v Clapp [1892] 3 Ch 382. In that case a 99-year lease was granted over land of which

the grantor believed himself to be the absolute owner. Title to the leasehold interest was

subsequently challenged on the grounds that the grantor that the property was settled land of

which he was tenant by the curtesy. However, the grantor as tenant by the curtesy had all the

powers of a tenant for life under the Settled Land Act 1882, including the power to grant a 99-

year lease. Section 20(2) provided, however, that to be effectual the lease had to be “expressed or

intended to operate” under the Act. The lease was clearly not “expressed” to operate under the

Act; the only question therefore was whether it was “intended” so to operate. The judge,

Kekewich J, appears to have assumed (at p 385) that the 1882 Act was not in the mind of either

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party to the lease and that lessor might well never have heard of it. He nevertheless held that the

lease was valid and effective. As he said (at p 388),

“There is an old rule, which I think is applicable to this case, that where you find an intention to effect a particular object, and there is nothing to exclude the intention to effect it by a power which is available, and there are no means of effecting it except by that power, then you conclude that the intention was to effect it by means of that power, because otherwise it would not be effected at all.”

The decision was upheld by a strong Court of Appeal (Lindley, Bowen and Kay LJJ). Lindley LJ

did not in fact consider that section 20(2) applied to the lease in question but expressed the view

(at p 395) that even if it did apply,

“the words in question ought not to be construed so as to defeat the obvious intention of both parties, which was that the lease should be a good and valid lease.”

6. A more recent authority on the point in question is Davis v Richards & Wallington

Industries Ltd [1990] 1 WLR 1511. The facts in brief were that in 1975 a group of companies

created a pension scheme and executed an interim deed to be superseded in due course by a

definitive deed. The interim deed conferred on the parent company power by resolution or

otherwise to appoint and remove trustees. In 1981 the final scheme was settled and a definitive

deed was prepared and engrossed for execution. However, before it was executed one of the

three individuals who were trustees of the scheme at the time purported to retire by letter.

Thereafter he played no further part in the administration of the scheme. Eventually in 1982 the

definitive deed was executed by the parent company and the two remaining trustees, the retiring

trustee’s name having been struck out in the engrossment of the definitive deed. One of the

contentions advanced in the case was that the definitive deed was invalid on the grounds that the

retiring trustee had not been effectively discharged as a trustee and was therefore a necessary

party to the deed who had not executed it. Scott J decided that on its true construction the interim

deed conferred a power on trustees to resign and held that the retiring trustee had therefore by his

letter effectively retired from office. However, he went on to consider the position on the footing

that the retiring trustee was not effectively discharged and remained a trustee at the time the

definitive deed was executed. After referring to Cowlishaw v Hardy, Mogridge v Clapp and Re

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Morgan, he formulated what he described as “an ameliorating principle of equity” in the

following words (at p 1530F-H) :-

“A disponor (A) purports to make a disposition of property. The disposition cannot be effective unless associated with the exercise of a power vested in A and that A could properly have exercised in order to make the disposition. The disposition makes no mention of the power and does not purport to be an exercise of it. The effect of the principle and cases to which I have referred is that A’s intention to make the disposition justifies imputing to him an intention to exercise the power, provided always that an intention not to exercise the power cannot be inferred. If the requisite intention can be imputed, the court will treat the disposition as an exercise of the power.”

Had it been necessary to do so, he would have upheld the definitive deed on the basis that the

company had validly removed the non-executing trustee: ibid at 1531F.

7. A similar point arose in LRT Pension Fund Trustee Co Ltd v Hatt [1993] PLR 227. One

of the issues in that case was whether the plaintiff company had been validly appointed sole

trustee of a pension fund. The company was not a trust corporation and the appointment did not

therefore comply with section 37(1)(c) of the Trustee Act 1925. However, the interim deed

constituting the fund conferred a power of amendment and Knox J, following Scott J in Davis v

Richards & Wallington Industries, held that the execution by the outgoing trustees of the deed of

appointment was to be treated as an exercise of the power of amendment so as to permit the

appointment of a sole corporate trustee which was not a trust corporation: ibid at paras 136-148.

8. Reference should finally be made to Epona Trustees Ltd v Pentera Trustees Ltd [2009]

WTLR 87 in which one of the trustees of an English settlement administered in Jersey purported

to retire as trustee by executing a deed poll declaring her intention of so doing; the deed did not

comply with section 39 of the Trustee Act 1925 because the continuing trustees had not

consented by deed to the retirement and to the vesting of the trust property in themselves alone;

the continuing trustees, believing that they were the sole trustees of the settlement, entered into a

transaction which involved the execution of two deeds. The Royal Court of Jersey held, applying

English law principles, that by executing these deeds the continuing trustees had impliedly given

the requisite consent by deed even though they were wholly unconscious of so doing and that in

consequence the requirements of section 39 had been satisfied and the outgoing trustee had

thereby been effectively discharged.

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B. Invalid exercise of one power: effective exercise of alternative power?

9. The present case differs from the cases referred to above in that in making the disputed

appointments the trustees consciously intended to exercise a particular dispositive power for the

benefit of Kuyt. The problem is that the power which they intended to exercise did not authorise

the disputed appointments as Kuyt, unbeknownst to them, was a stranger to the relevant power,

and there was no other power enabling them to benefit Kuyt. Is this factor fatal to the contention

that the disputed appointments are capable as a matter of law of being upheld as valid exercises

by the trustees of their power to apply capital for the benefit of another person, namely Kuyt’s

father? I suggest that the appointments to Kyut could be upheld on this basis.

10. The reasons trustees may have for exercising a power of appointment in favour of one

family member may well include wider considerations of family benefit. Typically appointments

in favour of children are often regarded as desirable because they indirectly benefit the parents.

Although the focus of powers of appointment and powers of advancement is not identical, the

considerations relevant to the exercise of the two powers may well be complementary rather than

opposed and may well dictate the same result. In my view there can be no objection in this sort

of situation to treating the purported exercise of a power of appointment in favour of a child

which the trustees do not in fact possess as a valid exercise of an available power to apply capital

for the parent’s benefit if in fact the trustees actually consider this to be the case.

C. Footnote: Kain v Hutton

11. The decision of the Supreme Court of New Zealand in Kain v Hutton [2008] WTLR 1381

is entirely at odds with the authorities referred to above. In that case the trustees of a settlement,

in purported exercise of the power of advancement conferred by the New Zealand Trustee Act

1956 (a power in broadly similar terms as the statutory power conferred by section 32 of the

English Trustee Act 1925), advanced certain trust assets to the trustees of a new settlement

created by the settlor for the benefit of his wife. Under the terms of the transferor settlement the

settlor’s wife was an object of a power of appointment, but had no interest in capital to which the

statutory power could attach. The New Zealand Court of Appeal upheld the transaction on the

basis that it must be treated as an initial appointment of the assets to the wife followed by a valid

advancement for her benefit of such shares to the new settlement.

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12. The Supreme Court unanimously reversed the Court of Appeal. The Court was much

influenced by the differences between powers of appointment and conventional powers of

advancement. As Blanchard J, giving the judgment of the majority, said (at para [32]),

“The matters relevant to the consideration of an exercise of each may differ substantially. A power of appointment amongst discretionary objects (a special power) is a power to select whether and to what extent and at what time one or more of the discretionary objects will receive any part of the trust fund, perhaps with the result that other discretionary objects will miss out entirely. It is often under a modern trust deed the most significant or fundamental power which the trustees have at their disposal. In contrast, a power of advancement is a purely ancillary power enabling the trustees to anticipate by means of an advance under it the date of actual enjoyment by a beneficiary, and it can only affect the destination of the trust fund indirectly in the event of the beneficiary failing to attain a vested interest.”

The crux of his judgment appears in para [35] where he said, (at para [32]),

“Where trustees have attempted to use a power they did not in fact enjoy, the courts will not come to their rescue by treating their action as if they had been engaged in exercising a quite different power that they did actually possess. A court of equity will not exercise a power which a donee has a discretion to exercise but has failed to exercise.”

13. In his concurring judgment Tipping J (at paras [55] ff) develops this theme.

“Where trustees have attempted to use a power which they did not in fact enjoy, the courts will not come to their rescue treating their action as if they had been engaged in exercising a quite different power which they did actually possess. A court of equity will not exercise a power which a donee has a discretion to exercise but has failed to exercise.”

After referring to various differences between powers of appointment and powers of

advancement, he concluded (at para [60]) as follows :-

“[I]n this case the trustees of the old ... ... trust purported to exercise a power which they did not possess. There is no basis upon which that ineffective act can be validated by means of the Court ascribing to the trustees an intention to exercise a materially different power which ... ... they demonstrably did not exercise. Indeed ... ... I do not consider the trustees could properly be treated as having exercised a power of a materially different kind requiring examination of materially different considerations.”

14. None of the relevant authorities were cited to the New Zealand Supreme Court. Its

decision in Kain v Hutton and the reasoning on which it was based does not represent the

position in English law and should not be relied on.

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TEN OLD SQUARE SEMINAR – 8 MARCH 2012

TRUSTS AND TRUST DISPUTES

BREACH OF DUTIES RELATING TO INVESTMENT

1. Sadly, trust funds do not always increase in value. Sometimes they decline in

value. Occasionally trust funds decline in value spectacularly. Furthermore,

the rise in the value of a trust fund may fails to match the rise in value of

apparently relevant indices. In those circumstances the beneficiaries and their

advisers search for legal guidance on –

(i) whether they can sue the trustees (or other persons involved in the

management of the investments and assets in the trust fund) for

breach of trust and

(ii) the quantification of any equitable compensation flowing from an

established breach.

2. It is striking how few reported modern cases there are on this subject. Most of

the English case law comes from an era when investment law and practice

was completely different from that in the modern world. Consequently, it is

often difficult to obtain useful guidance from the old authorities when

looking at modern complaints about alleged improper investment. What are

the main differences?

3. First, trustees’ powers of investment were, historically, very restrictive. The

underlying theory was that trustees ought to be allowed to invest only in safe

investments, not in speculative investments. This restrictive approach, albeit

relaxed in part, continued in the Trustee Investment Act 1961. Only in

section 3 of the Trustee Act 2000 did Parliament introduce the current wide

statutory power. Many of the reported cases concern trustees who had made

unauthorised investments. The rules on equitable compensation are

reasonably clear where trustees have wrongly applied funds in an

unauthorized manner (see Target Holdings Limited v Redfern [1996] AC

421). Nowadays though, the beneficiary is more likely to be complaining that

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the trustees have invested imprudently or negligently, albeit in an authorized

investment. The rules are much less to apply in that latter context.

4. Secondly, in the past the trustees were bound to make investment decisions

personally, absent express authority in their trust instrument. The trustees

could not delegate investment management to a discretionary portfolio

manager to make decisions on their behalf. In many cases though, this

approach threatened to jeopardize the trustees’ ability to procure that the trust

funds were invested as effectively as possible. (See Re Anker-Petersen

(1998) 12 Tru. LL. J. 66, where the expert evidence explained cogently the

desirability of conferring on trustees powers to delegate investment

management.) Now, sections 11 and ff of the Trustee Act 2000 authorise

trustees to delegate their investment management functions to agents, subject

to certain conditions (see below).

5. Thirdly, in England in the 19th century and the first decades of the 20th

century the purchasing power of the pound, although it experienced

fluctuations, remained remarkably constant. That phenomenon encouraged

investment in fixed interest securities, and trustees were discouraged from

investing in speculative equities or worse. Since the Second World War there

has been massive inflation. Investors have been forced to recognize that, in

the longer term, fixed interest securities may as risky, or even more risky,

than investments in equities or alternative assets.

6. Fourthly, in the modern investment world the modern portfolio theory

recognizes the need to look at the level of risk across the whole portfolio of

the trust fund not just individual investments within the trust fund (see

below). Additionally, there is a greater emphasis placed on the concept of

volatility. Some investors may be able to tolerate volatility, especially if they

can afford to take a long term approach to their investments. For other

investors, especially if they may face liabilities in the short to medium term,

volatility may represent a source of risk. I suggest such factors ought to play

a major part in the decision making of trustees.

7. Prior to the introduction of the statutory duty of care in the Trustee Act 2000

the basic equitable duty of a trustee in relation to investment was to comply

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with the well-known “prudence principle”, This was set out in the often cited

passage from the judgment of Lindley LJ in Re Whiteley (1886) 33 Ch D

347, 355 :-

“The duty of a trustee is not to take such care only as a prudent man would take if he had only himself to consider, the duty rather is to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide”.

8. For present purposes virtually the only modern judgments of relevance are

those in Nestlé v Nat West Bank (1988) (Hoffmann J) and the CA [1993] 1

WLR 1260. In that case the plaintiff proved that the trustee had failed to

understand that its power of investment authorised investment in ordinary

shares in any company incorporated in the UK, and the trustee had wrongly

restricted its investments in equities to a narrower range of equities than was

necessary. However, Hoffmann J and the CA held that the onus was on the

plaintiff to prove that she suffered loss as a result of the trustee’s breaches of

duty, and this she had failed to do.

9. Hoffmann J. and the CA recognized that at any time the investment duties of

trustees must reflect the changing investment world. Hoffmann J. referred to

the “prudence principle” in Re Whiteley, and he then continued:-

“This is an extremely flexible standard capable of adaptation to current economic conditions and contemporary understanding of markets and investments. For example, investments which were imprudent in the days of the gold standard may be sound and sensible in times of high inflation. Modern trustees acting within their investment powers are entitled to be judged by the standards of current portfolio theory, which emphasises the risk level of the entire portfolio rather than the risk attaching to each investment taken in isolation … But in reviewing the conduct of trustees over a period of more than 60 years, one must be careful not to endow the prudent trustee with prophetic vision or expect him to have ignored the received wisdom of his time. Mr Gerard Wright, who appeared for Miss Nestle, referred me to another passage in Re Whiteley at p 350 in which Cotton LJ said:-

‘Trustees are bound to preserve the money for those entitled to the corpus in remainder, and they are bound to invest it in such a way as will produce a

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reasonable income for those enjoying the income for the present’.

In 1886 what Cotton LJ had in mind was the safety of the capital in purely monetary terms. But Mr Wright submitted that in the conditions which prevail a century later, the trustees were under an overriding duty to preserve the real value of the capital. In my judgment this cannot be right. The preservation of the monetary value of the capital requires no skill or luck. The trustees can discharge their duties, as they often did until 1961, by investing the whole fund in gilt-edged securities. Preservation of real values can be no more than an aspiration which some trustees may have the good fortune to achieve. Plainly they must have regard to the interests of those entitled in the future to capital and such regard will require them to take into consideration the potential effects of inflation, but a rule that real capital values must be maintained would be unfair to both income beneficiaries and trustees”.

10. By the time that the Trustee Act 2000 was introduced the courts and

Parliament recognized that modern investment conditions were so complex

that, in order to manage their funds prudently, most trustees would have to

rely on specialist advice and might even have to delegate the investment of

their funds to professional managers. The emphasis has therefore switched.

Building on principles enunciated in the old authorities the Trustee Act 2000

has placed the spotlight on the trustees’ procedures:-

• they must take advice unless he reasonably concludes that in all the

circumstances it is unnecessary or inappropriate

• they must have regard to the suitability of their investments

• they must have regard to the need for diversification so far as it

appropriate to the circumstances of the trust

• they must put in place a detailed policy statement for their delegates

• they must periodically review the performance of their investments and

their delegates

• and so forth.

11. However, where there is a breach of these duties by a trustee, it may be

difficult to show that the trustee’s breach of duty has caused loss to the trust

fund and the beneficiaries, let alone to measure that loss. Take the following

cases, where in each case the trustee has the wide statutory power of

investment.

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(1) The trustee has failed to take any advice and he has invested the trust funds

exclusively in bank deposits which, over many decades of inflation, have lost

most of their real value. How does one identify the relevant breach and

quantify the loss there? What would the trustee have done with the funds if

he had acted properly? In such a case the court might proceed on the footing

that the trustee, acting properly and on advice, would have invested in a

mixed portfolio of say 60% equities and 40% bonds, and then calculate

compensation accordingly. (Compare the New Zealand case of Re Mulligan

[1998] 1 NZLR 481.) Nevertheless, such an approach would still depend on

the claimant being to establish that, in the circumstances of the particular

trust and that family, the putative asset allocation would have been adopted

by a trustee acting properly.

(2) The trustee has delegated the investment of the funds to a discretionary

portfolio manager, on the basis that the agent will invest 50% in equities and

50% in bonds, but the trustee fails to provide the agent with a written policy

statement. The agent invests the funds in equities and bonds. However, his

stock selection is so poor that the funds suffer huge losses. What is the

relevant breach of duty? Has the trustee’s breach of duty caused the loss?

12. It may be that by an application of established principles, in particular those

in Target v Redfern, the court will in individual cases be able to achieve just

results. Nestle v Nat West Bank makes clear though, that the onus of

proving both breach and loss rests on the claimant. In practice, the evidential

burden on the claimant is often tough.

SIMON TAUBE QC

Ten Old Square, Lincoln’s Inn

7 March 2012