Trustee exemption clauses

The Board of the Judicial Committee of the Privy Council has issued its judgment in Spread Trustee Company Limited v Hutcheson [2011] UKPC 13.

The case concerns an appeal from Guernsey. The Board comprised four current Justices of the Supreme Court and a retired Justice of the Court of Appeal, each of whom, unusually for the Privy Council, delivered their own individual judgments. The appeal was allowed by a 3 to 2 majority.  

The subject matter of the appeal will be of limited interest moving forward, but the case is of potentially far wider significance in that the Board was required to consider the judgment in Armitage v Nurse [1998] Ch 241.

Armitage has been the subject of criticism by some esteemed commentators but the Supreme Court, and previously The House of Lords, has not had occasion in which to consider the judgment. Whilst decisions of the Privy Council are not binding in English law, with four Justices of the Supreme Court on the Board, the Board’s decision is now, nevertheless, highly persuasive authority.   

Spread Trustee concerns two trusts, governed by Guernsey law, and which contained clauses which exempted the trustee from loss to the trusts arising from the trustee’s gross negligence.  Guernsey statute law rendered such clauses void for breaches of trust arising since 1991, but the alleged breaches arose before then. 

The Board unanimously held that the 1991 statute was not retrospective in its effect, but that left the remaining issue of whether the pre-1991 Guernsey customary law prohibited the exoneration of trustees for gross negligence.  

It was held that there was no such prohibition but, in so concluding, the Board considered the bearing of both English and Scots laws on Guernsey law and this necessitated a detailed consideration of Millett LJ’s judgment in Armitage.  

In summary, Armitage held that, under English law, a trustee is subject to an irreducible core of obligations but, outside of those obligations, the settlor and trustee are entitled to restrict the trustee’s liability for breaches of trust as they so choose.  

A trustee cannot avoid liability for failing to act honestly and in good faith, but negligence can only arise where the trustee is honest etc., but, nevertheless, makes a meal of things. Gross negligence still displays honesty, but the making not just of a meal, but a banquet.  

Objections to this analysis have been founded mainly on the argument that it should be contrary to public policy, as least with paid trustees, for a trustee to avoid liability in circumstances where an equivalent clause in a consumer contract would be held to be void for being unreasonably weighted against the consumer.  

The counter-argument is that the settlor and trustee should be free to agree upon such exemption clauses, and that the price for the trustee’s services will reflect the degree of exposure the trustee accepts when taking on the trusts.  

Whilst the theory may be fine, in practice there is little doubt that many settlors do not understand the implications of such clauses and often fail to take independent advice over the terms of the proposed trust.  This was acknowledged by the Law Commission in 2006 when making its compromise recommendation that clauses exempting trustees from liability should only be valid when the proposed settlor has been given, and acted upon, a specific health warning.   

With the Board deciding 3:2 that Armitage was sound in the context of the appeal, it could be said that The Supreme Court has now as good as approved Armitage. Nevertheless, the Board has displayed only limited enthusiasm collectively and, on an individual basis, Lady Hale [128-140] in particular has displayed none whatsoever.   

It might prove that the decision in Spread Trustee will now encourage a disgruntled beneficiary of an English law trust to allege loss through their trustee’s gross negligence and to assert that an exemption clause is invalid, either under trust law or, more likely, as being repugnant to public policy. If so, it could be expected that the lower courts will be bound to apply Armitage whilst granting leave to appeal through to the Supreme Court for that court finally to consider, and quite probably overturn, the decision in Armitage.

Otherwise, and in the meanwhile, professional trustees of English law trusts, and their insurers, will want to continue to seek exemption clauses for all loss arising from breaches of trust not amounting to wilful misconduct or fraud. And all the more so with the recent judgment in Pitt and Futter  [2011] EWCA Civ 197