Law Commission seeks to rein in professional trustees

In December, the Law Commission published a consultation paper entitled "Trustee Exemption Clauses" (Consultation Paper No 171). The paper can be accessed online at:

http://www.lawcom.gov.uk/190.htm

PRINCIPAL RECOMMENDATIONS

The consultation paper recommends changes in the law, including changes that would:

• allow all trustees to purchase indemnity insurance in respect of liabilities for breach of trust, whether or not the governing trust deed allows them to
• prevent professional trustees from relying on exemption clauses if their negligence causes a breach of trust
• prohibit professional trustees from claiming an indemnity from the trust fund in respect of liabilities for breach of trust that they may not, as a matter of law, exclude.

OTHER ISSUES WHERE VIEWS ARE SOUGHT

In addition to its recommendations, the Law Commission also invited views on other issues, including:

• whether trustee exemption clauses ought to have to satisfy a test of reasonableness, akin to that in the Unfair Contract Terms Act 1977 in respect of contracts (and whether such a test should apply only to professional trustees)
• whether the ability to rely on an exemption clause ought not to apply if it would not be reasonable to allow reliance in all the circumstances (including the nature and extent of the breach of trust)
• the economic implications of the proposed regulation of exemption clauses, including the additional cost of compliance and insurance.

CONSULTATION PERIOD

The views and recommendations expressed in the consultation paper are provisional only and the Law Commission invites comment. The consultation period runs until 30th April 2003.

WHO WILL BE INTERESTED?

The widespread use of trusts in a commercial context, particularly in financial services industries, means that these proposals will be of interest not only to trustees of private trusts, charitable trusts and pension funds, but also those involved in the wider investment community. For those who use trusts for commercial purposes, the economic consequences of the proposals will have to be considered carefully to ensure that they will not render a key investment structure unattractive. For charitable and other lay trustees, the proposals regarding professional trustees are likely to have little or no impact and other proposals - such as the ability to purchase insurance - may be beneficial. However, the possibility of any new "reasonableness" test will be relevant to lay trustees as well as professionals and the implications will require consideration.

THE CASE FOR REFORM

The Law Commission's decision to investigate trustee exemption clauses arose because of concerns that increasingly widely drawn exemption clauses were leaving beneficiaries of trusts with no effective right of redress against trustees. These concerns were crystallised by the decision in Armitage v Nurse in 1998, when the Court of Appeal held that a trustee exemption clause may exonerate liability for anything short of actual fraud. Whilst the Law Commission recognises that trusts today are used for purposes that would not have been envisaged in the past and that the risk of litigation has increased significantly over time, nonetheless, it feels that the exemption clauses included in modern trust instruments go too far in protecting trustees from liability. In view of the fact that the law offers little or no restriction on settlors' freedom to expressly exclude trustee liability when setting trusts up, the Law Commission has concluded that some limitations are necessary.

PROFESSIONAL AND LAY TRUSTEES DISTINGUISHED

The Law Commission was concerned to understand the economic implications of its proposals and took the unusual step of commissioning independent socio-economic research. This research revealed that although exemption clauses are widely used, especially by professional trustees, many people (including a number of professional trustees) believe their scope should be subject to limitations. Set against that, the Law Commission was also concerned that too much regulation may discourage "lay" trustees from acting at all, which would have undesirable consequences for charitable and smaller private and local trusts.

Accordingly, the principal reforms proposed by the Law Commission affect professional trustees, but not lay trustees.

The Law Commission considered which trustees ought to be considered "professional". One proposal was that any remunerated trustee ought to fall within that definition. The Law Commission has decided, however, not to follow that approach. It proposes that only trust corporations and trustees "acting in a professional capacity" should fall within the definition of "professional trustee". In doing so, it noted that its approach was consistent with section 28 of the Trustee Act 2000 (a provision - the Law Commission modestly omitted to remind us - that it prepared in the first place), which extends the right of "professional" trustees to be remunerated in certain circumstances.

If you would like to discuss these proposals further, please contact:

Niall McAlister
Corporate Partner
Tel: 020 7367 2694
email: [email protected]