Liability Protection for Trustees & Directors with Exoneration Clauses, Lecture notes of Law

Download Liability Protection for Trustees & Directors with Exoneration Clauses and more Lecture notes Law in PDF only on Docsity! 1 FORGIVENESS BEFORE THE EVENT Trustee exoneration clauses and articles of association protecting directors A. Exoneration clauses in trust deeds Trust deeds can by their terms protect a trustee or ease its task in different ways. First, they can limit the duties of the trustee – for example they can provide that a trustee does not have a duty that the general law would ascribe to it. One such example might be a provision to the effect that a trustee holding as part of the trust property a substantial proportion of the share capital of a private company should not have to concern itself with the director’s management of the company beyond specified steps. That will ease the task of the trustee – and do so by limiting his duty rather than by exonerating him from a breach of duty. Secondly a trust deed may extend the power of a trustee beyond what the general law might provide. The commonest example is an extension to a trustee’s investment powers. So investing in high risk assets will be expressly authorised by the trust deed – not be a breach of duty for which retrospective exoneration is needed. Thirdly, and this is the topic I am going to address, a trust deed can provide that even though a trustee breaches his duty, he will not be liable. There is a fundamental distinction 2 between cases of this type and cases where the duties of the trustee have been limited or the trustee’s powers extended. In those two cases, there will be no breach. In the situation that I am going to be addressing there has been a breach. There however is no liability because the trust deed says there is no liability. We are dealing therefore with a trust deed with a clause in it like this one: “No trustee shall be liable for any loss or damage which may happen to [the trust] fund or any part thereof or the income thereof at any time or from any cause whatsoever unless such loss or damage shall be caused by his own actual fraud . . . ." That is in fact the clause found in the case I am about to address: Armitage v Nurse [1998] Ch 241. You can see that it happily envisages a breach of trust but, other than where caused by actual fraud, it declares that the trustee shall not be liable for such a non-fraudulent breach. Confusingly this type of clause can be found referred to in the literature as an exclusion clause, an exoneration clause, an indemnity clause or a special indemnity clause. I shall try to use the term “exoneration clause”. Let’s look first then at the English CoA case of Armitage v Nurse. As noted on the slide, this case has been followed here in at least two cases that I am aware of. Armitage v Nurse is not without criticism, not least in relation to its reliance on Millet LJ’s view of Scots law which apparently is not entirely concurred in by Scots lawyers. As we shall 5 You have moreover to be careful even about apparently clear phrases such as deliberate breach of trust. Notoriously a trustee may be justified in committing a deliberate breach of trust. Certainly if it is committed with the intent to benefit beneficiaries, there is probably nothing dishonest about it. The illustration is of course the old story about LJ Lindley commenting that his old pupil master’s view was that a trustee’s main duty was precisely to commit “judicious” breaches of trust. It is worth bearing in mind that much of what Millett has to say in this context in Armitage v Nurse regarding the meaning of the phrase “actual fraud” is strictly merely his views in the construction of the settlement in front of him. As a matter of construction “actual fraud” is a phrase to be construed in the context of each settlement in which it is used. Obviously however Millett LJ’s approach may be persuasive. It also might now be considered part of a trust draftsman’s technical dictionary. Millett was clear that in the context of an exoneration clause in a trust deed, “actual fraud” meant dishonesty. Wilful default or equitable fraud, unless dishonest, would not be enough. Later cases in England appear to have come to some conclusion regarding what, in the case at least of a professional trustee, will amount to dishonesty. This was Lewison J’s conclusion in Fattal v Walbrook Trustees [2010] EWHC 2767: “what is required to show dishonesty in the case of a professional trustee is: i) A deliberate breach of trust; ii) Committed by a professional trustee: 6 a) Who knows that the deliberate breach is contrary to the interests of the beneficiaries; or b) Who is recklessly indifferent whether the deliberate breach is contrary to their interests or not; or c) Whose belief that the deliberate breach is not contrary to the interests of the beneficiaries is so unreasonable that, by any objective standard, no reasonable professional trustee could have thought that what he did or agreed to do was for the benefit of the beneficiaries.” A last point on Armitage v Nurse: note that Millett concluded his judgment in Armitage by referring to the controversy over whether trustees, in particular professional trustees, should be able to have their liability, including their liability for negligence extensively excluded by the settlor. His view was that if the freedom of the settlor and trustee to agree on the terms of the trust, including on trustee exoneration clauses, was to be restricted beyond the outlawing of exoneration for dishonesty, that would have to be done by statute. In England that has not been done generally - although certain statutes do regulate specific types of trust: for pension trustees and for trustees of unit trusts statute has outlawed clauses excluding liability for breach of a duty of skill and care: see Pensions Act 1995 s.33 and FSMA s. 253. As we shall see in other jurisdictions, statute has stepped in more generally. Brings me on to Spread v Hutcheson [2012] 2 AC 194. Millett in Armitage v Nurse grappled with the meaning of the term fraud and its various uses in the context of trustee exoneration clauses. In Spread v Hutcheson, the PC grappled with the meaning of the term negligence, specifically “gross negligence” in the same context. 7 As we are probably all aware English law, while it does sometimes use the term “gross negligence” generally is uncomfortable with it. The classic description was that it was no more than negligence with a vituperative epithet. It is important to bear in mind the status of Spread. It is a decision of the PC on appeal from the Guernsey Court of Appeal. In the PC it was a majority decision 3:2 on Guernsey law and its ratio also depends upon its analysis of both English and Scottish law. While clearly an important decision and certainly persuasive outside Guernsey, it cannot be ruled out that a PC hearing an appeal from another jurisdiction or the Supreme Court on an English case might not follow it. The question for the PC concerned the effect of a Guernsey statute. In short a 1989 statute had codified for the first time the Guernsey law relating to trusts and had included a provision to the effect that a trust deed could not relieve liability for breach of trust arising from fraud or wilful misconduct. That had then been amended in 1991 by the addition of the words “or gross negligence”. The settlements in question had an exoneration clause in the following form: “In the execution of the trusts and powers hereof no trustee shall be liable for any loss to the trust fund arising in consequence of the failure depreciation or loss of any investments made in good faith or by reason of any mistake or omission made in good faith or of any other matter or thing except wilful and individual fraud and wrongdoing on the part of the trustee who is sought to be made liable” 10 indemnity out of the trust fund to that extent and the claim would fail for circuity. Ingenious. Even more ingenious was the trustee’s answer to the point that the alleged defalcations had so diminished the trust fund that there was not enough in the trust fund to meet the trust fund’s liability to the trustee on the indemnity. The trustee answered that to the extent that it was ordered to pay compensation to the trust fund, it under its indemnity would have a first charge on that reconstituted trust fund. So circuity was maintained. Unfortunately we do not know whether the argument would ultimately have succeeded because it was a strike out application and the court refused a strike out on the grounds that it was arguable that the trustee’s indemnity did not as a matter of proper construction extend to breaches of trust at all. It was therefore arguable that the circuity argument did not arise and therefore the matter should proceed to trial. That failure of the Appleby strike out because of an issue of construction which had to go to trial is a timely reminder that we are on every occasion going to be facing a preliminary question of construction – what does the clause in question mean? On a proper construction, does the clause in question exonerate the trustee from liability for the breach in question? For this purpose it is worth remembering that the principle applies that a exoneration clause is an exclusion clause and should be construed restrictively – you need clear and unambiguous words. However as ever that principle should never be taken too far. see LJ 11 Millett again in Bogg v Raper (1998-99) 1 ITELR 267. Referring to a settlement in a case where at issue was an exclusion of liability for negligence, he observed: “The document is the unilateral work of the testator or settlor through whom the beneficiaries claim. There is no inherent improbability that he should intend to absolve his executors or trustees from liability from the consequences of their negligence. They accept office on the terms of a document for which they are not responsible, and are entitled to have the document fairly construed according to the natural meaning of the words used” B. Articles of Association & Directors We have been considering the position of exoneration clauses in trust deeds. What about the often analogous position of company directors? Here the position in England has since 1929 been regulated by statute. In England s.232 Companies Act 2006 now applies in general outlawing provisions in articles or contracts exonerating directors from liability for breach of duty. 12 232 Provisions protecting directors from liability (1) Any provision that purports to exempt a director of a company (to any extent) from any liability that would otherwise attach to him in connection with any negligence, default, breach of duty or breach of trust in relation to the company is void. (2) Any provision by which a company directly or indirectly provides an indemnity (to any extent) for a director of the company, or of an associated company, against any liability attaching to him in connection with any negligence, default, breach of duty or breach of trust in relation to the company of which he is a director is void, except as permitted by– (a) section 233(provision of insurance), (b) section 234(qualifying third party indemnity provision), or (c) section 235(qualifying pension scheme indemnity provision). (3) This section applies to any provision, whether contained in a company's articles or in any contract with the company or otherwise. (4) Nothing in this section prevents a company's articles from making such provision as has previously been lawful for dealing with conflicts of interest. As you can see, statute provides exceptions. Not time to look at now in detail but in short, it can be lawful for a company to pay for insurance, it can also be lawful for a company to indemnify a director for liabilities to third parties or for liability as a pension scheme trustee That however is the statutory position. Prior to 1929 it was customary and effective in England for articles to exempt directors for liability save in the case of wilful default or dishonesty. My understanding is that in some jurisdictions this remains the case. Certainly there is a Jersey Privy Council case as late as 1986 which suggests that as late as then Jersey statute had not intervened. My understanding however is that Guernsey law is now aligned with English law. I have perused the Cayman Companies Ordinance and as far as I can see it too refrains from intervening. That conclusion is reinforced by the two Cayman cases: In the matter of Bristol Fund Ltd [2008] CILR 317 and Renova Resources Private Equity Ltd v Gilbertson [2009] CILR