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Equity and Trusts Week 7 TOPIC 7: Trustee Duties

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Equity and Trusts Week 7 TOPIC 7: Trustee Duties Equity and Trusts Week 7 TOPIC 7: Trustee Duties 1 Strict Fiduciary Duties for Trustees Fiduciary Duties • All trustees are fiduciaries but not all fiduciaries are trustees • Trustees have fiduciary duties applied very strictly to them • This is illustrated in Keech v Sandford (1726) 25 ER 223 − No conflict of interest and account for profit Keech v Sandford (1726) 25 ER 223 Facts – • Lease held on trust but lessor refused to renew the lease to the trust because beneficiaries were infants and lessor was worried about their capacity to comply with the terms of the lease. • The trustee sought and was granted a renewal of the lease in his own name. Held – • Trustee held the new lease upon trust for the beneficiaries. • LC King felt that it was better that the lease be allowed to run out than to allow a trustee to have the lease. • This was reinforced by Deane J in Chan v Zacharia (1984) 154 CLR 178 where his Honour concluded that there is an ‘irrebuttable presumption’ that ‘any gain’ made by a trustee during the course of carrying out his duties is the consequence of a breach. • No gain whatsoever 2 Trustee Duties 1. Duty to act with Reasonable Prudence • Trustee must act with reasonable care. • This relates to the management of the trust property and the administration of the trust. • A standard of care being imposed upon trustees to manage the trust property that is vested in them with caution and sense (not as if it was theirs, but as if they were looking after property belonging to another person) • The nature of the duty will depend upon the character of the trustee − Professional trustees holding themselves out as having a higher level of experience than a family trustee (and perhaps negotiating remuneration for this will have a higher standard than ordinary trustees. Basic standard: Not a professional trustee • Where the trustee is non-professional standard of care is that of an ‘ordinary prudence business person who is morally bound to look after the interests of another.’ (Speight v Gaunt (1883) 9 AC 1/Re Whiteley (1886) 33 Ch D 347) • This duty applies to all trustees including trustees of a superannuation fund: Telstra Super Pty Ltd v Finch [2009] VSCA 318 at [65]; Manglicmot v Commonwealth Bank Officers Superannuation Corporation [2010] NSWSC 363 at [22] per Rein J When exercising discretion: • A trustee must act with reasonable prudence when exercising a discretion bestowed on them in the trust instrument or by statute. • Discretion may be impugned where it is not exercised reasonably and with care e.g. wantonly, irresponsibly, capriciously. − This was reinforced by the High Court in Attorney-General Cth v Breckler (1999) 197 CLR 87 at [7]: ▪ Where a trustee exercises a discretion, it may be impugned on a number of different bases such as that it was exercised in bad faith, arbitrarily, capriciously, wantonly, irresponsibly, mischievously or irrelevantly to any sensible expectation of the settlor, or without giving a real or genuine consideration to the exercise of the discretion. • Example: − The trustee has trust property (funds, and maybe some shares and other assets – particularly true to a trading trust when income is going to trustee) and the trustee is given, pursuant to the trust deed, wide powers to invest the funds as they see fit in accordance with their obligations as a trustee − Must act with reasonable care when exercising these powers. − Should not invest where it may be risky − Might do it with your own money, but would not do that with another’s money that you are morally obliged to look after − Even though there is discretion, discretion is modified by obligation to act with reasonable prudence Scope of the duty: When will an act of a trustee be ‘exercised in bad faith, arbitrarily, capriciously, wantonly, irresponsibly’ or ‘mischievously’? Speight v Gaunt (1883) 22 Ch D 727 CB 573 Facts – • A trustee employed a stockbroker to make some investments for him. • The broker fraudulently misappropriated the funds and the beneficiaries sought to hold the trustee personally liable for the loss which arose as a consequence. Held – • Not all trustees have strong financial knowledge and often need to seek advice about what type of investments they should be entering into; it’s not unreasonable to employ a stock broker • The question is, can the trustee be held responsible for a stock broker misappropriation • Not acting wantonly by hiring a stock broker • The Court of Appeal concluded that the trustee was not liable for breach of trust. • In reaching this conclusion, Jessell MR said that the obligations of a trustee in conducting a business were to conduct that business ‘in the same manner as an ordinary prudent man of business would conduct his own, and that beyond that, there is no liability or obligation on the trustee. • ‘…where you have an honest trustee fairly anxious to perform his duty and to do as he thinks best for the estate, you are not to straight the law against him to make him liable for doing that which has done and which he believes is right in the execution of his duty, unless you have a plain case made against him.’ .
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