147-335-11 THE LAW COMMISSION TRUSTEES’ POWERS AND DUTIES CONTENTS Paragraph Page PART I: INTRODUCTION AND BACKGROUND Background 1.1 1 The scope of this Consultation Paper 1.13 5 Approach to reform 1.16 6 Applicability 1.17 6 Structure of the Consultation Paper 1.20 8 Acknowledgements 1.21 8 PART II: MANAGING TRUST ASSETS TODAY Introduction 2.1 9 Investing in securities Financial services Introduction 2.9 12 Protection of private investors 2.10 13 The employment of nominees and custodians The practice and its advantages 2.12 14 Disadvantages RISKS FOR THE BENEFICIAL OWNER 2.14 16 LOSS OF SHAREHOLDER RIGHTS 2.16 17 The employment of discretionary fund managers Introduction 2.18 18 A typical discretionary fund management agreement 2.20 19 CREST The legal background 2.24 22 What is CREST? 2.25 22 Electronic settlement 2.26 23 Using CREST: contractual obligations 2.27 23 Uncertificated securities 2.28 24 CREST and trustees 2.29 25 Five-day rolling settlement 2.32 26 Land holdings Introduction 2.35 27 Vesting title in nominees 2.36 28 Delegation of estate management 2.37 28 Rent reviews and sales at valuation 2.39 28 Judicial attitudes to applications for additional powers 2.42 30 PART III: TRUSTEES’ POWERS OF DELEGATION - THE PRESENT LAW Introduction 3.1 33 The functions that may be delegated The underlying principle: delegatus non potest delegare 3.2 33 No delegation of discretions 3.3 34 The justification for the rule 3.5 35 Consultation with beneficiaries 3.6 36 iii Paragraph Page The circumstances in which trustees may delegate 3.7 36 The position at common law Legal and moral necessity 3.8 36 The extent of the doctrine of necessity 3.10 38 Delegation by trustees to one of themselves 3.14 40 Statutory powers to employ agents 3.16 41 Collective delegation: Trustee Act 1925, sections 23(1) and (2) 3.18 41 NO DELEGATION OF FIDUCIARY POWERS EXCEPT IN RELATION TO PROPERTY ABROAD 3.20 42 NO SUB-DELEGATION EXCEPT IN RELATION TO AGENTS ABROAD 3.21 43 THE ACT DELEGATED MUST BE ONE WHICH IS “REQUIRED TO BE TRANSACTED OR DONE” 3.22 44 NO POWER TO EMPLOY AN AGENT ON A RETAINER? 3.23 44 THE TERMS ON WHICH AGENTS MAY BE EMPLOYED 3.24 44 Collective delegation: Trustee Act 1925, section 23(3) 3.34 49 Delegation by individual trustees: Trustee Act 1925, section 25 3.35 50 Delegation by individual trustees: Enduring Powers of Attorney Act 1985, section 3(3) 3.39 53 Charitable trusts 3.41 54 Pension trusts PENSIONS ACT 1995, SECTION 34 3.42 54 THE GOODE REPORT AND THE RATIONALE OF SECTION 34 3.43 55 PART IV: TRUSTEES’ POWERS OF DELEGATION: THE STANDARD OF CARE REQUIRED IN THE SELECTION AND EMPLOYMENT OF AGENTS Introduction 4.1 57 The position at common law The selection of agents 4.2 57 Directions to employ an agent 4.3 58 The standard of supervision 4.4 59 The meaning of “prudence” 4.5 59 Exclusion of liability and the meaning of “wilful default” Lord St Leonards’ Act 1859 4.6 60 The meaning of “wilful default” in courts of equity 4.11 61 The meaning of “wilful default” in courts of law 4.17 64 “Wilful default” and directors’ indemnity clauses 4.18 64 The Trustee Act 1925 and its interpretation Introduction: the four statutory provisions 4.20 65 Trustee Act 1925, section 23(1) 4.21 66 Trustee Act 1925, section 23(2) 4.25 67 Trustee Act 1925, section 23(3) 4.26 68 Trustee Act 1925, section 30(1) 4.27 68 Inherent difficulties 4.29 69 The decision in Re Vickery 4.32 70 Proposition 1 4.34 71 Proposition 2 4.35 71 Proposition 3 4.36 72 Proposition 4 4.38 73 iv Paragraph Page Reactions to Re Vickery 4.39 73 Subsequent authority 4.48 76 Orders under Charities Act 1993, section 26 4.50 77 Pensions Act 1995, section 34 The general rule: no exclusion of liability for negligence by the trustees 4.51 78 Exceptions where discretionary fund managers are employed 4.52 78 Vicarious liability where there is delegation to some of the trustees 4.54 79 PART V: TRUSTEES’ POWERS OF DELEGATION - A CRITICAL SUMMARY OF THE PRESENT LAW Introduction 5.1 80 Powers of delegation The present law and its practical consequences 5.2 80 “Delegatus non potest delegare” 5.7 82 Should powers of investment and management continue to be regarded as fiduciary? 5.10 83 Summary 5.16 86 Trustees’ duties of care when delegating Introduction 5.17 87 Summary of the present law 5.18 87 Orders under the Charities Act 1993, section 26 5.22 88 Pension trusts under the Pensions Act 1995, section 34 5.23 88 PART VI: TRUSTEES’ POWERS OF DELEGATION - OPTIONS FOR REFORM Introduction 6.1 89 Is reform needed? 6.2 89 Previous Law Reform Proposals The Law Reform Committee’s Report on the powers and duties of trustees 6.3 89 Powers of delegation: the Committee’s recommendations 6.4 90 Powers of delegation: comment 6.7 90 Duties of care when delegating: the Committee’s recommendations 6.12 92 Duties of care when delegating: comment 6.13 92 The Model Trustee Code for Australian States and Territories 6.15 93 Comment 6.18 94 National Conference of Commissioners on Uniform State Laws: Uniform Prudent Investor Act (USA) 6.19 94 Comment 6.22 96 Proposals for reform The issues 6.23 97 What powers of delegation should trustees have? 6.25 98 Specific delegation powers 6.35 102 Situations (1) and (2) 6.36 103 Situation (3) 6.38 104 Situation (4) 6.40 105 v Paragraph Page Duties of care Introduction 6.44 106 To what matters should the duty of care relate? 6.45 106 What should the standard of care be? 6.46 107 GOOD FAITH 6.47 107 VICARIOUS LIABILITY 6.48 107 “SAFE HARBOUR” CRITERIA 6.51 108 CONDUCT OF A REASONABLE PRUDENT PERSON 6.52 108 DUTY OF CARE THAT IS BOTH SUBJECTIVE AND OBJECTIVE 6.53 109 Applicability to express delegation powers 6.56 111 To which trusts should any new power of delegation apply? Introduction 6.57 111 Applicability: general principles 6.58 111 Charitable trusts THE PARTICULAR PROBLEM 6.62 113 IN WHAT CIRCUMSTANCES SHOULD CHARITY TRUSTEES BE ABLE TO DELEGATE THEIR FUNCTIONS? 6.65 114 THE POWERS PROPOSED 6.66 114 Pension trusts 6.69 115 PART VII: TRUSTEES’ POWERS TO EMPLOY NOMINEES AND CUSTODIANS Introduction 7.1 117 The present law - private trusts The position at common law 7.2 117 Statutory exceptions to the common law rule 7.5 119 Where the trustees act collectively TRUSTEE ACT 1925, SECTION 21 7.6 119 TRUSTEE ACT 1925, SECTION 7 7.7 119 PUBLIC TRUSTEE ACT 1906, SECTION 4 7.8 120 Where trustees act individually TRUSTEE ACT 1925, SECTION 25 7.11 121 The special position of charitable trusts The Official Custodian for Charities 7.12 121 The case for reform 7.14 123 Proposals for reform Powers to employ nominees and custodians 7.19 126 Protection for beneficiaries Possible options 7.28 128 Restricting the persons that can act as nominees and custodians TRUSTS OTHER THAN CHARITABLE TRUSTS 7.29 129 CHARITABLE TRUSTS 7.33 130 Power to insure against the defaults of the nominee or custodian 7.34 130 Duties of care 7.36 130 To which trusts should the new power apply? 7.41 132 PART VIII: TRUSTEES’ POWERS TO PURCHASE LAND Introduction 8.1 133 The present law Powers of trustees of personal property 8.2 133 vi Paragraph Page Powers of trustees where land is held in trust 8.6 135 Settled land 8.7 135 Land held on a trust of land 8.8 136 Criticisms of the present law 8.10 137 Proposals for reform 8.11 137 To which trusts should the new powers apply? 8.13 138 PART IX: TRUSTEES’ POWERS TO INSURE THE TRUST PROPERTY Introduction 9.1 140 The present law The position at common law 9.2 140 Statutory powers 9.5 142 Criticisms of the present law Specific criticisms Uncertainty 9.9 143 Conflict with trustees’ duties to the trust 9.10 144 Unsatisfactory nature of the statutory powers to insure and their application 9.11 144 The approach in other jurisdictions 9.13 145 The proposals of the Law Reform Committee 9.15 146 Proposals for reform The issues 9.16 146 The power to insure 9.17 147 A duty to insure? 9.19 147 Bare trusts 9.22 149 Should premiums be paid out of income or capital? 9.26 149 Application of the proposed powers and duties 9.27 150 PART X: PROFESSIONAL CHARGING CLAUSES Introduction 10.1 152 The present law The general rule and its exceptions 10.2 152 Charging clauses 10.5 156 The Law Reform Committee’s Twenty-third Report No professional charging clauses 10.8 157 Attesting witnesses and charging clauses 10.14 160 The case for reform The issues 10.17 161 Should there be a statutory charging clause? 10.18 161 Other defects in the law 10.20 162 Proposals for reform Statutory charging clause 10.21 163 Other reforms 10.29 165 PART XI: SUMMARY OF ISSUES FOR CONSULTATION Introduction 11.1 168 Applicability 11.2 168 Powers of collective delegation Should trustees’ powers of collective delegation be reformed? 11.3 168 vii Paragraph Page The proposed new power to delegate 11.4 168 Conditions for exercising the power 11.7 169 Specific delegation powers 11.11 170 Duties of care 11.14 171 Application of the new power In general 11.18 172 Charitable trusts 11.20 172 Powers to employ nominees and custodians The powers proposed 11.24 173 Protection for beneficiaries 11.30 175 Power to purchase land 11.37 176 Power to insure 11.39 177 Professional charging clauses 11.45 178 APPENDIX A: EXTRACTS FROM THE PRINCIPAL STATUTES AND OTHER MATERIALS REFERRED TO IN THE PAPER 181 APPENDIX B: MEMBERS OF THE TRUST LAW COMMITTEE 191 viii PART I INTRODUCTION AND BACKGROUND BACKGROUND 1.1 Trusteeship is an increasingly specialised task that often requires professional skills that the trustees may not have.