Trust Law Reform Essay

Errors of law commonly occur when the trust deed in misconstrued. This can be avoided simply by seeking legal advice. Those who fail to do this before they pay a beneficiary or make an investment should be held strictly liable. This is categorically an error of law for which little defence can be argued. Thus, the reason for the law/fact distinction is obvious.

However it is possible that professional advice could be careless or misleading. Where advice of this kind is given to a trustee and then followed, which is likely where the trustee has reasonable cause to believe otherwise, the error can be likened more justifiably to an error of fact. It is unfair that a trustee who acts on the poor advice of a professional of otherwise good standing, should be held liable for his actions. Thus it is accepted that the objective test in this proposal would be a useful measure for determining whether or not liability should be imposed in such a case. However as the Commission states that the fact/law distinction serves no useful purpose and that they fail to clarify their proposed law in relation to the terminology used, proposal one is subsequently rejected.

Proposal 3

(a)

At present trustees are liable when they carry out authorised acts carelessly or rashly in effect they commit an Intra Vires breach. The law as currently applicable is laid down in Raes v Meek which requires that the trustee use the “same degree of diligence that a man of ordinary prudence would exercise in his own affairs”. The Commission proposes a more objective test that “every trustee should have to use the same care and diligence that a person of ordinary prudence would use in managing the affairs of others”. This can be construed with substituting one objective test with another. The Commission however deems the present law to be dangerously low and inconvenient for the court, as it would involve investigation into how each trustee carries out his own affairs, in spite of the fact that it was applied successfully in Tibbert v McColl.

This allegedly higher standard of care is based upon a presumption that “people are generally more careful and diligent in relation to the affairs of others than they are in relation to their own”. It is this presumption that appears less than solid. The way that people act in relation to other people’s affairs is subjective, as some may treat the responsibility with a greater degree of care than others, who may act more carelessly. It is unreasonable to base a minimum standard of care on a situation that relies on unpredictability of human nature. The Commission argues that a statutory definition of care in managing the affairs of others is required for clarification purposes. However, raising the minimum standard as the Commission proposes will not guarantee clarity. Unquestionably, clarification of the law is required but statutory duplication of the existing law is pointless when a current test is being used successfully. Thus it is submitted that the suggested reform in part (a) is rejected.

(b)

At present the law in not clear whether any higher standard of care is expected of professional trustees. The Commission proposes that “a trustee who acts in the course of his or her business or profession should in addition have to use any special knowledge or expertise that it is reasonable to expect of a member of that business or profession”.  This move by the Commission to link skills and knowledge as opposed to financial benefit is laudable. It has been said that the standard of care is designed to protect beneficiaries and it is entirely fortuitous whether they are professional or not, yet it is presumed that the standard of care is also designed to protect the truster and by the necessity of carrying out the trust purposes, the trustee. Consequently it seems reasonable to lay trustees that they should not be subject to the same standard of care as those who possess special knowledge or skills.

It has previously been contested that trustees that are remunerated should be subject to a higher standard of care yet it seems more sensible to base the standard of care upon the level of skill and knowledge that the trustee claims to have. If it is considered that a truster could vary the standard of care using remuneration, then surely it is just as conceivable that appointing a trustee who holds himself out to have special knowledge or skills may vary it also. The argument put forward for restricting a professional standard of care is that indemnity insurance for a specialized trustee does not extend to their private actions. This could be seen as discriminatory.

The concept that a trustee with a skill in a particular area such as an investment banker who acts outwith the course of his business and invests recklessly, being too idle to use his own special knowledge should be absolved from liability providing he meets the minimum standard of care, is intolerable. Surly it is far more sensible to require the trustee to weigh any decision against his own knowledge. This would emphasise the notion of trust and protect beneficiaries ’ interest.  Under the proposed test the weight of the burden would be proportionate to the skill of the trustee and nothing else. For these reasons, it is suggested that part b) of proposal three is accepted.

Proposal 10

Under the current law, trustees are under a duty not to put themselves in a position where their individual interests clash with their duties as trustees, and any breach of this fiduciary duty is a breach of trust. There is strict liability for those who enter into such a transaction even if entered into in good faith and for the best interests of the trust.

 It is this discrepancy that the commissions’ proposal attempts to remedy, arguing that the current rules are too strict and inflexible. The Commission suggests that a transaction by a trustee in breach of his or her fiduciary duty should not be disputable provided it was of an advantage to the trust estate and the beneficiaries as a whole and was on terms at least as constructive as an arms-length transaction.

However it is submitted that the Commission’s proposal fails to address what appears to be an important issue concerning the difference between being auctor in rem suam or “acting in his own cause” and breaching a fiduciary duty. It is argued that a distinction is necessary in order to determine the degree of liability that should be imposed upon the trustee.

Acting auctor in rem suam implies the trustee acted entirely for his own benefit which unusually results in a unilateral benefit to the trustee and not the trust depending on the nature of the event. Actions such as these should incur strict liability

However a breach of fiduciary duty may occur more regularly and result in a bilateral benefit to the trustee, the trust and the beneficiaries. In such a case it could be naturally debated that parts (a) and (b) have been fulfilled. It would be useful if a statutory distinction was drawn between such transactions that are able of conferring unilateral benefits making the trustee auctor in rem suam and those which are bilateral, and thus subject to the objective test in the proposal.

If such a distinction is not put in place then Part (2) of proposal ten which is phrased as a question, is essential, as it requires that the trustee in order to exercise the above power, should have acted reasonably and in good faith. This criterion is essential, as those who have acted in bad faith like those who have acted auctor in rem suam would be able to escape liability through the above proposed test, purely by the coincidence of meeting the criteria. Whereas those who have breached their fiduciary duty, yet have acted reasonably and in good faith would be relieved partly or wholly of the consequences of that breach. The argument against this requirement is that if a trustee knew he could yield more profit by supplying certain goods himself as in Cherry’s Trustees v Partick but would be acting in bad faith and thus have to engage in a less profitable transaction to prevent personal liability, is not foreseen to be a problem as if the transaction is truly within the trust’s best interests then consent from the beneficiaries can be attained to legitimise the breach.

In relation to the section proposing whole or partial relief of the trustee, it is submitted that this is a necessary power for the court to have as each individual case that comes before the court will have different circumstances and thus require different degrees of relief.

       

0205429

Word count 1598

        

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