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SINELS’ SIXTH ANNUAL CHANNEL ISLANDS TRUSTS LAW CONFERENCE 2010 SINELS’ SIXTH ANNUAL CHANNEL ISLANDS TRUSTS LAW CONFERENCE 2010

TRUSTS AND THE OPERATION OF THE NO REFLECTIVE LOSS PRINCIPLE by Victor Joffe QC TRUSTS AND THE OPERATION OF THE NO REFLECTIVE LOSS PRINCIPLE by Victor Joffe QC 1

What if the Trustee acts in Breach of Trust or Breach of Fiduciary Duty? What if the Trustee acts in Breach of Trust or Breach of Fiduciary Duty? 1. Removal as Trustee? 2. Personal Liability : Art 30(1) 3. Equitable compensation – the restoration of the Trust Fund : Art 30(2) 4. Litigation 2

How can Trustee liability be avoided or mitigated? 1. Exemption and anti-Bartlett clauses (Art How can Trustee liability be avoided or mitigated? 1. Exemption and anti-Bartlett clauses (Art 30(10) saving for trustee’s fraud, wilful misconduct or gross negligence) 2. Release or indemnity by beneficiary: Art 30(6) and (7) 3. Relief by Court: Art 45 4. Prescription: Art 57 3

Reflective loss – Another Way to Avoid Liability? The paradigm fact situation: 1. Trustee: Reflective loss – Another Way to Avoid Liability? The paradigm fact situation: 1. Trustee: X Trust Co Limited 2. Holds shares in ABC Limited 3. Whose directors Mr D and Ms E cause ABC to enter into a transaction 4. Which causes loss to ABC 5. Which in turn causes value of Trust’s shares in ABC to fall in value 4

What is reflective loss? 1. G Limited is a company owned by H, its What is reflective loss? 1. G Limited is a company owned by H, its shares worth £ 250, 000. 2. It buys a piece of land for £ 100, 000 to build on, but its Advocate negligently fails to notice a covenant prohibiting development 3. Land is in fact worth only £ 10, 000 – G Limited suffers loss 4. Consequently, shares in G Limited worth only £ 160, 000 and it can no longer pay dividends to H. 5. H’s loss reflects that of G Limited 5

General Rule: Shareholder cannot sue the wrongdoer for reflective loss – ONLY the company General Rule: Shareholder cannot sue the wrongdoer for reflective loss – ONLY the company can sue: Johnson v Gore Wood & Co [2002] 2 AC 1 Exceptions: 1. Company has no cause of action 2. Shareholder suffers separate and distinct loss caused by breach of duty owed to him independently 3. [Quaere] Wrongdoer disables company from suing 6

Why a Rule Preventing Recovery of Reflective Loss? 1. To prevent double recovery: protection Why a Rule Preventing Recovery of Reflective Loss? 1. To prevent double recovery: protection of the Defendant 2. To protect the company’s creditors: protection against the Plaintiff extracting value from the company 7

Position where Shares are Held by Trustees of Trust Exactly the same as the Position where Shares are Held by Trustees of Trust Exactly the same as the General Rule: The Trustee (as shareholder), director (even if he is the Trustee or is appointed by the Trustee) and the beneficiary cannot sue for the loss suffered by the Company – ONLY the Company can sue 8

Where the Trustee is the Wrongdoer Example: Trustee/director of Trust-owned company causes it to Where the Trustee is the Wrongdoer Example: Trustee/director of Trust-owned company causes it to enter improvident transaction. The conventional position: Gardner v Parker [2004] 2 BCLC 554, 565: “…it appears clearly to have been determined in [Shaker v Al-Bedrawi [2003] 1 BCLC 157] that, even when the claim is brought by a beneficiary against a trustee for breach of fiduciary duty, it can be barred by the [no reflective loss principle]. ” 9

Trustee Failure to Supervise the Directors of Trust-Owned Companies Example: Trustee fails to prevent Trustee Failure to Supervise the Directors of Trust-Owned Companies Example: Trustee fails to prevent directors of trust-owned company from misusing company’s assets or diverting them to third parties n Position in England: n Walker v Stones [2001] QB 902: Beneficiary can sue Trustee where He can establish Trustee’s conduct has constituted a breach of some legal duty owed to him personally; The breach of duty has caused Beneficiary personal loss, separate and distinct from any loss that may have been occasioned to any corporate body in which he may be financially interested. 1. 2. 10

Is Jersey any Different? n Freeman v Ansbacher Trustees (Jersey) Ltd [2009] JLR 1 Is Jersey any Different? n Freeman v Ansbacher Trustees (Jersey) Ltd [2009] JLR 1 n The facts: n Assets of a discretionary trust held by a company, SDR, the shares in which were all held by the Trustee. The plaintiff beneficiaries alleged Trustee failed to supervise SDR in respect of three transactions which caused it loss. n Trustee sought to have the claim struck out, relying on the no reflective loss principle. The Royal Court proceeded on the basis that the claims raised were reflective of SDR’s losses, and held at the principle formed part of the law of Jersey. 11

Does the No Reflective Loss Principle Apply to a Jersey Discretionary Trust? n Birt Does the No Reflective Loss Principle Apply to a Jersey Discretionary Trust? n Birt DB: n “I accept that, if the [no reflective loss] principle applies to the present case, the order of justice should be struck out. However, I am by no means convinced that the principle should necessarily be applied to a situation such as the present involving a discretionary trust. I think it is not entirely clear that the principle would necessarily be applied in England; but even if it were, I consider that there are strong grounds for believing that Jersey law should follow a different path…” 12

Possible Bases of Action against Jersey Trustee 1. Beneficiaries ask Trustee to replace directors Possible Bases of Action against Jersey Trustee 1. Beneficiaries ask Trustee to replace directors so new directors can cause company to sue former directors 2. If Trustee refuses to replace directors, beneficiaries bring action against it for new breach of trust 3. Derivative action by beneficiaries 13

The DB’s Solution? n Where Plaintiff seeks reconstitution of the trust fund, the remedy The DB’s Solution? n Where Plaintiff seeks reconstitution of the trust fund, the remedy is at the discretion of the court: the court could arguably direct the Trustee to reimburse or refinance the trust-owned company. n Thus the company would no longer have suffered any loss and could not bring any claim against its directors, thereby removing the danger of double recovery. 14

The Lesson to be Learned? 1. The no reflective loss principle may not protect The Lesson to be Learned? 1. The no reflective loss principle may not protect a Trustee from action where it has failed properly to supervise the directors of a trust-owned company. 2. The Trustee should check its PI policy. 15

Stephen Whale Director - Private Wealth Qualifications: FCA, FCCA T: F: E: +44 (0) Stephen Whale Director - Private Wealth Qualifications: FCA, FCCA T: F: E: +44 (0) 1534 816 275 +44 (0) 1534 700 007 stephen. [email protected] com 16

Channel Islands Trusts Law Conference 2010 Trusts and the operation of the no reflective Channel Islands Trusts Law Conference 2010 Trusts and the operation of the no reflective loss principle: commentary Advocate Paul Tracey 25 November 2010

What is the English position? • Walker v Stones [2001] QB 902 at 927: What is the English position? • Walker v Stones [2001] QB 902 at 927: - plaintiff defendants’ conduct breached a duty owed to personally distinct that breach caused plaintiff loss separate and from any loss suffered by company in which plaintiff - has an interest what is meant by a separate loss?

What is the English position? • But see now: Shaker v Al-Bedrawi [2003] Ch What is the English position? • But see now: Shaker v Al-Bedrawi [2003] Ch 350; Gardner v Parker [2004] 2 BCLC 554; Barnes v Tomlinson [2007] WTLR 377; Ellis v Property Leeds (UK) Limited [2002] EWCA Civ

What is the English position? All following Johnson v Gore-Wood & Co [2002] 2 What is the English position? All following Johnson v Gore-Wood & Co [2002] 2 AC 1 and authorities for the propositions that, first, “[t]he fact that the beneficiaries‘ claim may be a claim for breach of fiduciary duty is not a reason why the reflective loss principle should not apply” (Lewin at para 39 -38) and “… the reflective loss principle normally does prevent the beneficiaries from recovering the diminution in the value of the trusts shareholding in a breach of trust action caused by a breach of duty by the trustee as a director of the company concerned for which the company has a claim against the director” (ibid; emphasis mine)

What is the English position? • But see also: Giles v Rhind [2003] Ch What is the English position? • But see also: Giles v Rhind [2003] Ch 618: Reflective loss principle does not apply if the defendant’s/s’ actions have stripped the relevant company of funds such that the company is unable to pursue action against the directors • and cf. Waddington Limited v Chan [2008] HKLR 1381

What is the nascent Jersey position? • Freeman v Ansbacher [2009] JLR 1 • What is the nascent Jersey position? • Freeman v Ansbacher [2009] JLR 1 • The case’s facts: - “at all material times the shares in [the company] SDR were the sole significant asset of the Trust and all the underlying assets were owned by SDR or its subsidiaries. ” (id at 8) - application to strike out an order of justice on ground, in part, “that the losses claimed … were merely reflective of were not therefore instance of the beneficiaries” the losses suffered by SDR and recoverable at the

What is the nascent Jersey position? • The Bailiff’s judgment and reasons: “None of What is the nascent Jersey position? • The Bailiff’s judgment and reasons: “None of the English cases had to consider the position where there is a discretionary trust. It seems to me strongly arguable that the two reasons for the principle may have no application in a case such as the present. …. [The plaintiff] is merely seeking reconstitution of the trust fund. It seems to me strongly arguable that the remedy, were breaches of trust on Ansbacher’s part proved, is at the discretion of the court and, being an equitable remedy, may be moulded to suit the circumstances of the case. Thus, in the event of the breaches of trust being proved, the court could arguably order Ansbacher to reconstitute the trust fund exactly by reimbursing that particular part of the

What is the nascent Jersey position? trust fund which had been primarily affected by What is the nascent Jersey position? trust fund which had been primarily affected by the breach of trust. Thus, the court could order Ansbacher to reimburse SDR from where the funds had been lost in the first place. Alternatively, if it was felt that the court could only order Ansbacher to reimburse the trust fund itself by putting the appropriate moneys into the trust fund, it seems to me arguable that the court could nevertheless direct as a term of such relief that the funds be used to acquire new shares in SDR, so that the funds eventually find their way in to SDR. This would have the effect of exactly reconstituting the trust fund because it would take the value of the shares in SDR back to what they had been previously and the financial position of SDR back to what it had been. Such remedies may not be available in all cases but it seems to me strongly arguable that they are available where the company in question is wholly owned by a discretionary trust. ” (id at 37 -8)

What is the nascent Jersey position? Further: “It is of the first importance that What is the nascent Jersey position? Further: “It is of the first importance that beneficiaries of a trust whose assets have been mismanaged should have a simple and effective remedy available to them, whether such assets are held directly by the trustee or through a wholly-owned company. I consider that it is strongly arguable that the law of Jersey provides this simple and effective remedy in a case such as the present by enabling the court to order the defaulting trustee to reconstitute the trust fund by reimbursing the company for its losses, thereby removing both reasons for the application of the Prudential principle. ” (id at 42)

Should Jersey follow England here? • Lewin: “… it is necessary to consider whether Should Jersey follow England here? • Lewin: “… it is necessary to consider whether the reasons for exclusion of recovery of reflective loss outside of a trust context apply also in the trust context” (para 39 -40) • Trust investments and/or trading all but invariably carried out through companies • Obvious injustice arises from rigid and unbending application of principle • Any justification for not applying principle or applying it with greater discrimination where there is also loss to a trust estate?

Should Jersey follow England here? • Mischief at which principle directed can be prevented Should Jersey follow England here? • Mischief at which principle directed can be prevented otherwise in a trust context (at least, where relevant company’s shares wholly owned on the trust) • How convincing is the Bailiff’s reasoning in Freeman v Ansbacher? • How much weight do the English authorities have in Jersey compared with the Bailiff’s decision in Freeman v Ansbacher? • Where in English authorities is the reasoning for an unbending application of the principle in a discretionary trust

Channel Islands Trusts Law Conference 2010 Identifying and assessing the remedial consequences of a Channel Islands Trusts Law Conference 2010 Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care Advocate Paul Tracey 25 November 2010

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 1 The questions 2 The statutory provisions in Jersey and England 3 The content of the duty 4 The fiduciary nature of the duty 5 Breach of duty and its remedial consequences 6 Limiting liability 7 Conclusions and checklist

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 1 The questions • What is breach of trust under Jersey law? and what do we mean when we use that phrase? • What are the duties of a trustee under Jersey law? • Does a Jersey trustee have a duty to exercise reasonable care and skill in carrying out his or her office? • Is a breach of duty by a Jersey trustee always a breach of trust?

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 2 The statutory provisions in Jersey and England • art. 1(1), Trusts (Jersey) Law 1984 (“TJL”): “ ‘breach of trust’ means a breach of any duty imposed on a trustee by this Law or by the terms of the trust” • art. 1(2) TJL: “This Law shall not be construed as a codification of laws trustees and persons interested under regarding trusts, trust. ”

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 2 The statutory provisions in Jersey and England • What is a Jersey trustee liable to do? See art. 21(1), TJL: “A trustee shall in the execution of his or her duties and in the exercise of his or her powers and discretions – (a) act – (i) with due diligence, (ii) as would a prudent person, (iii) to the best of the trustee's ability and skill; and

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 2 The statutory provisions in Jersey and England • art. 21(3), TJL: “Subject to the terms of the trust, a trustee shall – (a) the value of the trust property; (b) the value of the trust so far as is reasonable preserve so far as is reasonable enhance property. ”

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 2 The statutory provisions in Jersey and England • What do the English equivalent provisions say? • s. 1, Trustee Act 2000: “(1) applies to a Whenever the duty under this subsection trustee, he must exercise such care and skill as is reasonable in the circumstances, having regard in (a) that he has and particular – to any special knowledge or experience or holds himself out as having,

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 2 The statutory provisions in Jersey and England (b) if he acts as trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession. (2) called ‘the In this Act, the duty under subsection (1) is duty of care’. ”

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 2 The statutory provisions in Jersey and England • s. 4, Trustee Act 2000: “(1) In exercising any power of investment, whether arising under this Part or otherwise, a trustee must have regard to the standard investment criteria. (2) A trustee must from time to time review the investments of the trust and consider whether, having regard to the investment criteria, they should be varied. ” standard

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 2 The statutory provisions in Jersey and England “(3) The standard investment criteria in relation to a trust, are – (a) the suitability to the trust of investment of the same kind as any particular investment proposed to be made or retained and of that particular investment as an investment of that kind, and (b) investments of the as is appropriate to the need for diversification of trust, in so far

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 2 The statutory provisions in Jersey and England • s. 5, Trustee Act 2000: “(1) Before exercising any power of investment, whether arising under this Part or otherwise, a trustee must (unless the exception applies) obtain and consider proper advice about the way in which, having regard to the standard investment criteria, the power should be exercised.

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 2 The statutory provisions in Jersey and England (2) When reviewing the investments of the trust, a trustee must (unless the exception applies) obtain and consider proper advice about whether, having regard to the standard investment criteria, the investments should be varied. (3) obtain such The exception is that a trustee need not advice if he reasonably concludes that in all the unnecessary or inappropriate to do circumstances it is so.

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 2 The statutory provisions in Jersey and England (4) Proper advice is the advice of a person who is reasonably believed by the trustee to be qualified to give it by his ability in and practical experience of financial and other matters relating to the proposed investment. ”

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 3 The content of the duty • a professional trust company? See Midland Bank Trust Co (Jersey) Ltd v. Federated Pension Services [1994] JLR 276 at 290: “There is, in our view, a higher duty imposed on those who … field in which they • claim a long and detailed expertise in the practise. ” contexts: trust investments (funds, bonds, listed shares etc. ), wholly owned private companies, partially owned private

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 3 The content of the duty • general investment power a usual provision in trust powers; trustee will and • also usually be empowered to trade, to borrow, to give guarantees indemnities, to give security and to exercise voting rights The classic statement: “[W]hat is the liability of a trustee who undertakes an office which requires him to make an investment on behalf of his cestui que trust[? ] It seems to me that on general principles a trustee ought to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own, and that beyond that there is no liability or obligation on the trustee. In other words, a trustee is not bound because he is a trustee to conduct business in other than the ordinary and usual way in which similar business is conducted by mankind in transactions of their own. It never could be reasonable to make a trustee adopt further and better precautions than an ordinary prudent man of business would adopt, or to conduct the business in any other way. If it were otherwise, no one would be trustee at all”: Speight v Gaunt (1883) 2 Ch 727, 739 -40 per Jessell

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 3 The content of duty • An objective, external standard independent of the trustee’s personal special skill and prudence? • What would a reasonably prudent and careful person have done in like circumstances? Trustees’ behaviour tested by this standard or else “[i]n every case where neglect of duty is imputed to a body of trustees, it would necessitate an exhaustive inquiry into the private transactions of each being to show that he was individual member, - the interest of the trustee a stupid fellow, careless in money matters: and that of his opponents to prove that he was a man of superior intelligence and exceptional shrewdness. ”: Knox v Mackinnon (1888) 13 App Cas 753 per Ld Watson at 766 -767

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 3 The content of duty • Past performance of trustees judged by standards of the relevant period and not judged by “what the trustee then did or failed to do by the light of later events that could not then have been surely foreseen. They are relevant in determining what loss resulted from the breach if there was one. They do not help to determine whether or not there was one”: Elder’s Trustee and Executor Co Ltd v Higgins (1963) 113 CLR 426 at 448; see also Re Hurst (1892) 67 LT 96 at 99 and Nestle v National Westminster Bank [1994] 1 All ER 118 per Staughton J at 134: judged with hindsight”. “the trustees’ performance must not be

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 3 The content of duty 4 • a duty to act positively? : trading trusts or where active management of trust assets needed • a duty of supervision? : investment managers, agents, private companies in which the trustee has an interest (possibly a controlling interest) • a duty to provide trading and financial information to the beneficiaries? See now The Cats’ Protection League v Deans & Anor [2010] NZHC 130

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 3 • 726 ER All The content of duty a duty of supervision: the particular position of a controlling interest 3 Will see Lucking’s [1967] a Trusts Re private company: in per Cross J at 733: “Now what steps, if any, does a reasonably prudent man who finds himself a majority shareholder in a private company take with regard to the management of the company's affairs? He does not content himself with such information as to the management of the company's affairs as he is entitled to as shareholder, but ensures that he is represented on the board. He may be prepared to run the business himself as managing director or, at least, to become a non-executive director while having the business managed by someone else. Alternatively, he may find someone who will act as his nominee on the board and report to him from time to time as to the company's affairs. In the same way trustees holding a controlled interest ought to ensure so far as they can that they have such information as to the progress of the company's affairs as directors would have. If they sit back and allow the shareholder and receive no more information than company to be run by the minority shareholders are

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 3 • The content of duty a duty of supervision: the particular position of a controlling interest in a private company: see also Bartlett v Barclays Bank Trust Co Ltd [1980] Ch 515 per Brightman J at 533 -534: “[Cross J] was merely outlining convenient methods by which a prudent man of business (as also a trustee) with a controlling interest in a private company can place himself in a position to make an informed decision whether any action is appropriate to be taken for the protection of his asset … Alternatives which spring to mind are the receipt of copies of the agenda and minutes of board meetings, the receipt of monthly management accounts in the case of a trading concern or quarterly reports. Every case will depend on its own facts … The purpose to be achieved is not that of monitoring every move of the directors, but of making it reasonably probable … that the trustees or one of them will receive an adequate flow of information in time to enable the trustees to make use of their controlling shareholding should this be necessary for the protection of their trust asset, namely the shareholding … It was not proper for the bank to confine itself to the receipt of the annual balance sheet and profit and loss account, detailed annual financial statements and the chairman's report and statement, and to attendance at the annual general meetings and the luncheons that followed, which were the limits of the bank's regular sources of information. Had the bank been in receipt of more

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 3 The content of duty • a duty of supervision § judged by performance of portfolio overall or by reference to individual component parts? (see Nestle v National Westminster Bank (1993) 1 WLR 1260) § Remember art 30(3), TJL: “[w]here there are 2 or more breaches of trust, a trustee shall not set off a gain from one breach of trust against a loss resulting from another breach of trust. ”

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 3 The content of duty • Do we have any conclusions as to the content of the Jersey trustee’s duty to exercise • reasonable care? What should a trustee do to discharge this duty? Remember the absolute key words: “due diligence”, “a prudent person”, “to the best • of the trustee’s skill and ability”, “the utmost good faith” What else? : “[s]ubject to the terms of the trust … so far as reasonable preserve … [and] enhance the value of the trust property” • But, it remains the case that “[e]ssentially, to succeed in a claim that negligent or unfair investment of the trustees caused loss, a claimant beneficiary has to prove that no trustee, acting with the requisite minimum care and skill and suffering from the bad luck that can affect investors, could possible have ended up with a trust fund of the complained-of value. ”: Underhill & Hayton, 17 th ed’n at para.

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 4 The fiduciary nature of the duty • Is the duty a fiduciary duty/trust duty? • That is, is a breach of the duty a breach of trust? (cf. a fiduciary's breach of duty not necessarily a breach of fiduciary duty) • Are a trustee's duties in Jersey all necessarily duties of trust? • If not a breach of trust, what sort or kind of duty has been breached?

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 4 The fiduciary nature of the duty • the content of a trustee’s duty to exercise reasonable care in common law (and England? ) compared with the Jersey statutory formulation; a duty outside equity’s exclusive jurisdiction or not? • In Jersey, a trustee’s breach of any duty imposed upon him by art 21, TJL, the trust or by common law) constitutes, by reason of art 1(1), a breach of trust. By comparison, it is contended in England that not all breaches of duty by a trustee are breaches of trust: see Tito v Waddell [1977] Ch 106 per Megarry V-C at 247 -50 and Millett LJ in Bristol and West Building Society v Motthew [1998] Ch 1 at 16 -17.

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 4 The fiduciary nature of the duty • The answer in Jersey? Remember art. 1(1), TJL: “ ‘breach of trust’ means a breach of any duty imposed on a trustee by this Law or by the terms of the trust”. • Elsewhere, no explanation in the cases why a duty owed by a trustee is not a fiduciary duty; linked to attempts to limit equitable compensation by common law analogy

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 4 The fiduciary nature of the duty • why it matters that the duty is a trusts duty (or, better put, that breach of the duty is a breach of trust) • causation and remoteness limits for compensation; limitation and (conceivably) proprietary remedies

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 5 Breach of duty and its remedial consequences • Having defined what the trustee was required to do, the next question is: did the • First, consider the definition of when a trustee shall be liable for breach of trust in • trustee fail to do what he was required to do? Jersey. See art. 30(1), TJL: “Subject to this Law and to the terms of the trust, a trustee shall be liable for a breach of trust committed by the trustee or in which the trustee • has concurred. ” Remember - a breach of trust is a breach of any duty imposed on a trustee by the TJL or by the terms of the trust: art 1(1) TJL.

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 5 Breach of duty and its remedial consequences • Next, consider the consequences of being liable for breach of trust in Jersey. • See art. 30(2), TJL: “A trustee who is liable for a breach of trust shall be liable for – (a) the loss or depreciation in value of the trust resulting from such (b) breach; and the profit, if any, which would have accrued to the trust property if there • property had been no such breach. ” Relevant causation test: would the loss have occurred or would a profit have been made if there had been no breach?

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 5 Breach of duty and its remedial consequences 6 • Last, art. 30(3), TJL: “Where there are 2 or more breaches of trust, a trustee shall not set off a gain from one breach of trust against a loss resulting from another breach of trust. ” • Cases show some difficulty in applying this principle • Breach of trust is a breach of an equitable obligation and creates a liability to make good the loss of trust property caused by the wrongful act or omission; that is, an obligation to put the trust estate in the same position as if the breach of trust had not been committed.

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 5 Breach of duty and its remedial consequences • Consider of the nature of equitable compensation; as to this remedy, the fundamental rule is a simple one: “The obligation of a defaulting trustee is essentially one of of a be limited by effecting restitution to the estate. The obligation is personal character and its extent is not to common law principles governing remoteness of damage. ”: Re Fidelity Trustee Co Ltd v Perpetual Trustee Co [1966] 2 NSWR 211 per Street J at 214 Dawson; Union Ltd

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 5 Breach of duty and its remedial consequences • The defaulting trustee’s obligation, is “to place the trust estate in the position as it would have been in if no breach had been committed”: id at 215. • It is an “obligation to restore to the estate the assets of which he deprived it…. “[t]he tantamount to an obligation to effect restitution in specie”. Thus, form of relief is couched in terms appropriate to require the defaulting trustee to restore to the estate the assets of which he deprived it” and “[t]he obligation to restore to the estate the assets of which [the defaulting trustee] deprived it necessarily connotes that, where monetary compensation is to be paid in lieu of restoring assets, that value of the assets at the date of restoration and not at the date of deprivation”: ibid. compensation is to be assessed by reference to the

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 5 Breach of duty and its remedial consequences • The House of Lords has confirmed this reasoning in terms that: “The basic right of a beneficiary is to have the trust duly administered in accordance with the provisions of the trust instrument, if any, and the general law. Thus, in relation to a traditional trust where the fund is held in trust for a number of beneficiaries having different, usually successive, equitable interests, (e. g. A for life with remainder to B), the right of each beneficiary is to have the whole fund vested in the trustees so as to be available to satisfy his equitable interest when, and if, it falls into possession. Accordingly, in the case of a breach of such a trust involving the wrongful paying away of trust assets, the liability of the trustee is to restore to the trust fund, often called ‘the trust estate’, what ought to have been there. ” : Target Holdings v Redferns [1996] 1 AC 421 per Ld Browne- Wilkinson at 434

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 5 Breach of duty and its remedial consequences • His Lordship continued: “The equitable rules of compensation for breach of trust have been largely developed in relation to such traditional trusts, where the only way in which all the beneficiaries' rights can be protected is to restore to the trust fund what ought to be there. In such the basic rule is that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss. Courts of Equity did not award damages but, acting in personam, ordered the defaulting Lord trustee to restore the trust estate: see Nocton v. Ashburton [1914] A. C. 932, 952, specific restitution of 958, per Viscount Haldane L. C. If the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to would have been had the breach not been committed: Caffrey v. Darby (1801) 6 what it Ves. 488; Clough v. Bond (1838) 3 M. & C. 490. Even if the immediate cause of the loss is the dishonesty or failure of a third party, the trustee is liable to make good that loss to the trust but for the breach, such loss would not have occurred. ” estate if,

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care: 5 Breach of duty and its remedial consequences • “[c]onsiderations of causation, foreseeability and remoteness do not readily enter into the matter”: Re Dawson at 214 • “ … the common law rules of remoteness of damage and causation do not apply. However there does have to be some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable, viz. the fact that the loss would not have occurred but for the breach”: Target Holdings at 434

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care: 5 Breach of duty and its remedial consequences • But compare: “Equitable compensation for breach of the duty of skill and care resembles common law damages in that it is awarded by way of compensation to the plaintiff for his loss. There is no reason why the common law rules of causation, remoteness of damage and measure of damage should not be applied in such a case”: Bristol & West Building Society v Mothew [1998] Ch 1 at 18

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care: 5 Breach of duty and its remedial consequences • There is very good reason for distinguishing between the rules for compensation for breach of a common law obligation and the rules for compensation for breach of trust (or, for that matter, breach of some other fiduciary duty). • Given TJL provisions, no reason in Jersey not to make the distinction; see also Australian cases which support this position – Youyang P/L v Minter Ellison Morris Fletcher (2003) 212 CLR 484 and Maguire v Makaronis (1997) 188 CLR 449: “… there must be a real question whether the unique foundation and goals of equity, which has the institution of the trust at its heart, warrant any assimilation the measure of compensatory damages in tort and … with contract. It may be thought strange to decide that the precept that trustees are to by courts of equity up to their duty has an application limited to the be kept

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 6 Limiting liability • art. 30(1), TJL: “Nothing in the terms of a trust shall relieve, release or exonerate a trustee from liability for breach of trust arising wilful misconduct or gross from the trustee's own fraud, negligence. ”

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 6 Limiting liability • What are the usual provisions in trust deeds limiting liability?

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 6 Limiting liability • An example: “In the purported execution of this trust no Trustee or delegate of or person connected with a Trustee shall be liable for any loss or loss of profit to the Trust Fund arising in consequence of the failure depreciation or loss of any investments made or retained in good faith or any failure to enhance or preserve the value of the Trust Fund or any part thereof or by reason of any act or omission made in good faith or of any other matter or thing except fraud wilful misconduct or gross negligence on the part of the Trustee or delegate of or person connected with a Trustee who is sought to be made liable delegate of or corporate and in the case of a corporate Trustee or corporate person connected with a Trustee all references in this clause thereto shall include the directors

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 6 Limiting liability • exclusion of liability clause to be restrictively construed, particularly if trustee is professional trustee company; trustee to show case falls within ambit of clause; and, doubts and unclear expression resolved against trustee: Midland Bank Trust Co. (Jersey) Ltd. v. Federated Pension Servs [1995] JLR 352 • explanation/notification of relevant clauses in trust declaration to settlor or beneficiaries? cf proposed position in English law

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 6 Limiting liability • what does “gross negligence” mean? • a serious or flagrant degree of negligence beyond ordinary negligence (whatever that intentional or is for a professional trustee); questions of reckless behavior irrelevant: Midland Bank Trust Co. (Jersey) Ltd. v. Federated Pension Servs [1995] JLR 352 not a separate cause of action from negligence but merely a label for • the degree of culpability (therefore plaintiff pleading negligence [sic] by trustee may amend to plead gross negligence on the same facts, even if this defeats a defence based on prescription/ time limitation, because such an amendment is not pleading new cause of action): Freeman v. Ansbacher Trustees (Jersey) Ltd. [2009] JLR 1

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 6 Limiting liability • “anti-Bartlett” clauses • Bartlett v Barclays Bank Trust Co Ltd (Nos. 1 and 2) [1980] 1 All ER 139; [1980] 2 All ER 92: trustees held nearly all the shares in a company although never had a representative on the board of directors; company had sent totally inadequate reports to the trustees who never sought any further information; company entered disastrous property speculations and trustees held liable to account for failure to monitor adequately the company’s activities (and implicitly failure to take action)

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 6 Limiting liability • An example (seeking to limit liability of company directors, officers and employees): “Without prejudice to the generality of the foregoing provisions of this clause [ ] and without prejudice to any other provisions of this trust for the purposes of this clause [ ] any director officer or employee of a trustee who acts as a director officer or employee of any company or body any of whose shares or securities directly or indirectly form part of the Trust Fund shall be deemed to Trustee and in respect of acts or be a person connected with a omissions made in

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 6 Limiting liability 7 shall (mutatis mutandis) have the benefit of the exemptions from liability contained in the foregoing provisions of this clause [ ]; 8 and shall be entitled to be indemnified out of the trust fund to the extent not prohibited by the constitution of the relevant company or body or the governing law of such company or body (in each case from time to time) in respect of all other liabilities other than those arising out of fraud or wilful misconduct incurred in connection with the relevant company or body. ”

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 6 Limiting liability 7 • And attempting to restrict the scope of the trustee’s duty: “If the trust fund shall include any shares or other interests in a company the ownership of which gives to the Trustees the right in any circumstances to control the affairs of the company or of any of its subsidiaries the trustees shall be under no liability or duty to appoint any representative to the Board of the said company or any of its subsidiaries and further shall have no responsibility to enquire into oversee or take part in the management or of its affairs or business of the company or any subsidiaries. ”

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 6 Limiting liability • “no duty to balance or diversify investments”? For example: “The Trustees shall not be bound to maintain a balance between income and capital nor shall they be under any obligation to diversify the investments in the • Trust Fund. ” Are the more specific clauses purporting to limit liability or restrict duty more effective than the general limitation of liability clause? Any purported restriction of be subject too to • duty has a similar effect on a trustee’s potential liability and, so, will art 30(1)’s minimum standard. What if the trustee involves itself formally or otherwise with the company’s/ies’ affairs notwithstanding an “anti-Bartlett” clause?

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 6 Limiting liability • the role of the no reflective loss principle? : Freeman v. Ansbacher [2009] JLR 1

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 7 Conclusions and checklist • Conclusions breach - A breach of any duty owed by a Jersey trustee is a of trust: art 1 (1) TJL A Jersey trustee is liable if he/she commits or concurs in the breach: art 30(1) TJL A Jersey trustee is liable to restore the trust to the position it would have been in if no breach had occurred: art: 30(2) TJL)

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 7 Conclusions and checklist • When these governing principles are expressed in these simple terms, the • serious issue of breach of trust becomes a deceptively simple one. When these issues arise in practice, there will ordinarily be a company involved and the trust deed will contain the usual well drafted protective • provisions. That being so, invariably the trustee will confidently point to his anti. Bartlett clauses, his indemnity clauses, his exoneration clauses and, perhaps a little more rarely, the reflective loss principle to assist him in • saying that there has been no breach of duty. The reality is that it is far from clear that the trustee will be able to rely on these provisions.

Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of Identifying and assessing the remedial consequences of a Jersey trustee’s liability for breach of duty to exercise reasonable care 7 Conclusions and checklist • A checklist for trustees (look at from other side if a beneficiary): § Identify beneficiaries’ goals/ wishes for the trust estate (and reconcile them to reality) § Records! In writing! § Independent appointments of managers and agents on merit § Regular reviews and monitoring (again, in writing) § If there is a problem, do something (useful) § If you think your duty to your beneficiaries conflicts with other legal obligations (e. g. to prevent money laundering), nothing could be simpler than to seek the directions of the Court § Don’t be afraid to communicate with beneficiaries and involve them, where sensible, in decision making (remember art 30(6), TJL which confirms beneficiaries may relieve or indemnify you for breach of trust)

Stephen Whale Director - Private Wealth Stephen joined Jersey Trust Company in July 2010 Stephen Whale Director - Private Wealth Stephen joined Jersey Trust Company in July 2010 and is head of our Private Wealth Division. Previously, Stephen held the position of Managing Director at Caversham Fiduciary Services, where he worked for over 17 years. He is a Chartered Accountant and has extensive commercial experience as well as specific expertise in wealth planning for clients based in East Africa and non-UK domiciliaries living and investing in the UK. Qualifications: FCA, FCCA stephen. [email protected] com 78

Philip Sinel Commentary Philip Sinel Commentary

Channel Islands Trusts Law Conference 2010 Trustees’ agents and delegates and responsibility for loss Channel Islands Trusts Law Conference 2010 Trustees’ agents and delegates and responsibility for loss to a trust estate Advocate Paul Tracey 25 November 2010

Trustees’ agents and delegates and responsibility for loss to a trust estate: 1 The Trustees’ agents and delegates and responsibility for loss to a trust estate: 1 The statutory provisions in Jersey and England 2 Distinguishing agency and delegation 3 Breach of trust and trustees’ agents and delegates 4 Two recent Jersey cases 5 Conclusions and checklist

Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The statutory provisions in Jersey and England • art. 25(1), Trusts (Jersey) Law 1984 (“TJL”): “Subject to the terms of the trust, a trustee may delegate the execution or exercise of any of his or her trusts or powers and dispositive) and any delegate any such trusts or powers. ” (both administrative may further so

Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The statutory provisions in Jersey and England • art. 25(2), TJL: “Except where the terms of the trust specifically provide to the contrary, a trustee – (a) may delegate management of trust property to and employ investment managers whom the trustee considers competent and qualified to manage the investment of trust property; and reasonably

Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The statutory provisions in Jersey and England (b) may employ accountants, advocates, attorneys, bankers, brokers, custodians, investment advisers, nominees, property agents, solicitors and other professional agents or relation to any of the affairs of the hold any of the trust property. ” persons to act in trust or to

Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The statutory provisions in Jersey and England • art. 25(3), TJL: “A trustee shall not be liable for any loss to the trust arising from a delegation or appointment under this Article who, neglect, makes such delegation in good faith and without or appointment or permits the continuation thereof. ” • Protection given only if any loss resulting from a delegation or appointment is not through the trustee’s own wilful default or neglect whether on appointment or any time following.

Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The statutory provisions in Jersey and England • What do the English equivalent provisions say? • s. 11(1), Trustee Act 2000 (“TA”): “Subject to the provisions of this Part, the trustee of a trust may authorise any person to exercise any or all of their delegable functions as their agent. ”

Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The statutory provisions in Jersey and England • s. 11(2), TA: “In the case of a trust other than a charitable trust, the trustees' delegable functions consist of any function (a) other than – any function relating to whether or in what way any assets of the trust should be distributed, (b) any power to decide whether any fees or other payment trust funds should be made out due to be made out of the of income or

Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The statutory provisions in Jersey and England (c) any power to appoint a person to be a trustee of the trust, or (d) any power conferred by any other enactment or the trust instrument which permits the trustees to delegate any of appoint a person to act as a nominee their functions or to or custodian. ” • see also ss. 16 and 17, TA (powers to appoint “nominees” and “custodians”)

Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The statutory provisions in Jersey and England • s. 22(1), TA: “While the agent, nominee or custodian continues to act for the trust, the trustees – (a) must keep under review the arrangements under which the agent, custodian acts and how these arrangements nominee or are being put into effect, (b) if circumstances make it appropriate to do so, must consider whethere is a need to exercise any power of intervention that (c) such a power, must they have, and if they consider that there is a need to exercise do so. ”

Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The statutory provisions in Jersey and England • s. 22(2), TA: “If the agent has been authorised to exercise asset management functions, the duty under subsection (1) includes, in particular – (a) a duty to consider whethere is any need to revise or replace the policy statement made for the purposes of section 15, (b) replace the policy if they consider that there is a need to revise or statement, a duty to do so, and (c) (as it has effect for a duty to assess whether the policy statement the time being) is being

Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The statutory provisions in Jersey and England 2 • s. 23(1), TA: “If a trustee has agreed a term under which the agent, nominee of custodian is permitted to appoint a substitute, the trustee is not liable for any act or default of the substitute unless he has failed to comply with the duty of care applicable to him …(a) (b) 22 in so far as when agreeing that term, or when carrying out his duties under section they relate to the use of

Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The Trustees’ agents and delegates and responsibility for loss to a trust estate 1 The statutory provisions in Jersey and England • The traditional position: not to delegate duties or powers • Now, delegation allowed where specifically permitted by the trust instrument or statute • Is there a distinction between agency and delegation? Should you care? • Consider standard trust terms in respect of appointing agents and delegates

Trustees’ agents and delegates and responsibility for loss to a trust estate 2 Distinguishing Trustees’ agents and delegates and responsibility for loss to a trust estate 2 Distinguishing agency and delegation • First: “Any Trustee may from time to time delegate to any person for any period and upon any terms whatsoever the execution or exercise of all or any trusts and powers (both administrative and dispositive) vested in him in connection with this trust and (without limiting the foregoing) unless prohibited under the terms of the delegation any such trusts any delegate may further so delegate all or and powers. ”

Trustees’ agents and delegates and responsibility for loss to a trust estate 2 Distinguishing Trustees’ agents and delegates and responsibility for loss to a trust estate 2 Distinguishing agency and delegation 3 • Second: “The Trustees may employ and pay at the expense of the Trust Fund or any income thereof any agent in any part of the world and whether a solicitor advocate attorney banker accountant stock-broker or other agent to transact any business or do any act required to be transacted or done in the execution of this trust including without prejudice to the generality of the foregoing the receipt and payment of money and the execution documents. ” of

Trustees’ agents and delegates and responsibility for loss to a trust estate 2 Distinguishing Trustees’ agents and delegates and responsibility for loss to a trust estate 2 Distinguishing agency and delegation • Third: “The Trustees may invest or hold or allow to remain in the name or under the control of some or one only of the corporation as nominee of Trustees or of any person or the Trustees the whole or such part of the Trust Fund Trustees shall in their discretion think fit. ” as the

Trustees’ agents and delegates and responsibility for loss to a trust estate 2 Distinguishing Trustees’ agents and delegates and responsibility for loss to a trust estate 2 Distinguishing agency and delegation • Fourth: “The Trustees may appoint or employ investment advisers and managers and may delegate to any such advisers or managers (for such periods to such extent and generally on such terms and in such manner as the Trustees may from time to time think fit) all or any of the Trustees' powers and discretions with regard to making retaining varying or transposing investments. ”

Trustees’ agents and delegates and responsibility for loss to a trust estate 2 Distinguishing Trustees’ agents and delegates and responsibility for loss to a trust estate 2 Distinguishing agency and delegation • Delegation: “[a] trustee’s delegate attends meetings of the trustees in the place of the absent, delegating trustee and participates in the decisions of the trustees as one of their number. A delegate is therefore concerned with the administration of the trust as such, as well as with all the other business that the trustees must transact in the management of the trust property. ”: Lee, “Purifying the dialect of equity”, (2009) 7 TQR 12 at

Trustees’ agents and delegates and responsibility for loss to a trust estate 2 Distinguishing Trustees’ agents and delegates and responsibility for loss to a trust estate 2 Distinguishing agency and delegation • Agency: “An agent … simply performs the tasks imposed upon it by the trustees. It is concerned with implementing decisions of the trustees relative to the management of the trust property. An ever attends meetings of the trustees and agent rarely if cannot participate in any of the decisions of the trustees relating to the administration of the trust as such. ”: Lee, ibid.

Trustees’ agents and delegates and responsibility for loss to a trust estate 3 Breach Trustees’ agents and delegates and responsibility for loss to a trust estate 3 Breach of trust and trustees’ agents and delegates • Confusion between delegation and agency in statute and trust deeds • The words seem now to be used interchangeably when there are • two clear and different concepts It ought to matter as part of proper trusts’ administration; it must also matter when liability for breach of trust or breach of duty causing loss to the trust estate is in issue

Trustees’ agents and delegates and responsibility for loss to a trust estate 3 Breach Trustees’ agents and delegates and responsibility for loss to a trust estate 3 Breach of trust and trustees’ agents and delegates • contemporary trusts practice • again, consider typical provisions in modern trust deeds purporting to limit liability which might arise out of the appointment of an agent or a delegate

Trustees’ agents and delegates and responsibility for loss to a trust estate 3 Breach Trustees’ agents and delegates and responsibility for loss to a trust estate 3 Breach of trust and trustees’ agents and delegates • Let's try to limit liability! First: “In the purported execution of this trust no Trustee or delegate of or person connected with a Trustee shall be liable for any loss or loss of profit to the Trust Fund arising in consequence of the failure depreciation or loss of any investments made or retained in good faith or any failure to enhance or preserve the value of the Trust Fund or any part thereof or by reason of any act or omission made in good faith or of any other matter or thing except fraud wilful misconduct or gross negligence on the part of the Trustee or delegate of or person connected with a Trustee who is sought to be made liable and in the case of a corporate Trustee or corporate person connected with a Trustee all references in this clause thereto shall include the directors officers and employees thereof. ”

Trustees’ agents and delegates and responsibility for loss to a trust estate 3 Breach Trustees’ agents and delegates and responsibility for loss to a trust estate 3 Breach of trust and trustees’ agents and delegates 4 • Second: “Without prejudice to the generality of clause [ ] neither the Trustee nor any person connected with any Trustee shall incur any liability whatsoever arising from: the negligence or fraud of any delegate or agent appointed or employed by the Trustees or any of them in good faith although the appointment or employment of such delegate or agent was not strictly necessary or expedient; or anything done or omitted in conformity with any advice given or purporting to have been given by any investment adviser or manager appointed or employed by the Trustees or any of them in connection with this trust or the delegation to any such adviser or manager of all or any of the Trustees' powers and discretions with regard to making retaining varying or transposing investments …. ”

Trustees’ agents and delegates and responsibility for loss to a trust estate 3 Breach Trustees’ agents and delegates and responsibility for loss to a trust estate 3 Breach of trust and trustees’ agents and delegates • The question: how successfully do these sort of trusts provisions limit liability in the teeth of the Jersey statutory provisions that define the minimum standard of trustee skill and care and define the consequences of breach of that standard? • Purporting to limit the trustee’s liability to the beneficiaries • Purporting to limit the liability of agents and delegates to

Trustees’ agents and delegates and responsibility for loss to a trust estate 3 Breach Trustees’ agents and delegates and responsibility for loss to a trust estate 3 Breach of trust and trustees’ agents and delegates • Some further particular points as to trustees’ agents: § Trustees must ensure that a suitable agent is employed § Appointing an agent with a conflict of duty and interest or duty and duty is not to appoint a suitable agent § Agent employed should be employed within the scope of the agent’s business § In all questions requiring exercise of trustee’s discretion or power, the decision has to be that of the trustee, not the agent, even if in making that decision the trustee is guided by the advice of others; cf where delegation of powers has actually taken place § Trustees must be diligent in ensuring that the task or responsibility given to the agent has been or is being duly performed or discharged

Trustees’ agents and delegates and responsibility for loss to a trust estate 4 Two Trustees’ agents and delegates and responsibility for loss to a trust estate 4 Two recent Jersey cases • Chvetsov v. BNP Paribas Jersey Trust Corporation Limited & anor [2009] JLR 217; [2009] JCA 157: § House in north London owned on trust and occupied by plaintiff beneficiary and his family § The house was “held by MA [the second defendant] as nominee for BNP [the trustee] and … MA executed a declaration of trust to that effect in favour of BNP as trustee of the trust”: see at 220 § House renovated with considerable cost overruns causing substantial loss to trust estate; MA had entered the relevant building contract “as nominee on behalf of BNP”: ibid § Both BNP and MA sued to which MA responded arguing no proper cause of action had been pleaded against it: does a beneficiary of a discretionary trust have a claim “against an agent or delegate appointed by … [the] trustee of the trust”? : id at 221

Trustees’ agents and delegates and responsibility for loss to a trust estate 4 Two Trustees’ agents and delegates and responsibility for loss to a trust estate 4 Two recent Jersey cases • Chvetsov v. BNP Paribas Jersey Trust Corporation Limited & anor § “The legal position is that MA was simply an agent or delegate appointed by BNP in its capacity as trustee of the trust. If MA were to act negligently or beyond its authority in connection with that agency or delegation, the remedy would lie with BNP as trustee of the trust. Any duties owed by MA in connection with its appointment were owed to BNP as trustee of the trust, not to the beneficiaries. It would be similar in the case of an investment manager appointed by a trustee to manage the investments of a trust. If that investment manager were to be negligent in the performance of his duties, the cause of action would lie with the trustee, not with any beneficiaries. ”: per Birt, B. at 221 -222 § “MA held the property on bare trust for BNP, as trustee of the trust, and the remedy for any breach of that bare trust lies only with BNP, which, in its capacity as trustee of the trust, was the sole beneficiary of the bare trust. The fact that MA was acting as nominee for BNP cannot possibly mean that, simply as a result of so acting, MA thereby assumed the obligations of a trustee towards the beneficiaries of the trust”: id at 222

Trustees’ agents and delegates and responsibility for loss to a trust estate 4 Two Trustees’ agents and delegates and responsibility for loss to a trust estate 4 Two recent Jersey cases • Chvetsov v. BNP Paribas Jersey Trust Corporation Limited & anor: § “ … the trustee would have a cause of action against the defaulting agent and would therefore be able to obtain restitution of any loss to the trust fund. In the event of a trustee failing to enforce that right, the beneficiaries would have a remedy either by way of an administrative action to force the trustee to take action against the agent or by way of a derivative action. ”: id at 223 § As to the claim in tort, “[a]n agent or delegate of a trustee owes a duty in contract (and possibly tort) to his principal (in this case BNP as trustee of the trust) but, in the absence of particular factors, he owes no duty of care towards the beneficiaries of the trust” (id at 224) but “[t]his is not to say that there may not be circumstances in which beneficiaries may have a claim against an agent of a trustee for economic loss suffered by the beneficiaries” (id at 226) where there is reliance by a beneficiary known to an agent or an assumption of responsibility by an agent towards the beneficiaries.

Trustees’ agents and delegates and responsibility for loss to a trust estate 4 Two Trustees’ agents and delegates and responsibility for loss to a trust estate 4 Two recent Jersey cases • Cunningham v. Cunningham & ors [2009] JLR 227: § The background to the amendments sought: a purported use of protector’s power and subsequent purported exercises of purported new trustee’s power to remove a beneficiary from the trust; all trust assets then subsequently “lent” out to remaining beneficiary § SI the purported trustee but then says it has been refused PI cover; amendment sought to allege SG trustee de son tort (amendments also sought to allege dishonest assistance against SG and relevant director of SI) § Why go after SG? : “ … in January 2009, the plaintiff [beneficiary] was informed that [SI]’s insurers were not maintaining cover. … it is [SG] which is the main company of the … Group, with employees, property, etc. , whereas [SI] merely acts as a trustee. The plaintiff is therefore concerned as to whether, even if successful, he will necessarily recover all financial loss to the trust from [SI]. ”: Birt, B. at 246

Trustees’ agents and delegates and responsibility for loss to a trust estate 4 Two Trustees’ agents and delegates and responsibility for loss to a trust estate 4 Two recent Jersey cases • Cunningham v. Cunningham & ors [2009] JLR 227 at 240: § “ … of critical importance … is that, to be a trustee de son tort, a person who intermeddles in a trust must be one ‘ … not having authority from a trustee’ or who ‘takes it upon himself’ to act as a trustee. If a duly appointed trustee delegates functions to a person, that person derives his authority from the trustee and is entitled to act within the confines of the authority conferred on him by the trustee without himself becoming a trustee. ” § “ … where a duly constituted trustee appoints a person to act as his agent but such actions cause loss to the trust fund, the beneficiaries will have a remedy for breach of trust against the trustee, who may or may not in turn have a remedy against the agent for any wrongdoing. However, the interests of the beneficiaries are protected because of the strict liability of the trustee for breach of trust. In those circumstances, there is no justification for imposing the liability of a trustee upon an agent or deeming him to be a trustee. ”

Trustees’ agents and delegates and responsibility for loss to a trust estate 4 Two Trustees’ agents and delegates and responsibility for loss to a trust estate 4 Two recent Jersey cases • Cunningham v. Cunningham & ors [2009] JLR 227: § “The response of [SG] was straightforward. … [SG] is the main trading or operational company in Gibraltar of the Group. It rents office premises and employs over 50 people. It is the service company within the Sovereign Group which provides various services, such as preparing accounts and financial statements, opening bank accounts, legal and documentary services and administrative services, to other entities within the Sovereign Group which act as trustees of trusts. There is power under the trust deed of the trust to delegate and, in effect, [SI] as trustee delegated many of its functions to [SG]. ”: id at 241 § “[SG] submitted that it was commonplace in the trust industry for the administration of a trust to be carried out largely by another company within the same group of companies as the corporate trustee. … it would be very surprising if such a company were to find itself designated as a trustee de son tort. ” id at 242

Trustees’ agents and delegates and responsibility for loss to a trust estate 4 Two Trustees’ agents and delegates and responsibility for loss to a trust estate 4 Two recent Jersey cases • Cunningham v. Cunningham & ors [2009] JLR 227: § “… an agent or a delegate acting with the authority of a duly appointed trustee is not committing any ‘wrong’ by acting within the scope of his delegation and is not ‘intermeddling’ in the trust so as to constitute him a trustee de son tort. He is acting in the capacity in which he has been authorised to act. In those circumstances, it is the trustee who has made the delegation that is acting as trustee of the trust, not the agent or delegate. ”: ibid § “However, if the plaintiff is successful in his claim that the purported appointment of [SI] as trustee … is void, [SG] will not have been acting under the authority of the trustee, because [SI] itself will not have been the duly appointed trustee of the trust. In these circumstances, given the degree of involvement alleged by the plaintiff, it does not seem to me that the claim that [SG] was acting as a trustee de son tort is so hopeless as to be doomed to failure and therefore liable to be struck out. ”: id at 242 -3

Trustees’ agents and delegates and responsibility for loss to a trust estate 5 Conclusions Trustees’ agents and delegates and responsibility for loss to a trust estate 5 Conclusions and checklist • Conclusions: § Confusion between what a delegate is (or should be) and what an agent is (or should be); the offices are completely different (or should be) and the questions to be asked where there has been loss to the trust estate should be completely different depending upon whether you are looking at a delegate or an agent § “Modern” trusts practice and the risk of a trustee being a man of straw: what if the “administrative” agent or delegate [sic] has caused or been involved in the actions causing loss to the trust estate § What does it now mean to be a trustee? § Any right of action against an agent or nominee is an asset of the trust which a trustee should seek to realise: is the trustee happy to sue any agent he or she has appointed? If not, why not?

Trustees’ agents and delegates and responsibility for loss to a trust estate 5 Conclusions Trustees’ agents and delegates and responsibility for loss to a trust estate 5 Conclusions and checklist • A trustee may delegate trusts’ powers to an agent so making an agent a delegate also but delegates are not necessarily agents nor vice versa. • The distinction between agents and delegates is hopelessly muddled and we ought to be clear about whether we are dealing with an agent or a delegate (even if these two offices, so to speak, are held by the one person) because the duties of the two offices are not co-extensive and an consequent questions of liability for breach causing loss to the trust estate must also be different.

Trustees’ agents and delegates and responsibility for loss to a trust estate 5 Conclusions Trustees’ agents and delegates and responsibility for loss to a trust estate 5 Conclusions and checklist • In Cunningham and Chvetsov, then Deputy Bailiff used angeably terms the suggesting that there was no difference between the two. • Unfortunately, then Deputy Bailiff also used the terms “agent” and “nominee” (which term is, in itself, the Devil’s work) interchangeably; that only serves to muddy the waters of liability for loss to a trust estate further.

Trustees’ agents and delegates and responsibility for loss to a trust estate 5 Conclusions Trustees’ agents and delegates and responsibility for loss to a trust estate 5 Conclusions and checklist • Agents’ or delegates’ liability towards the trustee? to a direct relationship where the difficulty will be getting the trustee sue someone with whom he or she probably has some kind of • relationship Agents’ or delegates’ liability towards the beneficiaries? - an indirect or a direct relationship? the difficult question may be establishing standing for the beneficiaries to sue the agent or the delegate

Trustees’ agents and delegates and responsibility for loss to a trust estate 5 Conclusions Trustees’ agents and delegates and responsibility for loss to a trust estate 5 Conclusions and checklist • Is it consistent with a trustee’s duties to his or her beneficiaries for a trustee to purport to limit or otherwise countenance a liability? purported limitation of agents’ or delegates’

Trustees’ agents and delegates and responsibility for loss to a trust estate 5 Conclusions Trustees’ agents and delegates and responsibility for loss to a trust estate 5 Conclusions and checklist • A trustee's checklist for dealing with agents or delegates (read through looking glass § § § § § if a beneficiary): What are you doing? Appointing an agent or a delegate? Is the agent or delegate independent? How have you selected them? What purpose is being served by the appointment? Is it for your benefit or to serve your purposes? Or is the appointment in the interests of the trust as a whole? Can you show the latter? Is the relevant appointment in writing? Have the adult beneficiaries been made aware of the appointment? Does the relevant appointment define what the agent or delegate is to do? To what extent does the appointee seek to limit or avoid any liability to the trust estate? And, if so, is your countenance of such a purported limitation or avoidance of liability consistent with your duty as trustee? What sort of supervision/ review/monitoring regime is in place? What records would you be able to show of same? Have you considered intervention/ replacement of appointee at any stage? If so, what records do you have showing the decision you made and the basis/es for same?

Stephen Whale Director - Private Wealth Qualifications: FCA, FCCA T: F: E: +44 (0) Stephen Whale Director - Private Wealth Qualifications: FCA, FCCA T: F: E: +44 (0) 1534 816 275 +44 (0) 1534 700 007 stephen. [email protected] com 118

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