- Published on
SQE – Equity and Trust – The Duty of Care in Relation to the Powers of Maintenance and Advancement
Introduction
Trustees possess important statutory powers that enable them to apply trust income and capital for the benefit of beneficiaries before they become absolutely entitled to the trust property. These powers are known as the powers of maintenance and advancement and are principally governed by sections 31 and 32 of the Trustee Act 1925, as amended by the Inheritance and Trustees’ Powers Act 2014.
Although trustees enjoy broad discretion when exercising these powers, they must still comply with an appropriate standard of care. Unlike many other trustee functions that are governed by the statutory duty of care under section 1 of the Trustee Act 2000, the powers of maintenance and advancement remain subject to the traditional common law standard established in Speight v Gaunt.
The law therefore requires trustees to exercise these powers prudently, honestly, and in the best interests of the beneficiaries concerned.
The Applicable Standard of Care
When deciding whether to exercise the powers of maintenance or advancement, trustees are not subject to the statutory duty of care contained in section 1 of the Trustee Act 2000.
Instead, the applicable standard is derived from the common law decision in Speight v Gaunt (1883) 9 App Cas 1.
Under this principle, trustees must act as:
“A prudent man of business managing his own affairs.”
This objective standard requires trustees to act carefully and responsibly when deciding whether trust income or capital should be distributed before the beneficiary becomes absolutely entitled.
The court does not expect perfection, but it does expect trustees to act reasonably and prudently in the circumstances.
The Duty of Care in Relation to Maintenance
The power of maintenance allows trustees to apply trust income for the benefit of a beneficiary who has not yet become absolutely entitled to the trust property.
When exercising this power, trustees must consider:
However, trustees are not obliged to make maintenance payments merely because a beneficiary requests them.
The Duty of Care in Relation to Advancement
The power of advancement allows trustees to apply trust capital for the benefit of a beneficiary before the beneficiary becomes fully entitled to receive it.
Because capital distributions may permanently reduce the trust fund, trustees must exercise particular caution.
The central question is whether the advancement will genuinely benefit the beneficiary.
This does not necessarily require an immediate financial gain. The courts have adopted a broad interpretation of “benefit” and recognise educational, professional, personal, and social advantages as capable of satisfying the requirement.
Re Pauling’s Settlement Trusts (No 1) [1964] Ch 303
An important authority on the exercise of the advancement power is Re Pauling’s Settlement Trusts (No 1).
In this case, trustees advanced substantial sums of trust capital to the father of infant beneficiaries. The father subsequently used much of the money for his own purposes rather than for the benefit of the children.
The court held that although trustees are not required to supervise every penny after an advancement has been made, they must make reasonable enquiries before approving the payment.
Trustees should therefore satisfy themselves that the proposed advancement is genuinely intended to benefit the beneficiary.
The case illustrates that trustees cannot simply distribute trust capital without making appropriate enquiries into its proposed use.
The Requirement to Make Enquiries
Trustees are not expected to investigate exhaustively how every advancement is ultimately spent.
However, prudent trustees should obtain sufficient information to satisfy themselves that:
Example – Proper Exercise of the Advancement Power
Suppose trustees manage a trust for a 20-year-old beneficiary who wishes to attend medical school.
The beneficiary requests £50,000 from the trust fund to cover tuition fees and living expenses.
The trustees investigate the proposal, obtain details of the educational programme, and conclude that the expenditure will enhance the beneficiary’s future prospects.
The advancement is likely to be regarded as beneficial and a proper exercise of the trustees’ discretion.
Example – Improper Exercise of the Advancement Power
Assume a beneficiary requests £200,000 from the trust fund to invest in a highly speculative cryptocurrency venture.
The trustees make no enquiries regarding the proposal and approve the payment immediately.
The investment subsequently fails and the money is lost.
The trustees may be liable for breach of trust because they failed to exercise the degree of prudence required by Speight v Gaunt and Re Pauling’s Settlement Trusts.
The Discretionary Nature of the Powers
A crucial feature of both maintenance and advancement is that they are discretionary powers rather than rights.
Beneficiaries cannot compel trustees to exercise these powers in their favour.
Similarly, beneficiaries cannot insist upon receiving maintenance payments or capital advancements simply because they would prefer to receive trust property earlier.
The trustees must exercise their own judgment and decide whether exercising the power would be appropriate.
Judicial Reluctance to Interfere
The courts are generally reluctant to interfere with trustees’ discretionary decisions concerning maintenance and advancement.
This reflects the principle that trustees, rather than judges, are entrusted with administering the trust and exercising discretionary powers.
Provided trustees act honestly, reasonably, and within the scope of their powers, courts will rarely substitute their own judgment for that of the trustees.
Grounds for Judicial Intervention
Although judicial intervention is rare, the courts may intervene where trustees:
Practical Difficulties in Challenging Decisions
Challenges to maintenance and advancement decisions are often expensive and difficult to pursue.
The costs of litigation may exceed the value of the disputed payment, particularly where the trust fund is modest.
Consequently, court proceedings are generally only worthwhile where:
Removal of Trustees
Persistent refusal to exercise maintenance or advancement powers appropriately may indicate deeper problems in trust administration.
In some circumstances, unreasonable conduct regarding maintenance or advancement may support an application to remove a trustee.
The court’s primary concern in such cases is whether the trustee is acting in the best interests of the beneficiaries and the proper administration of the trust.
Where trustees repeatedly fail to exercise their powers responsibly, removal may be justified.
Case Study
Facts
A trust fund worth £3 million is held for Emma, who will become absolutely entitled at the age of 25.
At age 20, Emma wishes to undertake a law degree and requests £60,000 from the trust fund to cover tuition fees and accommodation.
The trustees investigate the proposal, review the university’s admission documents, and conclude that the expenditure will benefit Emma’s education and future career.
Analysis
The trustees have exercised the power of advancement prudently.
They made appropriate enquiries, considered Emma’s interests, and concluded that the payment would be beneficial.
Their conduct satisfies the standard established in Speight v Gaunt and reflects the approach approved in Re Pauling’s Settlement Trusts.
Outcome
The advancement would almost certainly be valid, and the courts would be unlikely to interfere with the trustees’ decision.
Conclusion
The powers of maintenance and advancement provide trustees with valuable flexibility in managing trust property for the benefit of beneficiaries. Although these powers are discretionary, trustees must exercise them with appropriate care and prudence. The applicable standard remains the traditional common law duty established in Speight v Gaunt, requiring trustees to act as prudent businesspersons managing their own affairs. In exercising the advancement power, trustees must ensure that any payment will genuinely benefit the beneficiary and should make reasonable enquiries into its proposed use, as demonstrated in Re Pauling’s Settlement Trusts (No 1). While courts generally respect trustees’ discretionary decisions, they may intervene where trustees act improperly, irrationally, or contrary to their fiduciary obligations.
References
Speight v Gaunt (1883) 9 App Cas 1.
Re Pauling’s Settlement Trusts (No 1) [1964] Ch 303.
Trustee Act 1925, ss 31–32.
Inheritance and Trustees’ Powers Act 2014.
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, Oxford University Press 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, Oxford University Press 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
Introduction
Trustees possess important statutory powers that enable them to apply trust income and capital for the benefit of beneficiaries before they become absolutely entitled to the trust property. These powers are known as the powers of maintenance and advancement and are principally governed by sections 31 and 32 of the Trustee Act 1925, as amended by the Inheritance and Trustees’ Powers Act 2014.
Although trustees enjoy broad discretion when exercising these powers, they must still comply with an appropriate standard of care. Unlike many other trustee functions that are governed by the statutory duty of care under section 1 of the Trustee Act 2000, the powers of maintenance and advancement remain subject to the traditional common law standard established in Speight v Gaunt.
The law therefore requires trustees to exercise these powers prudently, honestly, and in the best interests of the beneficiaries concerned.
The Applicable Standard of Care
When deciding whether to exercise the powers of maintenance or advancement, trustees are not subject to the statutory duty of care contained in section 1 of the Trustee Act 2000.
Instead, the applicable standard is derived from the common law decision in Speight v Gaunt (1883) 9 App Cas 1.
Under this principle, trustees must act as:
“A prudent man of business managing his own affairs.”
This objective standard requires trustees to act carefully and responsibly when deciding whether trust income or capital should be distributed before the beneficiary becomes absolutely entitled.
The court does not expect perfection, but it does expect trustees to act reasonably and prudently in the circumstances.
The Duty of Care in Relation to Maintenance
The power of maintenance allows trustees to apply trust income for the benefit of a beneficiary who has not yet become absolutely entitled to the trust property.
When exercising this power, trustees must consider:
- the beneficiary’s financial needs;
- the beneficiary’s age and circumstances;
- the size of the trust fund;
- the interests of other beneficiaries;
- the overall purpose of the trust.
However, trustees are not obliged to make maintenance payments merely because a beneficiary requests them.
The Duty of Care in Relation to Advancement
The power of advancement allows trustees to apply trust capital for the benefit of a beneficiary before the beneficiary becomes fully entitled to receive it.
Because capital distributions may permanently reduce the trust fund, trustees must exercise particular caution.
The central question is whether the advancement will genuinely benefit the beneficiary.
This does not necessarily require an immediate financial gain. The courts have adopted a broad interpretation of “benefit” and recognise educational, professional, personal, and social advantages as capable of satisfying the requirement.
Re Pauling’s Settlement Trusts (No 1) [1964] Ch 303
An important authority on the exercise of the advancement power is Re Pauling’s Settlement Trusts (No 1).
In this case, trustees advanced substantial sums of trust capital to the father of infant beneficiaries. The father subsequently used much of the money for his own purposes rather than for the benefit of the children.
The court held that although trustees are not required to supervise every penny after an advancement has been made, they must make reasonable enquiries before approving the payment.
Trustees should therefore satisfy themselves that the proposed advancement is genuinely intended to benefit the beneficiary.
The case illustrates that trustees cannot simply distribute trust capital without making appropriate enquiries into its proposed use.
The Requirement to Make Enquiries
Trustees are not expected to investigate exhaustively how every advancement is ultimately spent.
However, prudent trustees should obtain sufficient information to satisfy themselves that:
- the beneficiary will benefit;
- the purpose of the advancement is legitimate;
- the transaction is consistent with the objectives of the trust.
Example – Proper Exercise of the Advancement Power
Suppose trustees manage a trust for a 20-year-old beneficiary who wishes to attend medical school.
The beneficiary requests £50,000 from the trust fund to cover tuition fees and living expenses.
The trustees investigate the proposal, obtain details of the educational programme, and conclude that the expenditure will enhance the beneficiary’s future prospects.
The advancement is likely to be regarded as beneficial and a proper exercise of the trustees’ discretion.
Example – Improper Exercise of the Advancement Power
Assume a beneficiary requests £200,000 from the trust fund to invest in a highly speculative cryptocurrency venture.
The trustees make no enquiries regarding the proposal and approve the payment immediately.
The investment subsequently fails and the money is lost.
The trustees may be liable for breach of trust because they failed to exercise the degree of prudence required by Speight v Gaunt and Re Pauling’s Settlement Trusts.
The Discretionary Nature of the Powers
A crucial feature of both maintenance and advancement is that they are discretionary powers rather than rights.
Beneficiaries cannot compel trustees to exercise these powers in their favour.
Similarly, beneficiaries cannot insist upon receiving maintenance payments or capital advancements simply because they would prefer to receive trust property earlier.
The trustees must exercise their own judgment and decide whether exercising the power would be appropriate.
Judicial Reluctance to Interfere
The courts are generally reluctant to interfere with trustees’ discretionary decisions concerning maintenance and advancement.
This reflects the principle that trustees, rather than judges, are entrusted with administering the trust and exercising discretionary powers.
Provided trustees act honestly, reasonably, and within the scope of their powers, courts will rarely substitute their own judgment for that of the trustees.
Grounds for Judicial Intervention
Although judicial intervention is rare, the courts may intervene where trustees:
- act in bad faith;
- fail to consider relevant factors;
- take account of irrelevant considerations;
- misunderstand their powers;
- act irrationally;
- breach their fiduciary duties.
Practical Difficulties in Challenging Decisions
Challenges to maintenance and advancement decisions are often expensive and difficult to pursue.
The costs of litigation may exceed the value of the disputed payment, particularly where the trust fund is modest.
Consequently, court proceedings are generally only worthwhile where:
- substantial sums are involved;
- there is evidence of trustee misconduct;
- the dispute forms part of a wider challenge to the trustees’ administration of the trust.
Removal of Trustees
Persistent refusal to exercise maintenance or advancement powers appropriately may indicate deeper problems in trust administration.
In some circumstances, unreasonable conduct regarding maintenance or advancement may support an application to remove a trustee.
The court’s primary concern in such cases is whether the trustee is acting in the best interests of the beneficiaries and the proper administration of the trust.
Where trustees repeatedly fail to exercise their powers responsibly, removal may be justified.
Case Study
Facts
A trust fund worth £3 million is held for Emma, who will become absolutely entitled at the age of 25.
At age 20, Emma wishes to undertake a law degree and requests £60,000 from the trust fund to cover tuition fees and accommodation.
The trustees investigate the proposal, review the university’s admission documents, and conclude that the expenditure will benefit Emma’s education and future career.
Analysis
The trustees have exercised the power of advancement prudently.
They made appropriate enquiries, considered Emma’s interests, and concluded that the payment would be beneficial.
Their conduct satisfies the standard established in Speight v Gaunt and reflects the approach approved in Re Pauling’s Settlement Trusts.
Outcome
The advancement would almost certainly be valid, and the courts would be unlikely to interfere with the trustees’ decision.
Conclusion
The powers of maintenance and advancement provide trustees with valuable flexibility in managing trust property for the benefit of beneficiaries. Although these powers are discretionary, trustees must exercise them with appropriate care and prudence. The applicable standard remains the traditional common law duty established in Speight v Gaunt, requiring trustees to act as prudent businesspersons managing their own affairs. In exercising the advancement power, trustees must ensure that any payment will genuinely benefit the beneficiary and should make reasonable enquiries into its proposed use, as demonstrated in Re Pauling’s Settlement Trusts (No 1). While courts generally respect trustees’ discretionary decisions, they may intervene where trustees act improperly, irrationally, or contrary to their fiduciary obligations.
References
Speight v Gaunt (1883) 9 App Cas 1.
Re Pauling’s Settlement Trusts (No 1) [1964] Ch 303.
Trustee Act 1925, ss 31–32.
Inheritance and Trustees’ Powers Act 2014.
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, Oxford University Press 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, Oxford University Press 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
- Published on
SQE – Equity and Trust – Identifying a Breach of Trust
Introduction
Before a trustee can be held liable and before any remedy can be awarded, the court must first identify whether a breach of trust has occurred. The existence of a breach is the foundation of any claim against a trustee. Without a breach, there can be no liability and therefore no need to consider issues such as causation, remoteness, equitable compensation, tracing, or proprietary remedies.
A breach of trust occurs whenever a trustee fails to comply with the obligations imposed by the trust instrument, statute, or general principles of equity. Broadly speaking, breaches of trust fall into two categories. First, a trustee may do something that they are not authorised to do. Secondly, a trustee may fail to do something that they are under a duty to perform.
Acts That a Trustee Ought Not to Do
The first category of breach occurs where a trustee performs an act that exceeds their authority. Trustees derive their powers from the trust instrument and from legislation. If they act outside those powers, they commit a breach of trust.
This type of breach is often described as an ultra vires act because it falls outside the trustee’s lawful authority.
A trustee may exceed their powers by making unauthorised investments, disposing of trust property improperly, exercising powers for improper purposes, or entering into transactions prohibited by the trust deed.
Breach of Statutory Powers
Trustees are frequently granted powers by statute. If they exercise those powers beyond the limits established by legislation, they may become personally liable.
For example, section 8 of the Trustee Act 2000 gives trustees a broad power to acquire freehold or leasehold land. However, if trustees use trust money to purchase property in circumstances not authorised by statute or contrary to the trust’s purposes, they may commit a breach of trust.
The fact that trustees believed they were acting in the trust’s best interests will not necessarily excuse the breach.
Example – Acting Beyond Statutory Powers
Suppose a trust was established to provide income for a beneficiary through conservative investments.
The trustees decide to use the trust fund to purchase speculative overseas real estate that falls outside the powers granted by the trust instrument and is inconsistent with the trust’s investment objectives.
Even if the trustees genuinely believe that the investment will generate substantial profits, they may be liable because they have acted beyond their authorised powers.
Breach of the Trust Instrument
Trustees must also comply with the specific provisions contained in the trust deed.
Many trust instruments impose restrictions on how trust property may be managed. These restrictions are legally binding and must be followed.
A trustee who ignores those restrictions commits a breach of trust regardless of whether the transaction ultimately benefits the trust.
Example – Acting Contrary to the Trust Deed
Assume a trust deed expressly prohibits investment in oil and gas companies for ethical reasons.
The trustees nevertheless invest £1 million of trust funds in a multinational oil corporation because they believe the shares will increase in value.
Even if the investment proves profitable, the trustees have acted outside the powers granted by the trust deed and have therefore committed a breach of trust.
Innocent Breaches of Trust
Not all breaches involve dishonesty or bad faith. A trustee may commit a breach entirely innocently while genuinely attempting to administer the trust correctly.
Equity distinguishes between the existence of a breach and the trustee’s state of mind. Liability may arise even where the trustee acted honestly and reasonably.
Re Diplock [1941] Ch 253
An important example is Re Diplock.
The executors of a deceased person’s estate distributed approximately £250,000 among numerous charitable institutions. They believed that the relevant clause in the will was valid and authorised the distribution.
However, the clause directed the executors to distribute the residue of the estate among “charitable or benevolent objects.” Because the purposes were not exclusively charitable, the gift was void.
As a result, the executors had distributed property to the wrong recipients and committed a breach of trust despite acting honestly and in good faith.
The decision was subsequently affirmed by the House of Lords in Chichester Diocesan Fund and Board of Finance (Incorporated) v Simpson [1944] AC 341.
Failures to Perform Trustee Duties
The second major category of breach occurs where trustees fail to do something that they are legally required to do.
Trustees owe numerous duties arising under the trust instrument, statute, and equitable principles. Failure to perform those duties may result in liability.
Unlike the first category, these breaches involve omissions rather than positive acts.
Failure to Distribute Trust Property
One common example is a failure to distribute trust property when distribution is required.
If trustees unreasonably delay the distribution of trust assets after a beneficiary becomes entitled to them, they may be liable for breach of trust.
The beneficiaries may seek equitable compensation for losses resulting from the delay.
Failure to Manage Investments Properly
Trustees also owe duties concerning investment management.
They must exercise reasonable care, diversify investments where appropriate, and periodically review the trust portfolio.
A failure to maintain a balanced and suitable portfolio may constitute a breach of trust, particularly where losses result from excessive concentration of investments or a failure to review changing market conditions.
Example – Failure to Review Investments
Suppose trustees invest the entire trust fund in a single company and then fail to review the investment for ten years.
During that period, the company experiences financial difficulties and eventually collapses.
The trustees may be liable for breach of trust because they failed to exercise the degree of care and supervision required of prudent trustees.
Consent and Condonation by Beneficiaries
A trustee will not always be liable for conduct that would otherwise constitute a breach of trust.
Beneficiaries who possess full legal capacity may consent to, authorise, or subsequently approve a breach of trust.
Where valid consent is given, the trustee will generally be protected from liability because the beneficiaries have agreed to the conduct in question.
This principle recognises that beneficiaries are entitled to determine how their interests should be managed.
Requirements for Valid Consent
For consent to be effective, several conditions must be satisfied.
The beneficiaries must have full legal capacity, meaning they must be adults and possess the necessary mental capacity.
The beneficiaries must also act freely and voluntarily.
Furthermore, they must possess full knowledge of all material facts surrounding the proposed transaction.
If any of these requirements are absent, the consent may be ineffective.
Circumstances Where Consent Will Not Protect the Trustee
Consent will not excuse a breach where it has been obtained through inequitable conduct.
Examples include:
Example – Valid Consent
Suppose all adult beneficiaries of a trust agree that trustees may retain a high-risk investment that would otherwise be inconsistent with the trust’s investment strategy.
The trustees fully explain the risks and provide complete information.
If the investment subsequently performs poorly, the beneficiaries may be unable to sue because they knowingly consented to the transaction.
Example – Invalid Consent
Suppose trustees persuade beneficiaries to approve a speculative investment by falsely stating that independent financial advisers have guaranteed success.
The beneficiaries rely on that representation and consent to the investment.
Because the consent was obtained through misrepresentation, it will not protect the trustees from liability if losses occur.
Relationship with Trustee Liability
Identifying a breach is only the first stage in establishing trustee liability.
Once a breach has been identified, the court must then consider:
Comprehensive Case Study
Facts
A trust deed prohibits investments in fossil fuel companies and requires trustees to maintain a diversified investment portfolio.
The trustees invest 80% of the trust fund in a single oil company because they believe oil prices will rise significantly.
The beneficiaries are not informed.
Two years later, the company’s share price collapses and the trust loses £3 million.
Analysis
The trustees have committed two separate breaches of trust.
First, they acted outside the powers granted by the trust deed by investing in a prohibited industry.
Secondly, they failed to maintain a diversified investment portfolio and therefore breached their investment duties.
The beneficiaries did not consent to the transaction and therefore cannot be said to have authorised the conduct.
Outcome
The trustees are likely to be liable for breach of trust and may be required to pay equitable compensation to restore the trust fund.
Conclusion
Identifying a breach of trust is the essential first step in any claim against a trustee. A breach may arise either because a trustee performs an unauthorised act or because the trustee fails to perform a required duty. Cases such as Re Diplock demonstrate that liability may arise even where trustees act honestly and in good faith. However, beneficiaries who possess full capacity may authorise or condone conduct that would otherwise constitute a breach, provided that their consent is fully informed and free from improper influence. Once a breach has been established, the court may then proceed to consider causation, loss, available defences, and the appropriate equitable remedies.
References
Re Diplock [1941] Ch 253.
Chichester Diocesan Fund and Board of Finance (Incorporated) v Simpson [1944] AC 341.
Trustee Act 2000, ss 1–8.
Boardman v Phipps [1967] 2 AC 46.
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, Oxford University Press 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, Oxford University Press 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
Introduction
Before a trustee can be held liable and before any remedy can be awarded, the court must first identify whether a breach of trust has occurred. The existence of a breach is the foundation of any claim against a trustee. Without a breach, there can be no liability and therefore no need to consider issues such as causation, remoteness, equitable compensation, tracing, or proprietary remedies.
A breach of trust occurs whenever a trustee fails to comply with the obligations imposed by the trust instrument, statute, or general principles of equity. Broadly speaking, breaches of trust fall into two categories. First, a trustee may do something that they are not authorised to do. Secondly, a trustee may fail to do something that they are under a duty to perform.
Acts That a Trustee Ought Not to Do
The first category of breach occurs where a trustee performs an act that exceeds their authority. Trustees derive their powers from the trust instrument and from legislation. If they act outside those powers, they commit a breach of trust.
This type of breach is often described as an ultra vires act because it falls outside the trustee’s lawful authority.
A trustee may exceed their powers by making unauthorised investments, disposing of trust property improperly, exercising powers for improper purposes, or entering into transactions prohibited by the trust deed.
Breach of Statutory Powers
Trustees are frequently granted powers by statute. If they exercise those powers beyond the limits established by legislation, they may become personally liable.
For example, section 8 of the Trustee Act 2000 gives trustees a broad power to acquire freehold or leasehold land. However, if trustees use trust money to purchase property in circumstances not authorised by statute or contrary to the trust’s purposes, they may commit a breach of trust.
The fact that trustees believed they were acting in the trust’s best interests will not necessarily excuse the breach.
Example – Acting Beyond Statutory Powers
Suppose a trust was established to provide income for a beneficiary through conservative investments.
The trustees decide to use the trust fund to purchase speculative overseas real estate that falls outside the powers granted by the trust instrument and is inconsistent with the trust’s investment objectives.
Even if the trustees genuinely believe that the investment will generate substantial profits, they may be liable because they have acted beyond their authorised powers.
Breach of the Trust Instrument
Trustees must also comply with the specific provisions contained in the trust deed.
Many trust instruments impose restrictions on how trust property may be managed. These restrictions are legally binding and must be followed.
A trustee who ignores those restrictions commits a breach of trust regardless of whether the transaction ultimately benefits the trust.
Example – Acting Contrary to the Trust Deed
Assume a trust deed expressly prohibits investment in oil and gas companies for ethical reasons.
The trustees nevertheless invest £1 million of trust funds in a multinational oil corporation because they believe the shares will increase in value.
Even if the investment proves profitable, the trustees have acted outside the powers granted by the trust deed and have therefore committed a breach of trust.
Innocent Breaches of Trust
Not all breaches involve dishonesty or bad faith. A trustee may commit a breach entirely innocently while genuinely attempting to administer the trust correctly.
Equity distinguishes between the existence of a breach and the trustee’s state of mind. Liability may arise even where the trustee acted honestly and reasonably.
Re Diplock [1941] Ch 253
An important example is Re Diplock.
The executors of a deceased person’s estate distributed approximately £250,000 among numerous charitable institutions. They believed that the relevant clause in the will was valid and authorised the distribution.
However, the clause directed the executors to distribute the residue of the estate among “charitable or benevolent objects.” Because the purposes were not exclusively charitable, the gift was void.
As a result, the executors had distributed property to the wrong recipients and committed a breach of trust despite acting honestly and in good faith.
The decision was subsequently affirmed by the House of Lords in Chichester Diocesan Fund and Board of Finance (Incorporated) v Simpson [1944] AC 341.
Failures to Perform Trustee Duties
The second major category of breach occurs where trustees fail to do something that they are legally required to do.
Trustees owe numerous duties arising under the trust instrument, statute, and equitable principles. Failure to perform those duties may result in liability.
Unlike the first category, these breaches involve omissions rather than positive acts.
Failure to Distribute Trust Property
One common example is a failure to distribute trust property when distribution is required.
If trustees unreasonably delay the distribution of trust assets after a beneficiary becomes entitled to them, they may be liable for breach of trust.
The beneficiaries may seek equitable compensation for losses resulting from the delay.
Failure to Manage Investments Properly
Trustees also owe duties concerning investment management.
They must exercise reasonable care, diversify investments where appropriate, and periodically review the trust portfolio.
A failure to maintain a balanced and suitable portfolio may constitute a breach of trust, particularly where losses result from excessive concentration of investments or a failure to review changing market conditions.
Example – Failure to Review Investments
Suppose trustees invest the entire trust fund in a single company and then fail to review the investment for ten years.
During that period, the company experiences financial difficulties and eventually collapses.
The trustees may be liable for breach of trust because they failed to exercise the degree of care and supervision required of prudent trustees.
Consent and Condonation by Beneficiaries
A trustee will not always be liable for conduct that would otherwise constitute a breach of trust.
Beneficiaries who possess full legal capacity may consent to, authorise, or subsequently approve a breach of trust.
Where valid consent is given, the trustee will generally be protected from liability because the beneficiaries have agreed to the conduct in question.
This principle recognises that beneficiaries are entitled to determine how their interests should be managed.
Requirements for Valid Consent
For consent to be effective, several conditions must be satisfied.
The beneficiaries must have full legal capacity, meaning they must be adults and possess the necessary mental capacity.
The beneficiaries must also act freely and voluntarily.
Furthermore, they must possess full knowledge of all material facts surrounding the proposed transaction.
If any of these requirements are absent, the consent may be ineffective.
Circumstances Where Consent Will Not Protect the Trustee
Consent will not excuse a breach where it has been obtained through inequitable conduct.
Examples include:
- fraud;
- misrepresentation;
- undue influence;
- concealment of material facts;
- abuse of a fiduciary position.
Example – Valid Consent
Suppose all adult beneficiaries of a trust agree that trustees may retain a high-risk investment that would otherwise be inconsistent with the trust’s investment strategy.
The trustees fully explain the risks and provide complete information.
If the investment subsequently performs poorly, the beneficiaries may be unable to sue because they knowingly consented to the transaction.
Example – Invalid Consent
Suppose trustees persuade beneficiaries to approve a speculative investment by falsely stating that independent financial advisers have guaranteed success.
The beneficiaries rely on that representation and consent to the investment.
Because the consent was obtained through misrepresentation, it will not protect the trustees from liability if losses occur.
Relationship with Trustee Liability
Identifying a breach is only the first stage in establishing trustee liability.
Once a breach has been identified, the court must then consider:
- Whether the breach caused loss to the trust;
- Whether the trustee obtained an unauthorised profit;
- Whether any defences apply;
- The appropriate remedy.
Comprehensive Case Study
Facts
A trust deed prohibits investments in fossil fuel companies and requires trustees to maintain a diversified investment portfolio.
The trustees invest 80% of the trust fund in a single oil company because they believe oil prices will rise significantly.
The beneficiaries are not informed.
Two years later, the company’s share price collapses and the trust loses £3 million.
Analysis
The trustees have committed two separate breaches of trust.
First, they acted outside the powers granted by the trust deed by investing in a prohibited industry.
Secondly, they failed to maintain a diversified investment portfolio and therefore breached their investment duties.
The beneficiaries did not consent to the transaction and therefore cannot be said to have authorised the conduct.
Outcome
The trustees are likely to be liable for breach of trust and may be required to pay equitable compensation to restore the trust fund.
Conclusion
Identifying a breach of trust is the essential first step in any claim against a trustee. A breach may arise either because a trustee performs an unauthorised act or because the trustee fails to perform a required duty. Cases such as Re Diplock demonstrate that liability may arise even where trustees act honestly and in good faith. However, beneficiaries who possess full capacity may authorise or condone conduct that would otherwise constitute a breach, provided that their consent is fully informed and free from improper influence. Once a breach has been established, the court may then proceed to consider causation, loss, available defences, and the appropriate equitable remedies.
References
Re Diplock [1941] Ch 253.
Chichester Diocesan Fund and Board of Finance (Incorporated) v Simpson [1944] AC 341.
Trustee Act 2000, ss 1–8.
Boardman v Phipps [1967] 2 AC 46.
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, Oxford University Press 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, Oxford University Press 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
- Published on
SQE – Equity and Trust – The Trustee’s Duty to Take Advice Before Investing
Introduction
One of the most important responsibilities of trustees is the management and investment of trust assets. Modern trust funds frequently contain substantial investments, and poor investment decisions can significantly prejudice the interests of beneficiaries. Recognising the complexity of modern financial markets, the Trustee Act 2000 imposes a specific obligation on trustees to obtain and consider proper advice before exercising investment powers.
The duty to take advice forms part of the wider framework governing trustee investment decisions and complements the statutory duty of care under section 1 of the Trustee Act 2000 and the standard investment criteria contained in section 4. Together, these provisions seek to ensure that trustees make informed and prudent investment decisions in the best interests of beneficiaries.
The primary statutory authority governing this duty is section 5 of the Trustee Act 2000.
Statutory Basis
Section 5 of the Trustee Act 2000 provides that trustees must obtain and consider proper advice before exercising any power of investment.
The duty applies whenever trustees are making decisions regarding:
Relationship with the Standard Investment Criteria
The duty to obtain advice is closely linked to the standard investment criteria contained in section 4 of the Trustee Act 2000.
Before making investment decisions, trustees must consider:
Daniel v Tee
The importance of obtaining appropriate advice was reinforced in Daniel v Tee [2016] EWHC 1538 (Ch).
The court emphasised that trustees must have a coherent investment strategy and should obtain advice from suitably qualified individuals before making significant investment decisions.
The case also highlighted the importance of conducting regular reviews of investment performance and ensuring continued compliance with the statutory investment framework.
The decision demonstrates that obtaining advice is not a one-off exercise but forms part of an ongoing process of prudent trust management.
Exceptions to the Duty
The duty to obtain advice is not absolute.
Section 5(3) provides that trustees need not obtain advice where they reasonably conclude that, in all the circumstances, it is unnecessary or inappropriate to do so.
The key requirement is that the trustees’ conclusion must itself be reasonable.
Trustees who decide not to obtain advice must therefore be able to justify that decision objectively.
Situations Where Advice May Be Unnecessary
The Explanatory Notes to the Trustee Act 2000 provide examples of situations where obtaining advice may be unnecessary.
One example is where the trustees themselves possess sufficient expertise to make the decision without external assistance.
For instance, a trustee who is an experienced investment professional may already possess the necessary knowledge and practical experience.
However, trustees should be cautious before relying on their own expertise and should ensure that they genuinely possess the relevant specialist knowledge.
Example – Trustee with Investment Expertise
Suppose one trustee is a chartered financial analyst with twenty years of experience managing investment portfolios.
The trust wishes to invest a modest sum in a diversified portfolio of government bonds.
The trustees may reasonably conclude that external advice is unnecessary because the trustee already possesses sufficient expertise.
Provided this conclusion is reasonable, section 5(3) permits the trustees to proceed without obtaining independent advice.
Situations Where Advice May Be Inappropriate
The Explanatory Notes also recognise situations where obtaining advice may be inappropriate.
For example, where the value of the investment is very small, the cost of obtaining professional advice may be disproportionate to the value of the transaction itself.
In such circumstances, requiring formal advice could unnecessarily deplete the trust fund.
Trustees must nevertheless act prudently and document their reasons for proceeding without external advice.
Example – Small Investment Decision
A trust contains £5,000 of surplus cash that trustees wish to place in a low-risk savings account.
The cost of obtaining professional financial advice would exceed any likely benefit.
The trustees may reasonably conclude that obtaining advice would be disproportionate and unnecessary.
Their decision would likely fall within the exception provided by section 5(3).
Meaning of “Proper Advice”
Section 5(4) defines proper advice as:
“The advice of a person who is reasonably believed by the trustees to be qualified to give it by virtue of his ability in and practical experience of financial matters relating to the proposed investment.”
This definition focuses on practical expertise rather than formal qualifications alone.
The emphasis is on whether the adviser is reasonably believed to possess the necessary knowledge and experience.
No Requirement for Professional Qualifications
Interestingly, section 5(4) does not expressly require advisers to:
However, trustees must still act reasonably when selecting advisers, and professional qualifications may provide important evidence of competence.
Selecting the Appropriate Adviser
The nature of the proposed investment will often determine the type of adviser that should be consulted.
Different investments require different forms of expertise.
For example:
Example – Heritage Assets
A trust owns a valuable collection of rare paintings and is considering selling part of the collection.
The trustees seek advice from an internationally recognised art valuation specialist.
This would likely constitute proper advice because the adviser possesses practical experience and specialist knowledge relating to the assets in question.
Financial Services and Markets Act 2000
Although section 5 does not expressly require professional qualifications, trustees should also consider section 19 of the Financial Services and Markets Act 2000.
Section 19 generally provides that persons carrying on regulated investment activities must be authorised or exempt.
This requirement applies primarily to the adviser rather than to the trustees.
Nevertheless, prudent trustees would normally seek advice from an appropriately authorised individual where investment business is involved.
Doing so helps demonstrate compliance with both the statutory duty of care and the duty to act in beneficiaries’ best interests.
Relationship with the Duty of Care
The duty to obtain advice operates alongside the statutory duty of care contained in section 1 of the Trustee Act 2000.
Trustees must exercise reasonable care when:
Trustees must still exercise independent judgment.
Ongoing Investment Reviews
The obligation to act prudently does not end once an investment has been made.
Section 4 requires trustees to review investments periodically.
As emphasised in Daniel v Tee, trustees should regularly reassess:
Case Study
Facts
A trust worth £8 million holds a diversified investment portfolio.
The trustees wish to invest £2 million in a private technology company.
None of the trustees possesses specialist knowledge of venture capital investments.
The trustees seek advice from an experienced corporate finance adviser with extensive expertise in technology investments.
The adviser provides a detailed report assessing the risks and opportunities.
The trustees carefully consider the report before making their decision.
Analysis
The trustees have complied with section 5 by obtaining and considering proper advice.
The adviser possesses relevant practical experience and expertise.
The trustees have also fulfilled their duty of care by carefully evaluating the advice before proceeding.
Outcome
The trustees are likely to satisfy their statutory obligations even if the investment subsequently performs poorly, provided their decision-making process was reasonable and prudent.
Conclusion
The duty to obtain proper advice under section 5 of the Trustee Act 2000 is a fundamental component of modern trust investment law. It reflects Parliament’s recognition that investment decisions often require specialist expertise beyond the knowledge of many trustees. While trustees may dispense with advice where it is reasonably unnecessary or inappropriate, they must be able to justify that decision. Proper advice must come from a person reasonably believed to possess relevant expertise and practical experience, and trustees must continue to exercise independent judgment after receiving it. Together with the statutory duty of care and the standard investment criteria, the duty to take advice promotes prudent investment management and helps ensure that trust assets are administered in the best interests of beneficiaries.
References
Daniel v Tee [2016] EWHC 1538 (Ch).
Trustee Act 2000, ss 1, 4 and 5.
Financial Services and Markets Act 2000, s 19.
Law Commission, Trustee Powers and Duties (Law Com No 260, 1999).
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, Oxford University Press 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, Oxford University Press 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
Introduction
One of the most important responsibilities of trustees is the management and investment of trust assets. Modern trust funds frequently contain substantial investments, and poor investment decisions can significantly prejudice the interests of beneficiaries. Recognising the complexity of modern financial markets, the Trustee Act 2000 imposes a specific obligation on trustees to obtain and consider proper advice before exercising investment powers.
The duty to take advice forms part of the wider framework governing trustee investment decisions and complements the statutory duty of care under section 1 of the Trustee Act 2000 and the standard investment criteria contained in section 4. Together, these provisions seek to ensure that trustees make informed and prudent investment decisions in the best interests of beneficiaries.
The primary statutory authority governing this duty is section 5 of the Trustee Act 2000.
Statutory Basis
Section 5 of the Trustee Act 2000 provides that trustees must obtain and consider proper advice before exercising any power of investment.
The duty applies whenever trustees are making decisions regarding:
- the acquisition of investments;
- the disposal of investments;
- investment strategy;
- portfolio restructuring;
- significant changes to trust assets.
Relationship with the Standard Investment Criteria
The duty to obtain advice is closely linked to the standard investment criteria contained in section 4 of the Trustee Act 2000.
Before making investment decisions, trustees must consider:
- The suitability of the proposed investment.
- The need for diversification of trust investments.
Daniel v Tee
The importance of obtaining appropriate advice was reinforced in Daniel v Tee [2016] EWHC 1538 (Ch).
The court emphasised that trustees must have a coherent investment strategy and should obtain advice from suitably qualified individuals before making significant investment decisions.
The case also highlighted the importance of conducting regular reviews of investment performance and ensuring continued compliance with the statutory investment framework.
The decision demonstrates that obtaining advice is not a one-off exercise but forms part of an ongoing process of prudent trust management.
Exceptions to the Duty
The duty to obtain advice is not absolute.
Section 5(3) provides that trustees need not obtain advice where they reasonably conclude that, in all the circumstances, it is unnecessary or inappropriate to do so.
The key requirement is that the trustees’ conclusion must itself be reasonable.
Trustees who decide not to obtain advice must therefore be able to justify that decision objectively.
Situations Where Advice May Be Unnecessary
The Explanatory Notes to the Trustee Act 2000 provide examples of situations where obtaining advice may be unnecessary.
One example is where the trustees themselves possess sufficient expertise to make the decision without external assistance.
For instance, a trustee who is an experienced investment professional may already possess the necessary knowledge and practical experience.
However, trustees should be cautious before relying on their own expertise and should ensure that they genuinely possess the relevant specialist knowledge.
Example – Trustee with Investment Expertise
Suppose one trustee is a chartered financial analyst with twenty years of experience managing investment portfolios.
The trust wishes to invest a modest sum in a diversified portfolio of government bonds.
The trustees may reasonably conclude that external advice is unnecessary because the trustee already possesses sufficient expertise.
Provided this conclusion is reasonable, section 5(3) permits the trustees to proceed without obtaining independent advice.
Situations Where Advice May Be Inappropriate
The Explanatory Notes also recognise situations where obtaining advice may be inappropriate.
For example, where the value of the investment is very small, the cost of obtaining professional advice may be disproportionate to the value of the transaction itself.
In such circumstances, requiring formal advice could unnecessarily deplete the trust fund.
Trustees must nevertheless act prudently and document their reasons for proceeding without external advice.
Example – Small Investment Decision
A trust contains £5,000 of surplus cash that trustees wish to place in a low-risk savings account.
The cost of obtaining professional financial advice would exceed any likely benefit.
The trustees may reasonably conclude that obtaining advice would be disproportionate and unnecessary.
Their decision would likely fall within the exception provided by section 5(3).
Meaning of “Proper Advice”
Section 5(4) defines proper advice as:
“The advice of a person who is reasonably believed by the trustees to be qualified to give it by virtue of his ability in and practical experience of financial matters relating to the proposed investment.”
This definition focuses on practical expertise rather than formal qualifications alone.
The emphasis is on whether the adviser is reasonably believed to possess the necessary knowledge and experience.
No Requirement for Professional Qualifications
Interestingly, section 5(4) does not expressly require advisers to:
- hold professional qualifications;
- belong to a professional body;
- act in the course of a business.
However, trustees must still act reasonably when selecting advisers, and professional qualifications may provide important evidence of competence.
Selecting the Appropriate Adviser
The nature of the proposed investment will often determine the type of adviser that should be consulted.
Different investments require different forms of expertise.
For example:
- land investments may require advice from a land agent or surveyor;
- works of art may require advice from auction houses or specialist valuers;
- heritage assets may require specialist conservation advice;
- stocks and shares may require advice from an investment manager or stockbroker.
Example – Heritage Assets
A trust owns a valuable collection of rare paintings and is considering selling part of the collection.
The trustees seek advice from an internationally recognised art valuation specialist.
This would likely constitute proper advice because the adviser possesses practical experience and specialist knowledge relating to the assets in question.
Financial Services and Markets Act 2000
Although section 5 does not expressly require professional qualifications, trustees should also consider section 19 of the Financial Services and Markets Act 2000.
Section 19 generally provides that persons carrying on regulated investment activities must be authorised or exempt.
This requirement applies primarily to the adviser rather than to the trustees.
Nevertheless, prudent trustees would normally seek advice from an appropriately authorised individual where investment business is involved.
Doing so helps demonstrate compliance with both the statutory duty of care and the duty to act in beneficiaries’ best interests.
Relationship with the Duty of Care
The duty to obtain advice operates alongside the statutory duty of care contained in section 1 of the Trustee Act 2000.
Trustees must exercise reasonable care when:
- deciding whether advice is required;
- selecting advisers;
- evaluating advice received;
- implementing recommendations.
Trustees must still exercise independent judgment.
Ongoing Investment Reviews
The obligation to act prudently does not end once an investment has been made.
Section 4 requires trustees to review investments periodically.
As emphasised in Daniel v Tee, trustees should regularly reassess:
- investment performance;
- changing market conditions;
- suitability of investments;
- diversification of the portfolio.
Case Study
Facts
A trust worth £8 million holds a diversified investment portfolio.
The trustees wish to invest £2 million in a private technology company.
None of the trustees possesses specialist knowledge of venture capital investments.
The trustees seek advice from an experienced corporate finance adviser with extensive expertise in technology investments.
The adviser provides a detailed report assessing the risks and opportunities.
The trustees carefully consider the report before making their decision.
Analysis
The trustees have complied with section 5 by obtaining and considering proper advice.
The adviser possesses relevant practical experience and expertise.
The trustees have also fulfilled their duty of care by carefully evaluating the advice before proceeding.
Outcome
The trustees are likely to satisfy their statutory obligations even if the investment subsequently performs poorly, provided their decision-making process was reasonable and prudent.
Conclusion
The duty to obtain proper advice under section 5 of the Trustee Act 2000 is a fundamental component of modern trust investment law. It reflects Parliament’s recognition that investment decisions often require specialist expertise beyond the knowledge of many trustees. While trustees may dispense with advice where it is reasonably unnecessary or inappropriate, they must be able to justify that decision. Proper advice must come from a person reasonably believed to possess relevant expertise and practical experience, and trustees must continue to exercise independent judgment after receiving it. Together with the statutory duty of care and the standard investment criteria, the duty to take advice promotes prudent investment management and helps ensure that trust assets are administered in the best interests of beneficiaries.
References
Daniel v Tee [2016] EWHC 1538 (Ch).
Trustee Act 2000, ss 1, 4 and 5.
Financial Services and Markets Act 2000, s 19.
Law Commission, Trustee Powers and Duties (Law Com No 260, 1999).
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, Oxford University Press 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, Oxford University Press 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
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SQE – Equity and Trust – Trustee Remuneration and Reimbursement of Expenses
Introduction
Traditionally, trustees were expected to act gratuitously and were generally prohibited from profiting from their position. This principle reflects the fiduciary nature of trusteeship and the fundamental rule that trustees must not place themselves in situations where personal interests conflict with their duties to beneficiaries. However, modern trust administration often requires specialist legal, financial, accounting, and investment expertise. Consequently, the law has evolved to recognise that professional trustees should ordinarily be entitled to remuneration for services properly provided to a trust.
Today, trustee remuneration may arise through express provisions contained in the trust instrument, through agreement of the beneficiaries, through court authorisation, or under statutory powers contained in the Trustee Act 2000.
Remuneration Through the Trust Instrument
The most common method of authorising payment is through a charging clause contained in the trust deed or will.
A charging clause expressly permits a trustee to receive remuneration from trust funds for services performed in administering the trust. Such clauses are particularly common where professional trustees, such as solicitors, accountants, trust corporations, or financial advisers, are appointed.
In practice, many professional trustees would be unwilling to accept appointment without an appropriate charging clause because trust administration can involve significant responsibilities, risks, and potential litigation.
Where a valid charging clause exists, its terms govern the trustee’s entitlement to payment.
Beneficiary Authorisation
Even where the trust instrument contains no charging clause, the beneficiaries may collectively authorise remuneration.
For such consent to be effective, all beneficiaries must:
- possess full legal capacity;
- be at least 18 years of age;
- have full knowledge of the relevant facts;
- freely consent to the proposed payment.
This reflects the principle that beneficiaries, as the equitable owners of the trust property, may collectively determine how trust assets should be administered.
Court Authorisation of Remuneration
The courts possess a limited equitable jurisdiction to award remuneration in exceptional circumstances.
The leading authority is Boardman v Phipps [1967] 2 AC 46.
Although the defendant fiduciaries technically breached their fiduciary duties by obtaining information through their position and using it for personal gain, they had acted honestly and generated substantial benefits for the trust.
Recognising the value of the services provided, the House of Lords awarded generous remuneration despite the breach of fiduciary duty.
The case demonstrates that equity may award compensation for skill, effort, and expertise where it would otherwise be unjust for beneficiaries to retain the benefit of those services without payment.
Statutory Remuneration Under the Trustee Act 2000
Prior to the Trustee Act 2000, there was no general statutory right for trustees to be paid.
Following recommendations by the Law Commission, Parliament recognised that modern trust administration often requires professional expertise and that remuneration may be necessary to attract suitably qualified trustees.
Consequently, section 29 of the Trustee Act 2000 introduced a statutory right to remuneration for professional trustees.
Under section 29, a trustee acting in a professional capacity may receive reasonable remuneration from the trust fund, provided that the other trustees agree in writing to the payment.
This provision reflects the practical realities of contemporary trust management.
Professional Capacity
Section 28(5) of the Trustee Act 2000 defines acting in a professional capacity.
A trustee acts professionally where they provide services in the course of a profession or business involving the management or administration of trusts.
Examples include:
- solicitors;
- accountants;
- trust corporations;
- financial advisers;
- professional wealth managers.
The Requirement of Reasonable Remuneration
The statutory right is limited to “reasonable remuneration.”
Section 29(3) provides that remuneration must be reasonable in the circumstances for the particular services supplied.
Determining reasonableness requires consideration of factors such as:
- the complexity of the trust;
- the size of the trust fund;
- the nature of the services performed;
- the trustee’s qualifications and expertise;
- the amount of time spent on administration.
Guidance from the Explanatory Notes
The Explanatory Notes to the Trustee Act 2000 provide additional guidance regarding reasonableness.
Paragraph 105 states that courts should have regard to:
- the nature of the trust;
- the trustee’s experience;
- the complexity of the work undertaken;
- the overall circumstances of administration.
Administrative Tasks and Section 29(4)
Interestingly, section 29(4) permits remuneration for work that could have been performed by a lay person.
Examples include:
- photocopying;
- filing;
- record keeping;
- administrative correspondence.
Pullan v Wilson [2014] EWHC 126 (Ch)
An important modern authority concerning trustee remuneration is Pullan v Wilson.
The court emphasised that professional trustees are not automatically entitled to charge their standard commercial rates merely because they are professionals.
Instead, the court must retain effective supervision over trustee remuneration.
The court stated that regard must be had to:
- the value of the services provided;
- whether the work was necessary;
- the proportionality of the charges;
- whether the level of fee earner used was appropriate.
Effect of a Charging Clause
Where a trust instrument already contains a charging clause, section 29 generally does not apply.
Instead, remuneration is governed by the specific wording of the trust deed.
Trustees must therefore carefully examine the terms of the trust instrument before relying on statutory provisions.
This reflects the broader principle that the settlor’s intentions, as expressed in the trust deed, remain paramount.
Reimbursement of Expenses
Trustee remuneration must be distinguished from reimbursement of expenses.
Section 31 of the Trustee Act 2000 provides trustees with a statutory right to recover expenses properly incurred in administering the trust.
Examples include:
- travel expenses;
- postage costs;
- court fees;
- valuation fees;
- professional advice obtained for the benefit of the trust.
Professional Practice and Charging Clauses
Modern professional practice strongly favours the inclusion of comprehensive charging clauses.
Both the Law Society and STEP (Society of Trust and Estate Practitioners) require practitioners to explain likely costs to clients who appoint them as executors or trustees.
Consequently, professionally drafted trust instruments frequently contain wide charging provisions covering:
- trustee remuneration;
- administrative services;
- delegation costs;
- agent fees;
- professional advice.
Practical Considerations for Settlors
When creating a trust, settlors should carefully consider the financial implications of appointing professional trustees.
Professional expertise may significantly improve trust administration and reduce the risk of costly mistakes.
However, remuneration and expenses may substantially reduce the value of the trust fund available for distribution to beneficiaries.
The likely costs should therefore be balanced against:
- the size of the trust fund;
- the complexity of the trust;
- the nature of the trust assets;
- the needs of the beneficiaries.
Case Study
Facts
A trust worth £8 million appoints a solicitor as sole professional trustee.
The trust instrument contains no charging clause.
The solicitor spends three years managing investments, dealing with tax matters, preparing trust accounts, and administering distributions.
The beneficiaries subsequently challenge the solicitor’s fees.
Analysis
The solicitor is acting in a professional capacity within the meaning of section 28(5) of the Trustee Act 2000.
Provided the statutory requirements are satisfied and the remuneration is reasonable, section 29 permits payment from the trust fund.
The court would assess whether the fees charged were proportionate to the services provided, applying principles discussed in Pullan v Wilson.
Outcome
The solicitor would likely be entitled to reasonable remuneration and reimbursement of properly incurred expenses, but excessive or disproportionate fees could be reduced by the court.
Conclusion
The law governing trustee remuneration reflects a balance between traditional fiduciary principles and modern practical realities. While trustees were historically expected to act gratuitously, contemporary trust administration often requires professional expertise that justifies payment. Remuneration may be authorised by the trust instrument, by beneficiary consent, by the courts, or under section 29 of the Trustee Act 2000. However, trustees are entitled only to reasonable remuneration, and the courts retain supervisory jurisdiction to prevent excessive charges. Alongside remuneration, trustees may recover expenses properly incurred under section 31. Together, these rules ensure that trustees are fairly compensated while safeguarding the interests of beneficiaries.
References
Boardman v Phipps [1967] 2 AC 46.
Pullan v Wilson [2014] EWHC 126 (Ch).
Trustee Act 2000, ss 28–31.
Law Commission, Trustee Powers and Duties (Law Com No 260, 1999).
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, Oxford University Press 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, Oxford University Press 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
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SQE – Equity and Trust – Ethical Investments and Trustees’ Investment Duties
Introduction
One of the most challenging issues in modern trust law concerns the extent to which trustees may take ethical, moral, social, religious, or environmental considerations into account when making investment decisions. The question arises because trustees owe fiduciary duties to beneficiaries and must manage trust assets in their best interests. However, settlors, beneficiaries, and trustees themselves may hold strong ethical views regarding particular industries or investment activities.
Examples include investments involving:
Although the Trustee Act 2000 modernised many aspects of trustee investment powers, it did not provide a definitive answer to this issue. Consequently, the principles governing ethical investments continue to be derived primarily from case law.
The General Duty to Act in Beneficiaries’ Best Interests
The starting point is the fundamental fiduciary duty requiring trustees to act in the best interests of the beneficiaries.
Traditionally, the courts have interpreted this duty as requiring trustees to act in the beneficiaries’ best financial interests.
Trustees are therefore expected to maximise returns and preserve trust assets, subject to the standard investment criteria and the statutory duty of care.
This principle reflects the idea that trust property belongs beneficially to the beneficiaries rather than to the trustees or settlor.
Consequently, trustees cannot ordinarily pursue personal objectives at the expense of beneficiaries’ financial interests.
Financial Interests as the Primary Consideration
The traditional approach emphasises that trustees must focus on financial outcomes rather than personal beliefs.
Trustees are not free to use trust assets to advance political, moral, religious, or social causes merely because they personally support them.
Their primary obligation remains the proper management of trust assets for the benefit of beneficiaries.
This principle was clearly demonstrated in the early authorities concerning trustee investment decisions.
Buttle v Saunders
The leading authority illustrating the duty to prioritise beneficiaries’ financial interests is Buttle v Saunders [1950] 2 All ER 193.
In this case, trustees agreed orally to sell trust land to a purchaser. Before formal contracts were signed, a higher offer was received from another buyer.
The trustees believed they were morally obliged to honour the original agreement and proceeded with the sale to the first purchaser despite the lower price.
The court held that the trustees had acted improperly.
Although their conduct may have been honourable, their overriding duty was to obtain the best financial outcome for the beneficiaries.
By accepting a lower offer, they had failed to maximise the value of the trust property and were therefore in breach of trust.
Significance of Buttle v Saunders
The decision demonstrates that trustees cannot allow personal moral considerations to override their fiduciary obligations.
The beneficiaries’ financial interests must take precedence over the trustees’ personal views of fairness, honour, or morality.
The case remains an important illustration of the principle that trustees must act objectively when managing trust assets.
Cowan v Scargill
The most significant authority concerning ethical investments is Cowan v Scargill [1985] Ch 270.
The case involved the trustees of the National Coal Board pension fund.
Certain trustees, representing the National Union of Mineworkers, objected to investments in overseas energy companies and competing fuel industries. Their objections were based largely upon political and industrial considerations.
The dispute concerned whether trustees could restrict investment opportunities because of their own beliefs about the desirability of particular investments.
Decision in Cowan v Scargill
Megarry VC held that the trustees could not pursue their personal views or political preferences at the expense of the beneficiaries’ financial interests.
The court stated that trustees must put aside their own opinions and concentrate upon securing the best financial return for beneficiaries.
According to Megarry VC, the duty of trustees is generally:
“to provide the greatest financial benefits for the present and future beneficiaries.”
The trustees were therefore not entitled to exclude potentially profitable investments merely because they personally disagreed with them.
Importance of Cowan v Scargill
Cowan v Scargill established what is often regarded as the orthodox position in trust law.
The decision suggests that trustees must maximise financial returns and cannot subordinate beneficiaries’ interests to political, ethical, religious, or social objectives.
For many years, the case was viewed as imposing a strict limitation upon ethical investment policies.
Criticism of the Traditional Approach
The strict approach adopted in Cowan v Scargill attracted criticism.
Many commentators argued that the decision failed to recognise modern investment realities.
Ethical investing increasingly became accepted as a legitimate investment strategy, and many ethical funds demonstrated competitive financial performance.
The growth of environmental, social, and governance (ESG) investing further challenged the assumption that ethical considerations necessarily conflict with financial returns.
These developments prompted the courts to adopt a more flexible approach.
Harries v Church Commissioners for England
A more nuanced approach emerged in Harries v Church Commissioners for England [1992] 1 WLR 1241.
The case concerned investments held by the Church Commissioners.
The Commissioners sought to avoid investments that conflicted with the ethical teachings and mission of the Church.
The court considered whether such restrictions were compatible with trustees’ fiduciary duties.
Decision in Harries
The court recognised that ethical considerations could legitimately influence investment decisions in certain circumstances.
Nicholls V-C accepted that trustees could pursue an ethical investment policy provided that doing so did not significantly prejudice the financial interests of beneficiaries.
The court observed that trustees often have numerous investment options available and that ethical investments may be equally profitable.
Where an ethical investment strategy produces returns comparable to alternative investments, trustees are not necessarily acting in breach of duty.
The Harries Principle
The key principle emerging from Harries is that trustees may take ethical considerations into account where:
Ethical Investments and the Trustee Act 2000
The Trustee Act 2000 does not expressly regulate ethical investments.
However, paragraph 23 of the Explanatory Notes acknowledges that ethical considerations may be relevant when trustees exercise investment powers.
The legislation therefore leaves the issue to be resolved through the general principles governing trustee investment decisions.
Trustees must continue to comply with:
Role of the Settlor’s Wishes
The safest way to incorporate ethical considerations into trust investment policy is through express provisions in the trust instrument.
A settlor may direct trustees to:
Letters of Wishes
In practice, settlors frequently express ethical preferences through a letter of wishes.
Although not legally binding, a letter of wishes provides guidance to trustees regarding the settlor’s intentions.
Professional trustees will often take such guidance into account, particularly where it can be followed without compromising beneficiaries’ financial interests.
Modern ESG Investing
Modern investment practice increasingly incorporates environmental, social, and governance (ESG) considerations.
Many investors now regard ESG factors as financially relevant rather than purely ethical concerns.
Issues such as:
Consequently, consideration of ESG factors may sometimes be required as part of prudent investment management rather than being viewed as a departure from trustees’ financial duties.
Case Study
Facts
A trust fund worth £15 million is administered for several beneficiaries.
The trustees wish to avoid investments in tobacco companies because the settlor strongly opposed smoking and expressed this preference in a detailed letter of wishes.
Professional investment advice confirms that a diversified portfolio excluding tobacco investments is likely to achieve returns comparable to the broader market.
Analysis
The trustees are not sacrificing financial performance.
The investment strategy remains prudent and financially sound.
The exclusion reflects the settlor’s wishes while maintaining the beneficiaries’ financial interests.
Applying Harries, the trustees would likely be entitled to adopt the proposed ethical investment policy.
Outcome
The ethical investment strategy would probably be lawful because the beneficiaries suffer no material financial disadvantage and the investments remain suitable and diversified.
Practical Guidance for Trustees
Before adopting an ethical investment strategy, trustees should:
Conclusion
The law governing ethical investments seeks to balance trustees’ fiduciary duties with modern ethical and social concerns. The traditional position established in Buttle v Saunders and Cowan v Scargill emphasised that trustees must prioritise beneficiaries’ financial interests and cannot pursue personal moral or political objectives at the expense of investment returns. However, Harries v Church Commissioners introduced a more flexible approach, recognising that ethical investment policies may be legitimate where they remain financially sound and do not significantly disadvantage beneficiaries. While the Trustee Act 2000 does not expressly resolve the issue, modern trust practice increasingly accepts ethical and ESG considerations as part of prudent investment management. Nevertheless, trustees must always ensure that their primary duty to act in the best interests of beneficiaries remains paramount.
References
Buttle v Saunders [1950] 2 All ER 193.
Cowan v Scargill [1985] Ch 270.
Harries v Church Commissioners for England [1992] 1 WLR 1241.
Trustee Act 2000, ss 1, 4 and 5.
Trustee Act 2000, Explanatory Notes, para 23.
Law Commission, Trustee Powers and Duties (Law Com No 260, 1999).
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, Oxford University Press 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, Oxford University Press 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
Introduction
One of the most challenging issues in modern trust law concerns the extent to which trustees may take ethical, moral, social, religious, or environmental considerations into account when making investment decisions. The question arises because trustees owe fiduciary duties to beneficiaries and must manage trust assets in their best interests. However, settlors, beneficiaries, and trustees themselves may hold strong ethical views regarding particular industries or investment activities.
Examples include investments involving:
- tobacco companies;
- arms manufacturers;
- gambling businesses;
- fossil fuel industries;
- alcohol production;
- environmentally harmful activities.
Although the Trustee Act 2000 modernised many aspects of trustee investment powers, it did not provide a definitive answer to this issue. Consequently, the principles governing ethical investments continue to be derived primarily from case law.
The General Duty to Act in Beneficiaries’ Best Interests
The starting point is the fundamental fiduciary duty requiring trustees to act in the best interests of the beneficiaries.
Traditionally, the courts have interpreted this duty as requiring trustees to act in the beneficiaries’ best financial interests.
Trustees are therefore expected to maximise returns and preserve trust assets, subject to the standard investment criteria and the statutory duty of care.
This principle reflects the idea that trust property belongs beneficially to the beneficiaries rather than to the trustees or settlor.
Consequently, trustees cannot ordinarily pursue personal objectives at the expense of beneficiaries’ financial interests.
Financial Interests as the Primary Consideration
The traditional approach emphasises that trustees must focus on financial outcomes rather than personal beliefs.
Trustees are not free to use trust assets to advance political, moral, religious, or social causes merely because they personally support them.
Their primary obligation remains the proper management of trust assets for the benefit of beneficiaries.
This principle was clearly demonstrated in the early authorities concerning trustee investment decisions.
Buttle v Saunders
The leading authority illustrating the duty to prioritise beneficiaries’ financial interests is Buttle v Saunders [1950] 2 All ER 193.
In this case, trustees agreed orally to sell trust land to a purchaser. Before formal contracts were signed, a higher offer was received from another buyer.
The trustees believed they were morally obliged to honour the original agreement and proceeded with the sale to the first purchaser despite the lower price.
The court held that the trustees had acted improperly.
Although their conduct may have been honourable, their overriding duty was to obtain the best financial outcome for the beneficiaries.
By accepting a lower offer, they had failed to maximise the value of the trust property and were therefore in breach of trust.
Significance of Buttle v Saunders
The decision demonstrates that trustees cannot allow personal moral considerations to override their fiduciary obligations.
The beneficiaries’ financial interests must take precedence over the trustees’ personal views of fairness, honour, or morality.
The case remains an important illustration of the principle that trustees must act objectively when managing trust assets.
Cowan v Scargill
The most significant authority concerning ethical investments is Cowan v Scargill [1985] Ch 270.
The case involved the trustees of the National Coal Board pension fund.
Certain trustees, representing the National Union of Mineworkers, objected to investments in overseas energy companies and competing fuel industries. Their objections were based largely upon political and industrial considerations.
The dispute concerned whether trustees could restrict investment opportunities because of their own beliefs about the desirability of particular investments.
Decision in Cowan v Scargill
Megarry VC held that the trustees could not pursue their personal views or political preferences at the expense of the beneficiaries’ financial interests.
The court stated that trustees must put aside their own opinions and concentrate upon securing the best financial return for beneficiaries.
According to Megarry VC, the duty of trustees is generally:
“to provide the greatest financial benefits for the present and future beneficiaries.”
The trustees were therefore not entitled to exclude potentially profitable investments merely because they personally disagreed with them.
Importance of Cowan v Scargill
Cowan v Scargill established what is often regarded as the orthodox position in trust law.
The decision suggests that trustees must maximise financial returns and cannot subordinate beneficiaries’ interests to political, ethical, religious, or social objectives.
For many years, the case was viewed as imposing a strict limitation upon ethical investment policies.
Criticism of the Traditional Approach
The strict approach adopted in Cowan v Scargill attracted criticism.
Many commentators argued that the decision failed to recognise modern investment realities.
Ethical investing increasingly became accepted as a legitimate investment strategy, and many ethical funds demonstrated competitive financial performance.
The growth of environmental, social, and governance (ESG) investing further challenged the assumption that ethical considerations necessarily conflict with financial returns.
These developments prompted the courts to adopt a more flexible approach.
Harries v Church Commissioners for England
A more nuanced approach emerged in Harries v Church Commissioners for England [1992] 1 WLR 1241.
The case concerned investments held by the Church Commissioners.
The Commissioners sought to avoid investments that conflicted with the ethical teachings and mission of the Church.
The court considered whether such restrictions were compatible with trustees’ fiduciary duties.
Decision in Harries
The court recognised that ethical considerations could legitimately influence investment decisions in certain circumstances.
Nicholls V-C accepted that trustees could pursue an ethical investment policy provided that doing so did not significantly prejudice the financial interests of beneficiaries.
The court observed that trustees often have numerous investment options available and that ethical investments may be equally profitable.
Where an ethical investment strategy produces returns comparable to alternative investments, trustees are not necessarily acting in breach of duty.
The Harries Principle
The key principle emerging from Harries is that trustees may take ethical considerations into account where:
- The investment remains financially sound.
- Beneficiaries do not suffer significant financial disadvantage.
- The ethical policy is consistent with the purposes of the trust.
Ethical Investments and the Trustee Act 2000
The Trustee Act 2000 does not expressly regulate ethical investments.
However, paragraph 23 of the Explanatory Notes acknowledges that ethical considerations may be relevant when trustees exercise investment powers.
The legislation therefore leaves the issue to be resolved through the general principles governing trustee investment decisions.
Trustees must continue to comply with:
- the statutory duty of care (s 1);
- the standard investment criteria (s 4);
- the duty to obtain proper advice (s 5);
- their fiduciary duty to act in beneficiaries’ best interests.
Role of the Settlor’s Wishes
The safest way to incorporate ethical considerations into trust investment policy is through express provisions in the trust instrument.
A settlor may direct trustees to:
- avoid particular industries;
- retain certain investments;
- pursue socially responsible investments;
- follow religious investment principles.
Letters of Wishes
In practice, settlors frequently express ethical preferences through a letter of wishes.
Although not legally binding, a letter of wishes provides guidance to trustees regarding the settlor’s intentions.
Professional trustees will often take such guidance into account, particularly where it can be followed without compromising beneficiaries’ financial interests.
Modern ESG Investing
Modern investment practice increasingly incorporates environmental, social, and governance (ESG) considerations.
Many investors now regard ESG factors as financially relevant rather than purely ethical concerns.
Issues such as:
- climate change risks;
- corporate governance failures;
- labour practices;
- sustainability concerns;
Consequently, consideration of ESG factors may sometimes be required as part of prudent investment management rather than being viewed as a departure from trustees’ financial duties.
Case Study
Facts
A trust fund worth £15 million is administered for several beneficiaries.
The trustees wish to avoid investments in tobacco companies because the settlor strongly opposed smoking and expressed this preference in a detailed letter of wishes.
Professional investment advice confirms that a diversified portfolio excluding tobacco investments is likely to achieve returns comparable to the broader market.
Analysis
The trustees are not sacrificing financial performance.
The investment strategy remains prudent and financially sound.
The exclusion reflects the settlor’s wishes while maintaining the beneficiaries’ financial interests.
Applying Harries, the trustees would likely be entitled to adopt the proposed ethical investment policy.
Outcome
The ethical investment strategy would probably be lawful because the beneficiaries suffer no material financial disadvantage and the investments remain suitable and diversified.
Practical Guidance for Trustees
Before adopting an ethical investment strategy, trustees should:
- obtain professional investment advice;
- consider the standard investment criteria;
- assess potential financial consequences;
- review the trust deed;
- consider any letter of wishes;
- document their decision-making process carefully.
Conclusion
The law governing ethical investments seeks to balance trustees’ fiduciary duties with modern ethical and social concerns. The traditional position established in Buttle v Saunders and Cowan v Scargill emphasised that trustees must prioritise beneficiaries’ financial interests and cannot pursue personal moral or political objectives at the expense of investment returns. However, Harries v Church Commissioners introduced a more flexible approach, recognising that ethical investment policies may be legitimate where they remain financially sound and do not significantly disadvantage beneficiaries. While the Trustee Act 2000 does not expressly resolve the issue, modern trust practice increasingly accepts ethical and ESG considerations as part of prudent investment management. Nevertheless, trustees must always ensure that their primary duty to act in the best interests of beneficiaries remains paramount.
References
Buttle v Saunders [1950] 2 All ER 193.
Cowan v Scargill [1985] Ch 270.
Harries v Church Commissioners for England [1992] 1 WLR 1241.
Trustee Act 2000, ss 1, 4 and 5.
Trustee Act 2000, Explanatory Notes, para 23.
Law Commission, Trustee Powers and Duties (Law Com No 260, 1999).
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, Oxford University Press 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, Oxford University Press 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
- Published on
SQE – Equity and Trust – Causation in Breach of Trust Claims
Introduction
Once a breach of trust has been established, the court must determine whether that breach actually caused a loss to the trust fund or enabled the trustee to obtain an unauthorised profit. This requirement is known as causation. A trustee will not automatically be liable simply because a breach of trust has occurred. There must be a sufficient causal connection between the breach and the loss suffered by the beneficiaries. Without such a connection, liability will generally not arise.
The law of trusts therefore requires beneficiaries to demonstrate not only that a trustee acted improperly, but also that the breach caused the loss complained of. This principle ensures that trustees are held responsible only for the consequences of their own wrongdoing and not for losses that would have occurred regardless of the breach.
The “But For” Test
The principal test used to establish causation in breach of trust claims is the “but for” test.
The court asks the following question:
Would the loss have occurred but for the trustee’s breach of trust?
If the answer is no, the trustee’s breach caused the loss and liability will generally follow.
If the answer is yes, the loss would have occurred even if the trustee had performed their duties properly, and therefore the trustee will not be liable for that loss.
This approach is familiar from other areas of private law, particularly tort law, but it has been firmly incorporated into equitable compensation claims involving breaches of trust.
Target Holdings Ltd v Redferns [1996] AC 421
The leading authority on causation in breach of trust cases is Target Holdings Ltd v Redferns.
The claimant company agreed to lend approximately £1.5 million to finance the purchase of two properties. The properties were represented as having a value of approximately £2 million. In reality, however, they were worth only around £775,000, meaning that the lender’s security was substantially inadequate.
The defendants were solicitors who acted for both the lender and the purchasers. The lender transferred the mortgage funds to the solicitors before completion of the transaction. Under the terms of the arrangement, the money was not to be released until completion occurred.
The solicitors nevertheless released the money prematurely, thereby committing a breach of trust.
The property transaction later completed as planned. Subsequently, the purchasers defaulted on the mortgage repayments. When the lender enforced its security and sold the properties, it discovered the true value of the properties and suffered a substantial shortfall.
The lender therefore sued the solicitors for breach of trust and sought compensation equal to the loss suffered.
Decision in Target Holdings
The House of Lords accepted that the solicitors had committed a breach of trust by releasing the funds prematurely. However, the court held that the solicitors were not liable for the lender’s loss.
The crucial issue was causation.
The evidence demonstrated that even if the solicitors had complied with their instructions and released the funds only upon completion, the transaction would still have proceeded exactly as it did. The lender would still have received inadequate security and would still have suffered the same loss when the borrowers defaulted.
Consequently, the breach of trust did not cause the loss.
Applying the “but for” test, the court concluded that the loss would have occurred regardless of the breach. Therefore, although a breach had occurred, there was no causal connection between the breach and the claimant’s loss.
Significance of Target Holdings
Target Holdings established that equitable compensation is not automatically available whenever a trustee commits a breach of trust.
Instead, beneficiaries must demonstrate that the breach actually caused the loss suffered by the trust.
The case rejected the notion that trustees should be liable for every loss associated with trust property simply because a breach occurred at some stage during the transaction.
Rather, equitable compensation should restore losses that flow from the breach itself and not losses that would have arisen in any event.
This approach aligns equitable compensation with principles of causation while preserving the distinctive objectives of trust law.
Example Applying the “But For” Test
Suppose a trustee is instructed not to release £500,000 from a trust account until certain legal documents have been signed.
The trustee ignores the instructions and releases the money immediately. The recipient absconds with the funds and disappears.
Had the trustee waited until the documents were signed, the money would have remained protected and the loss would not have occurred.
Applying the “but for” test, the trustee’s breach clearly caused the loss. The beneficiaries would therefore be entitled to equitable compensation.
Example Where Causation Is Absent
Suppose a trustee releases funds one day earlier than authorised, thereby committing a technical breach of trust.
The transaction subsequently completes successfully exactly as intended. Several years later, an economic downturn causes the investment to fail.
The beneficiaries argue that the trustee should compensate them because a breach of trust occurred.
Although the trustee acted improperly, the loss was caused by market conditions rather than the premature release of funds. The same loss would have occurred even if the trustee had complied fully with their obligations.
Applying the “but for” test, causation is not established and compensation would not be awarded.
AIB Group (UK) Plc v Mark Redler & Co Solicitors [2015] AC 1503
The Supreme Court reaffirmed the principles established in Target Holdings in AIB Group (UK) Plc v Mark Redler & Co Solicitors.
The case involved solicitors acting as trustees who improperly distributed mortgage funds during a refinancing transaction. The claimant argued that the solicitors should be responsible for all losses associated with the transaction.
The Supreme Court rejected this argument and confirmed that equitable compensation must be linked to losses actually caused by the breach.
Lord Toulson stated that, absent fraud, it would be wrong to impose liability for losses that would have been suffered even if the trustee had performed their duties correctly.
He emphasised that it would be a backward step to depart from Lord Browne-Wilkinson’s analysis in Target Holdings.
The decision therefore confirmed that the “but for” test remains the governing principle in modern breach of trust claims.
The Position in Cases Involving Fraud
The courts have indicated that different considerations may arise where fraud is involved.
Fraudulent trustees are treated particularly harshly by equity because of the fundamental fiduciary obligations owed to beneficiaries.
However, even in cases involving dishonesty, the courts still require a connection between the wrongful conduct and the loss claimed. The primary difference is that equitable remedies are often interpreted more strictly against fraudulent trustees.
Relationship with Equitable Compensation
Causation is central to the assessment of equitable compensation.
The purpose of equitable compensation is to restore the trust fund to the position it would have occupied had the breach not occurred.
The court therefore compares:
Accordingly, even where a trustee has clearly acted improperly, compensation will not be awarded if the claimant cannot demonstrate that the breach caused the loss.
Comprehensive Case Study
Facts
Daniel acts as trustee of a family trust.
The trust deed requires him to hold £1 million until all conditions of a property transaction have been satisfied. Instead, Daniel releases the funds one week early.
The transaction later completes exactly as anticipated. Two years afterwards, the property market collapses and the investment loses £600,000.
The beneficiaries bring proceedings against Daniel for breach of trust.
Analysis
Daniel clearly committed a breach of trust by releasing the money prematurely.
However, the court must determine whether the breach caused the £600,000 loss.
The evidence shows that the transaction would have completed regardless of the timing of the payment and that the subsequent loss resulted from a downturn in the property market.
Applying the “but for” test established in Target Holdings and reaffirmed in AIB Group, the beneficiaries cannot show that the loss would have been avoided had Daniel complied with his duties.
Outcome
Although Daniel committed a breach of trust, he will not be liable for the £600,000 loss because the breach did not cause the loss suffered by the trust.
Conclusion
Causation is an essential element of trustee liability. Beneficiaries must establish not only that a breach of trust occurred but also that the breach caused the loss for which compensation is sought. The leading decisions in Target Holdings Ltd v Redferns and AIB Group (UK) Plc v Mark Redler & Co Solicitors confirm that the appropriate approach is the “but for” test. A trustee will generally be liable only where the loss would not have occurred but for the breach. Consequently, equitable compensation seeks to restore losses actually caused by the trustee’s misconduct rather than providing recovery for losses that would have arisen regardless of the breach.
References
Target Holdings Ltd v Redferns [1996] AC 421.
AIB Group (UK) Plc v Mark Redler & Co Solicitors [2015] AC 1503.
Nestle v National Westminster Bank Plc [1993] 1 WLR 1260.
Bartlett v Barclays Bank Trust Co Ltd (No 2) [1980] Ch 515.
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, Oxford University Press 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, Oxford University Press 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
Introduction
Once a breach of trust has been established, the court must determine whether that breach actually caused a loss to the trust fund or enabled the trustee to obtain an unauthorised profit. This requirement is known as causation. A trustee will not automatically be liable simply because a breach of trust has occurred. There must be a sufficient causal connection between the breach and the loss suffered by the beneficiaries. Without such a connection, liability will generally not arise.
The law of trusts therefore requires beneficiaries to demonstrate not only that a trustee acted improperly, but also that the breach caused the loss complained of. This principle ensures that trustees are held responsible only for the consequences of their own wrongdoing and not for losses that would have occurred regardless of the breach.
The “But For” Test
The principal test used to establish causation in breach of trust claims is the “but for” test.
The court asks the following question:
Would the loss have occurred but for the trustee’s breach of trust?
If the answer is no, the trustee’s breach caused the loss and liability will generally follow.
If the answer is yes, the loss would have occurred even if the trustee had performed their duties properly, and therefore the trustee will not be liable for that loss.
This approach is familiar from other areas of private law, particularly tort law, but it has been firmly incorporated into equitable compensation claims involving breaches of trust.
Target Holdings Ltd v Redferns [1996] AC 421
The leading authority on causation in breach of trust cases is Target Holdings Ltd v Redferns.
The claimant company agreed to lend approximately £1.5 million to finance the purchase of two properties. The properties were represented as having a value of approximately £2 million. In reality, however, they were worth only around £775,000, meaning that the lender’s security was substantially inadequate.
The defendants were solicitors who acted for both the lender and the purchasers. The lender transferred the mortgage funds to the solicitors before completion of the transaction. Under the terms of the arrangement, the money was not to be released until completion occurred.
The solicitors nevertheless released the money prematurely, thereby committing a breach of trust.
The property transaction later completed as planned. Subsequently, the purchasers defaulted on the mortgage repayments. When the lender enforced its security and sold the properties, it discovered the true value of the properties and suffered a substantial shortfall.
The lender therefore sued the solicitors for breach of trust and sought compensation equal to the loss suffered.
Decision in Target Holdings
The House of Lords accepted that the solicitors had committed a breach of trust by releasing the funds prematurely. However, the court held that the solicitors were not liable for the lender’s loss.
The crucial issue was causation.
The evidence demonstrated that even if the solicitors had complied with their instructions and released the funds only upon completion, the transaction would still have proceeded exactly as it did. The lender would still have received inadequate security and would still have suffered the same loss when the borrowers defaulted.
Consequently, the breach of trust did not cause the loss.
Applying the “but for” test, the court concluded that the loss would have occurred regardless of the breach. Therefore, although a breach had occurred, there was no causal connection between the breach and the claimant’s loss.
Significance of Target Holdings
Target Holdings established that equitable compensation is not automatically available whenever a trustee commits a breach of trust.
Instead, beneficiaries must demonstrate that the breach actually caused the loss suffered by the trust.
The case rejected the notion that trustees should be liable for every loss associated with trust property simply because a breach occurred at some stage during the transaction.
Rather, equitable compensation should restore losses that flow from the breach itself and not losses that would have arisen in any event.
This approach aligns equitable compensation with principles of causation while preserving the distinctive objectives of trust law.
Example Applying the “But For” Test
Suppose a trustee is instructed not to release £500,000 from a trust account until certain legal documents have been signed.
The trustee ignores the instructions and releases the money immediately. The recipient absconds with the funds and disappears.
Had the trustee waited until the documents were signed, the money would have remained protected and the loss would not have occurred.
Applying the “but for” test, the trustee’s breach clearly caused the loss. The beneficiaries would therefore be entitled to equitable compensation.
Example Where Causation Is Absent
Suppose a trustee releases funds one day earlier than authorised, thereby committing a technical breach of trust.
The transaction subsequently completes successfully exactly as intended. Several years later, an economic downturn causes the investment to fail.
The beneficiaries argue that the trustee should compensate them because a breach of trust occurred.
Although the trustee acted improperly, the loss was caused by market conditions rather than the premature release of funds. The same loss would have occurred even if the trustee had complied fully with their obligations.
Applying the “but for” test, causation is not established and compensation would not be awarded.
AIB Group (UK) Plc v Mark Redler & Co Solicitors [2015] AC 1503
The Supreme Court reaffirmed the principles established in Target Holdings in AIB Group (UK) Plc v Mark Redler & Co Solicitors.
The case involved solicitors acting as trustees who improperly distributed mortgage funds during a refinancing transaction. The claimant argued that the solicitors should be responsible for all losses associated with the transaction.
The Supreme Court rejected this argument and confirmed that equitable compensation must be linked to losses actually caused by the breach.
Lord Toulson stated that, absent fraud, it would be wrong to impose liability for losses that would have been suffered even if the trustee had performed their duties correctly.
He emphasised that it would be a backward step to depart from Lord Browne-Wilkinson’s analysis in Target Holdings.
The decision therefore confirmed that the “but for” test remains the governing principle in modern breach of trust claims.
The Position in Cases Involving Fraud
The courts have indicated that different considerations may arise where fraud is involved.
Fraudulent trustees are treated particularly harshly by equity because of the fundamental fiduciary obligations owed to beneficiaries.
However, even in cases involving dishonesty, the courts still require a connection between the wrongful conduct and the loss claimed. The primary difference is that equitable remedies are often interpreted more strictly against fraudulent trustees.
Relationship with Equitable Compensation
Causation is central to the assessment of equitable compensation.
The purpose of equitable compensation is to restore the trust fund to the position it would have occupied had the breach not occurred.
The court therefore compares:
- The actual position of the trust after the breach; and
- The position the trust would have occupied if the trustee had acted properly.
Accordingly, even where a trustee has clearly acted improperly, compensation will not be awarded if the claimant cannot demonstrate that the breach caused the loss.
Comprehensive Case Study
Facts
Daniel acts as trustee of a family trust.
The trust deed requires him to hold £1 million until all conditions of a property transaction have been satisfied. Instead, Daniel releases the funds one week early.
The transaction later completes exactly as anticipated. Two years afterwards, the property market collapses and the investment loses £600,000.
The beneficiaries bring proceedings against Daniel for breach of trust.
Analysis
Daniel clearly committed a breach of trust by releasing the money prematurely.
However, the court must determine whether the breach caused the £600,000 loss.
The evidence shows that the transaction would have completed regardless of the timing of the payment and that the subsequent loss resulted from a downturn in the property market.
Applying the “but for” test established in Target Holdings and reaffirmed in AIB Group, the beneficiaries cannot show that the loss would have been avoided had Daniel complied with his duties.
Outcome
Although Daniel committed a breach of trust, he will not be liable for the £600,000 loss because the breach did not cause the loss suffered by the trust.
Conclusion
Causation is an essential element of trustee liability. Beneficiaries must establish not only that a breach of trust occurred but also that the breach caused the loss for which compensation is sought. The leading decisions in Target Holdings Ltd v Redferns and AIB Group (UK) Plc v Mark Redler & Co Solicitors confirm that the appropriate approach is the “but for” test. A trustee will generally be liable only where the loss would not have occurred but for the breach. Consequently, equitable compensation seeks to restore losses actually caused by the trustee’s misconduct rather than providing recovery for losses that would have arisen regardless of the breach.
References
Target Holdings Ltd v Redferns [1996] AC 421.
AIB Group (UK) Plc v Mark Redler & Co Solicitors [2015] AC 1503.
Nestle v National Westminster Bank Plc [1993] 1 WLR 1260.
Bartlett v Barclays Bank Trust Co Ltd (No 2) [1980] Ch 515.
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, Oxford University Press 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, Oxford University Press 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
- Published on
SQE – Equity and Trust – Exclusion from Liability Clauses
Introduction
A common feature of modern trust instruments is the inclusion of an exclusion from liability clause, sometimes referred to as an exemption clause. Such clauses are designed to protect trustees from personal liability arising from mistakes made during the administration of the trust. They are particularly significant because trustees frequently exercise wide discretionary powers and must make difficult judgments regarding investments, distributions, and trust management.
Exclusion clauses are especially important in the context of professional trustees, who often insist upon their inclusion before accepting appointment. Although these clauses may substantially reduce a trustee’s exposure to liability, they are not unlimited. Equity imposes important restrictions on the extent to which trustees can exempt themselves from responsibility.
The modern law concerning exclusion clauses is largely derived from the Court of Appeal’s decision in Armitage v Nurse, which remains the leading authority on the subject.
The Nature and Purpose of Exclusion Clauses
An exclusion clause is a provision contained within a trust instrument that seeks to excuse trustees from liability for certain breaches of trust.
The primary purpose of such clauses is to protect trustees from claims arising out of honest mistakes, errors of judgment, negligence, or failures in administration. Trust administration often involves complex decisions, particularly in relation to investments and asset management. Consequently, trustees may be reluctant to accept office unless afforded some protection from personal liability.
Professional trustees, such as solicitors, accountants, and trust corporations, frequently require exclusion clauses because of the increasing risk of litigation in modern trust administration.
Barnsley v Noble [2016] EWCA Civ 799
The existence and interpretation of exclusion clauses were considered by the Court of Appeal in Barnsley v Noble.
The case concerned a standard-form exemption clause contained within a will trust. The claimant argued that the clause should be interpreted narrowly and should not protect the trustees from liability.
The Court of Appeal rejected this argument and upheld the protection provided by the clause. The decision demonstrated the courts’ willingness to respect exclusion clauses where their wording is clear and where the trustees have acted honestly.
The case also illustrates the courts’ recognition that trustees, particularly non-professional trustees, should not automatically be exposed to personal liability for every mistake made during trust administration.
Armitage v Nurse [1998] Ch 241
The leading authority on trustee exclusion clauses is Armitage v Nurse.
In this case, the trust instrument contained a clause excluding liability for all breaches of trust except those involving actual fraud.
The claimant argued that such a broad clause was invalid because it undermined the fundamental obligations owed by trustees to beneficiaries.
The Court of Appeal rejected this argument.
Millett LJ held that trustees could validly exclude liability for negligence, gross negligence, carelessness, imprudence, and even deliberate breaches of trust, provided that the trustees acted honestly and in good faith.
The only liability that could not be excluded was liability arising from fraud.
The Fraud Exception
The most important limitation on exclusion clauses is that they cannot exclude liability for fraud or dishonesty.
A trustee who acts dishonestly cannot rely upon an exemption clause to escape liability.
Millett LJ explained that a trustee commits fraud when they deliberately act dishonestly or intentionally disregard the interests of beneficiaries for improper purposes.
Accordingly, exclusion clauses cannot protect trustees who knowingly misuse trust property, intentionally deceive beneficiaries, or act with fraudulent intent.
This principle preserves what the courts regard as the irreducible core of trustee obligations.
Honest but Deliberate Breaches
One of the most controversial aspects of Armitage v Nurse is its treatment of deliberate breaches of trust.
The Court of Appeal held that a trustee may still rely upon an exclusion clause even where the trustee intentionally commits a breach of trust, provided the trustee honestly believes that their actions are in the best interests of the beneficiaries.
Therefore, a deliberate breach is not necessarily fraudulent.
The distinction lies in the trustee’s state of mind. Honest mistakes, however serious, may be protected. Dishonest conduct may not.
This approach significantly broadens the protection available to trustees.
Example – Exclusion Clause Successfully Protects a Trustee
Suppose a trustee decides to retain a risky investment despite receiving advice suggesting that the investment should be sold.
The trustee genuinely believes that holding the investment will ultimately benefit the beneficiaries.
The investment later collapses, causing substantial losses.
If the trust instrument contains a suitably drafted exclusion clause, the trustee may avoid liability because the decision, although imprudent, was made honestly and in good faith.
Example – Exclusion Clause Does Not Apply
Suppose a trustee transfers trust funds into a personal bank account and conceals the transaction from the beneficiaries.
The trustee knows that the transfer is unauthorised and intends to benefit personally.
Even if the trust instrument contains a broad exclusion clause, the trustee will not be protected because the conduct amounts to fraud and dishonesty.
The beneficiaries may bring claims for equitable compensation, tracing, constructive trusts, and account of profits.
Interaction with the Trustee Act 2000
The Trustee Act 2000 introduced a statutory duty of care that applies to trustees when exercising various powers and functions.
Section 1 requires trustees to exercise such care and skill as is reasonable in the circumstances, taking account of any special knowledge or expertise possessed by the trustee.
However, the practical significance of this duty may be substantially reduced where a trust instrument contains an effective exclusion clause.
As a result, trustees may be exempt from liability for conduct that would otherwise constitute a breach of the statutory duty of care.
This has generated significant debate regarding the effectiveness of statutory protections for beneficiaries.
Academic Criticism
Exclusion clauses have attracted considerable criticism from academics and practitioners.
Critics argue that allowing trustees to exclude liability for negligence undermines beneficiary protection and weakens trustee accountability.
Some commentators contend that broad exemption clauses effectively permit trustees to escape responsibility for conduct that would ordinarily amount to serious breaches of trust.
Others argue that beneficiaries are often unaware of such clauses and therefore receive less protection than they might reasonably expect.
The criticism is particularly strong where professional trustees seek protection from liability despite charging fees for their services.
The Law Commission’s Position
The Law Commission has considered trustee exemption clauses on several occasions, both before and after the enactment of the Trustee Act 2000.
Despite recognising concerns regarding their use, the Law Commission ultimately declined to recommend legislative restrictions.
The Commission accepted that professional trustees may be unwilling to accept appointments if exposed to unlimited personal liability.
Instead, the Law Commission favoured greater transparency, recommending that settlors should be made fully aware of the implications of exemption clauses before creating trusts.
No statutory reforms were introduced, and the Trustee Act 2000 remains largely silent on the issue.
Professional Trustees and Modern Practice
In modern practice, exclusion clauses are extremely common.
Professional trustees generally regard them as essential risk-management tools.
The increasing complexity of trust administration, together with the growth of litigation against trustees, has encouraged professionals to insist upon contractual protection before accepting appointment.
This does not necessarily indicate an intention to act carelessly. Rather, professional trustees recognise that many decisions involve subjective judgments and that courts may later disagree with decisions that appeared reasonable at the time.
Exclusion clauses therefore provide a degree of certainty and protection against hindsight-based litigation.
Comprehensive Case Study
Facts
A solicitor-trustee administers a family trust containing £10 million in investments.
The trust deed contains a clause excluding liability for all breaches of trust except fraud.
The trustee decides to retain a large holding in a technology company despite warnings from financial advisers that the shares are highly volatile.
The trustee genuinely believes the investment will produce substantial long-term gains.
The company’s value subsequently collapses, causing losses of £4 million.
The beneficiaries bring proceedings alleging negligence and breach of trust.
Analysis
The trustee may have acted imprudently and may have failed to satisfy the statutory duty of care under section 1 of the Trustee Act 2000.
However, the exclusion clause expressly protects the trustee from liability for negligent breaches of trust.
There is no evidence that the trustee acted dishonestly or fraudulently.
The trustee genuinely believed that retaining the investment was in the beneficiaries’ interests.
Applying Armitage v Nurse, the exclusion clause is likely to protect the trustee from liability.
Outcome
The beneficiaries are unlikely to recover compensation because the exclusion clause effectively excludes liability for negligence and poor judgment, provided that the trustee acted honestly and in good faith.
Conclusion
Exclusion clauses represent one of the most significant protections available to trustees. Modern trust law permits trustees to exclude liability for negligence, carelessness, imprudence, and even deliberate breaches of trust committed honestly and in good faith. The leading authority of Armitage v Nurse confirms that the only absolute limitation is fraud or dishonesty. While these clauses remain controversial because they reduce beneficiary protection, they continue to play a central role in trust administration, particularly in the context of professional trustees. Despite academic criticism and Law Commission scrutiny, English law continues to uphold broad exclusion clauses, reflecting a balance between trustee accountability and the practical realities of modern trust management.
References
Armitage v Nurse [1998] Ch 241.
Barnsley v Noble [2016] EWCA Civ 799.
Trustee Act 2000, s 1.
Law Commission, Trustee Exemption Clauses (Law Com No 301, 2006).
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, Oxford University Press 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, Oxford University Press 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
Introduction
A common feature of modern trust instruments is the inclusion of an exclusion from liability clause, sometimes referred to as an exemption clause. Such clauses are designed to protect trustees from personal liability arising from mistakes made during the administration of the trust. They are particularly significant because trustees frequently exercise wide discretionary powers and must make difficult judgments regarding investments, distributions, and trust management.
Exclusion clauses are especially important in the context of professional trustees, who often insist upon their inclusion before accepting appointment. Although these clauses may substantially reduce a trustee’s exposure to liability, they are not unlimited. Equity imposes important restrictions on the extent to which trustees can exempt themselves from responsibility.
The modern law concerning exclusion clauses is largely derived from the Court of Appeal’s decision in Armitage v Nurse, which remains the leading authority on the subject.
The Nature and Purpose of Exclusion Clauses
An exclusion clause is a provision contained within a trust instrument that seeks to excuse trustees from liability for certain breaches of trust.
The primary purpose of such clauses is to protect trustees from claims arising out of honest mistakes, errors of judgment, negligence, or failures in administration. Trust administration often involves complex decisions, particularly in relation to investments and asset management. Consequently, trustees may be reluctant to accept office unless afforded some protection from personal liability.
Professional trustees, such as solicitors, accountants, and trust corporations, frequently require exclusion clauses because of the increasing risk of litigation in modern trust administration.
Barnsley v Noble [2016] EWCA Civ 799
The existence and interpretation of exclusion clauses were considered by the Court of Appeal in Barnsley v Noble.
The case concerned a standard-form exemption clause contained within a will trust. The claimant argued that the clause should be interpreted narrowly and should not protect the trustees from liability.
The Court of Appeal rejected this argument and upheld the protection provided by the clause. The decision demonstrated the courts’ willingness to respect exclusion clauses where their wording is clear and where the trustees have acted honestly.
The case also illustrates the courts’ recognition that trustees, particularly non-professional trustees, should not automatically be exposed to personal liability for every mistake made during trust administration.
Armitage v Nurse [1998] Ch 241
The leading authority on trustee exclusion clauses is Armitage v Nurse.
In this case, the trust instrument contained a clause excluding liability for all breaches of trust except those involving actual fraud.
The claimant argued that such a broad clause was invalid because it undermined the fundamental obligations owed by trustees to beneficiaries.
The Court of Appeal rejected this argument.
Millett LJ held that trustees could validly exclude liability for negligence, gross negligence, carelessness, imprudence, and even deliberate breaches of trust, provided that the trustees acted honestly and in good faith.
The only liability that could not be excluded was liability arising from fraud.
The Fraud Exception
The most important limitation on exclusion clauses is that they cannot exclude liability for fraud or dishonesty.
A trustee who acts dishonestly cannot rely upon an exemption clause to escape liability.
Millett LJ explained that a trustee commits fraud when they deliberately act dishonestly or intentionally disregard the interests of beneficiaries for improper purposes.
Accordingly, exclusion clauses cannot protect trustees who knowingly misuse trust property, intentionally deceive beneficiaries, or act with fraudulent intent.
This principle preserves what the courts regard as the irreducible core of trustee obligations.
Honest but Deliberate Breaches
One of the most controversial aspects of Armitage v Nurse is its treatment of deliberate breaches of trust.
The Court of Appeal held that a trustee may still rely upon an exclusion clause even where the trustee intentionally commits a breach of trust, provided the trustee honestly believes that their actions are in the best interests of the beneficiaries.
Therefore, a deliberate breach is not necessarily fraudulent.
The distinction lies in the trustee’s state of mind. Honest mistakes, however serious, may be protected. Dishonest conduct may not.
This approach significantly broadens the protection available to trustees.
Example – Exclusion Clause Successfully Protects a Trustee
Suppose a trustee decides to retain a risky investment despite receiving advice suggesting that the investment should be sold.
The trustee genuinely believes that holding the investment will ultimately benefit the beneficiaries.
The investment later collapses, causing substantial losses.
If the trust instrument contains a suitably drafted exclusion clause, the trustee may avoid liability because the decision, although imprudent, was made honestly and in good faith.
Example – Exclusion Clause Does Not Apply
Suppose a trustee transfers trust funds into a personal bank account and conceals the transaction from the beneficiaries.
The trustee knows that the transfer is unauthorised and intends to benefit personally.
Even if the trust instrument contains a broad exclusion clause, the trustee will not be protected because the conduct amounts to fraud and dishonesty.
The beneficiaries may bring claims for equitable compensation, tracing, constructive trusts, and account of profits.
Interaction with the Trustee Act 2000
The Trustee Act 2000 introduced a statutory duty of care that applies to trustees when exercising various powers and functions.
Section 1 requires trustees to exercise such care and skill as is reasonable in the circumstances, taking account of any special knowledge or expertise possessed by the trustee.
However, the practical significance of this duty may be substantially reduced where a trust instrument contains an effective exclusion clause.
As a result, trustees may be exempt from liability for conduct that would otherwise constitute a breach of the statutory duty of care.
This has generated significant debate regarding the effectiveness of statutory protections for beneficiaries.
Academic Criticism
Exclusion clauses have attracted considerable criticism from academics and practitioners.
Critics argue that allowing trustees to exclude liability for negligence undermines beneficiary protection and weakens trustee accountability.
Some commentators contend that broad exemption clauses effectively permit trustees to escape responsibility for conduct that would ordinarily amount to serious breaches of trust.
Others argue that beneficiaries are often unaware of such clauses and therefore receive less protection than they might reasonably expect.
The criticism is particularly strong where professional trustees seek protection from liability despite charging fees for their services.
The Law Commission’s Position
The Law Commission has considered trustee exemption clauses on several occasions, both before and after the enactment of the Trustee Act 2000.
Despite recognising concerns regarding their use, the Law Commission ultimately declined to recommend legislative restrictions.
The Commission accepted that professional trustees may be unwilling to accept appointments if exposed to unlimited personal liability.
Instead, the Law Commission favoured greater transparency, recommending that settlors should be made fully aware of the implications of exemption clauses before creating trusts.
No statutory reforms were introduced, and the Trustee Act 2000 remains largely silent on the issue.
Professional Trustees and Modern Practice
In modern practice, exclusion clauses are extremely common.
Professional trustees generally regard them as essential risk-management tools.
The increasing complexity of trust administration, together with the growth of litigation against trustees, has encouraged professionals to insist upon contractual protection before accepting appointment.
This does not necessarily indicate an intention to act carelessly. Rather, professional trustees recognise that many decisions involve subjective judgments and that courts may later disagree with decisions that appeared reasonable at the time.
Exclusion clauses therefore provide a degree of certainty and protection against hindsight-based litigation.
Comprehensive Case Study
Facts
A solicitor-trustee administers a family trust containing £10 million in investments.
The trust deed contains a clause excluding liability for all breaches of trust except fraud.
The trustee decides to retain a large holding in a technology company despite warnings from financial advisers that the shares are highly volatile.
The trustee genuinely believes the investment will produce substantial long-term gains.
The company’s value subsequently collapses, causing losses of £4 million.
The beneficiaries bring proceedings alleging negligence and breach of trust.
Analysis
The trustee may have acted imprudently and may have failed to satisfy the statutory duty of care under section 1 of the Trustee Act 2000.
However, the exclusion clause expressly protects the trustee from liability for negligent breaches of trust.
There is no evidence that the trustee acted dishonestly or fraudulently.
The trustee genuinely believed that retaining the investment was in the beneficiaries’ interests.
Applying Armitage v Nurse, the exclusion clause is likely to protect the trustee from liability.
Outcome
The beneficiaries are unlikely to recover compensation because the exclusion clause effectively excludes liability for negligence and poor judgment, provided that the trustee acted honestly and in good faith.
Conclusion
Exclusion clauses represent one of the most significant protections available to trustees. Modern trust law permits trustees to exclude liability for negligence, carelessness, imprudence, and even deliberate breaches of trust committed honestly and in good faith. The leading authority of Armitage v Nurse confirms that the only absolute limitation is fraud or dishonesty. While these clauses remain controversial because they reduce beneficiary protection, they continue to play a central role in trust administration, particularly in the context of professional trustees. Despite academic criticism and Law Commission scrutiny, English law continues to uphold broad exclusion clauses, reflecting a balance between trustee accountability and the practical realities of modern trust management.
References
Armitage v Nurse [1998] Ch 241.
Barnsley v Noble [2016] EWCA Civ 799.
Trustee Act 2000, s 1.
Law Commission, Trustee Exemption Clauses (Law Com No 301, 2006).
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, Oxford University Press 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, Oxford University Press 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
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KembaraXtra – Legal Terms – Resolution
A resolution is a formal decision made by a meeting or assembly. In company law, resolutions are decisions reached by members or shareholders during company meetings. Such decisions may concern management, governance, financial matters, or structural changes within the company. Resolutions provide the legal mechanism through which collective decisions are expressed. They are fundamental to corporate administration.
Different types of resolutions exist in company law. An ordinary resolution is typically passed by a simple majority of votes cast. A special resolution usually requires a higher majority, commonly at least 75 percent of votes cast. Certain important corporate actions, such as altering articles of association or reducing share capital, require special resolutions. The law therefore attaches different voting thresholds to different decisions.
Resolutions may be passed at meetings or, in some cases, through written procedures. Modern company legislation often allows written resolutions to be circulated among members without the need for a physical meeting. This can increase efficiency and reduce administrative costs. However, statutory requirements governing notice, voting rights, and record-keeping must still be observed. Proper procedure is essential to validity.
Outside company law, the term resolution also applies to decisions made by other bodies and organizations. Examples include resolutions adopted by trade unions, professional associations, local councils, and international organizations. Such resolutions may express policy positions, authorize action, or record collective decisions. Their legal effect depends upon the powers and constitutional framework of the body concerned. Some resolutions are legally binding, while others are merely advisory.
The concept of resolution reflects the importance of collective decision-making in legal and organizational structures. It provides a formal method for expressing the will of a group. Properly passed resolutions can create legal rights, obligations, and organizational changes. They are therefore a central feature of governance and administration. Understanding resolutions is essential for understanding how institutions function legally.
A resolution is a formal decision made by a meeting or assembly. In company law, resolutions are decisions reached by members or shareholders during company meetings. Such decisions may concern management, governance, financial matters, or structural changes within the company. Resolutions provide the legal mechanism through which collective decisions are expressed. They are fundamental to corporate administration.
Different types of resolutions exist in company law. An ordinary resolution is typically passed by a simple majority of votes cast. A special resolution usually requires a higher majority, commonly at least 75 percent of votes cast. Certain important corporate actions, such as altering articles of association or reducing share capital, require special resolutions. The law therefore attaches different voting thresholds to different decisions.
Resolutions may be passed at meetings or, in some cases, through written procedures. Modern company legislation often allows written resolutions to be circulated among members without the need for a physical meeting. This can increase efficiency and reduce administrative costs. However, statutory requirements governing notice, voting rights, and record-keeping must still be observed. Proper procedure is essential to validity.
Outside company law, the term resolution also applies to decisions made by other bodies and organizations. Examples include resolutions adopted by trade unions, professional associations, local councils, and international organizations. Such resolutions may express policy positions, authorize action, or record collective decisions. Their legal effect depends upon the powers and constitutional framework of the body concerned. Some resolutions are legally binding, while others are merely advisory.
The concept of resolution reflects the importance of collective decision-making in legal and organizational structures. It provides a formal method for expressing the will of a group. Properly passed resolutions can create legal rights, obligations, and organizational changes. They are therefore a central feature of governance and administration. Understanding resolutions is essential for understanding how institutions function legally.
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KembaraXtra – Legal Terms – Respondent
A respondent is the party who responds to an application, appeal, petition, or other legal proceeding. The term is commonly used in appellate courts and in proceedings commenced by application rather than by traditional claims. The respondent occupies a position similar to that of a defendant in ordinary civil litigation. However, the terminology reflects the procedural nature of the proceedings. The respondent’s role is to answer and oppose the claims advanced by another party.
In appellate proceedings, the respondent is usually the party who succeeded in the lower court. The appellant seeks to overturn or modify the earlier decision, while the respondent seeks to uphold it. The respondent may submit legal arguments, evidence, and authorities supporting the original judgment. Their objective is to persuade the appellate court that the lower court’s decision was correct. The respondent therefore plays a crucial role in the appeal process.
In family law, immigration law, administrative law, and judicial review proceedings, the term respondent is frequently used. For example, in a judicial review application, the respondent is often the public authority whose decision is being challenged. In family proceedings, the respondent may be the person against whom an application is made. The designation depends on procedural rules rather than substantive rights. It simply identifies the party required to respond.
Respondents enjoy procedural rights equivalent to those available to other litigants. They are entitled to receive notice of proceedings, present evidence, make legal submissions, and challenge the applicant’s case. Courts ensure that respondents are given a fair opportunity to be heard. This reflects the broader principles of natural justice and procedural fairness. A decision reached without hearing the respondent may be vulnerable to challenge.
The concept of the respondent is essential to adversarial legal systems. Legal disputes generally require both a party advancing a claim and a party responding to it. The respondent ensures that competing arguments are properly presented before the court. This assists judges in reaching informed and balanced decisions. Consequently, the respondent occupies a central position in many forms of legal proceedings.
A respondent is the party who responds to an application, appeal, petition, or other legal proceeding. The term is commonly used in appellate courts and in proceedings commenced by application rather than by traditional claims. The respondent occupies a position similar to that of a defendant in ordinary civil litigation. However, the terminology reflects the procedural nature of the proceedings. The respondent’s role is to answer and oppose the claims advanced by another party.
In appellate proceedings, the respondent is usually the party who succeeded in the lower court. The appellant seeks to overturn or modify the earlier decision, while the respondent seeks to uphold it. The respondent may submit legal arguments, evidence, and authorities supporting the original judgment. Their objective is to persuade the appellate court that the lower court’s decision was correct. The respondent therefore plays a crucial role in the appeal process.
In family law, immigration law, administrative law, and judicial review proceedings, the term respondent is frequently used. For example, in a judicial review application, the respondent is often the public authority whose decision is being challenged. In family proceedings, the respondent may be the person against whom an application is made. The designation depends on procedural rules rather than substantive rights. It simply identifies the party required to respond.
Respondents enjoy procedural rights equivalent to those available to other litigants. They are entitled to receive notice of proceedings, present evidence, make legal submissions, and challenge the applicant’s case. Courts ensure that respondents are given a fair opportunity to be heard. This reflects the broader principles of natural justice and procedural fairness. A decision reached without hearing the respondent may be vulnerable to challenge.
The concept of the respondent is essential to adversarial legal systems. Legal disputes generally require both a party advancing a claim and a party responding to it. The respondent ensures that competing arguments are properly presented before the court. This assists judges in reaching informed and balanced decisions. Consequently, the respondent occupies a central position in many forms of legal proceedings.
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KembaraXtra - Legal Terms - Responsible Clinician
A responsible clinician is a professional appointed under the Mental Health Act 1983. This person has overall responsibility for a patient receiving compulsory mental health treatment. The role applies to detained patients and those subject to Community Treatment Orders. The responsible clinician coordinates treatment decisions. The position carries significant legal authority.
The responsible clinician is usually a psychiatrist, although other approved professionals may hold the role. The individual must satisfy statutory requirements. They must possess appropriate expertise and approval. Their responsibilities include assessment and treatment planning. They also oversee the patient’s progress.
A responsible clinician has authority to make decisions regarding detention and discharge. These decisions affect the patient’s liberty and healthcare. The clinician must act in accordance with legal safeguards. The patient’s rights must always be respected. Professional judgment plays a central role in decision-making.
The role differs from that of an approved clinician. An approved clinician is qualified and authorized under the legislation. A responsible clinician is the approved clinician assigned to a specific patient. Not every approved clinician is necessarily a responsible clinician at a given time. The distinction is important in mental health law.
The position reflects the need for accountability in mental health care. A single professional is responsible for coordinating treatment and legal decisions. This promotes consistency in patient management. It also ensures compliance with statutory requirements. The responsible clinician is therefore central to the operation of the Mental Health Act.
A responsible clinician is a professional appointed under the Mental Health Act 1983. This person has overall responsibility for a patient receiving compulsory mental health treatment. The role applies to detained patients and those subject to Community Treatment Orders. The responsible clinician coordinates treatment decisions. The position carries significant legal authority.
The responsible clinician is usually a psychiatrist, although other approved professionals may hold the role. The individual must satisfy statutory requirements. They must possess appropriate expertise and approval. Their responsibilities include assessment and treatment planning. They also oversee the patient’s progress.
A responsible clinician has authority to make decisions regarding detention and discharge. These decisions affect the patient’s liberty and healthcare. The clinician must act in accordance with legal safeguards. The patient’s rights must always be respected. Professional judgment plays a central role in decision-making.
The role differs from that of an approved clinician. An approved clinician is qualified and authorized under the legislation. A responsible clinician is the approved clinician assigned to a specific patient. Not every approved clinician is necessarily a responsible clinician at a given time. The distinction is important in mental health law.
The position reflects the need for accountability in mental health care. A single professional is responsible for coordinating treatment and legal decisions. This promotes consistency in patient management. It also ensures compliance with statutory requirements. The responsible clinician is therefore central to the operation of the Mental Health Act.