- Published on
SQE – Equity and Trust – Exclusion Clauses
Introduction
An exclusion clause in a trust instrument is a clause designed to protect trustees from personal liability when carrying out their duties. These clauses are extremely common in modern trust deeds, especially where professional trustees such as solicitors, accountants, or trust corporations are involved.
The purpose of exclusion clauses is to reduce the risk faced by trustees when administering trusts, particularly given the increasingly complex nature of investment management and fiduciary obligations. However, exclusion clauses remain highly controversial because they may leave beneficiaries without effective remedies even where trustees have acted incompetently or negligently.
The law therefore attempts to balance:
Meaning of an Exclusion Clause
An exclusion clause is a provision in a trust deed that:
excludes or limits a trustee’s liability for certain breaches of trust.
The clause may protect trustees from liability arising from:
❌ fraud;
❌ dishonesty;
❌ or deliberate wrongdoing.
Armitage v Nurse
The leading authority is Armitage v Nurse.
Facts
The claimant alleged that trustees failed properly to supervise trust investments, resulting in significant financial losses.
The trust deed contained an exclusion clause protecting trustees from liability except for:
fraud.
Decision
The Court of Appeal upheld the exclusion clause.
The trustees were protected because the claim involved:
✅ negligence,
not fraud.
Millett LJ’s Principle
Millett LJ stated that trustees cannot exclude liability for:
❌ fraud or dishonesty.
However, liability for:
✅ negligence,
including possibly gross negligence,
may be excluded.
Importance of Armitage
The case confirmed that exclusion clauses may validly protect trustees from many forms of breach of trust, provided the trustees have not acted fraudulently or dishonestly.
Trustee’s Core Obligations
Despite exclusion clauses, trustees must still perform the:
✅ irreducible core obligations
of trusteeship.
A trust cannot exist if trustees are completely free from all accountability.
Example
Suppose Daniel is trustee of a family trust.
The trust deed states:
“The trustee shall not be liable for any loss unless caused by fraud.”
Daniel negligently invests:
£2 million
in extremely risky shares without obtaining professional advice.
The investment collapses and only:
£200,000
remains.
Result
Under Armitage v Nurse:
✅ the exclusion clause may protect Daniel,
because the conduct amounts to negligence rather than fraud.
Taylor v Midland Bank Trust Co Ltd (No 2)
The limitation upon exclusion clauses was reinforced in:
Taylor v Midland Bank Trust Co Ltd (No 2).
The court confirmed that exclusion clauses cannot exclude liability for:
❌ fraud;
❌ dishonesty;
❌ or breaches of core fiduciary obligations.
Bogg v Raper
The controversial nature of exclusion clauses appeared clearly in:
Bogg v Raper.
Facts
Trustees mismanaged trust assets so severely that losses reached nearly:
£8 million
within only two years.
The trust deed contained an exemption clause.
Issue
Did the solicitor drafting the trust deed owe duties regarding explanation of the exclusion clause?
Decision
The court held that the solicitor owed a duty to:
✅ explain the effect of the exclusion clause to the settlor.
However:
❌ independent legal advice was not required.
The trustees remained protected by the clause.
Importance of Bogg
The case demonstrates how exclusion clauses may shield trustees even after catastrophic financial losses.
It also confirms that trustees may insist upon exclusion clauses before agreeing to act.
Walker v Stones
A more claimant-friendly approach appeared in:
Walker v Stones.
Principle
The court interpreted dishonesty broadly and objectively.
For solicitor-trustees, it was insufficient merely to claim:
“I honestly believed I acted properly.”
The court considered whether no reasonable solicitor-trustee could honestly have believed the conduct benefited beneficiaries.
Result
The trustee could not rely upon the exclusion clause.
Importance
Walker v Stones reduced the ability of professional trustees to escape liability by claiming subjective honesty.
Barnsley v Noble
In Barnsley v Noble, the court adopted a more lenient approach toward:
✅ non-professional trustees.
Facts
The dispute concerned interpretation of a standard exemption clause in a will trust.
Decision
The Court of Appeal upheld the protection afforded by the clause.
Importance
The decision reflects judicial sympathy toward:
Trustee Act 2000
The Trustee Act 2000 did not abolish exclusion clauses.
In fact, Schedule 1 paragraph 7 confirms that the statutory duty of care under section 1 may be excluded where the trust instrument clearly indicates this intention.
Law Commission Debate
The Law Commission considered whether professional trustees should be prohibited from relying upon exclusion clauses.
However, concerns arose that:
Final Recommendation
The Law Commission ultimately recommended only that professional trustees should:
✅ take reasonable steps to ensure the settlor understands the exclusion clause.
This recommendation appeared in:
Law Commission Report No 301 (2006).
Policy Debate
Exclusion clauses remain controversial because they create tension between:
Protection of Trustees
Trust administration is complex and risky.
Trustees need protection to encourage people to act.
Protection of Beneficiaries
Beneficiaries may suffer severe losses without meaningful remedies if exclusion clauses are interpreted too broadly.
Professional v Lay Trustees
Courts often distinguish between:
Professional Trustees
Expected to possess:
Lay Trustees
Usually treated more sympathetically where they acted honestly and conscientiously.
Practical Protection for Trustees
Prudent trustees commonly seek:
Relationship With Remedies
Where exclusion clauses operate successfully:
❌ beneficiaries may lose personal remedies against trustees.
However, beneficiaries may still pursue:
Key SQE Principles
Exclusion clauses may validly exclude liability for:
✅ negligence;
✅ breaches of duty of care;
and possibly
✅ gross negligence.
However, they cannot exclude liability for:
❌ fraud;
❌ dishonesty;
❌ or core fiduciary obligations.
Courts apply stricter scrutiny to:
✅ professional trustees.
Conclusion
Exclusion clauses play a central role in modern trust administration by protecting trustees from personal liability arising from negligence and mistakes. While the courts generally permit broad exclusion clauses, they continue to prohibit protection against fraud, dishonesty, and breaches of core fiduciary obligations. The law seeks to balance fairness to beneficiaries with the practical need to encourage competent individuals and professionals to act as trustees. Modern cases demonstrate increasing judicial sensitivity toward the distinction between professional and lay trustees, while continuing debate reflects ongoing tension between trustee protection and beneficiary accountability.
Sources of Reference
Armitage v Nurse [1998] Ch 241 (CA).
Taylor v Midland Bank Trust Co Ltd (No 2) [2002] WTLR 95.
Walker v Stones [2001] QB 902 (CA).
Barnsley v Noble [2016] EWCA Civ 799.
Bogg v Raper (1998) The Times, 22 April.
Trustee Act 2000.
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, OUP 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, OUP 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
Introduction
An exclusion clause in a trust instrument is a clause designed to protect trustees from personal liability when carrying out their duties. These clauses are extremely common in modern trust deeds, especially where professional trustees such as solicitors, accountants, or trust corporations are involved.
The purpose of exclusion clauses is to reduce the risk faced by trustees when administering trusts, particularly given the increasingly complex nature of investment management and fiduciary obligations. However, exclusion clauses remain highly controversial because they may leave beneficiaries without effective remedies even where trustees have acted incompetently or negligently.
The law therefore attempts to balance:
- protection of trustees;
- commercial practicality;
- and protection of beneficiaries.
Meaning of an Exclusion Clause
An exclusion clause is a provision in a trust deed that:
excludes or limits a trustee’s liability for certain breaches of trust.
The clause may protect trustees from liability arising from:
- negligence;
- mistakes;
- poor investment decisions;
- or breaches of duty of care.
❌ fraud;
❌ dishonesty;
❌ or deliberate wrongdoing.
Armitage v Nurse
The leading authority is Armitage v Nurse.
Facts
The claimant alleged that trustees failed properly to supervise trust investments, resulting in significant financial losses.
The trust deed contained an exclusion clause protecting trustees from liability except for:
fraud.
Decision
The Court of Appeal upheld the exclusion clause.
The trustees were protected because the claim involved:
✅ negligence,
not fraud.
Millett LJ’s Principle
Millett LJ stated that trustees cannot exclude liability for:
❌ fraud or dishonesty.
However, liability for:
✅ negligence,
including possibly gross negligence,
may be excluded.
Importance of Armitage
The case confirmed that exclusion clauses may validly protect trustees from many forms of breach of trust, provided the trustees have not acted fraudulently or dishonestly.
Trustee’s Core Obligations
Despite exclusion clauses, trustees must still perform the:
✅ irreducible core obligations
of trusteeship.
A trust cannot exist if trustees are completely free from all accountability.
Example
Suppose Daniel is trustee of a family trust.
The trust deed states:
“The trustee shall not be liable for any loss unless caused by fraud.”
Daniel negligently invests:
£2 million
in extremely risky shares without obtaining professional advice.
The investment collapses and only:
£200,000
remains.
Result
Under Armitage v Nurse:
✅ the exclusion clause may protect Daniel,
because the conduct amounts to negligence rather than fraud.
Taylor v Midland Bank Trust Co Ltd (No 2)
The limitation upon exclusion clauses was reinforced in:
Taylor v Midland Bank Trust Co Ltd (No 2).
The court confirmed that exclusion clauses cannot exclude liability for:
❌ fraud;
❌ dishonesty;
❌ or breaches of core fiduciary obligations.
Bogg v Raper
The controversial nature of exclusion clauses appeared clearly in:
Bogg v Raper.
Facts
Trustees mismanaged trust assets so severely that losses reached nearly:
£8 million
within only two years.
The trust deed contained an exemption clause.
Issue
Did the solicitor drafting the trust deed owe duties regarding explanation of the exclusion clause?
Decision
The court held that the solicitor owed a duty to:
✅ explain the effect of the exclusion clause to the settlor.
However:
❌ independent legal advice was not required.
The trustees remained protected by the clause.
Importance of Bogg
The case demonstrates how exclusion clauses may shield trustees even after catastrophic financial losses.
It also confirms that trustees may insist upon exclusion clauses before agreeing to act.
Walker v Stones
A more claimant-friendly approach appeared in:
Walker v Stones.
Principle
The court interpreted dishonesty broadly and objectively.
For solicitor-trustees, it was insufficient merely to claim:
“I honestly believed I acted properly.”
The court considered whether no reasonable solicitor-trustee could honestly have believed the conduct benefited beneficiaries.
Result
The trustee could not rely upon the exclusion clause.
Importance
Walker v Stones reduced the ability of professional trustees to escape liability by claiming subjective honesty.
Barnsley v Noble
In Barnsley v Noble, the court adopted a more lenient approach toward:
✅ non-professional trustees.
Facts
The dispute concerned interpretation of a standard exemption clause in a will trust.
Decision
The Court of Appeal upheld the protection afforded by the clause.
Importance
The decision reflects judicial sympathy toward:
- lay trustees;
- honest trustees;
- and non-professional fiduciaries.
Trustee Act 2000
The Trustee Act 2000 did not abolish exclusion clauses.
In fact, Schedule 1 paragraph 7 confirms that the statutory duty of care under section 1 may be excluded where the trust instrument clearly indicates this intention.
Law Commission Debate
The Law Commission considered whether professional trustees should be prohibited from relying upon exclusion clauses.
However, concerns arose that:
- professionals would refuse to act as trustees;
- or trustee services would become prohibitively expensive.
Final Recommendation
The Law Commission ultimately recommended only that professional trustees should:
✅ take reasonable steps to ensure the settlor understands the exclusion clause.
This recommendation appeared in:
Law Commission Report No 301 (2006).
Policy Debate
Exclusion clauses remain controversial because they create tension between:
Protection of Trustees
Trust administration is complex and risky.
Trustees need protection to encourage people to act.
Protection of Beneficiaries
Beneficiaries may suffer severe losses without meaningful remedies if exclusion clauses are interpreted too broadly.
Professional v Lay Trustees
Courts often distinguish between:
- professional trustees;
and - ordinary lay trustees.
Professional Trustees
Expected to possess:
- expertise;
- experience;
- and higher standards of care.
Lay Trustees
Usually treated more sympathetically where they acted honestly and conscientiously.
Practical Protection for Trustees
Prudent trustees commonly seek:
- exclusion clauses;
- indemnity clauses;
- professional advice;
- insurance;
- and retirement before disputes arise.
Relationship With Remedies
Where exclusion clauses operate successfully:
❌ beneficiaries may lose personal remedies against trustees.
However, beneficiaries may still pursue:
- tracing;
- proprietary remedies;
- knowing recipients;
- dishonest assistants;
- or substitute assets,
Key SQE Principles
Exclusion clauses may validly exclude liability for:
✅ negligence;
✅ breaches of duty of care;
and possibly
✅ gross negligence.
However, they cannot exclude liability for:
❌ fraud;
❌ dishonesty;
❌ or core fiduciary obligations.
Courts apply stricter scrutiny to:
✅ professional trustees.
Conclusion
Exclusion clauses play a central role in modern trust administration by protecting trustees from personal liability arising from negligence and mistakes. While the courts generally permit broad exclusion clauses, they continue to prohibit protection against fraud, dishonesty, and breaches of core fiduciary obligations. The law seeks to balance fairness to beneficiaries with the practical need to encourage competent individuals and professionals to act as trustees. Modern cases demonstrate increasing judicial sensitivity toward the distinction between professional and lay trustees, while continuing debate reflects ongoing tension between trustee protection and beneficiary accountability.
Sources of Reference
Armitage v Nurse [1998] Ch 241 (CA).
Taylor v Midland Bank Trust Co Ltd (No 2) [2002] WTLR 95.
Walker v Stones [2001] QB 902 (CA).
Barnsley v Noble [2016] EWCA Civ 799.
Bogg v Raper (1998) The Times, 22 April.
Trustee Act 2000.
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, OUP 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, OUP 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
0 Comments