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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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