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SQE – Equity and Trust – Liability for the Acts of Agents
Introduction
Trustees are generally expected to administer trusts personally and to exercise their powers and duties in accordance with the trust instrument and their fiduciary obligations. However, modern trust administration often requires specialist expertise in areas such as investment management, accounting, taxation, and property management. As a result, trustees frequently delegate certain functions to professional agents.
The delegation of responsibilities raises an important legal issue: if an agent commits an error or causes loss to the trust fund, who bears responsibility? The answer depends upon the statutory basis of the delegation and whether the trustees have complied with their legal duties when appointing and supervising the agent.
The General Principle
The appointment of an agent does not automatically relieve trustees of their responsibilities. Trustees remain fiduciaries and continue to owe duties to beneficiaries. They must therefore exercise reasonable care when selecting agents, provide appropriate instructions, and supervise the performance of delegated functions.
Whether trustees are personally liable for an agent’s acts depends upon the type of delegation used and the extent to which trustees have complied with their statutory obligations.
Individual Delegation Under Section 25 Trustee Act 1925
Section 25 of the Trustee Act 1925 permits a trustee to delegate powers through a power of attorney. This form of delegation is usually temporary and enables another person to perform trust functions on behalf of the trustee.
A significant feature of section 25 is that it imposes strict liability upon the appointing trustee. Section 25(7) provides that the trustee remains responsible for the acts and defaults of the attorney. Consequently, even where the trustee has acted honestly and carefully in making the appointment, liability may still arise if the attorney causes loss to the trust.
This strict approach explains why section 25 is relatively uncommon in modern trust administration.
Example of Individual Delegation
Suppose Sarah is the trustee of a family trust worth £2 million. Before travelling overseas, she appoints her brother as attorney under section 25. During her absence, the attorney improperly withdraws £300,000 from the trust account and uses the money for personal purposes.
Although Sarah selected her brother carefully and had no reason to suspect wrongdoing, she may nevertheless be personally liable for the loss because section 25(7) imposes strict liability upon the appointing trustee.
Collective Delegation Under the Trustee Act 2000
The Trustee Act 2000 introduced a more flexible and commercially realistic approach to delegation. Section 11 allows trustees collectively to delegate a wide range of administrative and investment functions to professional agents.
This reflects the reality that modern trust administration often requires specialist knowledge that trustees themselves may not possess. Investment managers, solicitors, accountants, and surveyors are therefore commonly appointed to assist trustees in carrying out their duties.
Unlike section 25 of the Trustee Act 1925, delegation under the Trustee Act 2000 does not automatically result in trustee liability if the agent makes a mistake.
Liability Under Section 23 Trustee Act 2000
Section 23 of the Trustee Act 2000 provides that trustees will only be liable for the acts or defaults of an agent where they have failed to comply with their statutory obligations when selecting, instructing, or supervising that agent.
Consequently, trustees are not liable simply because an agent performs poorly or makes an incorrect decision. Liability arises only where the trustees themselves have failed to exercise reasonable care.
This represents a significant departure from the strict liability approach adopted under section 25 of the Trustee Act 1925.
The Statutory Duty of Care
When appointing and supervising agents, trustees must comply with the statutory duty of care contained in section 1 of the Trustee Act 2000.
The duty requires trustees to exercise such care and skill as is reasonable in the circumstances, taking into account any special knowledge or expertise that they possess. Professional trustees are therefore expected to meet a higher standard than ordinary lay trustees.
Reasonable care may require trustees to investigate an agent’s qualifications, experience, professional reputation, and suitability before making an appointment.
The Requirement to Provide a Policy Statement
Section 15 of the Trustee Act 2000 requires trustees to provide agents with a written policy statement.
The policy statement establishes the framework within which the agent is expected to operate. It may specify investment objectives, acceptable levels of risk, ethical considerations, or restrictions on particular transactions.
This requirement ensures that agents understand the trustees’ expectations and act consistently with the interests of the beneficiaries.
The Duty to Keep the Agent Under Review
Trustees must not simply appoint an agent and then ignore their activities. Section 22 of the Trustee Act 2000 requires trustees to keep the agent’s performance under regular review.
This involves monitoring reports, assessing investment performance, reviewing decisions, and determining whether the delegation remains appropriate.
Failure to supervise an agent adequately may expose trustees to personal liability, even where the original appointment was reasonable.
Example of Proper Delegation
Assume that trustees appoint a qualified investment manager to manage a trust portfolio worth £10 million. Before making the appointment, they investigate the manager’s qualifications, issue a detailed policy statement, and regularly review performance reports.
Despite these precautions, the investment manager makes a series of poor investment decisions that result in losses of £1 million.
In these circumstances, the trustees are unlikely to be personally liable. They have complied with their statutory obligations and exercised reasonable care throughout the delegation process. The loss arises from the agent’s mistakes rather than any breach by the trustees.
Example of Trustee Liability
Suppose instead that trustees appoint a friend with no investment experience to manage a trust fund worth £5 million. No due diligence is undertaken, no policy statement is issued, and the trustees fail to monitor the agent’s activities.
The agent subsequently loses £2 million through reckless investments.
In this situation, the trustees are likely to be personally liable because they have failed to comply with their statutory duties under sections 1, 15, and 22 of the Trustee Act 2000.
Indemnities Upon Retirement
When a trustee retires, they may seek an indemnity from the continuing trustees. An indemnity is a promise that the continuing trustees will assume responsibility for certain liabilities that may arise after retirement.
Such indemnities are particularly important where there is concern about future claims relating to the administration of the trust. However, negotiating indemnities can be difficult, especially where there may have been prior breaches of trust or uncertainty regarding potential liability.
Exclusion Clauses and Agent Liability
Trustees may also benefit indirectly from exclusion clauses contained within the trust instrument. Where a trust deed excludes liability for negligence or certain breaches of trust, the clause may protect trustees from liability arising from an agent’s mistakes, provided that the trustees themselves have complied with their statutory duties.
An exclusion clause does not automatically protect trustees from dishonesty, fraud, or breaches of core fiduciary obligations, but it may provide significant protection in relation to ordinary administrative errors.
Relationship with Remedies for Breach of Trust
Where trustees fail to comply with their duties regarding delegation, beneficiaries may pursue a range of remedies. These include equitable compensation, restoration of trust property, tracing, constructive trusts, equitable liens, and interest on sums improperly administered.
Conversely, where trustees have exercised reasonable care and complied with the Trustee Act 2000, they will generally avoid personal liability even if the agent’s conduct causes substantial losses to the trust.
Conclusion
The law governing liability for the acts of agents seeks to balance the practical necessity of delegation with the need to protect beneficiaries. While section 25 of the Trustee Act 1925 imposes strict liability on trustees who delegate through powers of attorney, the Trustee Act 2000 adopts a more flexible approach that focuses on whether trustees have exercised reasonable care. Provided trustees comply with their duties when selecting, instructing, and supervising agents, they will generally not be liable for an agent’s mistakes. Modern trust law therefore recognises the importance of professional delegation while ensuring that trustees remain accountable for the proper administration of trust property.
References
Trustee Act 1925, s 25.
Trustee Act 2000, ss 1, 11, 15, 22 and 23.
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 are generally expected to administer trusts personally and to exercise their powers and duties in accordance with the trust instrument and their fiduciary obligations. However, modern trust administration often requires specialist expertise in areas such as investment management, accounting, taxation, and property management. As a result, trustees frequently delegate certain functions to professional agents.
The delegation of responsibilities raises an important legal issue: if an agent commits an error or causes loss to the trust fund, who bears responsibility? The answer depends upon the statutory basis of the delegation and whether the trustees have complied with their legal duties when appointing and supervising the agent.
The General Principle
The appointment of an agent does not automatically relieve trustees of their responsibilities. Trustees remain fiduciaries and continue to owe duties to beneficiaries. They must therefore exercise reasonable care when selecting agents, provide appropriate instructions, and supervise the performance of delegated functions.
Whether trustees are personally liable for an agent’s acts depends upon the type of delegation used and the extent to which trustees have complied with their statutory obligations.
Individual Delegation Under Section 25 Trustee Act 1925
Section 25 of the Trustee Act 1925 permits a trustee to delegate powers through a power of attorney. This form of delegation is usually temporary and enables another person to perform trust functions on behalf of the trustee.
A significant feature of section 25 is that it imposes strict liability upon the appointing trustee. Section 25(7) provides that the trustee remains responsible for the acts and defaults of the attorney. Consequently, even where the trustee has acted honestly and carefully in making the appointment, liability may still arise if the attorney causes loss to the trust.
This strict approach explains why section 25 is relatively uncommon in modern trust administration.
Example of Individual Delegation
Suppose Sarah is the trustee of a family trust worth £2 million. Before travelling overseas, she appoints her brother as attorney under section 25. During her absence, the attorney improperly withdraws £300,000 from the trust account and uses the money for personal purposes.
Although Sarah selected her brother carefully and had no reason to suspect wrongdoing, she may nevertheless be personally liable for the loss because section 25(7) imposes strict liability upon the appointing trustee.
Collective Delegation Under the Trustee Act 2000
The Trustee Act 2000 introduced a more flexible and commercially realistic approach to delegation. Section 11 allows trustees collectively to delegate a wide range of administrative and investment functions to professional agents.
This reflects the reality that modern trust administration often requires specialist knowledge that trustees themselves may not possess. Investment managers, solicitors, accountants, and surveyors are therefore commonly appointed to assist trustees in carrying out their duties.
Unlike section 25 of the Trustee Act 1925, delegation under the Trustee Act 2000 does not automatically result in trustee liability if the agent makes a mistake.
Liability Under Section 23 Trustee Act 2000
Section 23 of the Trustee Act 2000 provides that trustees will only be liable for the acts or defaults of an agent where they have failed to comply with their statutory obligations when selecting, instructing, or supervising that agent.
Consequently, trustees are not liable simply because an agent performs poorly or makes an incorrect decision. Liability arises only where the trustees themselves have failed to exercise reasonable care.
This represents a significant departure from the strict liability approach adopted under section 25 of the Trustee Act 1925.
The Statutory Duty of Care
When appointing and supervising agents, trustees must comply with the statutory duty of care contained in section 1 of the Trustee Act 2000.
The duty requires trustees to exercise such care and skill as is reasonable in the circumstances, taking into account any special knowledge or expertise that they possess. Professional trustees are therefore expected to meet a higher standard than ordinary lay trustees.
Reasonable care may require trustees to investigate an agent’s qualifications, experience, professional reputation, and suitability before making an appointment.
The Requirement to Provide a Policy Statement
Section 15 of the Trustee Act 2000 requires trustees to provide agents with a written policy statement.
The policy statement establishes the framework within which the agent is expected to operate. It may specify investment objectives, acceptable levels of risk, ethical considerations, or restrictions on particular transactions.
This requirement ensures that agents understand the trustees’ expectations and act consistently with the interests of the beneficiaries.
The Duty to Keep the Agent Under Review
Trustees must not simply appoint an agent and then ignore their activities. Section 22 of the Trustee Act 2000 requires trustees to keep the agent’s performance under regular review.
This involves monitoring reports, assessing investment performance, reviewing decisions, and determining whether the delegation remains appropriate.
Failure to supervise an agent adequately may expose trustees to personal liability, even where the original appointment was reasonable.
Example of Proper Delegation
Assume that trustees appoint a qualified investment manager to manage a trust portfolio worth £10 million. Before making the appointment, they investigate the manager’s qualifications, issue a detailed policy statement, and regularly review performance reports.
Despite these precautions, the investment manager makes a series of poor investment decisions that result in losses of £1 million.
In these circumstances, the trustees are unlikely to be personally liable. They have complied with their statutory obligations and exercised reasonable care throughout the delegation process. The loss arises from the agent’s mistakes rather than any breach by the trustees.
Example of Trustee Liability
Suppose instead that trustees appoint a friend with no investment experience to manage a trust fund worth £5 million. No due diligence is undertaken, no policy statement is issued, and the trustees fail to monitor the agent’s activities.
The agent subsequently loses £2 million through reckless investments.
In this situation, the trustees are likely to be personally liable because they have failed to comply with their statutory duties under sections 1, 15, and 22 of the Trustee Act 2000.
Indemnities Upon Retirement
When a trustee retires, they may seek an indemnity from the continuing trustees. An indemnity is a promise that the continuing trustees will assume responsibility for certain liabilities that may arise after retirement.
Such indemnities are particularly important where there is concern about future claims relating to the administration of the trust. However, negotiating indemnities can be difficult, especially where there may have been prior breaches of trust or uncertainty regarding potential liability.
Exclusion Clauses and Agent Liability
Trustees may also benefit indirectly from exclusion clauses contained within the trust instrument. Where a trust deed excludes liability for negligence or certain breaches of trust, the clause may protect trustees from liability arising from an agent’s mistakes, provided that the trustees themselves have complied with their statutory duties.
An exclusion clause does not automatically protect trustees from dishonesty, fraud, or breaches of core fiduciary obligations, but it may provide significant protection in relation to ordinary administrative errors.
Relationship with Remedies for Breach of Trust
Where trustees fail to comply with their duties regarding delegation, beneficiaries may pursue a range of remedies. These include equitable compensation, restoration of trust property, tracing, constructive trusts, equitable liens, and interest on sums improperly administered.
Conversely, where trustees have exercised reasonable care and complied with the Trustee Act 2000, they will generally avoid personal liability even if the agent’s conduct causes substantial losses to the trust.
Conclusion
The law governing liability for the acts of agents seeks to balance the practical necessity of delegation with the need to protect beneficiaries. While section 25 of the Trustee Act 1925 imposes strict liability on trustees who delegate through powers of attorney, the Trustee Act 2000 adopts a more flexible approach that focuses on whether trustees have exercised reasonable care. Provided trustees comply with their duties when selecting, instructing, and supervising agents, they will generally not be liable for an agent’s mistakes. Modern trust law therefore recognises the importance of professional delegation while ensuring that trustees remain accountable for the proper administration of trust property.
References
Trustee Act 1925, s 25.
Trustee Act 2000, ss 1, 11, 15, 22 and 23.
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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