Professional Trustees: use of Trustee Exoneration Clauses
In a measure that will be welcomed by all professional trustees, and by their professional indemnity insurers, the Government has signalled approval of the continued use of this important layer of protection for trustees.
A trustee “exoneration” clause (or trustee “exemption clause”) seeks to limit or exclude a trustee’s liability for negligence and/or breach of trust. When a trust contains such a clause it controls the risk faced by trustees and keep costs down, encouraging prospective trustees to take office. However, these clauses have been under the spotlight for many years. They have attracted criticism for giving too much protection to trustees who are paid to perform their duties. The high watermark of this was reached when the Law Commission suggested that professional trustees should not be able to rely on any clause excluding liability for breach of trust arising from negligence (see Trustee Exemption Clauses (2003) Law Com Consultation Paper No 171).
The contrary argument is that restricting exoneration clauses in this way would lead to increased professional indemnity premiums, defensive trusteeship, an increase in speculative litigation for breach of trust, and even a possible reluctance to accept trusteeship.
Professional trustees will therefore breathe a collective sigh of relief at the news that the Government has accepted revised recommendations to maintain the use of these clauses, but with certain safeguards. Mr Jonathan Djanogly, the Parliamentary Under-Secretary of State for Justice, has announced acceptance of recommendations by the Law Commission (see Trustee Exemption Clauses (2006) Law Com Consultation Paper 301) that:
•Exoneration clauses may still be included in trust documents.
•Professional trustees, and those drafting the trust documents (who may be different), must, however, take reasonable steps to ensure that the settlor is aware of the meaning and effect of the clause.
•A breach of this rule, which will be adopted not by means of legislation, but by a practice-based approach by professional bodies, will leave the trustee open to disciplinary measures by the relevant governing body, and although the Law Commission believe that a breach of this rule in itself will not give rise to liability in damages, it remains to be seen how the courts would treat such a breach.
It is worth noting that a number of professional bodies, including the Solicitors Regulatory Authority and the Institute of Chartered Accountants for England & Wales, have already adopted some of these recommendations in codes of conduct for their relevant professionals. This reflects and complements the ethically-based principle that a professional must ensure that those with whom he deals are not misled.
In order to comply with his professional obligations, the professional trustee must therefore take “reasonable steps” to bring the exoneration clause to the attention of the settlor. This will clearly be a question of fact and degree in each case. In practice, however, the professional will be expected to:
•Retain a written record of all steps taken;
•For as long as the trust exists (and for a suitable period afterwards); and
•It may be appropriate in some circumstances to suggest that the settlor seeks independent advice.
It was never proposed that trustees of occupational pension schemes would be affected by the Law Commission's proposals. Now other trustees are in the same position. Accordingly, those contemplating a trusteeship, and those insurers offering professional indemnity insurance to trustees, will be pleased by the Government’s approval of these clauses. However, they do not ensure that a trustee will always escape personal liability. Exoneration clauses will never exempt a trustee from fraud or dishonesty, and they will continue to be strictly construed by the courts; if they are not clearly worded, unequivocal and unambiguous they may still be set aside by the courts. In many cases however, they will prove extremely valuable for those trustees and their insurers when faced with allegations of personal liability.
This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, please go to www.law-now.com