In this talk I want to say a few words on two topics of some interest, at least to me. The first part of this talk is concerned with the question how far a settlor can in the trust instrument cater for the most scrupulous trustee. The second is concerned with the law of equitable accounting and the impact of the decision of the House of Lords in Stock v. Dowden [2007] 2 WLR 831 (“Stack”).
The scrupulous trustee
I recall as a law student when I began the study of trust law that I was particularly struck by two pieces of advice proffered by Chancery judges and recorded in the text books. The first was that it was the main duty of a trustee to commit judicious breaches of trust (see Perrins v. Bellamy [1899] 1 Ch 797 at 798) or at least it was of great use to do so (see National Trustees Co of Australasia Ltd v. General Finance Co of Australasia Ltd [1905] AC 373 at 375). The second was that the office of trustee should be shunned unless there was an compelling reason to accept it.
As regards the first piece of advice I was soon disappointed to learn that it provided no open-ended passport to trustees to commit “judicious” breaches of trust: so far as there was any passport to commit breaches of trust, it was confined to technical breaches which the court would have authorised if an application for prior authorisation had been made. As regards the second, I soon learnt the practical common sense of the warning against acceptance of the office. Problems arising from querulous beneficiaries are par for the course.
What I want to address in the first part of my talk is the dilemma on the part of a scrupulous trustee of being obliged to act in a manner which the trustee regards as morally or ethically wrong, and what can be done by the settlor to safeguard such a trustee if impelled to act in accordance with his conscience.
I was brought up to believe that the appointment of a party as a trustee, and most particularly the appointment of a trusted friend or relation of the settlor, manifested the settlor’s intention to confer upon the trustee the right (and indeed duty) to bring into play in the exercise of his powers and duties his own judgment and moral values which (it may be inferred) was the reason for his selection as a trustee. But according to established principles of Equity the duties imposed on a trustee may restrain him from exercising his judgment and acting in accordance with his moral sense.
Let me refer to the situations in two cases in which I was involved where the question of such restraint arose. In the first case I had to consider the exercise of judgment in respect of a trust’s investment policy. The trust held a substantial number of shares in a pharmaceutical company. This proved over the years to be a provident, indeed highly profitable, investment. But in recent years the pharmaceutical company had increasingly (no doubt because of its success) become the victim of direct and unlawful interference with its activities by animal right extremists who took objection to its testing of its drugs on live animals. It was the view of the company, and indeed most (if not all) detached outside experts, that there was no practical alternative to such testing if new discoveries were to be made and if new life saving drugs were to be made available for the market. The extremists were not satisfied with debating the merits of their view, but insisted on taking all possible actions, lawful and unlawful, to close down the business, and this action extended to unlawful threats and action against its staff, suppliers and customers. Inevitably the company’s business suffered a dramatic down turn in its turnover, profits and prospects, and most particularly its share price began to decline. A further loss of confidence in the company by its existing shareholders was likely to trigger a collapse in confidence in the company by customers and suppliers and prove catastrophic. The question before the trustees was whether they should bail out by selling their shares (so far as they could) ahead of other shareholders, reckless of the consequences for other shareholders and the company or whether they should stand by the company in its hour of need.
In the second case there was a prominent family of high standing in the community. The father and mother to all appearances (and in fact) were devoted to each other, but unknown to his family and the public the father had a mistress. During his lifetime the father’s overriding concern was that no breath of this scandal should reach his wife, for this would break her heart. For this reason he made no reference to the mistress in his will. He intended to make provision for her in his lifetime.
The father died before he could do so, predeceasing the mistress and his wife. The mistress quite reasonably did not consider that she had been adequately provided for, and she threatened proceedings for further provision out of the estate. The estate, in which the widow had a life interest, was more than adequate to make the further provision required and meet the needs of the widow. Indeed the impact of making such provision would scarcely be noticed.
The question arose whether the executors and trustees could settle the claim and by such settlement agree to make provision for the mistress without disclosure to the widow. If the disclosure was made to the widow, her consent would inevitably have been granted because the claim to provision was bound to succeed and the widow would do anything to prevent a public scandal.
In both of these situations, the position of the trustees was invidious. Looking first at the position of the trustees of shares in pharmaceutical company, selling the shares ahead of the market and indeed precipitating a collapse in the market could only reinforce the efforts of the extremists and precipitate what the extremists had through unlawful means set out to achieve – the destruction of the company’s business. It was morally repugnant to bail out abrogating all responsibility for the consequences and succumbing to blackmail. (The position would not be materially different if the reason for the extremists’ action was not hostility to a particular business activity, but the religious, ethnic or racial character of the controlling shareholders.)
Looking at the position of the executors and trustees, are they bound in law to volunteer information to the widow about her husband’s secret life and that their marital bliss was a sham? I think that they are bound to do so. The claim is a claim not so much against the estate which they can settle without reference to the beneficiaries, as a claim against the beneficiaries to make provision for the mistress at their expense out of the provisions made for them. Compliance with the duty of the executors and trustees to volunteer the information to the widow as a beneficiary under the will would cause disproportionate harm to the grieving widow and achieve no advantage. A breach of this duty in the circumstances would surely be regarded by right thinking observers as ethical and excusable, but would the law take the same view?
I have only given two examples of moral dilemmas for trustees. The authorities provide many more. It is possible to multiply examples. Trustees may be able to obtain a higher price than that agreed “subject to contract” by gazumping. In this case are they bound to “gazump”? Are trustees of holdings in family companies bound to sell by reason of their duty to maintain a balanced portfolio notwithstanding the sentiments of all the family which treasures the maintenance of the existing level and connection with the company? Are trustees bound, notwithstanding ethical objections, to invest to obtain the highest return if the investment is morally dubious or indeed down right objectionable e.g. if the investment supports the continuance of an abhorrent (apartheid) regime or exploits the arms trade or promotes the sale of alcohol or tobacco?
In my view in strict law the answers to the questions under the law of trusts, are in the affirmative. Though the appointment of a trustee generally speaking vests in the trustee the right (and indeed duty) to administer the trust exercising his judgment and moral sense, the trustee is subject to the overriding obligation to give effect to his equitable duties however repugnant this may be and he can only lawfully take into account moral considerations to the degree specifically authorised to do so by the trust instrument or if the legally relevant considerations (e.g. the financial merits) are of equal weight, in which case the legally irrelevant moral consideration may be thrown into the balance. He is under a duty to sell the shares in the company victimised by animal activists, to disclose the shattering information about the deceased husband’s aberration, to gazump and to invest so as to obtain the best return. His equitable obligations may oblige the trustee to act in an unprincipled manner. His choice is limited to acting in an unprincipled way or acting true to his principles but in breach of trust or retiring as trustee.
What I want to consider is whether and (if so) how far a settlor, in order to attract scrupulous trustees, can make provision in the settlement which will obviate this dilemma and free the trustees from making such invidious choices.16. The trust instrument may to an extent modify the trustee’s powers and duties. It may impose constraints on the exercise of the power to invest e.g. requiring adoption of an ethical (and less profitable) investment policy or the consent of a named individual for any change of investment, even if the need for the change is self evident. The trust instrument may provide that the trustee shall not be under the ordinary equitable duty of care in regard to exercise of the power of investment and indeed of other powers. It may likewise confer on trustees a wide exemption from liability for breach of trust. But (in the absence of legislative provision in the domestic law to this effect) the trust (if it is to be a valid trust) cannot include any provision that impinges upon the core obligation of a trustee to act in good faith and in the honest belief that he is acting in the interests of the beneficiaries and to account to them. A trust instrument cannot exclude this duty or contain an exemption clause which excludes a trustee’s liability for its breach. This is a core obligation, for otherwise the trustee is free to deal with the trust assets as his own and this is the antithesis of a trust.
I want to look for a moment at each of the three components of the core obligation. The first component is the requirement that the trustee acts “in good faith”. There are two possible meanings of the term “in good faith”. The first is that the trustee must honestly believe that what he is doing is rightly and properly being done and accordingly that he is acting in accordance with his legal duties. The second is that he must not be fraudulent or dishonest, but that acting in deliberate breach of trust is not necessarily either. There is much to be said for the former meaning, but the established view is that the latter is correct and that accordingly a trustee may be excused liability for a deliberate judicious breach of trust: see Walker v. Stones [2001] QB 902 at 941.
The second component is that the trustee must honestly believe that he is acting in the interests of the beneficiaries. This ordinarily requires that the trustee should believe that he is improving the material position of the beneficiaries: see X v A [2006] 1 WLR 74 at paragraph 42. If the trustee is indifferent to the interests of the beneficiaries, he acts dishonestly: Fitzwood v. Unique Goal (2002) 188 ALR 566 at 607 (paragraph 552) or otherwise in breach of this core obligation. As a gloss on the language used, honesty in this context requires that the trustees’ perception of the interests of the beneficiaries is not so unreasonable that no reasonable trustee could have held that belief. This requirement accordingly precludes any exemption of a deliberate decision by the trustee to exercise his powers to benefit a non-beneficiary or to achieve an extraneous object, such as the survival of a family company, the well-being of the work force or an industry or the achievement of a social or political objective. The position is accordingly that no provision can authorise the trustees to exercise their powers for the benefit of anyone other than the beneficiaries or grant them a free pass to take into account in their decision-making moral considerations. The provision may allow the trustees to sell without taking efforts to obtain the best price, so long as they consider that a sale at the price at which they are selling is in the interests of the beneficiaries, but a provision cannot authorise them to sell for less than the best price for the benefit and thereby or otherwise to confer an advantage on any person who is not the beneficiary intended to be benefited by the settlement. The general rule must be that the trustee may only seek to confer a benefit on a non-beneficiary or take account of moral considerations if this is incidental to the primary object of the conferment of a benefit on a beneficiary or as a means of benefiting a beneficiary. In accordance with this principle a trustee of a charity cannot freely refuse to accept a contribution to its funds from a source which it disapproves (for example freemasons): a trustee can only refuse a contribution if he believes that its acceptance is contrary to the interests of the charity to accept e.g. if knowledge of the receipt will offend and alienate other donors.
It should be noted that the core obligation that the trustee considers that the sale is in the interests of the beneficiaries goes some way to make good the absence (where it is absent) of the protection afforded to the beneficiaries by a trustee’s duty to sell at the best price reasonably obtainable. For a trustee who has not inquired as to the market value and satisfied himself that the sale price approximates to it may have difficulty in satisfying the court that in selling at the price at which he sold he believed that he was acting in the interests of the beneficiaries.
The third component is the trustees account to the beneficiaries for their stewardship of the trust assets. This core obligation precludes the trust instrument entitling the trustees to decline to give full and proper effect to their duties of disclosure of their dealings with trust assets to beneficiaries, however morally unacceptable such disclosure may be. The disclosure to the widow of the deceased’s misconduct cannot be excused however purposeless. An exemption clause may not exempt a trustee from acting in deliberate breach of such duty. The trustee may however feel sufficiently strongly to act according to his conscience and risk a claim for breach of trust.21. It is perhaps worth pointing out that an exemption clause will not ordinarily (if ever) ex post facto justify a breach of trust. The court can, or ordinarily will, order that the breach be remedied and grant an injunction against further breaches; further it may on the ground of the existence of the breach remove the trustee. The only constraint on the court is that it may be unable in the circumstances to hold the trustee liable to pay compensation for the breach.
In summary as the law stands the settlor in the drafting of his settlement should be able to cater for the most scrupulous trustee giving him a free hand to give effect in his decisions to his moral scruples so long as his decisions are honest and made for the benefit of the relevant beneficiaries and so long as the trustee duly accounts to the beneficiaries.
It is possible to go further and for the trust instrument to facilitate the conferment of benefits on persons who are not existing beneficiaries by appointing them as additional beneficiaries. It may be possible to entitle trustees to refrain from disclosure of “damaging information” to a beneficiary by containing provisions conferring unfettered power on the trustees with retrospective effect to make changes from time to time in the class of beneficiaries so as to exclude beneficiaries to whom disclosure is considered undesirable. There is however today a real question whether such provisions would be legally effective. That is a question for another conference.
Equitable Accounting
The law on matters of equitable accounting between co-owners of land has developed significantly in recent years. Co-owners of land (as such) are all equally entitled to possession and occupation of the whole. Problems arise when the co-owners cannot or will not enjoy occupation peaceably together. This may occur for any of a number of reasons. The question facing the court has been whether a co-owner in sole occupation should be liable on the taking of accounts between the co-owners to be charged an occupation rent. The practice of the court in this respect has significantly changed over the years. Initially a charge would only be made against the co-owner in occupation if he evicted or excluded the other co-owner or co-owners. This condition was later relaxed to include situations where there was only a constructive exclusion or eviction e.g. conduct by the co-owner in possession which rendered joint occupation by the other co-owners impracticable. The condition was later further relaxed to allow the court to order payment of an occupation rent when it would be unjust not to do so. Finally in its present form, the practice is that an order will be made whenever it is just as between the co-owners to do so: see Murphy v.Gooch [2007] EWCA Civ 603 CA (“Murphy”). The way that the “law” has changed over the years reflects two features of the doctrine of equitable accounting: (1) the “rule” applicable is a rule of practice and not of law and accordingly subject to evolution and review in changing times and social conditions. (As to the like distinction between rules of law and of practice in the field of the appointment of receivers: see Lightman & Moss, The Law of Administrators and Receivers of Companies 4th ed paragraph 29-001); and (2) the jurisdiction is discretionary.
The principal issue before the House of Lords in Stack was the approach to be adopted by the court in determining the respective beneficial interests of co-owners of land. There is not time in this talk (perhaps even in this conference) to say all that can and should be said in relation to the leading judgment on this issue. It is sufficient to say that the infliction upon co-owners as joint tenants of the legal consequences unforeseen and unintended by them of the doctrine of survivorship is likely to prove a recipe for injustice, But there also arose a subsidiary issue as to the applicable principle to be adopted in determining claims by a co-owner out of occupation to an occupation rent from a co-owner in occupation and in particular the effect on those principles of sections 12 to 15 of the Trusts of Land and Appointment of Trustees Act 1996 (“the 1996 Act”).
Baroness Hale in the leading speech summarised those sections as follows:“Section 12(1) gives a beneficiary who is beneficially entitled to an interest in land the right to occupy the land if the purpose of the trust is to make the land available for his occupation. Section 13(1) gives the trustees the power to exclude or restrict that entitlement, but under section 13(2) this power must be exercised reasonably. The trustees also have power under section 13(3) to impose conditions upon the occupier. These include, under section 13(5), paying any outgoing or expenses in respect of the land and under section 13(6) paying compensation to a person whose right to occupy has been excluded or restricted. Under section 14(2)(2), both trustees and beneficiaries can apply to the court for an order relating to the exercise of these functions. Under section 15(1), the matters to which the court must have regard in making its order include (a) the intentions of the person or persons who created the trust, (b) the purposes for which the property subject to the trust is held, (c) the welfare of any minor who occupies or might reasonably be expected to occupy the property as his home, and (d) the interests of any secured creditor of any beneficiary. Under section 15(2), in a case such as this, the court must also have regard to the circumstances and wishes of each of the beneficiaries who would otherwise be entitled to occupy the property”. (see paragraph 93). ”
She went on to hold that the court’s power to order payment to a co-owner of an occupation rent is no longer governed by the doctrine of equitable accounting but is governed by these sections and in particular the principles laid down in section 15.28. With respect it is not immediately obvious that the statutory provisions can have been intended to be or are applicable (save perhaps by way of analogy) on an application for an occupation rent made after (rather than before) the occupation in question. The provisions and their language are apposite only to applications relating to present and future (and not past) periods of occupation. The position regarding past periods of occupation should naturally remain left to be governed by the equitable doctrine. (I regret that I did not have the confidence to say this when I delivered the judgment of the Court of Appeal in Murphy.) But even if the statutory provisions are read as governing rights in respect of past occupation, the provisions only add further considerations to be taken into consideration so far as applicable. The statutory provisions are only a gloss on the equitable doctrine. The focus of the court is no longer confined to doing justice between the co-owners, but extends also to having regard to the relevant statutory considerations, and in particular (when applicable) the welfare of the minor, the interests of secured creditors and the circumstances and wishes of the beneficiaries who would otherwise be entitled to occupy the property.
There are, as it seems to me, two remarkable features of this legislation. The first is that Parliament has apparently taken the view that the statutory considerations are to be additional, but only optional, considerations; they only come into play if the co-owners cannot agree a settlement and the court has to decide their dispute, and even then the court may decide, in the circumstances, to give them no weight. The second is that, if the court does have to decide the parties’ dispute, in particular the minors and secured creditors may presumably be held to have a sufficient interest in the outcome to render it necessary for the court to join or invite evidence and representations from them, though they are not otherwise beneficially interested. Only in this way can the court make a fully informed decision regarding their interests. Their interests however will remain at all times defeasible if a settlement can be reached between the co-owners before judgment is given.
Conclusion
I would suggest two conclusions. The first that the principle laying down the core obligations of trustees should not preclude settlors meeting the requirements of scrupulous trustees save in exceptional circumstances. The second is that the doctrine of equitable accounting survives the decision in Stack v. Dowden; but the principles stated in that case may not survive long in their present form.
2008 Legal Week Trusts & Estates Litigation Forum
