LAW REPORT: Clause excluding trustees' liability valid

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Armitage v Nurse; Court of Appeal (Lord Justice Hirst, Lord Justice Millett and Lord Justice Hutchison) 19 March 1997

A clause in a settlement excluding the trustees from liability for loss or damage to the capital or income of the trust property unless caused by their own actual fraud was not void, either for repugnancy or as contrary to public policy.

The Court of Appeal dismissed an appeal by Paula Rachel Armitage against the decision of Mr Justice Jacob on a preliminary issue in her action for breach of trust against the trustees of a settlement of which she was the principal beneficiary. The trustees' cross-appeal was also dismissed.

The judge had been asked to decide whether clause 15 of the settlement, which exempted the trustees from liability for loss or damage to the settlement fund "unless such loss or damage shall be caused by his own actual fraud", operated to absolve the trustees from liability for all or any of the breaches alleged against them.

Bernard Weatherill QC (Royds Treadwell) for the beneficiary; Gregory Hill (Hood Vores & Allwood, Dereham; Greenland Houchen, Attleborough; Mills & Reeve, Norwich) for the trustees.

Lord Justice Millett said that clause 15 had been taken from a conveyancing precedent, and its meaning was plain and unambiguous. No trustee could be made liable for loss or damage to the capital or income of the trust property unless caused by his own actual fraud. "Actual fraud" meant what it said. It did not mean "constructive fraud" or "equitable fraud".

Derry v Peak (1889) 14 App Cas 337 had established that nothing short of a fraudulent intent in the strictest sense, requiring proof of dishonesty, would suffice. Gross and culpable negligence was not enough. By consciously acting beyond their powers trustees might deliberately commit a breach of trust, but such conduct was not fraudulent if they acted in good faith.

Clause 15 was, therefore, apt to exclude liability for breach of trust in the absence of a dishonest intention on the part of the trustee whose conduct was impugned, no matter how indolent, imprudent, lacking in diligence, negligent or wilful he might have been.

There was some academic support for the submission made on behalf of the beneficiary that a trustee exemption clause which purported to exclude liability except for actual fraud was void, either for repugnancy or as contrary to public policy, but it was not supported by authority.

In Wilkins v Hogg (1861) 31 LJ Ch 41 at 42 counsel had been challenged to cite a case where an indemnity clause protecting the trustee from his ordinary duty had been held so repugnant as to be rejected, but had been unable to do so. No such case had occurred in England or Scotland since.

The cases that had been relied on as supporting the submission that it was contrary to public policy to exclude liability for gross negligence had been reviewed by the Jersey Court of Appeal in Midland Bank Trustee (Jersey) Ltd v Federated Pension Services Ltd [1996] Pensions Law Reports 179. The court had concluded that the cases all concerned the true construction of the particular clauses under consideration or of clauses in standard form in the 19th century. None of them dealt with the much wider form of clause which had become common in the present century, nor was authority for the proposition advanced.

The view was, however, widely held that such clauses had gone too far, and that trustees who charged for their services, but who as professional men would not dream of excluding liability for ordinary professional negligence, should not be able to rely on a trustee exemption clause excluding liability for gross negligence. Jersey had introduced a law in 1989 which denied effect to a trustee exemption clause which purported to absolve a trustee from libility for his own "fraud, wilful misconduct or gross negligence".

The subject was currently under consideration in this country by the Trust Law Committee. If clauses such as clause 15 of the settlement were to be denied effect, that should be done by Parliament which would have the advantage of wide consultation with interested bodies and the advice of the Trust Law Committee.

As they were at present drawn, the pleadings did not allege dishonesty, or any breach of trust for which the trustees were not absolved from liability by clause 15.