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The Law Commission

(Consultation Paper No 171)

TRUSTEE EXEMPTION CLAUSES

A Consultation Paper

London: TSO

The Law Commission was set up by section 1 of the Law Commissions Act 1965 for the purpose of promoting the reform of the law.

The Law Commissioners are:

The Honourable Mr Justice Toulson, Chairman
Professor Hugh Beale QC
Mr Stuart Bridge
Professor Martin Partington CBE
Judge Alan Wilkie QC

The Secretary of the Law Commission is Mr Michael Sayers and its offices are at Conquest House, 37-38 John Street, Theobalds Road, London WC1N 2BQ.

This consultation paper, completed on 2 December 2002, is circulated for comment and criticism only. It does not represent the final views of the Law Commission.

The Law Commission would be grateful for comments on this consultation paper before 1 May 2003. Comments may be sent either –

By post to:

Elaine Brown
Law Commission
Conquest House
37-38 John Street
Theobalds Road
London
WC1N 2BQ

Tel: 020-7453-1265
Fax: 020-7453-1297

By e-mail to:

[email protected]

It would be helpful if, where possible, comments sent by post could also be sent on disk, or by e-mail to the above address, in any commonly used format.

It may be helpful, either in discussion with others concerned or in any subsequent recommendations, for the Law Commission to be able to refer to and attribute comments submitted in response to this consultation paper. Any request to treat all, or part, of a response in confidence will, of course, be respected, but if no such request is made the Law Commission will assume that the response is not intended to be confidential.

The text of this consultation paper is available on the Internet at:

http://www.lawcom.gov.uk

CONTENTS

Executive Summary	Summary
PART I: INTRODUCTION	Part I
The expansion of trustee powers	1.1
Trustee exemption clauses	1.5
The Consultation Paper	1.17
Acknowledgements	1.23
PART II: THE CURRENT LAW	Part II
The nature of the problem	2.1
Breach of trust	2.13
Breach of fiduciary duty	2.14
Breach of duty of care	2.15
Duty of care under the general law	2.17
Statutory duty of care	2.18
Negligence not necessary	2.19
The nature of trustees' liability	2.20
The scope of exemption clauses at common law	2.22
The nineteenth century cases	2.22
The Scottish cases	2.23
The English cases	2.27
The late twentieth century	2.31
Midland Bank Trustee (Jersey) Ltd v Federated Pension Services Ltd	2.33
Armitage v Nurse	2.42
The construction approach	2.47
The fraud exclusion	2.52
The effect of Armitage v Nurse	2.54
The scope of trustee exemption clauses under English statutes	2.56
The Unfair Contract Terms Act 1977	2.57
Specific statutory controls	2.65
Trustee exemption clauses in charitable trusts	2.69
Incorporated charities	2.75
Control by the Charity Commission	2.80
Conclusion	2.86
Summary	2.89
PART III: THE ECONOMIC IMPLICATIONS OF REGULATINGTRUSTEE EXEMPTION CLAUSES	Part III
Method of research	3.7
Quantitative approach	3.9
Trustees	3.10
Legal advisers	3.15
Qualitative approach	3.18
The prevalence of trustee exemption clauses in practice	3.19
Sources of trustee exemption clauses	3.19
The frequency of trustee exemption clauses	3.20
Types of clause	3.23
Reliance on trustee exemption clauses	3.26
The attitude of trustees and settlors to the existing law	3.28
Trustees	3.28
Settlors	3.36
The attitude of trustees and settlors to regulation	3.42
Necessity of trustee exemption clauses	3.42
Willingness to act following regulation	3.44
The attitude of settlors	3.47
The perceived consequences of regulation	3.48
Movement of operations to less restrictive jurisdictions	3.48
What factors influence the location of the activity of trustees	3.48
The availability of alternative jurisdictions	3.54
Whether trustees would in fact operate in another jurisdiction	3.55
Impact of regulation on charges made for the work of trustees	3.59
Operational costs of trustees	3.61
Administration fees charged by trustees	3.63
Other administrative costs	3.66
Impact of regulation on investment of wealth in England and Wales	3.67
Wider financial implications	3.79
Availability and effectiveness of alternative protections from liability	3.81
Insurance	3.82
Indemnity clauses	3.91
Summary	3.93
PART IV: OPTIONS FOR REFORM	Part IV
The factual background	4.2
Analysis of the problem	4.6
The settlor	4.8
The trustee	4.10
The beneficiary	4.13
The objectives of reform	4.16
Approaches to regulation of trustee exemption clauses	4.17
Lay and professional trustees	4.23
The professional trustee	4.23
The lay trustee	4.29
The distinction between professional and lay trustees	4.33
Reforms to trust practice	4.41
An assessment of the reasonableness of the clause	4.46
An evaluation of the conduct of the trustee	4.53
Other jurisdictions	4.54
New Zealand	4.54
Jersey and Guernsey	4.56
British Columbia	4.58
Discussion	4.60
Exculpatory relief	4.62
Denying exemption from liability for gross negligence	4.67
Denying exclusion of liability for "ordinary" negligence	4.79
Duty exclusion, extended powers and indemnity clauses	4.87
Indemnity clauses	4.88
Duty exclusion clauses and extended powers clauses	4.89
Jurisdiction and choice of law	4.98
Transitional provisions	4.100
Human rights	4.102
Regulatory impact	4.103
PART V: CONSULTATION QUESTIONS	Part V
Introduction	5.1
Consultation questions	5.3
APPENDIX: STANDARD TRUST CLAUSES AVOIDING TRUSTEELIABILITY	Appendix
Clauses exempting trustees from liability for breach of trust	A.1
Trustee indemnity clauses	A.2
Clauses excluding the duties of trustees	A.3
Clauses extending the powers of trustees	A.4