ABOUT THE AUTHORS: John Greenfield is Managing
Partner and Kelly Walton is a Senior Associate at Carey Olsen. John
was lead counsel on the case for the beneficiaries at both first
instance and Court of Appeal, and a member of the Privy Council
team
The 67-page reasoned judgment from the Privy Council (the Board)
in Hutcheson and others v Spread Trustee Company Limited [2011]
UKPC 13 is remarkable in many ways. First, it covers some important
and complex issues of trust law that have significance for
professional trustees and legal practitioners not only in Crown
Dependencies, but also in the UK and elsewhere. Second, the fact
that these issues are finely balanced is reflected in the highly
unusual split decision (3:2) of the judges, which took over six
months to produce.
The case itself concerned the effect of a clause in a
long-established Guernsey trust deed exonerating the trustees for
anything except wilful and individual fraud and wrongdoing on the
part of the trustee. Under the terms of this clause, the trustees
could escape liability for gross negligence, if the law permitted.
The deed was established before statutory legislation prohibiting
such exoneration had been enacted in Guernsey (19 February 1991).
The Board held that a trustee could (under pre-1991 Guernsey common
law or customary law) exonerate itself for gross negligence.
The circumstances under Guernsey common law or customary law
where a trustee could lawfully exclude its liability from a breach
of trust had never previously been determined. The English Court of
Appeal had ruled upon this in Armitage v Nurse
[1998] Ch 241. However, a significant number of trust specialists
believe that the wrong decision was reached in Armitage,
and it has not been robustly endorsed.
Of particular interest to Channel Island trust practitioners is
not only the view taken by the Board on the position of Guernsey
law prior to 1991, but also its statement (on a majority decision)
that for the purposes of trust law, at least, it need look no
further than English trust law. This is directly contrary to the
view of the Royal Court of Guernsey and the Guernsey Court of
Appeal.
The two dissenting Law Lords took a very different view, finding
it inappropriate to simply apply English trust law to Guernsey,
particularly where the English law itself was uncertain. Lady Hale
reminded the Court that this case is about the law of Guernsey (not
England or Scotland). She noted that to disagree with the Courts in
Guernsey, the Board had to reach two conclusions: that it is
reasonably clear what the law of England and Wales was in 1988, and
that the Courts in Guernsey would have followed English law, rather
than taken their own view in light of the different views taken in
other jurisdictions and of the distinctive character of Guernsey
law.
Lord Kerr agreed with Lady Hale, noting that if: ‘…the placing
of reliance on a responsible person to manage property so as to
promote the interests of the beneficiaries of a trust is central to
the concept of trusteeship, denying trustees the opportunity to
avoid liability for their gross negligence seems to be entirely in
keeping with that essential aim.’
The Royal Court’s decision (Lieutenant
Bailiff Sir de Vic Carey)
On 23 June 2009, Carey LB, who is one of Guernsey’s most senior
judges and the longest-practising advocate at the bar, having
qualified in the early 1960s, handed down a judgment on a
preliminary issue taken in the substantive proceedings for breach
of trust issued by the Hutcheson family against Spread Trustee
Company Limited. This is the sequel to the disclosure of
information proceedings instituted by Alan Hutcheson against
Spread, which culminated in Clarke JA’s well-known judgment ((2002)
5 ITELR 140) upholding the rights of discretionary beneficiaries to
information in respect of trusts that had been established before
the Trusts (Guernsey) Law 1989 (TGL) came into effect (the
disclosure proceedings).
‘The board stated that for the purposes of trust law
guernsey need look no further than english law’
In the substantive proceedings, Hutcheson and others v
Spread Trustee Company Limited, to which Alan Hutcheson is
not a party, the claimants sought compensation in respect of
investment losses they alleged they had suffered as discretionary
beneficiaries of two settlements dated November 1977, which was
created by the late Peter Acatos and of which Spread was the sole
trustee. The breaches of trust took place over a period of time,
some prior to 22 April 1989 (when TGL 1989 came into effect), some
between 22 April 1989 and 19 February 1991 (when s1(f) of TGL 1990
added the words ‘or gross negligence’ to s34(7) of TGL 1989), and
some after 19 February 1991. Each of the trust deeds contained a
clause excluding the trustee from liability for any mistake or
omission except wilful and individual fraud and wrongdoing.
Carey LB held that the original s34(7) was declaratory in
nature, so that a trustee in Guernsey had never been able to opt
out of responsibility to act honestly and refrain from misconduct
that is fraudulent or wilful. Further, because the obligation in
s18(1) of TGL 1989 to act en bon père de famille
(literally, ‘as a good father’) was also declaratory of the
pre-existing law, to have held that a trustee could have acted in a
grossly negligent manner with impunity prior to 22 April 1989 would
have been wholly inconsistent with that duty.
The Guernsey Court of Appeal’s decision
(Martin (presiding), Vos and Montgomery JJA)
On 26 November 2009, Spread’s appeal was dismissed, but for
different reasons.
The Court of Appeal said that the position under English Law
when TGL 1989 was enacted was ‘at best unclear’, and the Court
thought it was possible for a Guernsey lawyer to conclude that
under English law it was not possible for a trustee to avoid
liability for gross negligence – for example, adopting the rule of
Scottish law that no trustee could be exonerated in respect of his
fraud or gross negligence – culpa lata.
The Court of Appeal also held that, even if English law
permitted a trustee to exclude gross negligence, such a principle
was inconsistent with Guernsey customary law ‘expressed in the
requirement to act en bon père de famille’.
The Court of Appeal refused leave to appeal, noting that: ‘the
preliminary issues relate to the state of the law in Guernsey prior
to 1991. On any footing, the law for the last 18 years has by
statute been that an exoneration clause cannot exclude liability
for gross negligence. Most claims arising before 1991 will no
longer be maintainable: it is likely to be only in a small number
of cases, where a beneficiary sues after attaining majority, that
the issue can have relevance. In those circumstances, we do not
consider that the matter is of sufficient general importance to
justify the attention of the Privy Council.’ The Board disagreed
and granted Spread leave to appeal.
‘Ordinary negligence could be excluded as a matter of
Guernsey customary law’
The Privy Council’s decision (Judgment of
the Board by Lord Clarke, Lord Mance and Sir Robin Auld concurring,
Lady Hale and Lord Kerr dissenting)
The Board ruled that the provision in Guernsey law that trustees
must act en bon père de famille did not invalidate the
exoneration clause – overturning both the Royal Court of Guernsey
and the Guernsey Court of Appeal on this issue. The Board held that
Guernsey law should follow English law in this area, noting Clarke
JA’s observations in the disclosure proceedings that:
‘(i) trusts do not form part of Norman law, from which Guernsey
customary law is, in part, derived; and
(ii) the trust is, in origin, an English law concept, developed
by English judges and by the courts in countries whose law is, or
is derived from, English law.’
The Board said that this case provides a strong pointer that the
Guernsey courts would be more likely to have looked at and followed
English law than Scottish law. The Board opined that
Armitage correctly stated English law as it stands at
present and concluded that: ‘[i]t seems to the Board to be much
more likely than not that a Guernsey lawyer or judge or the Board
itself, considering the position under English law before 1989,
would have looked at the cases cited by Millett LJ and would have
reached the same conclusions as he did.’
The Board’s decision could mean that the en bon père de
famille provision, which is rooted in Norman customary law and
is part of Guernsey’s statutory legislation, no longer has any
significance for trustees, despite it being a key distinction
between English and Guernsey law – a distinction that now looks
meaningless.
Lord Clarke stated: ‘If, as is common ground, the essential
obligation is to act as a prudent trustee would act, namely with
reasonable care and skill, it can be said with force that the core
obligation of a person acting en bon père de famille
includes a duty to act with reasonable care and skill and thus
without negligence.’
The Board accepted that English law would not be imported
wholesale into Guernsey law and that it would have to yield to a
provision of Guernsey customary or statute law. However, the Board
opined that there was no specific Guernsey customary law that had
focused on the extent of permissible exclusions.
The Board accepted the Court of Appeal’s description of the
nature of the duty imposed. The Court of Appeal stated: ‘The
obligation to act en bon père de famille implies a
standard of care similar to that required of trustees in England,
namely that of a prudent man in business.’ But it is important to
note that the Court of Appeal then said: ‘…the significance lies in
the use of the phrase itself: it is one which is derived from
French law and is otherwise encountered in Guernsey in the context
of tutelle and curatelle (guardianship), an area
which itself is heavily influenced by customary and French law. It
has no place in English trust law.’ This was recognised by Lady
Hale, who said: ‘It is right to emphasise the duty to act en
bon père de famille – even though this is clearly equivalent
to the duty adopted by English law to act as a prudent man of
business, it is differently phrased and has its roots in Norman,
and ultimately Roman, law.’ In his dissenting judgment, Lord Kerr
noted that this duty marks a distinct difference between the two
systems.
Lord Clarke noted that if the essential obligation is to act as
a prudent trustee would act, namely with reasonable care and skill,
it can be said with force that the core obligation of a person
acting en bon père de famille includes a duty to act with
reasonable care and skill and thus without negligence. However, it
was noted that it was common ground that ordinary negligence could
be excluded as a matter of Guernsey customary law and English law.
Lord Mance agreed and said: ‘Even if there were some special
understanding in Guernsey law in or before 1989 of the application
to the trustee/beneficiary relationship of the expression to act
en bon père de famille, it would have been a reason to
prohibit exclusion of liability of a trustee from all negligence,
not just gross negligence.’
Lord Kerr stated that the respondents correctly accepted that
Guernsey customary law permitted the exoneration from some aspects
of the duty and said that: ‘A conscientious father might be
forgiven a lapse that amounted to a failure to take reasonable
care. But to permit exemption for gross negligence is of a
different order entirely.’
What does ‘gross negligence’ mean?
The Board drew a dividing line between negligence and gross
negligence on the one hand and wilful default/misconduct and fraud
on the other. Lord Clarke noted that English law recognised the
difference in legal principle between (enshrined in Guernsey
statutory law) negligence and gross negligence and between those
types of negligence and fraud, but to describe ‘negligence as gross
does not change its nature so as to make it fraudulent or wilful
misconduct’. Lord Auld said that the terms ‘negligence’ and ‘gross
negligence’ differ only in the degree or seriousness of the want of
due care they describe. It is a difference of degree, not of
kind.
The Board’s decision could mean that the en bon père de
famille provision no longer has any significance for trustees,
despite it being a key distinction (enshrined in Guernsey statutory
law) between English and Guernsey law. Guernsey trustees, who have
been wondering (post-Armitage) whether their old
exoneration clause would actually provide any protection, can now
feel much safer. Also, it should not put off would-be settlors
using Guernsey trusts, because they know that, as a result of
legislation, any future acts of gross negligence by their trustee
can be actioned by the beneficiaries.