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.’

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.

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 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.’

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.