Spread Trustee Company Limited v Hutcheson and others

  • Author : Giles Richardson TEP
  • Date : September 2011

The Privy Council decision in Spread Trustee Company Limited v Hutcheson1 is clearly important. The issues raised by the case were also ones the Board itself found challenging: not only did almost six months pass from the hearing to handing down, but ultimately the Board was split three to two and all members gave reasoned judgments (Lord Clarke delivering the principal judgment for the majority, the two concurring members being Lord Mance and Sir Robin Auld; Lady Hale and Lord Kerr forming the minority).

The appeal was brought by the trustees of two Guernsey settlements dating from 1977. It was from a decision of a Guernsey Court of Appeal comprising John Martin QC, Geoffrey Vos QC (shortly before he left for the English bench) and Clare Montgomery QC, who upheld the first instance decision of the Lieutenant Bailiff Sir de Vic Carey. The membership of the tribunals was, therefore, impressive at all levels.

The issues

The issues were essentially the same at all levels of the case. They arose out of a direction for a trial of two preliminary issues, phrased as follows:

‘(1) Whether the inability of the terms of a trust to relieve a trustee of liability for a breach of trust arising from his own gross negligence applies to breaches of trust occurring prior to 19 February 1991; and

(2) if it does, whether it applies to breaches of trust occurring prior to 22 April 1989’ ([4] per Lord Clarke).

The two dates referred to were relevant because:

(1) the breaches of trust alleged against the trustee arose before the first date or between it and the second one

(2) the alleged breaches were ones of gross negligence, but not of deliberate fraud or wrongdoing

(3) the relevant trust instruments contained exculpation provisions which provided:

‘In the execution of the trusts and powers hereof no trustee shall be liable for any loss to the Trust Fund arising in consequence of the failure depreciation or loss of any investments made in good faith or by reason of any mistake or omission made in good faith or of any other matter or thing except wilful and individual fraud and wrongdoing on the part of the trustee who is sought to be made liable’

(4) on 22 April 1989, the Trusts (Guernsey) Law 1989 came into force, s34 (7) of which provided:

‘Nothing in the terms of a trust shall relieve a trustee of liability for breach of trust arising from his own fraud or wilful misconduct’ and

(5) then on 19 February 1991, an amendment to this provision came into force, which added the words ‘or gross negligence’ at the end.

It was, therefore, clear that a claim in Guernsey concerning a grossly negligent breach of trust committed after 19 February 1991 could not be defeated by an exculpation clause, howsoever it was drafted.

That, however, left over the live issues with which the Privy Council had to grapple, the most significant being:

(1) whether the 1989 law as amended had retrospective effect

(2) if it did not, whether the 1991 amendment was merely clarificatory, such that even from 22 April 1989, an exculpation clause could not defeat a claim for a grossly negligent breach of trust, because the concept of ‘fraud’ in s34 (7) encompassed that of gross negligence on the application of the maxim culpa lata dolo aequiparatur (roughly, ‘gross negligence is to be equated with fraud’) and

(3) if the law had no retrospective effect (and in relation to the period between 22 April 1989 and 19 February 1991 if the 1989 law as originally enacted did not cover gross negligence), whether under the pre-existing customary law of Guernsey it had not been possible to exclude liability for grossly negligent breaches of duty.

Of these, it is the latter two that have the greatest interest, because the exploration of the nature of gross negligence and of the pre-existing Guernsey law in fact involved careful consideration of the position under English law, including evaluation of Millett LJ’s decision in Armitage v Nurse2, as well as the Scottish case law in the area.

In relation to the first issue above, however, very briefly summarised, the whole Board found that the law had no retrospective effect: that is, its provisions did not apply to the invocation of an exculpation clause excluding liability for grossly negligent breaches of trust committed before it came into force, e.g. [64] – [79] per Lord Clarke.

The majority’s reasoning

In relation to the second issue, the view of the majority, with which the minority did not engage at least directly (the nearest to doing so being at [161] per Lord Kerr) was that very clearly the concept of fraud in s34 (7) did not encompass gross negligence such that the import of the maxim culpa lata dolo aequiparatur had no application to it ([21] – [37] per Lord Clarke). In this, it confirmed the general understanding of the nature of gross negligence arising in the trust context under English law and also under Jersey law, the statutory regime of which in relation to the permissible extent of trustee exculpation clauses being found by the Board likely to have been the inspiration for the 1991 amendment to Guernsey’s law ( [33]), e.g. [117] per Sir Robin Auld and Midland Bank v Federated Pension Services3 where the Jersey Court of Appeal summarised the requirements both of wilful misconduct and of gross negligence:

(a) ‘Wilful misconduct does require appreciation by the person guilty of misconduct that what this person is doing is contrary to his duty as trustee, alternatively recklessness consisting of this person’s shutting his eyes to the probability that his misconduct is in breach of duty’ (at pp 392)

(b) ‘… the approach [in the authorities] was to treat ‘gross negligence’ as meaning ‘very great negligence’ or flagrant and extreme negligence, or negligence consisting of ‘a very marked departure from the standards’ of responsible and competent people. In none of them was it suggested that ‘gross negligence’ involved either ‘a certain mens rea’ or ‘an intentional disregard of danger’ or ‘recklessness’… In our judgment, the direction to the Jurats in the present case as to the meaning of ‘gross negligence’ was erroneous. All that this phrase means is a serious or flagrant degree of negligence. It does not import any question of intentional or reckless fault…’ (at pp 392–3).

As for the general position under Guernsey and Jersey law before 1989, the Guernsey Court of Appeal had found:

(1) that the position in English law in 1989 as to whether a trustee’s liability for gross negligence could be excluded or excused by a trust instrument was unclear

(2) that the position in Scots law in 1989 had been clear: such liability could not be excluded, and

(3) that a Guernsey court in 1989 would have been more influenced by Scots law than English law on the question, and hence it would have found that under Guernsey law, liability could not be excluded ([38] per Lord Clarke).

In relation to the second of these findings, the trustees contended, before the Board, that was indeed a correct statement of the Scots law position then as now. This the Board accepted, at least for the purposes of the appeal before it. It therefore departed from the attempt by Millett LJ in Armitage v Nurse to explain the Scots authorities on the basis that they proceeded simply on the construction of the clauses in question in them, rather than a general proposition of Scots law (at [38] and [48] per Lord Clarke; although on this point, Lord Mance demurred from the view that the Scots authorities were so clear, regarding it as ‘improbable that they would be read as involving or giving rise to an absolutely inflexible rule’ prohibiting the exclusion of liability for gross negligence [108]).

In relation to the third finding, however, the majority rejected the notions that the Guernsey law invoked the concept of trustees having a duty to act en bon père de famille or that Guernsey law was a mixed civilian and common-law system, as was Scots law, supported the Court of Appeal’s approach. In relation to the former, they noted that the tag of en bonpère de famille was undefined in Guernsey law, was unknown in Scots law, and in any event its substance was nothing other than the general duty to act with reasonable care and skill known to and the same as that of both English and Scots law ([20] and [39] per Lord Clarke; [121] – [124] per Sir Robin Auld). And in relation to the latter, they noted that trusts law as developed in Guernsey was clearly based on the English law of trusts in general and, while they accepted that Guernsey would not wholesale adopt English law where it conflicted with a clear principle of Guernsey law, in this area there was no such exceptional principle of local law, which rendered the English approach repugnant ([40] – [44]).

Hence, ultimately, the question of what was the law of Guernsey as to the exclusion of liability for gross negligence in 1989 came down, in the view of the majority, to the question of what the law in England had been at that date. As to which, the Court of Appeal had determined that, while Armitage v Nurse correctly stated what the law had always been in England, until that case had been decided, the position had been uncertain in England such that ‘a Guernsey lawyer asked to advise [in 1989] on the position under English law would have been as likely as not to come to the conclusion that under English law it was not possible for a trustee to avoid liability for gross negligence’ ([46] and [52] per Lord Clarke).

The Court of Appeal’s conclusion, that the English position before Armitage v Nurse was seriously uncertain, was based principally on a consideration of an English Law Commission consultation paper published in 1992 called ‘Fiduciary Duties and Regulatory Rules, A Summary’4 and an article by Professor Paul Matthews published in January 19895, both of which suggested that the clear bar in English law on excluding liability not only for fraud but also for ‘wilful default’ as it was labelled in many older trust instruments or ‘wilful misconduct/wrongdoing’, as it is now usually labelled, encompassed a bar on excluding liability for gross negligence as well.

The majority in the Privy Council was having none of this, seeing it as involving a clear failure as a matter of principle to bear in mind the distinction between wilful defalcations by a trustee and merely negligent ones (discussed in Midland Bank v Federated Pension Services as set out above) ([53] – [55] per Lord Clarke). Lord Clarke also trenchantly rejected a submission by the beneficiaries that what Millett LJ had called the ‘irreducible core’ of a trustee’s obligations, which he located in his fiduciary duties of honesty and loyalty, should in fact also encompass a duty not to act with gross negligence (at [60] and [62]).

The majority further rejected the approach of Lord Kerr, who considered the fiduciary context of a trustee’s role (at least in the Guernsey context of an express statutory duty to act en bon père de famille, which he saw, unlike the majority, to import fiduciary obligations not just ones of care and skill) to have a bearing on the ambit of negligence that could properly be excluded by him, such that while it was uncontroversial that liability for ordinary negligence could be excluded, liability for gross negligence should not be capable of exclusion by a fiduciary such as a trustee (Lord Kerr at [177]; Lord Clarke at [61].)

Lord Clarke put it this way:

‘First, where, as here, what is alleged against the trustee is a breach of the duty of care owed to the beneficiaries by the trustee, the fiduciary duties of the trustee are of no relevance. Nothing in the fiduciary duties owed by the trustee alters the standard of the duty of care owed by it. In the opinion of the Board, the suggestion that the standard of the duty of care owed by the trustee is somehow elevated by reference to concomitant fiduciary duties elides the fundamental distinction between the fiduciary duties owed by the trustee on the one hand and the duty to exercise care and skill owed by the trustee on the other. Secondly, the exemption from liability in respect of a trustee’s gross negligence is not inimical to the fiduciary duties owed by a trustee for the simple reason that the absence of honesty and good faith inherent in the failure to perform fiduciary duties would take such conduct outside the scope of such an exemption.’

This reasoning is not necessarily immune from criticism. As to Lord Clarke’s first point, it may be considered good as far as it goes, but it fails to address the normative question of whether because someone is a fiduciary, they ought not to be able to escape liability for grossly negligent breaches of their duties of care and skill. Trustees’ fiduciary duties flow ultimately from the perceived peculiar vulnerability of beneficiaries that required the courts to develop the stringent duties of loyalty to which trustees are subject. Respectable arguments can be made, and have carried the day before, for instance before Scottish judges and the Jersey and Guernsey legislatures, that beneficiaries also ought not to be exposed to the effects of gross negligence by their trustees but should have a right that the trustee cannot take away to seek redress for such conduct. There is no elision of concepts there; merely a recognition that the fiduciary context ought to tell the courts something about what beneficiaries should also have a right to expect of their trustees in relation to the care and skill they exercise.

Moreover, Lord Clarke’s second point does not hold good: it is not necessary, for a breach of fiduciary duty to take place, that the fiduciary acted with an absence of honesty and good faith. Fiduciary duties are far stricter than that, and it is an open question whether an exculpation clause such as that in this case would permit a trustee to keep, for example, unauthorised profit negligently, but not recklessly, received by them for which they would otherwise be accountable6.

In any event, the ultimate conclusion of the majority was that a Guernsey court in 1989 would have looked to English law to determine whether a trust instrument could effectually permit the exclusion of liability by a trustee for a grossly negligent breach of trust, and would have concluded that English law indeed permitted such exclusion. In reaching that conclusion, it also concluded that, by contrast with Scots law, English law has always and continues to permit the exclusion of liability for gross negligence as well as ordinary negligence.

Aspects of the minority’s decisions

Both the minority judgments are of considerable interest, notwithstanding that their authors did not carry the day, not least since, as was clearly a matter of concern to Lady Hale, this was not a decision of the Supreme Court and hence the issues engaged by this appeal, in particular as to the status of Armitage v Nurse and the basic issue before the Board in relation to gross negligence might still require reconsideration in England at some stage. This led to an apparent and interesting tension between the view of Lady Hale on the one hand and that of the majority, in particular Sir Robin, on the other as to the correct approach of the Privy Council in general to an issue such as the one before them. Lady Hale noted that, to overturn the Guernsey courts’ decisions, ‘... the Board has to reach two conclusions, both of which are questionable: (i) that it is reasonably clear what the law of England and Wales was in 1988; and (ii) 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’ (at [129]). This led her to the conclusion that the Privy Council ought to accord great respect to the conclusions of Guernsey’s own courts such that ‘I see no reason why we should disagree with the Guernsey courts’ conclusion as to how Guernsey would have decided the matter [in 1988]. On this, it seems to me that the instinct of the Lieutenant Bailiff is as reliable a guide as any...’ (at [140]).

This sensitivity to the instincts of the local judiciary is not reflected in the decisions of the majority and, indeed, is expressly repudiated by Sir Robin Auld:

‘What matters is what a pre-1991 Guersney Court should have decided as a matter of Guernsey law on a logical and otherwise legally correct process of reasoning – an outcome that might also have required examination by the Board at the time. It is an issue on which the present Board – given the extensive material and submissions put before it – is as well placed as the Lieutenant Bailiff and Court of Appeal, then or now, to determine’ (at [127]).

Merits can be seen in both these positions, but it is interesting, at least to a lawyer, that such tensions exist among its membership as to the very approach to be taken properly by the highest court of appeal of many jurisdictions.

Finally, in the context of the majority’s clear approval of Armitage v Nurse’s determination that excluding liability for gross negligence was perfectly permissible in English law and remains so, unlike in, e.g. Scotland, Jersey and Guernsey, and given how influential that approval is bound to be for English lawyers, it is worth noting Lord Kerr’s decision to quote in full Millett LJ’s own doubts as to the acceptability of this position:

‘167. Although no investigation of the public policy arguments was undertaken, it appears that Millett LJ was alive to the opinion that it was less than satisfactory that trustees should be able to escape liability in this way for at pp256 B-C he said this:

‘… it must be acknowledged that the view is widely held that these clauses have gone too far, and that the trustees who charge for their services and 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 introduced a law in 1989 which denies effect to a trustee exemption clause which purports to absolve a trustee from liability for his own ‘fraud, wilful misconduct or gross negligence’. The subject is presently under consideration in this country by the Trust Law Committee under the chairmanship of Sir John Vinelott. If clauses such as clause 15 are to be denied effect, then in my opinion this should be done by parliament, which will have the advantage of wide consultation with interested bodies and the advice of the Trust Law Committee.
‘168. It is interesting to consider how a Guernsey court in 1988 would have reacted to the suggestion that it should follow English law in this area, if a statement such as that set out in the preceding paragraph had been then available. It seems to me to be entirely probable that it would have been extremely reluctant to follow English law on this question, not only because of the reservations about its propriety that appear to be implied in the passage quoted but also because the principle that a trustee was required to act as a bon père de famille was so deeply embedded in Guernsey customary law.’

While, since Millett LJ expressed himself as he did, all sorts of professional men and women have, in fact, ever increasingly in their contracts of engagement sought to limit their exposure to the consequence of their negligence, the doubts about the propriety and justice of the exclusion of liability for gross negligence by English trustees in particular have not gone away. Doubtless, they will remain with us notwithstanding the Board’s decision in this case.

[2011] UKPC 13
[1998] Ch 241 (CA)
[1995] JLR 352 (CA)
Law Commission Consultation Paper 124 at para 3.3.41
‘The Efficacy of Trustee Exemption Clauses in English Law’ [1989] Conv 42
For example, the general discussion in Lewin on Trusts 18th ed (2008) at 39-123

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