Nov 2009 | Conflicts of Interest in Trusts, STEP Diploma Lecture

 

 

We have come across in practice instances where we need to carry out conflict checks to ensure that we are acting for our clients in a fashion that is not in conflict with another client of our firm. Many firms have policies to ensure that staff is not allowed invest in shares in a company client for fear of appearing to be susceptible to insider dealing. In many cases clients are families and difficulties can arise between family members yet each family member has given instructions to the same firm in the past. These are important considerations of conflict for us in our professional capacity, but more so if we are also acting as trustees and holding fiduciary obligations. 

A potential conflict of interest can arise by virtue of circumstance which in no way impute any wrong doing to the professional yet the professional can be held liable as a trustee. Extreme care must be taken in such circumstances when acting as professionals and more so when also acting as trustees. Throughout the management of the file, care should be taken to continue to assess the position of the trustees to avoid coming into conflict.

 

 

A trustee must not personally purchase trust property unless specifically authorised under the trust instrument.[11] This is called ‘self dealing’ in so far as the trustee would be both vendor and purchaser. 

If the trustee sells the trust property to himself the transaction is voidable[12] by the beneficiary however fair the transaction and whether or not the trustee has made a profit. It is not sufficient to show that the trustee purchased at auction or with the benefit of  an independent valuation[13]. 

If the sale is to a spouse of the trustee or family members the court will scrutinise the transaction carefully, likewise sales to a company where the trustee has a substantial interest.[14] 

While the rule applies to trustees who have retired, the courts have allowed a transaction where the trustee retired 12 years before the transaction had taken place[15]. The rule does not apply if the transaction takes place and later the trustee is appointed to the office[16].

The trust instrument may authorise the trustee to purchase the trust property. In such a case it is then good practice to ensure bona fides that the trustee stands aside from acting as trustee in connection with the transaction so that the co trustees deal as vendor to that trustee as purchaser.

The court also has authority to authorise the transaction[17]. Likewise where beneficiaries are sui juris and consent to the transaction, the sale is permitted.

 

 

The ‘fair dealing’ provides that a trustee cannot purchase the interest of the beneficiaries in the trust from the beneficiaries. In this rule the inference is not as much that there might be a conflict of interest but the risk that the trustee will exert undue influence over the beneficiaries in making the purchase. If it can be proven unequivocally that the transaction is fair, that all the material facts were disclosed and that the beneficiaries received independent legal advice, the courts will likely permit the transaction to proceed.

 

 

We will deal later on in this lecture with the matter of trustee remuneration. The general rule is that a trustee is not entitled to payment other than by way of reimbursement for expenses properly incurred, which rule is based on the conflict of duty and interest principle. 

 

Where a beneficiary of a trust is involved in family law proceedings, typically the trustees must deal with the issue of conflict between that beneficiary and his spouse, whether the spouse is a beneficiary or not.

The Irish Courts in separation and divorce cases have a constitutional and statutory duty to ensure that “proper provision” exists or is put in place for the spouses and dependant children of the marriage.The court has a duty to carry out this responsibility and has a wide menu of ancillary relief orders that it can make to achieve proper provision. The court must take into account all the circumstances of the case and the specific statutory factors that are set out. The courts have shown that they will do what is necessary to equip themselves to enable them discharge that duty. 

In some cases, assets are owned not by the spouses but by trustees either for the benefit of one spouse alone or for the benefit of a class of beneficiaries which may include (among others) the spouses or one of them and their children. To what extent can the court take the value of the trust assets into account, particularly in relation to a discretionary trust where a beneficiary merely has an expectation to be considered and has no actual entitlement to any particular share of the assets of the trust?

 

There are two distinct aspects to this problem.

·         What impact will the existence of a trust have on a court in exercising its discretion to grant ancillary relief?; and

·         Does the trust comes within the definition of ante-nuptial or post-nuptial settlement and is it therefore capable of being varied by a property adjustment order?

 

The fact that a trust exists and that a spouse is a beneficiary or a potential beneficiary will be a factor that the court will, at the very least, have to examine and give due consideration to depending on the circumstances of each case.

Mr A has a life interest (with remainder to his children) in a trust fund which is invested in stocks and shares. Mr A receives the dividend income each year. The court will take the income of Mr A into account in assessing maintenance between Mr A and his spouse, however the court will not make a property adjustment order in relation to the trust assets themselves.

 

Mrs A, Mrs B and Mrs C and their children form the class of beneficiaries of a discretionary trust created by their father. In the past the trustees have exercised their discretion in favour of Mrs C who is in poor financial circumstances. Mrs A has never received anything from the trustees. Mrs A is now divorcing her husband. What significance will the court put on the fact that Mrs A is in the class of beneficiaries of this trust with the potential of receiving financial assistance from the trustees? The court cannot force the trustees to exercise their discretion in favour of a particular beneficiary.

 

 

 

In Browne v Browne[19], the parties had been married in 1965 and the husband had no substantial means. The wife however was a daughter and granddaughter of women of substantial assets and there were in existence two trusts over which it was alleged the wife exercised effective control and which had been set up outside of the jurisdiction. In the family division the Court had ordered her to pay a significant capital sum to the husband. The wife appealed and contended that the judge had been wrong in firstly finding that she exercised effective control over the two trust funds and that secondly in making an Order which would exert pressure upon discretionary trustees. 

 

It was held that there was clear authority under the phrase “other financial resources” in its legislation to include assets held on discretionary trusts and it would be unrealistic to disregard such foreign assets.

 

Furthermore it was held that with regard to discretionary trusts in the present case although it would be wrong for the Court to make Orders designed to put pressure on discretionary trustees nevertheless the Court must look at the reality of the situation. The evidence demonstrated that the trustees had acted throughout in accordance with the wife’s wishes and that she had immediate access to funds whenever she required them, and furthermore that the money due to be paid by the wife from the trusts was perfectly able to be paid and would be paid if the trustees were satisfied that she had to have the money. It followed that the Judge had been right to hold that the wife had effective control over the trust funds and that in making the Order he had exerted no improper pressure on the trustees.

In applications for separation and/or divorce, the Court has power to make what are known as "property adjustment orders". The Court has power to order one spouse to transfer property to the other spouse or to a person on behalf of a dependent member of the family. The Court cannot however order a third party to transfer property. The Court cannot order a company in which a spouse is a director and shareholder to transfer property to the other spouse. The Court cannot orders trustees to transfer trust property to the other spouse. The only proviso is where the Court may vary an ante-nuptial or post-nuptial settlement or where the Court sees the trust as a sham.

 

The order can provide for one or more of the following matters:

 

(a)   the transfer by either of the spouses to the other spouse, to any dependant member of the family or to any other specified person for the benefit of such a member of specified property, being property to which the first mentioned spouse is entitled either in possession or reversion,

 

(b)   the settlement to the satisfaction of the Court of specified property, being property to which either of the spouses is so entitled as aforesaid, for the benefit of the other spouse and of any dependent member of the family or of any or all of those persons,

 

(c)   the variation for the benefit of either of the spouses and of any dependant member of the family or any or all of those persons of any ante-nuptial or post-nuptial settlement (including such a settlement made by will or codicil) made on the spouses,

 

(d)   the extinguishment or reduction of the interest of either of the spouses under any such settlement.

 

As mentioned the Court has power to make

c)      “An Order varying for the benefit of the parties to the marriage and of the children of the family……………………any settlement (including such a settlement made by Will or codicil) made on the parties to the marriage…………….”

 

d)      “An Order extinguishing or reducing the interest of either of the parties to the marriage under such a settlement”.

So what is an ante-nuptial or post-nuptial settlement?

The case ofJD v DD [20] was an application heard in the High Court under the Judicial Separation and Family Law Reform Act and ancillary relief was sought under the Family Law Act, 1995.

 

There were in effect three trusts in this case. There was the D Family trust which was the husband’s trust the beneficiaries of which were the husband and the wife, their five children and the husband’s sister and her husband. While monies had been paid out of the trust to the other beneficiaries, the Applicant in the case, who was the wife, never received any money and was told by the trustees that she would get none. The assets in the D Family trust were worth about IR£600,000. There was also in existence a trust in the wife’s family called the L Family trust. The beneficiaries included the wife. The assets of the trust were worth €285,000. There was a further trust called the Isle of Man trust. This was a trust created by the husband in the weeks/months immediately prior to the full hearing of the case. The beneficiaries of the Isle of Man trust were the children of the marriage. Guinness J referred to the case as Howard v Howard which she cited, the principle of which was primarily that the Courts should not go after trust assets however she was not referred to the many other English cases.

 

Although McGuinness J did not have the other cases that are referred to in this paper to guide her she found other ways of ensuring that she provided proper provision for the wife in question. She used Section 35 of the Family Law Act, 1995 to set aside the Isle of Man trust that the husband created in the period immediately prior to the hearing of the case and used other family assets to make provision for the wife.

 

Her judgement stated:-

 

 

For the reasons set out in that judgment McGuinness J chose not to vary the trusts in accordance with Section 9(1)(c) in any event no application in that regard appears to have been made, but she was quite fearless in relying on Section 35 and the other resources outside of the trust to make proper provision for the wife.

 

The issue of variation of a post-nuptial settlement was examined by McGuinness J. in the case F(R) -v- F(J) [1995] 3 Fam LJ. The facts were that the parties had lived together since 1984 but had only married in 1990. There were two dependent children of the marriage. The applicant wife instituted proceedings in 1993 seeking a decree of judicial separation and ancillary relief. In 1994, the respondent husband transferred all of the then remaining off­shore funds, approximately £52,700, into a trust. The trustee of the trust was a trustee company and the beneficiaries were the two children of the marriage and the husband's mother. McGuinness J. stated in her judgment:

 

 

 

McGuinness J. went on to direct that from the trust assets in Guernsey, the husband should pay the sum of £25,000 to the wife. With regard to the remainder of the money in the trust fund, the judge directed that it should be left in trust for the benefit of the education of the children; however, she further directed that the husband's mother be removed from the list of beneficiaries of the trust. This was done pursuant to Section 15 of the Judicial Separation and Family Law Reform Act 1989 (property adjustment order section), now Section 9 of the Family Law Act 1995, permitting her to make an order altering the terms of a post-nuptial settlement.

 

 

It is likely that at first instance, the trustees will be involved in relation to disclosure and information gathering. There is a duty on parties to proceedings to full and frank disclosure and, while the Court at first instance is likely to try to get information from the party/parties who in turn can get it from the trustees, the trustees can be ordered to make third party discovery. This will be discussed in more detail later on in the course regarding beneficiaries’ entitlements under trusts.

 

If relief is sought to vary the terms of a nuptial settlement the trustee will probably be joined as notice parties either by the parties or either of them, the Court, or the trustees themselves and they should have separate legal representation which can, of course, be costly.

 

In a less formal way, the trustees may be asked if they will exercise their discretion in a certain way and undoubtedly if trustees take a pragmatic and flexible approach they may be able to assist the settlement of difficult family law litigation. For example, the Court cannot order trustees to appoint €50,000 to a husband for a deposit on a house, however if such a payment provided a solution to complex negotiations then trustees might be well advised to take a pragmatic view and not just automatically say that assets are not available for distribution.

 

Trustees may be called to give evidence to the Court on factual matters, such as the terms of the trust, the administration of the trust etc., as occurred in the J(D) v D(D) case.

 

 

The office of trustee is a gratuitous one. While a trustee is entitled to be indemnified against the expenses properly incurred by him as a trustee, he is not entitled to any allowance for his trouble, his inconvenience and loss of time, nor is he entitled to payment for any professional or other special services rendered by him. 

 

This rule is based on the conflict of duty and interest principle. The principle is that, if the trustee were allowed to perform the duties of the office and to claim remuneration for his services, his interest would be opposed to his duty to take care that no improper charges are made and, as a matter of prudence, the court will not allow the trustee to place himself in that situation[21].   If such a conflict occurs and the trustee obtains a benefit or profit as a consequence of his position, the trustee or fiduciary is accountable to the trust. This rule is applicable to any benefit received by a fiduciary whether financial or otherwise and whether received from the trust fund or a third party.  

 

The general rule was summarised by Lord Herschell in the case of Bray v Ford[22] in the following terms:

 

“It is an inflexible rule of a court of equity that a person in a fiduciary position…..is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and his duty conflict. It does not appear to me that this rule is…..founded upon principles of morality. I regard it rather as based on the consideration that, human nature being what it is, there is a danger in such circumstances of the person holding a fiduciary interest being swayed by interest rather than duty and thus prejudicing those he is bound to protect. It has, therefore, been deemed expedient to lay down this positive rule.”

 

Thus trustees are not entitled to receive or retain remuneration for their services as trustees, except in certain circumstances when they are expressly authorised to receive the same. The strict application of this rule is not dependent on what is fair to the trustee; rather it is based on protecting the trust assets and preventing the trustee from abusing his position. 

 

The basis for the general rule is illustrated in the case of Williams v Barton[23]. In this case the defendant was a trustee, employed as a stockbroker’s clerk. In this capacity he was entitled to receive a commission on business introduced to the firm. He persuaded his co-trustee to use his firm to value the trust property. The defendant took no part in the work of the valuation. The trustees paid the fees charged by the firm and the defendant received his commission. The co-trustee then brought a claim to recover the commission on behalf of the trust. The Court held that, despite the valuation being quite proper in the circumstances, the defendant was required to account for the commission because the opportunity to earn the reward derived from his position as trustee. Russell LJ stated:

 

 

This general rule is however, subject to some important exceptions. 

 

A trustee will be entitled to be remunerated where the trust instrument expressly provides that the trustee is to be entitled to remuneration for his services.  Such clauses are strictly construed.[24] As a prerequisite to recognising a charitable trust for taxation purposes, the Irish Revenue Commissioners stipulate that the trust instrument must contain a specified clause preventing the payment of any remuneration to the trustees.[25] Remuneration is likely to take one of three forms: 

 

 

The payment of a fixed sum or salary to the trustee may be directed by the settlor and will be provided for in the will or trust instrument. Thus, the provision of a yearly sum payable to the trustees for the ‘care and trouble they might have in the execution of the trust’ will be valid[26]. If the testator gives an executor a salary for his trouble the salary will not cease on commencement of proceedings for administration, since, while the management of the estate may be under the direction of the court, the executor is still required to assist the court with his care and vigilance, following the view taken by the Court in the case of Baker v Martin[27].

 

 

The charging of fees in accordance with a scale related to the value of the trust fund is almost exclusively the practice of corporate trustees and trust corporations. The fees charged in this manner will usually consist of acceptance fees, annual administration fees and withdrawal fees together with special fees in relation to particular duties that may be required to be carried out. 

 

When a trust corporation is appointed by will to act as executor, or executor and trustee, it is usual to provide in the will that the appointment is made on the terms and conditions upon which the particular trust corporation undertakes such duties. As such terms and conditions vary as between one corporation and another[28], it is desirable and advisable that a draft document should be submitted to the corporation for its approval and acceptance. In addition to the acceptance fee, annual administration fee and withdrawal fee, there may be fees for special activities, such as reinvestment, making tax returns and income collection. In this situation it would be advisable to include a clause to the effect that the trust corporation can charge its fees “in line with the terms and conditions which are current at the date hereof or which may be amended from time to time.”

 

 

This simply permits the professional trustee to be paid for his professional services. A professional trustee charging clause authorises a professional trustee to make reasonable and proper charges for his professional services but not for services not strictly belonging to his professional character except insofar as the charging clause expressly extends to non-professional services. Care needs to taken when drafting such clauses to ensure the trustee is entitled to be paid for work which falls outside the work usually conducted in the course of his own profession[29]. Thus, in the absence of an express extension to non-professional services, a solicitor who is appointed as trustee is not allowed to charge for such matters as attendances on auctioneers, attendances on paying legacies or debts[30] or for attending periodic meetings of trustees[31].

 

In the case of Re Ames[32], the clause under consideration authorised a solicitor trustee to make the usual professional or other proper and reasonable charges for all business done and time expended in relation to the trusts of the will, whether such business was usually within the business of a solicitor or not. The Court determined in this case that charges for business not strictly of a professional character were allowed. However, in the case of Re Chapple[33], the solicitor trustee was authorised to make the usual professional charges and was entitled

 

“to make the same professional charges and to receive the same pecuniary emoluments and remuneration for all business done by him and all attendances, time and trouble given and bestowed by him in or about the execution of the trusts and powers of my said will, or the management and administration of my trust estate…..as if he, not being himself a trustee or executor hereof, were employed by the trustee or executor, and he shall be entitled to retain out of my trust moneys, or to be allowed and to receive from his co-trustee if any out of the same moneys the full amount of such charges”.

 

Under this direction, the solicitor trustee delivered bills of costs, which included charges for all business done by him including business that could have been transacted by a lay trustee without the assistance of a solicitor. In this case, non-professional charges were disallowed and Kay LJ referred in his judgment to the case of Re Ames where the testator directed the solicitor trustee to be allowed, to make professional or other proper and reasonable charges, whether such business was usually within the business of a solicitor or not and noted that those words did not appear in the case before him.  

 

In Chalinder & Herington[34], a testator appointed executors and trustees and directed that one of them should be the solicitor in respect of the trust property and further directed that the solicitor should be “allowed all professional and other charges for his time and trouble, notwithstanding his being such executor and trustee”. It was held that his clause did not authorise charges for work done which was not strictly professional, but might have been performed personally by a trustee who was not a solicitor. Warrington J. was of the opinion that the clause simply provided that Mr. Chalinger would be the solicitor, and would be allowed his professional and other charges for this time and trouble as solicitor. The judge noted that, in order to enable a solicitor trustee to obtain payment for work, in respect of which an ordinary trustee could not be paid directly, there must be words in the will, which show that this was the testator’s intention.

 

The operation of a professional trustees charging clause is not confined to solicitors. Under such a clause, trustees engaged in any profession or business (e.g. banking), are entitled to remuneration for their services, even though the profession or business does not pertain to trust administration at all. Thus, a trustee who was a keeper of antiquities at the British Museum, was entitled, under the usual professional charging clause, to charge a commission in connection with sales by private treaty of the testator’s work of art[35]. 

 

In the absence of a trustee solicitor charging clause, professional fees may not be charged by that trustee solicitor who is acting as a solicitor for the trust. It appears also that he may not employ the firm of solicitors, in which he himself is one of the partners, to act on behalf of the trust. If he does, then that firm will not be entitled to be remunerated. This rule was stated by Maugham LJ in the case of Re Hill[36] as follows:

 

“The general rule, no doubt is this, that neither a solicitor who is a trustee, nor a firm of solicitors of which the trustee is a member, can receive out of the trust estate, profit costs by way of remuneration, for transacting legal business in connection with the trust. There are some exceptions to this rule……In Clack v Carlon…the defendant Carlon was the trustee under a deed, which the suit was instituted to carry into effect. He was a solicitor, and he was astute enough to employ his partner, Mr Haynes, in the trust matter, under an arrangement which was satisfactorily proved, by which it was agreed that Haynes should in all the matters connected with the trust act as solicitor for Carlon, and should alone, be entitled to receive for his own benefit any costs and charges, which might be incurred in carrying on the trust. Be it observed, that there are two material facts there, one that Haynes was to act as solicitor, in doing this work, and secondly that he alone, could receive the whole of the costs and charges which might be incurred in so doing. The result was that Carlon was wholly disinterested in the solicitor’s work done by Haynes”.

 

In the absence of a trustee solicitor charging clause, a trustee who is a solicitor is not precluded from doing what any other trustee can do, namely, employ an independent solicitor to act for him[37]. Once it is a necessary expense and one that the trustee can stand over, it is an expense properly incurred and payable out of the trust.

 

A clause in a will authorising remuneration is for many purposes equivalent to a legacy[38] and it is appears that a trustee who is an attesting witness of a will may not be entitled to claim remuneration under the express provisions of the will[39]. It is noted by Brian Spierin S.C. and Paula Fallon in The Succession Law 1965 and Related Legislation that a charging clause is a conditional legacy, and as such, is subject to the ordinary rules relating to gifts by will, including the rule that an attesting witness may not take a gift under the will. On this basis, if a solicitor, his spouse, or a partner in his firm attests a will, he may not be permitted to receive payment for his services under the charging clause and will be entitled only to reimbursement for his out-of-pocket expenses. Interestingly under the UK Trustee Act 2000 this position is reversed, but only in relation to the estate of a person who dies after the 2000 Act was brought into force and only in favour of personal representatives who are trust corporations or act in a professional capacity.)

 

The effect of a clause in a will authorising remuneration being held to be a legacy is that the trustee cannot charge at all if the estate is insolvent, as was held in the case of Re White[40]. A similar prohibition will apply if the estate has been exhausted by specific legacies. For practical purposes if the solicitor trustee is concerned about this, it would be advisable that he should engage an outside solicitor to act in the administration of the estate and whose costs will rank as prior administration expenses. 

 

In addition, because a charging clause is regarded as a legacy, it will abate, in whole or in part, with other pecuniary legacies if there are insufficient assets in the estate to meet all the legacies. To guard against this possibility it is therefore advisable for the will to provide that the charging clause takes priority over other legacies in the will.

 

It would be prudent, even for non-professional trustees, to insist on the insertion of charging clauses, even though they may wish to undertake such duties without reward. The reason for this is to facilitate the appointment of professional trustees should the need ever arise in the future. Without a clearly expressed charging clause, it may prove difficult to engage the services of a professional trustee who will be understandably reluctant to act if there is uncertainty as to whether he will be entitled to be remunerated.

 

An issue may arise if a solicitor executor obtains a grant of probate of a will that was apparently in order and acts in the administration of the estate, but the will is subsequently declared to be invalid. This situation was considered in the English case of Gray v Richards, Butler[41]. In that case the deceased had made a Will in 1989, appointing as executors the solicitor and another person. The 1989 Will contained a charging clause. The Will appeared to be in order and probate was granted in October 1990, the testatrix having died in May 1990. The solicitor and his co-executor proceeded with the administration of the estate. In due course it emerged that, notwithstanding the terms of the attestation clause, the two witnesses had not witnessed the testatrix’s signature together. The 1989 Will was subsequently declared to be invalid and probate was granted of an earlier Will, in which the plaintiff named as the sole executor. In the High Court, Cranwath J held that the effect of a charging clause was to put the solicitor in the position of a beneficiary of the Will, a recipient of the testator’s bounty. Consequently, if the Will was held to be invalid, the benefit had to be returned to the estate. Therefore, once it had been established that the 1989 Will was invalid, the plaintiff was merely carrying out his duty as executor of the 1980 Will in recovering the wrongly made payment. The following comment appeared, after this case, in the August/September 1998 Edition ofTrusts & Estates:

 

 

At the time of accepting the trust, the trustee may agree with the beneficiaries on remuneration for his services. In the past, it has been said that such contracts are watched by the court jealously[42], that they must be made freely and not submitted to under pressure. All the beneficiaries must be of full age and sui juris and consent to the trustee’s being paid remuneration[43].

 

Where the intending trustee is a solicitor who is acting as such in the preparation of the trust instrument purporting to confer the right to remuneration, there might be a difficulty in relying on this clause unless, at the very least, the solicitor could prove that the precise effect and nature of the agreement or arrangement has been clearly and distinctly explained to the client[44], particularly if the remuneration agreed to was considered excessive. A good attendance note will be of crucial importance if such a situation is subsequently challenged.  

 

It is important that such an agreement needs to be concluded before the trustee accepts office (unless it is done by way of a deed), since once the trustee has accepted his office he is already under a duty to the beneficiaries to act gratuitously, so that no consideration exists for a contractually binding agreement. However, the acquiescence of a beneficiary may prevent a beneficiary from suing for breach of trust for past payments of remuneration.

 

 

Under the rule in Cradock v Piper, where a solicitor acts for himself and another, the solicitor is allowed to charge his normal fees (notwithstanding a lack of express authorisation in the trust deed). This exception has been enunciated in the following terms:

 

“Where there is work done in a suit, not on behalf of the trustee who is a solicitor alone, but on behalf of himself and a co-trustee, the rule will not prevent the solicitor or his firm from receiving the usual costs, if the costs of appearing for and acting for the two have not increased the expense; that is to say, if the trustee himself has not added to the expense which would have been incurred if he or his firm had appeared only for his co-trustee”[45].   

 

The rationale behind this exception is that, if there are several co-trustees who are defendants to proceedings which have been taken, then one of the trustees, being a solicitor, is allowed to act for himself and the others and to receive the full costs of so acting, if those costs do not increase through his involvement as such.

 

It should be noted, that this exception is limited to the costs incurred in respect of work carried out in relation to litigation and does not apply to business done out of court. It is not necessary, that the court action should be hostile in character but there must be some form of litigious matter.

 

 

Under English law, a solicitor trustee may employ his partner in cases where it would be proper to employ an outside solicitor, provided that he himself will derive no benefit, direct or indirect, from such an employment[46]. This has not been confirmed in Ireland as yet.

 

Thus, if a solicitor trustee is in partnership with other solicitors, he may employ those partners to act for him as his solicitors on behalf of the trust, provided arrangements are made that none of the profit costs which those partners make, find their way into his own pocket. It must be expressly agreed in such a situation that the trustee is not to participate in the profits or have any benefit from such charges.

 

A director of a corporate trustee, who is engaged by and paid by the trustee to act in connection with the trust, is not accountable to the beneficiaries for such remuneration and the trustee may recover the remuneration as expenses of the trust if they come within the scope of expenses allowed by the terms and conditions under which the trustee acts[47].

 

 

The Court has an inherent jurisdiction to authorise remuneration of a trustee, but that jurisdiction will be exercised sparingly only and in exceptional cases[48]. The Court’s jurisdiction may be exercised not only to award remuneration upon[49], or after[50], the appointment of a trustee where none is allowed by the trust instrument, but also so as to increase the remuneration allowed by the trust instrument[51]. This applies irrespective of whether the trustee was appointed by the court.

 

Essentially, the basis of this jurisdiction of the court is that the court always has an inherent power to secure the proper administration of trusts. Before exercising this jurisdiction the court must be satisfied having regard to

 

“the nature of the trust, the experience and skill of a particular trustee, the amounts which he seeks to charge when compared with, what other trustees, might require to be paid, for their services, and to all other circumstances of the case, that it would be in the interests of the good administration of the trust, and therefore of the beneficiaries, to award or increase remuneration”[52]. 

 

It is suggested by Pettit in Equity and the Law of Trusts that remuneration may be awarded if that is necessary in order that the services of a particular trustee, whose services are of special value to the trust, are secured or that remuneration might be increased if this is necessary to retain the services of that particular trustee.

 

There are a number of established principles which apply to the exercise of the Court’s inherent jurisdiction to award remuneration. In particular, if the court feels that the trustee’s contribution to the trust has been exceptional and/or has proved to be of exceptional benefit to the trust, the court is likely to consider favourably the application. As Fox LJ stated in O’Sullivan v Management Agency and Music Ltd[53]

 

 

If there are objections from some of the beneficiaries to the exercise of this jurisdiction, then this would be an important matter for the court to take into consideration in determining whether the jurisdiction should be exercised, but would not go to the existence of the jurisdiction itself. In other words, objections from some of the beneficiaries will not prevent the court from considering the application.

 

In Re Duke of Norfolk’s Settlement Trusts[54], Walton J. authorised extra remuneration for what was considered exceptionally onerous work in connection with the development of Arundel Court in The Strand and which was entirely outside anything which could reasonably have been foreseen when the trustees accepted office. However he held that the court had no general inherent jurisdiction to authorise for the future a general increase in the trustee company’s remuneration, by increasing the management fee from 10p to 40p per £100.00 on the market values of the trust property. The Court of Appeal, in reversing the decision of Walton J to the extent that he held there was no general jurisdiction to authorise the increase in remuneration, held that:

 

 

Remuneration can also be sought for work already done, not only where the services of the trustee are required into the future and the payment will encourage the trustee to remain in office, but also where there is no need to retain the trustee’s services any further. Each case will depend on its own facts, and it will be a matter for the court to decide whether or not the award should be made.   It is stated in by Pettit in Equity and the Law of Trusts[55] that awards of remuneration for work done are typically made in cases where work of an exceptional character is performed, for example in relation to the development or realisation of land, and where it might not be practicable to asses the size of the task to be performed until after completion or indeed the funds for payment of remuneration might not be available until after completion[56]. It is suggested that the administration of trusts might therefore be better promoted if the application is made after rather than before the work is done, when the court is able to assess the merits of the application with the benefit of hindsight.

 

One further principle is proposed, that if the trustee has performed services over and above and outside the scope of any duties which would or could reasonably have been expected to be rendered by trustees in their normal course of their duties and this has resulted in a financial gain to the trust as a result of the work done, remuneration may be ordered, on the basis that trustees could not be expected to have acted, as they did, without remuneration, and on the basis that the beneficiaries would be unjustly enriched if no remuneration were paid. In the case of Foster v Spencer[57], the trustees were a surveyor and a building contractor and they had used their special skills over many years to bring about a sale of trust land at a profit. At the time of the appointment, they had not appreciated the extent of the task they had undertaken and would not have acted gratuitously if they had. Remuneration was awarded for the work done but not for any of the remaining tasks which required no special expertise. In Boardman v Phibbs[58] remuneration on a generous scale was ordered in recognition of the results achieved as the actions of the trustees resulted in a considerable windfall for the trust.

 

It is thought the court will not award remuneration in favour of directors of a company, on the basis that their remuneration is a matter between them and the company in which the court will not intervene, applying the case of Guinness v Sanders[59]. In that case the House of Lords refused a claim for remuneration by a company director who, it was assumed, had acted bona fide, but it was thought that he had involved himself in a conflict of interest. However, in this case it was doubted whether the jurisdiction could ever be exercised in favour of a director on the basis that this would constitute interference by the court in the administration of the company’s affairs and that the company’s articles of association usually give the board of directors the power to allow and fix the remuneration of directors as it did in this case. As such, the Lords took the view that any claim for remuneration should be addressed to the board of directors. This is not to say that the board of directors would not have awarded him remuneration in respect of the work carried out by him as a director, but his application would correctly be made to the board.

 

The decision in this case can be contrasted with Boardman v Phibbs[60], where remuneration was awarded to the directors but in that case the merits of the claim were overwhelming. It is suggested that the case of Guinness v Sanders is quite different since the director had put himself in a position where his interests were in stark conflict with his duty.

 

In the case of Llewellin’s Will Trusts[61] a will authorised the trustees to

 

“make arrangements with the…..company….for the appointment of my said trustees, or either of them, or any other person, as director or managing director, of the said company” 

 

Jenkins J., observing that the company articles provided for the remuneration of directors, remarked that “the testator had expressly empowered his trustees to make arrangements for the appointment of themselves to offices which can fairly be described as remunerated”, and so held that the trustees could retain their directors’ fees even though “the trustees are in the invidious position of fixing their own remuneration, being completely in control of the company……..but that is the result which must inevitably ensue.” [62] 

 

It should be noted however, as stated above, that a director of a corporate trustee who is engaged and paid by the trustee to act in connection with the trust is not accountable to the beneficiaries for such remuneration and the trustee may recover the remuneration as expenses of the trust if it comes within the scope of expenses allowed by the terms and conditions on which the trustee acts. 

There have been cases where delay on the part of the trustee in seeking remuneration from the Court may have prejudiced the success of the application, particularly if there was no good reason or explanation for the delay. It is not clear how far simple delay without any good reason or explanation will prejudice an application, which would have been successful if it had been timely. It has been suggested that ignorance may excuse delay where even a professional or corporate trustee has taken remuneration from the trust fund and had overlooked the absence of a charging clause in the trust instrument.

 

In circumstances where the trustee is awarded remuneration in respect of work already done pursuant to an order of the court in the exercise of its inherent jurisdiction, the trustee may also be awarded interest on the remuneration[63].

 

 

 

A trustee is entitled to be reimbursed for his expenses. This was placed on statutory footing by virtue of Section 24 Trustee Act 1893 which provides that a trustee “may reimburse himself, or pay or discharge, out of the trust premises all expenses incurred in or about the execution of his trusts or powers”. The principle that underlies this section was set out by Chatterton VC in the Irish case of Courtney v Rumley[64] in the following terms:

 

The right to be indemnified does not apply where expenses have been incurred through the misconduct or negligence of the trustee.

 

The UK Law Reform Committee[65] describes trustees in practice as coming within one of three categories:

 

(i)   Unprofessional unpaid trustees of the “family friend” type;

(ii) Paid, often professionally qualified, trustees such as solicitors and accountants; and

(iii) Professional trustees, such as banks, which advertise themselves as such.

 

As far as the standard of care required of trustees is concerned, it appears that a higher standard of care and diligence is expected of paid professional trustees than will be expected or required of unpaid trustees. This view has been echoed in many decisions of the courts in both this and neighbouring jurisdictions.

 

The standard of conduct required of an unpaid trustee is that laid down in Speight v Gaunt[66], namely that in managing the trust affairs, he must take the precautions which an ordinary prudent man of business would take in managing similar affairs of his own.As already mentioned in the earlier lecture, the court has described the standard of care applicable to trustees in terms of a requirement to exercise reasonable care and diligence or, in other words, “that ordinary prudence which a man uses in his own affairs[67]”. 

In contrast it is clear from case law that a higher standard is imposed on paid trustees who come within categories (ii) and (iii) above. In Re Waterman’s Will Trusts[68], Harman J said:

 

 

In a similar vein in Bartlett v Barclays Bank Trust Co. Ltd (No. 1)[69], Brightman J stated that:

 

 

Brightman J. thus confirmed the principle that in his opinion a higher duty of care is expected of a professional trustee, such as a trust corporation which carries on the specialised business of trust management, and such an entity will be liable for a breach of trust because it neglects to exercise the special degree of care and skill that it professes to have. 

 

It is currently unclear whether a higher standard is expected of a professional trustee as opposed to an unpaid trustee, in terms of the duty of diligence and care in respect of investments. There have been a number of decisions on this issue in the UK. In Bartlett v Barclays Bank Trust Company Limited[70] Brightman J L said “I am of the opinion that a high duty of care is plainly due from someone like a trust corporation which carries on a specialised business of trust management”. However, the courts have on occasion been rather generous in their treatment of professional trustees[71]. The UK decisions appear on balance to impose a higher standard on professional trustees. However, an authoritative Irish decision is lacking.

 

What is clear however as mentioned int eh earlier lectureis that a trustee must not take into account non-financial considerations. Trustees may have strongly held social, political or ethical views. They may be firmly opposed to certain types of investments, for example in alcohol companies or tobacco companies. Even so, if the investment of this type would be more beneficial to the beneficiary than other investments, the trustee must refrain from taking his own views into account[72].

 

The Trustee Act 1893 makes no provision for a general statutory duty of care on trustees. However, as mentioned in the earlier lecture, the Law Reform Commission recently published its Report “Trust Law: General Proposals” which contains a number of recommendations, including the introduction of a statutory of care for trustees. The Commission recommended that this statutory duty of care should be of general application and should replace the common law duty of care. The statutory duty of care should allow for a distinction to be drawn between professional and non-professional trustees by demanding a higher standard of care from trustees who are qualified professionals. 

Interestingly, the UK Law Reform Committee saw no need to incorporate the existing distinction between unpaid and professional trustees into a statutory provision, although the existing distinction is maintained through the application of section 61 of the UK Trustee Act, 1925, under which an unpaid family trustee is more likely to be relieved from liability than a professional trustee[73].   

 

One further point to note is that a paid trustee will be expected to do more of the work himself and to delegate less and a paid trustee will be given less opportunity to rely upon the fact that he acted upon legal advice[74] in seeking to absolve himself of liability.  

 

 

I HEREBY APPOINT the firm of solicitors practising under the style and title of [name of firm] of [business address], as executors and trustees of this my will, provided always that it shall be the partners of the said firm, at the date of my death who shall be entitled to prove the said will and in the event that the said firm shall amalgamate with another firm under its own or a new name, or that the said firm shall be incorporated into another firm of solicitors, the amalgamated firm of solicitors or the firm of solicitors into which the said firm shall be incorporated, shall be deemed to be executors and trustees of this my will. I APPOINT the said firm as trustees for the purposes of Section 57 of the Succession Act 1965[, the Conveyancing Acts 1881-92 and the Settled Land Acts, 1882-90][75].

 

The said firm of solicitors shall be entitled to charge professional fees for work done by it or its members in connection with my estate, whether or not the work is of a professional nature on the same basis as if the said firm were not my executors and trustees but employed to carry out work on their behalf and the fees so charged shall be paid in priority to all other bequests under this my will.

 

A corporate trustee shall have the rights benefits and remuneration set out in its published terms and conditions for the time being and as may be amended from time to time.

 

A trustee acting in a professional capacity is entitled to receive reasonable remuneration out of the Trust Fund for any services he provides on behalf of the Trust. For this purpose a trustee acts in a professional capacity if he acts in the course of a profession or business, which consists of or includes the provision of services in connection with the management or administration of trusts generally or a particular kind of trust, or any particular aspect of the management or administration of trusts generally or a particular kind of trust.

Any of my trustees being a solicitor or other person engaged in a profession or business may act, and be paid, for all acts done and time expended in or about the administration of my estate and the trusts hereof by himself, his partner or his firm including acts or business, which might be done or transacted by the trustee personally, and not requiring the employment of a solicitor or person engaged in such profession or business for the doing or transaction, even though not of a professional character.

 

(Taken from Williams on Wills, Precedents and Statutes, page 1459.

I declare that any one or more of my trustees may act as a director, officer or other employee of [the said     Company Limited] [any company] and may receive remuneration attaching to such office or employment, for so acting without being liable to account for the same to my estate or the persons beneficially interested therein.

 

(Taken from Williams on Wills, Precedents and Statutes, page 1449)

 

Any Trustee which shall be a trust corporation or company authorised to undertake trust business shall be entitled in addition to reimbursement of its proper expenses to remuneration for its services in accordance with its published terms and conditions for trust business in force from time to time and in the absence of any such published terms and conditions in accordance with such terms and conditions as may from time to time be agreed between such trustee and the settlor of (if the settlor is unfit unable or unwilling to act) the person or persons by whom the power of appointing new Trustees is for the time being exercisable such payment to be made in priority to any other payment under this Settlement.

 

Any trustee who is a solicitor or other person engaged in a profession or business shall be entitled to charge and be paid all normal professional or other charges for business done services rendered or time spent personally or by such trustee’s firm in the administration of the trusts including acts which the trustee not engaged in any profession or business could have done personally such payment to be made in priority to any other payment under this settlement.

 

Any trustee shall be entitled to retain any brokerage or other commission which may be received personally or by such trustee’s firm in payment of any transaction carried out on behalf of this Settlement for which such trustee or trustee’s firm is in the normal course of business allowed brokerage or other commission notwithstanding that the receipt of such brokerage or commission was procured by an exercise by such trustee or the trustees of powers over the trust fund.

 

(Drafted by Brian Spierin SC and reproduced by his kind permission)

 

A trustee or trustees jointly may authorise any person to exercise all or any functions on such terms as to remuneration and other matters as they think fit. A trustee shall not be responsible for the default of that person, even if the delegation was not strictly necessary or convenience provided he took reasonable care in his selection and supervision.

 

(Taken from Drafting Trusts and Will Trusts - James Kessler, page 417).

 

A person may retain any reasonable commission or profit in respect of any transaction relating to this Settlement even though that commission or profit was procured by an exercise of fiduciary powers provided that the person would in the normal course of business receive and retain the commission or profit on such transaction and the receipt of the commission or profit shall be disclosed to the trustees.

 

 

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