English fiduciary standards and trust law.

• Author: Hayton, David
• Position: The Rise of the International Trust

1. INTRODUCTION

   This Article will focus on two major areas of inquiry in contemporary English trust law: fiduciary standards and substantive trust law. In Part II it will cover the trustees' exercise of managerial discretions and of distributive discretions, before considering the role and duties of protectors in relation thereto. In Part III it will focus upon spendthrift and other protective trusts, the termination of trust rules, the hesitancy to invoke public policy to invalidate conditions imposed by settlors, and difficulties in ascertaining whether a proper valid trust has been created.

2. FIDUCIARY STANDARDS

   1. The Exercise of Managerial Discretions by Trustees

      English(1) law makes a distinction between the investment discretion of trustees and their other managerial discretions. The general managerial rule is that discretions must be exercised with the care of an ordinary prudent person in the management of his own affairs(2) but "a paid trustee is expected to exercise a higher standard of diligence and knowledge than an unpaid trustee."(3) A trust corporation is expected to exercise the care of a specialist in trust administration, reflecting the fact that it holds itself out as having such specialist skill.(4)

      However, when it comes to making investments, Lindley L.J., in a much endorsed(5) passage, stated:

      The duty of the trustee is not to take such care only as a prudent man would take if he had only himself to consider, the duty rather is to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide.(6) On appeal to the House of Lords in this case, Lord Watson stated:

      Business men of ordinary prudence may, and frequently do, select investments which are more or less of a speculative character; but it is the duty of a trustee to confine himself to the class of investments which are permitted by the trust, and likewise to avoid all investments of that class which are attended by hazard.(7) However, as Dillon L.J. has emphasized, "[W]hat the prudent man should do at any time depends on the economic and financial conditions of' that time--not on what judges of the past, however eminent, have held to be the prudent course in the conditions of 50 or 100 years before."(8)

      Indeed, at first instance Hoffmann J. made it clear that "[m]odern trustees acting within their investment powers are entitled to be judged by the standards of current portfolio theory, which emphasises the risk level of the entire portfolio rather than the risk attaching to each investment taken in isolation." 9 This led Lord Nicholls extra-judicially to write:

      Investment policy is aimed at producing a portfolio of investments which is balanced overall and suited to the needs of the particular trust.... Different investments are accompanied by different degrees of risk, which are reflected in the expected rate of return. A large fund with a widely diversified portfolio of securities might justifiably include modest holdings of high risk securities which would be ... imprudent and out of place in a smaller fund.... In such a case it would be inappropriate to isolate one particular investment out of a vast portfolio and enquire whether it can be justified as a trust investment. Such a line by line approach is misplaced. The inquiry, rather, should be to look at a particular investment and enquire whether that is justified as a holding in the context of the overall portfolio. Traditional warnings against the need for trustees to avoid speculative or hazardous investments are not to be read as inhibiting trustees from maintaining portfolios of investments which contain a prudent and sensible mixture of low risk and higher risk securities. They are not to be so read, because they were not directed at a portfolio which is a balanced exercise in risk management.(10) Significantly, in its Consultation Document on the Investment Powers of Trustees--published in May 1996--the Treasury accepted that trustees, within the limits of their investment power, are entitled to invest in accordance with modern portfolio theory.(11) While a power to "invest" in "investments" traditionally required the purchase of income-yielding assets,(12) it would seem that, in accordance with modern portfolio theory, such a power can be exercised to purchase a capital appreciation asset like a painting if it is balanced in a portfolio with some high-income-yielding assets.(13)

      The Treasury Consultation Document also reflected modern practitioners' views,(14) including that of Lord Nicholls,(15) that the duty of a trustee when investing is simply that of the ordinary prudent person or specialist trustee investing for the benefit of others, ignoring any stricter "safety first" standard that might be regarded as additionally implicit in Lindley L.J.'s "for whom he felt morally bound to provide," e.g., a widow and orphans whom the trustee would personally support if the trust fund were lost.

      However, as stated by Leggatt L.J. in Nestle v. National Westminster Bank,(16) the standard of prudence, even of a bank trustee, is "undemanding." The plaintiff, as remainderman entitled to capital after the death of various life tenants, complained that the 1922 trust fund of 53,000 [pounds sterling] should have been worth either 1,800,000 [pounds sterling] or 1,360,000 [pounds sterling] (depending on the percentage of equities in the fund) in 1986 when she obtained the capital actually worth only 269,203 [pounds sterling]. The Court of Appeal found that the trustee throughout erroneously interpreted the investment clause as much narrower than it actually was (so as to concentrate upon a narrow range of investments within the banking and insurance sectors) and failed to conduct regular periodic reviews of investments until 1960. Because some life tenants were domiciled abroad, during their lives(17) a large part of their shares in the fund was invested in Government gilt-edged securities exempt from income tax and from death duties, thereby benefiting both income and capital beneficiaries, as the tax savings on capital on deaths of the life tenants matched any increase that would have arisen if equities had been bought instead of fixed-interest gilts.

      The court held that the onus lay on the plaintiff to prove that a prudent trust company, knowing the proper wide scope of the investment power and conducting regular reviews, would so have invested the trust fund in a greater range of investments as to make it worth more than it was worth when the plaintiff inherited it.(18) The plaintiff had to show that, through one or both of the trustee's mistakes, breaches of trust arose either because the trustee made. decisions which it should not have made or failed to make decisions which it should have made, so resulting in the trust fund suffering loss(19) (which would include the gain that would have been made but for the wrong decisions of the trustee).(20) The court then held that the plaintiff had failed to discharge this difficult and costly burden of proof.(21)

      If a breach of trust had been proved,(22) the court would have been prepared to presume in favor of the plaintiff and against the trustee that the plaintiff should not receive compensation based on the very minimum that a prudent trustee might have achieved, but rather should receive fair compensation(23) based on what the average prudent trustee was likely to have achieved, taking into account the average performance of ordinary shares during the relevant period. However, the court was not prepared to assume that the trustee's continued ignorance of its wide investment powers (despite its doubts thereon) and lack of periodic reviews until 1960 would have lead to wrong investment decisions.

      As Leggatt L.J. stated:

      The fallacy is that it does not follow from the fact that a wider power of investment was available to the bank ... that it would have been exercised or that, if it had been, the exercise of it would have produced a result more beneficial than actually was produced. Loss cannot be presumed if none would necessarily have resulted.(24) Dillon L.J.(25) endorsed the following dictum of Megarry V-C:

      If trustees make a decision upon wholly wrong grounds, and yet it subsequently appears, from matters which they did not express or refer to that there are in fact good and sufficient reasons for supporting their decision, then I do not think that they would incur any liability for having decided the matter upon erroneous grounds; for the decision itself was right.(26) Thus, the plaintiff's claim apparently would fail if he cannot disprove the trustee's allegation that unimpeachable investment conduct could have resulted in a situation in which "right" decisions(27) produced a trust fund of the low value of the actual trust fund.(28) In essence, the plaintiff therefore must prove that the actual value of the trust fund is one which no trustee acting prudently could have produced, taking account of bad luck.(29) Is this not an almost impossible burden for any plaintiff to discharge? If the trustee therefore has immunity from liability for failure to conduct periodic reviews and for failure to ascertain the width of its power of investment despite having doubts thereon, the message this sends to trustees is that they do not need to worry about their duty(30) to ascertain the width of their power of investment (the most crucial managerial power) and to conduct periodic reviews of investments. Did not the Court of Appeal condone behavior that most would regard as reckless?

      Should not the proper position be that breach of such duty is per se a breach of trust rather than only a breach of trust if loss is proved to result? Strict deterrent or preventive duties like the "no profit" and "no conflict" rules are imposed upon trustees to ensure the proper administration of a trust in the interests of vulnerable...