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OPDU
Report 27 June 2010 - Annual Risk Conference Special Edition
What can and has gone wrong: prevention and cure
Trustee liability
Robin Ellison, Pinsent Masons
Exemption from liability
With all the potential liabilities, it would be surprising if
anyone were prepared to be a trustee of a pension fund without
built-in protection; the risk-reward ratio would otherwise be
unsupportable, especially in the light of some decisions by the
Pensions Ombudsman (see several determinations by the Pensions
Ombudsman against trustees, such as Prychidko Pensions
Ombudsman Determination No J00168 (16 March 2000) and Elliot v
Pensions Ombudsman [1999] 24 PBLR (017), where considering the
voluntary nature of the trusteeship, the outcome for the trustees
could have been considered harsh). That protection has traditionally
taken the form of indemnity and exoneration provisions in the trust
deed. There is also the possibility of protection by application to
Court and insurance; these protections are discussed later. The
comfort, for trustees, however is that there seems little doubt that
the burden of proof of any claim for breach of trust very much lies
on the persons complaining:
‘The appellant... had to prove that a prudent trustee, knowing of
the scope of the bank’s investment powers and conducting regular
reviews, would have so invested the trust funds as to make it worth
more than it was worth when the plaintiff inherited it.’ (Nestle
v National Westminster).
Statute law has limited some of these protections, but most
of them still apply to a greater or lesser extent. Meanwhile there
are several cases where the scope of indemnity and exoneration
clauses has been examined by the courts, the first being highly
unsympathetic, the other two being much more under-standing. For
pension funds there are three in particular:
- Midland Bank
- Armitage
- Seifert.
Midland Bank
In Midland Bank Trustee (Jersey) Limited v Federated Pensions
Services Limited, [1996] 15 PBLR (37) a decision of the Jersey Court
of Appeal in 1996, Federated Pensions Services Limited (‘FPS’) was
the sole trustee of a pensions scheme for medical, nursing and
auxiliary staff in Jersey set up by the States of Jersey as
employer. Following the coming into force of the UK Financial
Services Act 1986, FPS became concerned that it might be regarded as
‘carrying on investment business’ under the 1986 Act and would
therefore require authorisation from Investment Managers Regulatory
Organisation (now the Financial Services Authority) under the Act
and a ‘customer agreement’ in order to fulfil its role as trustee.
FPS sought general advice from its solicitors about this in 1987.
That advice was to the effect that, under the 1986 Act, a company
trustee of a pension fund which delegated investment decisions to an
authorised investment professional, would nevertheless have to be
authorised itself if it did not leave all ‘day-to-day’ decisions to
the investment professional.
In mid-1988 it was proposed that the assets of the Fund be put in
the hands of Hambros as investment managers and there were extensive
negotiations between the States of Jersey, FPS and Hambros about
this. At an advanced stage of those negotiations, FPS sent a draft
customer agreement to Hambros indicating that it would have to be
signed before any funds could be passed to Hambros. In the meantime,
the £12m assets were liqui-dated and put on deposit at the bank. It
was only two months later that FPS took specific advice about the
customer agreement and that advice was that there was no need for
it. FPS then handed over the moneys and accrued interest to Hambros
so that it could be invested in the stock market.
The strategic decision to invest the assets through Hambros was
based on the view that the stock market was rising. Accordingly, it
was claimed against FPS that the failure to obtain advice about the
Financial Services Act requirements and the placing of assets on
deposit had resulted in losses of about £800,000 to the Fund which,
under the Scheme Rules, the States of Jersey as employer had to make
good.
FPS relied on an exclusion clause in the Scheme in the following
terms:
‘The Trustee shall be indemnified against all liabilities
incurred by it in the execution of the trusts hereof and the
management and administration of the Scheme and shall have a lien on
the Fund for such indemnity and the Trustee shall not be liable for
anything whatever other than a breach of trust knowingly and
wilfully committed’.
The Jersey Court of Appeal carried out a detailed analysis of a
range of English, Scottish and Common-wealth cases on exclusion
clauses. They concluded that the general approach to the
interpretation of such clauses is as follows: where a party seeks to
exclude liability he will only be held to have achieved this if the
exclusion is expressed in clear, unequivocal and unambiguous terms.
All exculpatory clauses are restrictively construed and will not be
construed, unless they are clear and susceptible of only one
meaning, as having so wide an ambit as to deprive the positive
obligations under the contract of real contractual force. This last
point was explored further by the Court of Appeal in Armitage v
Nurse, discussed later.
In the context of trust deeds (and no distinction was made
between trust deeds generally and pension trust deeds), the
conclusion was that the only liability a trustee could not escape
was for fraud. Otherwise, if the exclusion of liability was clearly,
unequivocally and unambiguously expressed, then all other liability
could be excluded.
The Court also confirmed that the scope of duties imposed on
trustees and the performance of those duties, must vary according to
the category of trustee concerned. They quoted with approval, the
following passage from a decision of Brightman, J in Bartlett v
Barclays Bank Trust Co Ltd [l980] 1 All ER 139 at p52:
‘I am of the opinion that a higher duty of care is plainly due
from someone like a trust corporation which carries on a specialised
business of trust management. A trust corporation holds itself out
in its advertising literature as being above ordinary mortals. With
a specialist staff of trained trust officers and managers, with
ready access to financial information and professional advice,
dealing with and solving trust problems day after day, the trust
corporation holds itself out, and rightly, as capable of providing
an expertise which it would be unrealistic to expect to demand from
the ordinary prudent man or woman who accepts, probably unpaid and
sometimes reluctantly from a sense of family duty, the burdens of a
trusteeship. Just as, under the law of contract, a professional
person possessed of a particular skill is liable for breach of
contract if he neglects to use the skill and experience which he
professes, so I think that a professional corporate trustee is
liable for breach of trust if loss is caused to the trust fund
because it neglects to exercise the special care and skill which it
professes to have’.
Applying those principles to the facts, the court concluded that
the FPS decision to place the scheme moneys on bank deposit and not
transfer them immediately to Hambros for investments, was a
deliberate and intentional decision made without having troubled to
obtain specific legal advice at any time after June 1988 about the
Financial Services Act position. This amounted to a breach of trust
‘knowingly and wilfully committed’ by FPS and so the exclusion
clause provided no defence to the claim. The court characterised
FPS’s conduct as amounting to ‘gross negligence’ and conduct of that
nature was not protected by the exclusion clause.
This seems a somewhat harsh decision on the facts, but from the
point of view of scheme trustees attractive since it recognised that
a carefully drawn exclusion clause which protects trustees from
liability for ‘gross negligence’ will be recognised and applied by
the Court (The distinction is commonly held to be without a
difference, but see for one example where it was employed Red
Sea Tankers Ltd and ors v Basil Papachristidis and ors, Queens
Bench Commercial Court, 30 April 1997, per Mance J).
The distinction, or lack of it, between ‘ordinary’ and ‘gross’
negligence is discussed below.
That case was a decision under Jersey law, given by the Jersey
Court of Appeal. However, the Court comprised three eminent
(visiting) English QCs and was reached after a wide-ranging review
of all relevant cases. Although not binding, it has been widely
referred to in subsequent discussions in the English courts.
Armitage
More useful for pension trustees was the decision in Armitage
v Nurse and others (Armitage v Nurse (CA) [1998] Ch 241; [1997]
04 PBLR (18) [1997] 2 All ER 705; [1997] 74 P&CR D13; Times, 31
March 1997; Independant, 11 April 1997). It was about a dispute
arising under a marriage settlement and the facts had no pensions
element, but the heart of the case concerned the trustees’ exclusion
clause which was in the following terms:
‘No trustee shall be liable for any loss or damage which happen
to Paula’s Fund or any part thereof or the income thereof at any
time or from any cause whatsoever unless such loss or damage
shall be caused by his own actual fraud’.
Millett LJ decided that the exclusion clause protected the
trustees by giving the words their normal meaning:
‘‘Actual fraud’ means what it says. It does not mean
‘constructive fraud’ or ‘equitable fraud.’ The word ‘actual’ is
deliberately chosen to exclude them’.
That might have been the end of that part of the case, but the
court helpfully articulated the implications and basis for its view.
Breaches of trust are of course of many different kinds:
‘A breach of trust may be deliberate or inadvertent; it may
consist of an actual misappropriation or misapplication of the trust
property or merely of an investment or other dealing which is
outside the trustees’ power; it may consist of a failure to carry
out a positive obligation of the trustees or merely of a want of
skill and care on their part in the management of the trust
property; it may be injurious to the interests of the beneficiaries
or be actually to their benefit. By consciously acting beyond their
powers (as for example, by making an investment which they know to
be unauthorised), the trustees may deliberately commit a breach of
trust; but if they do so in good faith and in the honest belief that
they are acting in the interests of the beneficiaries, their conduct
is not fraudulent. So a deliberate breach of trust is not
necessarily fraudulent. Hence the remark famously attributed to
Selwyn, LJ, by Sir Nathaniel Lindley MR, in the course of argument
in Perrins v Bellamy [l889] 1 Ch 797, 798: ‘My old master,
the late Lord Justice Selwyn, used to say: ‘the main duty of a
trustee is to commit judicious breaches of trust.’’
He then summarised the position in this particular case by
saying:
‘In my judgment [the exclusion clause] exempts the trustees from
liability for loss or damage to the trust property no matter how
indolent, imprudent, lacking in diligence, negligent or wilful he
may have been, so long as he has not acted dishonestly’.
If the judgment had stopped there, indolent, imprudent, lazy,
negligent or wilful trustees would have received judicial blessing
of their worst behaviour provided that they acted honestly and had
the benefit of a well-drawn exclusion clause. But the court
recognised the implications of the legal position just declared:
‘I accept...that there is an irreducible core of obligations owed
by the trustees to the beneficiaries and enforceable by them, which
is fundamental to the concept of a trust. If the beneficiaries have
no rights enforceable against the trustees, there are no trusts. But
I do not accept the further submission that these core obligations
include the duties of skill and care, prudence and diligence. The
duty of the trustees to perform the trusts honestly and in good
faith for the benefit of the beneficiaries, is the minimum necessary
to give substance to the trusts, but in my opinion it is sufficient.
As Mr Hill pertinently pointed out in his able argument, a trustee
who relied on the presence of a trustee exemption clause to justify
what he proposed to do would thereby lose its protection: he would
be acting recklessly in the proper sense of the term’.
The court then confirmed that it was far too late in the
development of English law to suggest that the exclusion of
liability for ordinary negligence would be contrary to public policy
and that the difference between ordinary negligence and gross
negligence was simply one of degree. English law does not draw a
distinction between ordinary and gross negligence, but does draw a
sharp distinction between negligence, however gross, and fraud, bad
faith and wilful misconduct. It is only this latter category of
conduct by trustees which is culpable and a well-drawn exclusion
clause would effectively protect trustees from any negligence,
however gross. The court commented that:
‘The view is widely held that these clauses have gone too far,
and that 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’.
The judge then suggested that any reform of the law should be
carried out by Parliament (rather than by the courts) and after wide
consultation; in particular he made two observations:
- first, until this area of the law is
reformed to include some
obligation of diligence on trustees,
it may be that the range of
regulatory offences under the
Pensions Act 1995 and the
activities of the OPRA will
encourage trustees, if they need
encouragement, to act diligently
and carefully.
- second, the draftsman of
exemption clauses must take particular care not to draw them
so as to provide trustees with
more scope to breach the terms of
their trusts than is intended by the
instigator of the scheme, usually
the employer.
Duffield & Seifert
More relevant and effective is the pair of decisions in Duffield
by Carnwath J and Seifert by Lightman J (which described a decision
by the Pensions Ombudsman as void for unintelligibility) (Duffield v
Pensions Ombudsman [1996] 22 PBLR (13); Seifert v Pensions Ombudsman
(HC & CA) [1997] 4 All ER CA; [1999] 25 PBLR (28)). Disregarding the
knockabout comedy in the later decision, the judgments made it clear
that even retired trustees are protected by exclusion clauses, a
piece of law which the Ombudsman had said was in doubt and should
therefore be held contra preferentem against the trustee, who had in
fact retired many years previously. The decision was reversed as to
costs in the Court of Appeal.
Bogg v Raper
In the wake of the decision in Armitage on the meaning and effect
of a trustee exemption clause came Bogg v Raper (Bogg v Raper [1998]
The Times LR 22 April) which differs from Armitage in two key
respects. First it was concerned with a will and not a trust deed
and secondly, reliance was placed on the fact that the parties who
were seeking to rely on the clause were the persons who were said to
be instrumental in drafting it and including it in the document.
John Bogg died on 1 January 1989, survived by his widow and their
two children, along with two children from a previous marriage. By
his will Mr Bogg appointed his solicitor Mr Raper and his accountant
(a Mr Groves) to be his executors and trustees, and left his
residuary estate on trust for the children of his previous marriage
(he had already made a discretionary trust for the benefit of the
children of his second marriage, in respect of which Mr Raper and Mr
Groves were also trustees). For probate purposes the estate was
worth more than £8 million, of which the most valuable part was Mr
Bogg’s controlling interest (78.3%) in a group of companies which
was trading in commercial vehicles and static caravans, and was
valued in excess of £6 million. Mr Bogg’s fellow director owned 20%
and the remaining 1.7% was owned by the trustees of the
discretionary trust. Within a few days of Mr Bogg’s death, Mr Raper
was made a director of the company. By the end of 1990, just two
years after Mr Bogg’s death, the shares in the company had become worthless. The plaintiffs, Mr Bogg’s widow and
two daughters, alleged that the actions of Mr Raper and Mr Groves
and their failure to take appropriate action constituted a breach of
their duties as executors and trustees. They had, it was alleged,
failed to keep themselves informed of the company’s financial
position or to take adequate steps to prevent the value of the
estate and the discretionary trust’s interests from being destroyed.
The defendants sought to rely on an exclusion clause in the will
in the following terms:
‘In the professed execution of the trusts and powers hereof, no
trustees (other than a trust corporation) shall be liable for any
loss to the trust premises arising by reason of any improper
investment made in good faith or for the negligence or fraud of any
agent employed by him or by any other trustee hereof, although the
employment of such agent was not strictly necessary or expedient, or
by reason of any mistake or omission made in good faith by any
trustee hereto or by reason of any other matter or thing except
wilful or individual fraud or wrong doing on the part of the trustee
who is sought to be made liable’.
The plaintiffs claimed that Mr Raper (who had drawn up the will)
and Mr Groves should not be allowed to rely on the exemption clause
to exonerate them unless they could show that the testator had
received full and independent advice on its meaning. They claimed
that to rely on the clause would amount to taking a benefit under
the will.
The Court of Appeal rejected the plaintiffs argument and held
that the draftsman of a clause such as this in a will which
exonerates executors and trustees from potential liability in the execution of the trust
and powers of the will, was entitled as a trustee under the will to
rely on the provisions of the clause. Millett LJ said that the
fundamental fallacy in the argument was that the clause did not
confer a benefit on the persons responsible for advising the
testator on the will’s contents.
Firstly it did not discriminate between persons who advised the
testator in connection with his will and other persons who became
trustees or executors and who had no part in the preparation of the
will. Secondly, it did not confer a benefit on them but defined the
extent of their potential liabilities. Thirdly, the inclusion of the
clause in the will was not a transaction in which the testator and
those advising him had conflicting interests, nor one in which one
would expect him to the separately represented. It was the
solicitors duty to advise as to the terms on which executors and
trustees could properly be asked to accept office, and he was
entitled to tell the testator that he would himself insist on a wide
exemption clause and would not accept office as executor without
one.
The case is of less significance for pension schemes than the
others, save perhaps to re-enforce the principles laid down in
Midland Bank and Armitage; having decided that the trustees were not
prevented from relying on the clause, it followed that the clause
was itself valid.
Wight v Olswang
In Wight v Olswang (Wight v Olswang (No2) (CA) [2001] CP
Rep 54; [2001] Lloyds Rep PN 269; [2001] WTLR 291) the plaintiffs
were beneficiaries of a settlement. The defendants were the
two trustees, who were solicitors entitled to charge for their
services as trustees. The trust property included shares in a PLC,
and it was alleged that the trustees had failed to sell the shares
when they should have done, because one of the trustees was
solicitor to the PLC and had price-sensitive information which
prevented him from selling. It was claimed that the trustees,
knowing the first defendants position, had failed properly to
consider whether he might be prevented by law from dealing in the
shares. If they had dealt with the matter properly, then he would
have been replaced as trustee, and the shares could have been sold
more advantageously than proved possible.
The trustees denied breach of duty, and relied on various
exemption clauses in the trust deed; the question whether the
clauses successfully exempted them was tried as a preliminary issue.
Clause 11 exempted trustees from loss caused by investments,
mistakes and omissions made in good faith or caused by anything
other than wilful fraud and wrong doing of the trustee sought to be
made liable. Clause 18(A) exempted trustees from loss accruing from
exercising or failing to exercise any discretion or power, and
Clause 18(b) exempted trustees (other than those charging
remuneration for so acting) from liability for any error of
judgment, mistake of law or other mistake, and anything else except
wilful misconduct or breach of trust.
It was held that an exemption clause in a trust deed was to be
restrictively construed and anything which was not clearly within
should be treated as falling outside it. The rule of construing a
document more strongly against the party which made it did not apply
to trustee exemption clauses (the principle laid down in Bogg v
Raper). The conflict between the wide exemption provided by Clause
11 and the exemption provided by clause 18(B) limited to unpaid
trustees was too great to be ignored. The clauses could not take
effect cumulatively and clause 18 did not prevail over clause 11
simply because it was the later clause. Thus clause 11 conferred no
exemption to pay trustees because if it did it would be repugnant to
clause 18(B). The trustees (as paid trustees) could not rely on
clause 11, so the trustee with insider knowledge, if he was in
breach of his duty, was not protected by clause 11 if he would have
been protected had it been available to pay trustees. Both paid and
unpaid trustees could rely on clause 18(A), which did not overlap
with clause 18(B) in the way that clause 11 did, and the words in
clause 18(B) ‘anything save wilful misconduct’ could be read as
meaning ‘anything not mentioned in sub clause 18(A) save wilful
misconduct’. Clause 18(A) could be relied on in respect of the
alleged failure to exercise the power of sale.
This case is of only incidental significance to pension fund
issues, but it does have relevance to schemes where there are more
than one exemption clause covering different aspects of the trustees
duties. A number of older schemes are drafted in this way. In
practice, trustees in the light of Olswang need to ensure that the
exemption provisions are reviewed and if necessary brought up to
date so that they clearly express in a single clause what is
intended.
Effectiveness of exclusion clauses in contract
Although there is statutory provision (in the Trustee Act 1925)
for a trustee to be indemnified out of trust funds in respect of
expenses properly incurred, and to be exempted from liability for,
broadly, any loss not caused through his own wilful default, these
provisions are somewhat restricted in their effect, and pensions
scheme trust deeds will invariably contain express provisions which
are designed to go further. The question is: how far can they go?
It seems clear that however widely drawn, no provision can
protect against the breach of a statutory duty unless the statute
itself provides otherwise (see also Photo Productions v Securicor
(HL) [1980] AC 827; [1980] 2 WLR 283; [1980] 1 All ER 556 and Casson
v Ostley PJ Ltd & ors, Court of Appeal, Civil Division 29 June 2001
(exclusion clauses in commercial contracts and their impact where
fundamental breach is concerned and whether clauses are construed
against the party committing the breach). In Horace Holman Group Ltd
v Sherwood International Group Ltd (unreported) Holman was a group
of companies carrying on business in insurance broking which signed
a software licence with Sherwood to use a particular form of
software. The contract excluded warranties and conditions other than
those expressed in the contract; it also excluded liability for
increased costs of working in attempting to operate the new system.
It was held by the High Court (Technology and Construction Court, 12
April 2000, New Law Digest, 12 December 2001) that under the Unfair
Contract Terms Act 1977 although the parties were two substantial
commercial enterprises did not imply a presumption that the terms
were reasonable; the burden under s11(5) is on the party seeking to
rely on the clause. The exclusion clauses were struck down as
unreasonable). However, can it guard against the consequences of
maladministration, gross negligence or even fraud?
The question as to whether scheme trustees are under any
contractual liability to members in relation to their duties does
not appear to have been considered judicially yet but it is by no
means inconceivable that a contract may arise as between the scheme
trustees and the members, as for example where membership of the
scheme depends upon completion of an application form which is then
accepted by the trustees. The provisions of the trust deed and rules
would then form the basis of the contract, although it might also be
possible to imply terms that the trustees would fulfil all their
duties under the scheme - both those expressed in the deed and those
implied by trust law or required by statute. However, the express
terms would be of paramount importance, and in particular any
express provisions for exemption or indemnity. The validity of such
provisions in contract law will then depend upon the effect of the
Unfair Contract Terms Act 1977.
Where the Act applies, the liability of a contracting party to
take reasonable care or exercise reasonable skill in the performance
of the contract cannot be excluded or restricted, except insofar as
the wording used satisfies the requirement of reasonableness. That
means that any exemption clause in the deed must be a fair and
reasonable one to be included in the contract, having regard to the
circumstances which were, or ought reasonably to have been known to
be in the contemplation of the parties when the contract was made.
The Act only applies to contracts where there is ‘business
liability’, which is defined as ‘liability for breach of obligations
or duties arising ... ‘from things done or to be done by a person in
the course of a business (whether his own business or
another’s)...’’. Whether pension fund trustees fall within this
definition is at least arguable, particularly where a professional
corporate trustee is employed.
Recent cases on contractual exclusion clauses
Over the last few years there has been a steady stream of cases
before the Courts concerning the effectiveness of contractual
exclusion clauses, and the test of reasonableness under Section 11
of the Unfair Contract Terms Act 1977, but generally speaking they
each turn on their own facts. They include:
Monarch Airlines
In Monarch Airlines (Monarch Airlines v London Luton Airport Ltd
[1998] 1 Lloyds Rep 403; [1997] CLC 698) London Luton Airport
Limited was the owner of Luton Airport and Monarch Airlines was the
owner of an aircraft. During take-off, some paving blocks hit the
aircraft, resulting in damage. It was agreed that the loss was
caused by negligence and breach of Luton’s duty of care under the
Occupiers’ Liability Act 1957. The airport sought to rely on a
widely drafted exclusion clause which excluded liability for loss or
damage arising from any act, omission, neglect or default on its
part.
The High Court held that the exclusion relied on by the defendant
was wide enough to exclude its liability for negligence and breach
of statutory duty and did not fall foul of the Unfair Contract Terms
Act 1977. The twin facts that the Plaintiff was able to obtain
insurance and that similar clauses were common in international
aviation suggested that the exclusion would satisfy the
reasonableness test.
In attempting to apply the reasoning behind this decision to a
pensions context, two inferences can perhaps be drawn. The first is
that it would be unreasonable to expect scheme members to protect
themselves against the consequences of negligence on the part of
their trustees, so any exclusion provision might be regarded as
unreasonable on that basis. The second (and counterbalancing)
inference is that, as widely-drafted exclusion clauses in pension
schemes are commonplace, the Monarch decision would suggest that
they were reasonable.
Abbey National v SIF
In Abbey National (Abbey National PLC v Solicitors Indemnity Fund
Ltd [1997] PNLR 306; see also Horace Holman v Sherwood, outlined
above at Note 29) the issue arose not out of a contractual
relationship, but concerned an exclusion clause contained in the
Solicitors Indemnity Rules 1990. Abbey National plc claimed to be
indemnified by the Solicitors Indemnity Fund for losses it suffered
arising from the advance of monies secured by way of a mortgage to
the client of a solicitor, Mr Michael Fallon. Abbey had obtained
judgment against Mr Fallon for just over £68,000, having brought
proceedings for breach of trust, breach of contract and negligence.
Mr Fallon was later declared bankrupt and Abbey sought to recover
its damages from SIF on the basis that the loss was a civil
liability incurred in private practice by Mr Fallon as a solicitor.
Although Abbey’s statement of claim did not specifically allege
dishonesty, it contained allegations that Mr Fallon failed to
account to Abbey or the Purchaser for monies advanced by the Bank
and that he applied the same for his own use. SIF claimed exclusion
from liability to indemnify on the ground that they were not liable
to indemnify against losses occasioned by reason of a solicitor’s
dishonesty or fraud.
The primary question for the Court was what was the appropriate
test of dishonesty or fraud in a civil action. It was held that a
civil standard of proof applied. SIF had to satisfy the Court that
on the balance of probabilities dishonesty or fraud was established.
Previous authorities were cited for the fact that while the criminal
standard of proof does not apply to fraud in civil cases, the more
serious the allegation of fraud the higher the degree of probability
the Court will require. The standard of proof was commensurate with
the gravity of the allegation and the seriousness of the
consequences. When considering whether Mr Fallon had been dishonest
or fraudulent, Steel J stated that there must be proof of a high
degree of moral opprobrium before the Court could make a finding of
dishonesty or fraud and neither incompetence or carelessness
constituted dishonesty or fraud. The test was whether what was done
was dishonest by the standard of ordinary reasonable and honest
people and whether the circumstances were such that the individual
must have known that what he did was dishonest by those standards.
The Court found that Mr Fallon either acted dishonestly in
knowingly taking a wholly unacceptable and dishonest risk or was
deliberately dishonest in that he received Abbey’s money never
intending to complete the transaction. The circumstances were such
that Mr Fallon must have realised that what he did was dishonest.
Accordingly SIF succeeded in avoiding their liability to indemnify
Mr Fallon.
This case has relevance beyond merely contractual liability; it
seems that the test of dishonesty or fraud will apply equally to
exclusion clauses under trust law.
Validity of exclusion clauses in respect of administrative
liability
Although exclusion clauses in most trust deeds will have been
drafted before the Pensions Ombudsman came on the scene, there have
been several rulings from the High Court which acknowledge the
validity and effectiveness of exclusion clauses in preventing
personal liability of trustees where the Ombudsman has determined
that they have caused injustice by maladministration (see eg Duckitt
v Pensions Ombudsman [2001] 18 PBLR (009); for the Pensions
Ombudsman’s objections to exclusion clauses see comments throughout
Pensions Ombudsman, Annual Reports, 1994-95 to 2000-2001. In
Pensions Ombudsman determination No J00144 (Meikle) (20 March 2001)
concerning alleged maladministration of the Eastern Counties Farmers
pension fund a distinction was made between the duty of care of lay
trustees and an accountant trustee).
Directors of corporate trustees
Current practice in pension trusts is to appoint directors of a
trustee company rather than individual trustees; this is a further
step in risk control for pension fund trustees. It raises the
obvious question of whether the corporate veil is effective in such
cases. In HR and Others v JAPT and others (HR v JAPT [1997] 07 PBLR
(27) decided by Lindsay J in the High Court in March 1997, the
identity of the parties was kept anonymous by the Judge because his
decision was after a hearing in chambers and also because he
was dealing with the case at an early stage. The application before
him was by one of the defendants seeking to strike out the claim as
disclosing no reasonable cause of action. Such an application is
heard on the assumption that the facts alleged in the Statement of
Claim are true. If the claim is not struck out and goes to trial, it
is for the plaintiffs to prove those facts.
The plaintiffs were the current trustees of a pension scheme and
a representative member. The defendants were the former corporate
trustee of the scheme (which had a share capital of 30p. and no
assets), a Mr C (a solicitor and former managing director of the
employer company), other directors and officers of the employer
company, and the firm of solicitors who acted for the employer
company and the former corporate trustee in certain material
transactions. Mr C. had been a partner in that firm and, since the
relevant events, returned to being one there. The application to
strike out the claim was by Mr C.
The assumed but unproved allegations did not present a picture of
exemplary trustee conduct. In essence, it was alleged that the
corporate trustee lent about £3m of scheme moneys to the employer
without taking security or agreeing any provision for interest at a
time when the employer was in grave financial difficulty. A few
months later the former corporate trustee agreed to buy from the
employer its main working premises for a price of £3.5m, a price
substantially in excess of the open market price. Completion was
delayed for 2 years and shortly before it fell due, the corporate
trustee sold the property for £2.2m, a capital loss to the scheme of
£1.7m which, together with lost investment return, resulted in
losses exceeding £3.2m. Mr C set the price and terms as to
completion and signed the contract on behalf of the corporate
trustee. The Plaintiffs claimed that these arrangements subordinated
the interests of the scheme to those of the employer. The object of
the exercise had been to provide the employer with cash and
purportedly to regularise the original loan. Mr C was said to have
been actively involved in this subordination.
There was a further allegation against Mr C to the effect that he
had arranged augmentation of another director’s pension in
circumstances where the scheme was significantly in deficit
resulting in loss to the scheme of about £200,000.
Given the worthlessness of the corporate trustee, the director
and others involved in using it as a vehicle for transactions were
sued. This required some ingenuity and the claims were put in five
alternative ways.
First, it was said that those individuals owed a direct fiduciary
duty to the beneficiaries under the scheme. The Judge regarded
himself as bound by a 1911 Court of Appeal case (Bath v Standard
Land Co Ltd) (Bath v Standard Land Co Ltd (CA) [1911] 1 Ch 618) to
hold this claim as unarguable. The only fiduciary duty the directors
had were to their company and not to the beneficiaries of the trust
of which the company was trustee.
The second way of putting the claim was to say that the
individual directors had been negligent. The court rejected this
claim as unarguable; if anyone had been negligent, it was the
corporate trustee and there was no policy or other basis for
extending the law of negligence to make directors of a negligent
company personally liable in the absence of special facts.
The third avenue has been described as ‘knowing assistance’ in a
dishonest and fraudulent design. This type of claim was considered
by the Privy Council in Royal Brunei Airlines v Tan (Royal Brunei
Airlines v Tan (PC) [1995] 2 AC 378) and the judge in HR coined the
description ‘Royal Brunei dishonesty’ which he characterised as
follows:
‘It is Royal Brunei dishonest for a person, unless there is a
very good and compelling reason, to participate in a transaction if
he knows it involves a misapplication of trust assets to the
detriment of the beneficiaries or if he deliberately closes his eyes
and ears or choose deliberately not to ask questions so as to avoid
his learning something he would rather not know and for him then to
proceed regardless’.
The judge accepted that this was potentially a good cause of
action and so this way of putting the case was not struck out.
The fourth way in which the claim was put was as indirect claims
for breach of trust and tort. It was said that the individual
directors owed the corporate trustee a fiduciary duty and duties of
care. They had breached those duties and the corporate trustee had
suffered loss as a result. The new trustee could sue the individual
directors for breaches of these duties and claim the loss which it
had ‘inherited’ from the former corporate trustee which were owed to
the beneficiaries under the scheme. This was described as a ‘dog
leg’ claim and although it was recognised that there might be
complications where the corporate trustee was a trustee of other
schemes, that was not so here and it was a viable cause of action.
A final way in which the claim was put was an attempt to ‘pierce
the corporate veil’ and treat the actions of the former corporate
trustee as the actions of the directors themselves for which they
therefore had personal liability. This was held to be unarguable
because there had been no concealment of the true position and
public policy was against ‘looking through’ corporate structures
save in the most exceptional cases.
The result was that the plaintiffs’ claim was allowed to go
forward with no part of it being struck out, but various ways in
which the case might be argued were indicated to be unsustainable.
There is no mention in the report of the case of any indemnity
and exoneration provision which might release the corporate trustee
from any liability which could form the subject matter of any ‘dog
leg’ claim against the directors. This may have been simply a
consequence of the procedural nature of the application – an attempt
to strike out the claim against an individual director. However, it
may have been that any indemnity and exoneration provision would not
assist the corporate trustee as the alleged breaches in this case
appear to be fraudulent or made in bad faith rather than
inadvertently. If they are held to be deliberate and wrongful in
this way no exoneration provision would save the corporate trustee
from liability.
In Gregson v HAE Trustees [2008] 60 PBLR, one of the grounds of
claim by the beneficiary of the settlement was that the directors of
the trustee company were liable for breach of their duty of care to
it and that such claims were trust property of the settlement (the
'dog leg' claim). The defendants argued, inter alia, that the dog
leg claim lacked reasonable grounds or had no real prospect of success.The claim against the defendants was struck out. Following
the decision, directors of cororate trustees should be protected
from claims by members.
Companies Act 2006. The Companies Act 2006 ss 233-235 gives
statutory authority to pension trust companies to give indemnities
to their directors; this does not override the provisions of the
Pensions Act 2005 s33 which outlaws the provision of exoneration
clauses in relation to investment liabilities.
Quoted employers
Where the employer is listed on the London Stock Exchange, it is
subject to the Listing Rules. Chapter 11 deals in transactions with
related parties and is designed to safeguard against current or
recent directors abusing their position. When any transaction is
proposed between a listed company and a related party, certain
criteria must be met. There are exceptions to the general rule
(London Stock Exchange, Listing Rules, Section 11.7(f)) which deals
with the granting of an indemnity to a director which is not
otherwise prohibited by the Companies Act 1985 (Companies Act 1985
s310). S310 makes provision for exempting officers of the company
from liability which includes any officer indemnifying himself
against any liability which by virtue of any rule of law would
otherwise attach to him liability in respect of negligence, default,
breach of duty or breach of trust.
Some observers consider that indemnities given to a director who
is also a trustee of the pension fund amounts to an exception under
Section 11.7(f). The Listing department however consider at present
that the controls on indemnities only apply to directors being
granted indemnities in relation to their position as directors and
not to their position as trustees of pension funds. However while
this is helpful, there are still areas where company directors could
still be liable under the Pensions Act 1995, where they may still be
exposed.
Exoneration by the court
In theory, pension fund trustees who find themselves in an
uncertain position can seek the protection of the court. In
practice, most are reluctant to adopt this process; it is uncertain,
the costs are not always recoverable and it can be time-consuming.
In addition historically the court has not always appreciated the
practical requirements involved with the administration of pension
trusts.
Nonetheless, where the trustees are uncertain as to a particular
course of action or decision they may, and increasingly do, apply to
the court themselves for directions before taking any action or
decision. In particular the pre-emptive costs procedure (a ‘Beddoes’
application) (Re Beddoe [1983] 1 Ch 547) enables trustees to be
indemnified out of the trust fund for the costs of any proceedings
to clarify and decide the issue in question. The decision in
Armitage v Nurse also confirmed that trustees should not be deprived
of their right to recover costs of their defence from the trust fund
simply because they have put forward unsuccessful defence to an
action for breach of trust.
The Trustee Act 1925 (Trustee Act 1925 s57) gives the court wide
powers to authorise trustees to enter into a wide range of
transactions concerning trust property where the trustees lack the
necessary powers.
The Trustee Act 1925 (s61) enables the Court to excuse a trustee
for the consequences of a breach of trust where he has ‘acted
honestly and reasonably, and ought fairly to be excused’. This would
not be appropriate where a trustee proceeds blindly and without
taking advice, hoping to be excused for honest but wrong decisions.
In particular, the trustees are aware of the positive duties imposed
by the Pensions Act 1995, set out above.
The Pensions Act 1995 (Pensions Act 1995 s33) specifically
excludes the provision of exoneration for breach of trust in the
performance of investment functions; if those functions are
delegated, then exoneration becomes dependent upon proper selection
of the delegate and reasonable monitoring (ibid s34).
In practice an increasing number of trustees seek the protection
of insurance. Where the trust deed expressly or impliedly
gives power to the trustees to insure themselves for their own
benefit against breaches of trust it is generally regarded as wise
to effect this insurance. The beneficiaries are then less reliant on
the wealth of trustees to make good any breaches and indirectly
enjoy the comfort of insurance cover. Unless otherwise provided, the
employer must pay the premium for the protection, especially in
relation to investment liabilities. Insurance can also help expedite
distribution of assets following insolvency where, without
insurance, a retention is inevitably needed pending final
winding-up.
In the last few years pension fund trustees have also been
developing a reliance on defence unions. These operate somewhat
along the lines of the quondam Medical Defence Union; They
provide not only insurance against and defence of trustee liability
claims but also general advice and guidance on situations confronted
by trustees and managers of pension schemes – and in particular
protection against exposure once the trustee has left office, where
it is not certain that the internal protective mechanisms operate
effectively.
The Pensions Ombudsman in recent years has attempted to restrict
the scope of exemption clauses. Although exoneration clauses in most
trust deeds will have been drafted before the introduction of the
Pensions Ombudsman, several court rulings (Miller v Stapleton
[1996]
2 All ER 449; [1996] 04 PBLR (19) and Wild v Smith [1996] 2 FLR 680;
[1997] 1 FCR 248; [1996] Fam Law 667; [1996] 21 PBLR (13)) now
acknowledge the validity and effectiveness of exoneration clauses in
preventing personal liability of trustees where the Ombudsman has
determined that they have caused injustice by maladministration.
Robin Ellison
Head of Strategic Development for Pensions Pinsent Masons LLP
020 7606 9301
robin.ellison@pinsentmasons.com
www.pinsentmasons.com
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