Contents

Chapter 10
Reviewing the exercise of trustee discretion

Grounds for court intervention

10.29Section 68 does not prescribe the circumstance in which the court may interfere with a trustee’s decision or action. This may give the court a wide power to interpose its guiding, or restraining, hand on the exercise by trustees of their powers and discretions. In Rossiter v Wrigley the Court seemed to consider that the standard for review was whether the trustees acted reasonably or not in the steps that they took.273  In obiter comments in the recent case of Jaspers v Greenwood Kós J said that:274

the relevant beneficiary grievance must involve the exercise (or intended exercise) of a trustee power in a manner that is ultra vires, vitiable on the basis of relevance of considerations or bad faith, or unreasonable in a Wednesbury sense. In other words, the ordinary means of review of the exercise of a statutory power.

In Wendt v Orr the Supreme Court of Western Australia considered that while the established grounds for intervention allow the court to intervene, there may be other grounds as well.275  There is therefore some uncertainty as to the ground on which the court may currently intervene under section 68.
10.30This raises an important issue. We have already proposed expanding the scope of any new section 68 so it applies to the exercise of any power by a trustee whether that power is conferred by the Act, or by law, or by the trust deed. If the ambit of the review provision is expanded in this way there is scope for far greater use to be made of such review, and the question of what is the most appropriate standard for the courts to apply when reviewing a trustees’ actions becomes more important. If the courts take the broader approach that seemed to be taken in Rossiter v Wrigley the standard is whether the trustee acted reasonably or not.276  This sets a low threshold for intervention and also imposes a high standard of obligation on trustees. Trustees are effectively required to act reasonably when exercising any of their powers.

Options for reform

10.31The options we considered for the grounds for review were:
(a)restricting the grounds to those already developed by the court under its supervisory equitable jurisdiction, namely that the trustees:
  • acted in bad faith or for an improper motive;
  • failed to exercise the discretion by considering the wrong question or misinterpreting the trust deed;
  • considered irrelevant considerations;
  • failed to consider relevant considerations; or
  • reached a decision that is perverse or capricious;
(b)whether the court considers that the act, omission or decision of the trustee was one that was not reasonably open to the trustee in the circumstances;
(c)whether the court considers that the trustee acted reasonably; or
(d)allow the court to determine the grounds for review.

Discussion

10.32We consider that on balance a new provision should specify the standard against which the court will review trustees’ decisions. If the new provision is silent there will be continued uncertainty about the standard expected of trustees when exercising their powers. As discussed, there is currently some uncertainty as to whether trustees are required to exercise powers sourced from the Trustee Act reasonably or risk review under section 68. To make the position clear, and to alleviate concern that extending the range of powers that may be reviewed under the provision to include those in the trust deed as well may result in excessive intervention by the courts with trustees’ decision-making, the new provision should specify the standard against which trustees are to be reviewed. We are concerned that simply leaving it to the courts to develop the grounds for intervention without any legislative guidance would be unhelpful.

10.33Some submitters argued that review under the provision should be limited to reflect the grounds developed by the court under its supervisory equitable jurisdiction which are that the trustees acted ultra vires or in bad faith. This reflects the court’s role as a corrector of fundamentally flawed decisions and not a de facto trustee. There was favour from some submitters for new legislation clarifying that trustees’ decisions cannot be overturned on the grounds of unreasonableness. Other submitters favoured the standard in option (b).

10.34The NZLS argued against option (c) as it considered the word “reasonably” to be imprecise and various forms of noncompliance by a trustee can fall within the meaning of “unreasonable”. It can also give the impression that the merits of a trustee’s decision can be examined for reasonableness. The NZLS considered that the term “irrational” (in the sense that no reasonable trustee could make the decision) was more precise and should be used instead. However, it favoured the grounds on which the court may interfere with a trustee’s decision being left open for the courts to continue to develop. They argued that many of the grounds for intervention overlap and that trying to specify the grounds in legislation would be too complex and that there is also potential for unintended outcomes.

10.35The authors of Garrow and Kelly have argued that caution should be exercised before importing administrative law concepts such as unreasonableness into trust law.277  Requiring trustees of a typical trust to meet standards of reasonableness may set the standard too high. Trustees are selected by a settlor because they are trusted to give effect to the settlors’ interests. Chris Kelly has suggested that excessive judicial intervention with trustees’ decision-making may encourage unnecessarily defensive attitudes by trustees.278  Trustees need to be able to administer the trust fund without being second guessed by the courts. Striking a balance between these considerations and the need for beneficiaries to be able to hold trustees to account is not an easy task.

10.36We consider that the standard of whether the action or decision of the trustee was one that was not reasonably open to the trustee in the circumstances strikes an appropriate balance between these considerations. Option (b) is preferred to a less precise test of whether the decision is unreasonable.

10.37We also consider that the court’s inherent jurisdiction to supervise and review the action of trustees’ should be unaffected by any new provision. A number of submitters agreed. Thus it would be possible to apply to the court either under the replacement for section 68 or the inherent jurisdiction or both. The preservation of the case law would enable New Zealand courts to benefit from decisions in other common law countries as the law develops.

273Rossiter v Wrigley HC Hamilton A105/80, 3 July 1989.
274Jaspers v Greenwood [2012] NZHC 2433 at [22] (comments in obiter).
275Wendt v Orr [2004] WASC 28 ; see also the discussion in Kenny, above n 250, at 190.
276Rossiter v Wrigley HC Hamilton A105/80, 3 July 1989.
277Garrow and Kelly, above n 260, at 521.
278Chris Kelly “Supervision of Trustees: Enforcement or Problem Solving” (LLM Thesis, Victoria University of Wellington, 2009) at 47.