Duties of trustees
Overview: Our proposals are that new legislation should state the duties of trustees. The duties fall into three categories:
- conduct duties;
- mandatory (non-excludable) content duties; and
- default (excludable or modifiable) content duties.
Content duties need to be carried out with the standard of conduct set by the conduct duties. The conduct duties are the duty of honesty and good faith and the duty of care. The duty of honesty and good faith can never be excluded from application in a trust. The duty of care in the exercise of a mandatory content duty cannot be excluded, but as it applies to every other exercise of a duty, power or discretion by a trustee, the duty of care can be excluded. P5
(1) New legislation should provide that in exercising any of the duties (including those listed in P6 and P7), powers or discretions that apply to a trustee in a particular trust, the trustee must:
(a)act honestly and in good faith for the benefit of the beneficiaries or a permitted purpose; and
(b)exercise such care and skill as is reasonable in the circumstances, having regard in particular –
(i)to any special knowledge or experience that the trustee has or holds himself or herself out as having; and
(ii)if the trustee is paid for services as a trustee, to any special knowledge or experience that it is reasonable to expect of a person in that role.
(2) New legislation should provide that the conduct obligation in (1)(a) will be implied into every trust and cannot be excluded from the trust relationship.
(3) New legislation should provide that the duty of care and skill in (1)(b) applies:
(a)to every exercise of a mandatory duty in P6(1) regardless of anything in the terms of the trust; and
(b)to every other exercise of a duty, power or discretion only to the extent that it has not been excluded or modified by the terms of the trust.
(4) New legislation should provide that the trustee’s liability for:
(a)any breach of trust that arises from a failure to carry out the conduct obligation in (1)(a), and
(b)a breach of a mandatory duty listed in P6(1) that arises from failure to carry out either of the conduct obligations in (1)(a) and (1)(b),
cannot be excluded by the terms of the trust.
P6 Mandatory content duties
(1) New legislation should provide that the following duties will be implied into every trust:
(a)the duty to understand and adhere to the terms of the trust;
(b)the duty to account to the beneficiaries for the trust property; and
(c)the duty to exercise the powers of a trustee for a proper purpose.
(2) New legislation should provide that if a trust deed includes a clause that attempts to exclude the application of any of these duties to the trust, that clause will have no effect, provided that it is clear that the settlor’s overall intention was to create a trust.
P7 Default content duties
(1) New legislation should provide that unless otherwise stated in the terms of the trust, the following duties will be implied into every trust:
(a)the duty to maintain impartiality or evenhandedness between beneficiaries;
(b)the duty not to make profit from the trusteeship;
(c)the duty to act without reward;
(d)the duty to avoid a conflict of interest;
(e)the duty to be active (meaning the duty to consider the exercise of the trustees’ discretions regularly and not to fetter these discretions);
(f)the duty to act personally;
(g)the duty to act unanimously;
(h)the duty to manage the trust;
(i)the duty to invest;
(j)the duty to keep trust property separate from the trustee’s own property;
(k)the duty to keep and render accounts, and to provide information to beneficiaries; and
(l)the duty to transfer property only to beneficiaries or persons legally authorised to receive property.
(2) New legislation should provide that the duties in P7(1) may be excluded or modified by the terms of the trust. Duties P7(1)(c) and (g) may be excluded completely. With the remaining duties, the terms of the trust may modify the extent to which the duty is met, but only insofar as the mandatory duties are not breached.
(3) New legislation should provide that the terms of a trust may include additional duties for the trustee.
Please give us your views on these proposals.
3.3The duties of trustees are not set out in the Trustee Act 1956 or any other Act. They are found in centuries of case law. It is generally accepted that there are some fundamental duties which if excluded mean that the relationship does not constitute a trust. There are some duties which do not apply to every trust as trust deeds may alter the trustees’ obligations by explicitly including some duties and excluding others.
3.4The mandatory “irreducible core” of trustees’ duties was described in the English Court of Appeal by Millett LJ in the case of Armitage v Nurse as being to act honestly and in good faith for the benefit of the beneficiaries. Millett LJ described this as the minimum obligation necessary to give substance to a trust.
3.5The courts have held that trustees are subject to a duty of care. Trustees are obliged to take the care of an ordinary prudent person of business in the circumstances of the trust. A professional trustee, that is, one who is paid to act as a trustee, is expected to exercise a higher standard of diligence and knowledge than an unpaid trustee, while a professional corporate trustee is expected to use the special skill and care which it professed itself to have in its advertising literature and dealings with the settlor.
3.6Although the trustees’ duties are of central importance in a trust and a large number of New Zealanders, including those without legal training, are trustees, the duties are not clearly set out or easily accessible. We understand that many trustees do not fully understand their obligations.
3.7A further issue is whether the case law statement of the irreducible core of a trust from Armitage v Nurse sufficiently outlines all of the duties that must be present in a trust. The Armitage v Nurse duty has been criticised by some commentators for not being sufficiently full to give substance to the trust relationship. Several commentators have suggested “unpackaging” the core duty so that it is broken down into several elements that are essential to the role of the trustee.
3.8The law of trustees’ duties has been developed through many cases over hundreds of years. Many of the duties are nuanced and apply differently in different circumstances. If it is not to alter the current legal position, any statutory representation of the duties would need to clearly state that it is a summary only, and intended to restate the case law position.
Options for reform
3.9The options considered are including trustees’ duties in legislation, or retaining the status quo of leaving it to the case law to explain the duties. We based our consideration of the content of the duties on the “Butler list”, and the “irreducible core” from Armitage v Nurse. We considered which of the duties are mandatory and which may be modified or excluded. We looked at how to include the trustees’ duty of care, and whether to distinguish between the duty of care owed by professional trustees and by lay trustees.
Including trustees’ duties in legislation
3.10In line with the objectives of clarification and creating a more useful Act, we consider that it is worthwhile to include simplified summaries in legislation of what the duties of trustees are. This would provide a clear and accessible base from which trustees can gain an understanding of their duties. It would have educative value and may encourage improved standards among trustees because of the greater prominence given to the duties in the law. It could be argued that the duties are sufficiently clear in the case law and that there would be little practical benefit in expressing the duties in a statute. However, our view is that the significance of the duties to the trust relationship warrants them being given greater attention, even if they are in summary form only. Most submitters to the Fourth Issues Paper, including the New Zealand Law Society (NZLS), Auckland District Law Society (ADLS) and the Trustee Corporations Association (TCA), agreed as it would make the duties more accessible to non-lawyers, many of whom are ignorant of trustees’ obligations or do not fully understand what trusteeship entails. The Māori Land Court commented that lay trustees and beneficiaries in Māori land trusts often struggle to identify the duties, and it would be useful to set them out in legislation.
Nature of the duty provisions
3.11We intend that the duty provisions would express in general terms the principles of law about the duties trustees owe that can be gleaned from case law. They would not be a code of the law of trustees’ duties. The detail of how the law requires the duties to apply in practice would come from case law.
3.12We see this as being similar to the nature of the provisions on company directors’ duties in the Companies Act 1993. In its 1989 report upon which the reforms enacted in the Companies Act 1993 were based, the Law Commission described the intention of the recommendations relating to director’s duties as to:
… distil the general principles from the cases and express them in the statute, to make them more accessible. Such a statement of general principle was recommended by the Macarthur Committee and has been adopted by the Canadian and Australian Acts. The response to the [Law Commission’s] discussion paper indicated overwhelming support for similar reform.
3.13It is generally considered that the common law continues to be relevant in the law of company directors’ duties as an aid to the interpretation of the general principles in the Companies Act and to the extent that the Companies Act does not address a particular duty or remedy for breach of a duty.
3.14All submitters clearly preferred that the duties be expressed in general terms as summaries, rather than purporting to codify the law in this area. The Office of the Māori Trustee commented that because Māori land, by its nature, is handed down through generations, and trustees need to be able to take into account a wide range of short and long term circumstances and changing interests, a wide degree of flexibility is required in the duties. We agree that it would be too difficult to encompass in statute the exact meaning of each duty in all of the varying circumstances they apply.
3.15Law firms Chapman Tripp and Taylor Grant Tesiram both raised the option of only specifying mandatory duties in the legislation as these are the core obligations from which all others flow and there is a risk that the full meaning of the duties will not be fully encapsulated, which could potentially alter their meaning. We recognise that restating case law principles does have this risk, but believe that with careful drafting and clarification that the duties are intended as restatement of the existing law these risks can be mitigated. The benefits of having a full, clear list of duties outweigh these concerns. Because the duties would be in a summarised form their utility will not be in giving a precise indication of the requirements on a trustee. Rather they will be useful in giving trustees, settlors and beneficiaries notice of the existence of all duties and outlining the nature of the trust relationship in legislation to a much greater extent than is the case currently.
Classes of duties
3.16One of the difficulties of trying to accurately set out the duties of trustees in legislation is that there are different classes of duties which differ in relation to how fundamental they are to the existence of a trust and the type of requirement they place on trustees. Some duties relate to the type of conduct, including the care, knowledge and intention, which a trustee must have when carrying out their duties and powers (conduct duties). Other duties more directly prescribe what a trustee must do or not do (content duties). The content duties need to be carried out in a way that accords with the conduct duties. It is the level of conduct of the trustee that is established by the conduct duties that determines when a content duty is breached. For instance, the exercise of the duty to account requires the trustee to exercise reasonable skill and care in accounting to beneficiaries. The conduct/content distinction is useful when considering for which duties it is appropriate to allow trust deeds to exclude a trustee’s liability for a breach of duty.
3.17A second important distinction is between duties that are mandatory and duties that are default. Mandatory duties are part of every trust relationship. They will be implied into every true trust, even where a trust deed attempts to exclude them. There are other duties that the courts have found arise in a trust unless a trust deed states that they do not apply. We classify these as default duties. They will be implied in the trust relationship if the trust deed is silent on the matter. We consider it is useful to have a list of duties that apply to a trustee in the absence of any trust term to the contrary. Some of these duties may be excluded outright (such as the duty to act without reward) and some may be modified so as to alter the extent to which they must be met (such as the duty of impartiality).
3.18Conduct duties oblige a trustee to do everything he or she does as a trustee with a certain standard of conduct. The conduct duty to act honestly and in good faith, as confirmed in Armitage v Nurse, clearly forms an essential part of a trust. This duty is widely accepted in case law. It is considered to be the irreducible core of a trust. It must be present in every trust. Any attempt to contract out of it is of no effect. Where the terms of a “trust” attempt to exclude the duty of good faith and honesty, the intention to create a trust may be called into question, raising the possibility that the courts may find that no trust exists. All submitters on this issue agreed that the duty described in Armitage v Nurse was an essential duty of a trustee.
3.19The duty in P5(1)(b) (the duty of care) is clearly also a conduct obligation owed by trustees to beneficiaries. Trustees must carry out their role with reasonable care and skill. While few overseas jurisdictions have been willing to legislate full lists of trustees’ duties, the duty of care has often been included in their statutes or proposed statutes. We propose a duty of care based on the wording of the Trustee Act 2000 (UK), which spells out that a professional trustee’s special knowledge or experience, or that which a member of his or her profession could be expected to have, will be taken into account. A professional is a trustee who is paid to act as a trustee. This framing of the duty of care accurately represents the existing common law position, and so we do not consider that there is a significant risk that this provision will discourage professional trustees from offering their services. The duty of care in the United Kingdom Act only applies to specific statutory powers and duties of a trustee. We propose that the duty of care in new trusts legislation would be a conduct obligation applying to any exercise of a duty, power or discretion by a trustee.
3.20Unlike the obligation of honesty and good faith, the duty of care seems in law to be generally excludable. We understand that some trust deeds exclude the duty to use reasonable care and skill from a trust relationship or to exclude trustee liability for a breach of this duty. The duty of care is not considered to be fundamental to a trust. It has been held that the trustees’ duty of care is not itself fiduciary in nature, although some aspects of what is likely to fall under the duty of care are covered by the irreducible core and mandatory duties. The trustee’s duty of care developed in the late nineteenth century in the context of the increasing use of trusts for commercial investment. It related to the need to ensure trustees invested with care rather than being a principle fundamental to the existence of the trust relationship. Failure to exercise reasonable skill and care amounts to negligence.
3.21In England, the Court of Appeal’s decision in Armitage v Nurse has limited the irreducible core of a trust, that is, the completely unexcludable obligations, to the duty to act in good faith and honestly for the benefit of the beneficiaries. This likely represents the current law in New Zealand, although there has been little case law on the issue. However, there are those that argue that the irreducible core should be wider than the duty of honesty and good faith. The obligations that make a trust a trust are arguably empty without mandatory content obligations also. In the Privy Council’s consideration of trustee exemption clauses in Spread Trustee v Hutcheson the minority raised the possibility that the English courts could revisit the law established in Armitage v Nurse if the appropriate case came before the courts.
3.22The irreducible core is too bare without other completely mandatory obligations. A true trust requires more than just the duty of good faith and honesty. We consider that there is a risk if the statute states that the duty of care may be excluded in relation to any exercise of a trustee duty, power or discretion, including the most fundamental content duties, that trustee obligations may be too weak. It is appropriate and realistic to use this opportunity to broaden the irreducible core by stating that there are certain mandatory content duties which cannot be excluded themselves and to which the duty of care must always apply. We recognise that this does likely alter the existing law, but believe it only does so in a way that brings the mandatory standard of trustee conduct and obligations to the level that should be sensibly implied by the nature of the trust. We are keen to receive feedback on whether this reform is appropriate.
Mandatory content duties
3.23We consider that some of the content duties of trustees are mandatory duties because they must be implied into every trust that meets the requirements for the creation of a trust. This is a shift from the way that trustees’ duties are commonly represented. The duty to act in good faith and honestly for the benefit of the beneficiaries (or a permitted purpose) is usually considered the only mandatory obligation on trustees. We would argue that the mandatory content duties we list in our proposal are as vital to the existence of a trust as the obligation of honesty and good faith. They are necessarily implied by the trust relationship. Under our proposal any attempt to exclude these duties from a trust in a trust deed will be unsuccessful and instead trustees will always be under the obligation to carry out these duties. While the conduct duties creates a standard of conduct, it is necessary also to have definite mandatory duties that give content to the trustee’s obligation to trust property and the relationship to beneficiaries.
3.24We have carefully considered how to express the duty to account as a mandatory obligation of a trustee. The duty to account is central to the trust relationship as it is necessary for the trust property to be identifiable and for beneficiaries to have access to information about the trust property if the trustees are to be accountable to the beneficiaries. The trust will have no substance if the trustees are not accountable. David Hayton wrote that the right of a beneficiary to monitor and protect his or her interest by obtaining accounts from the trustee is at the core of the trust concept.
3.25The duty to account for the trust property is a wide-ranging duty that to some extent requires trustees to keep records, provide information to beneficiaries and manage the trust for the benefit of the beneficiaries or a permitted purpose depending on the nature and circumstances of each individual trust. It is not possible to spell out completely what these component duties are. It does not simply mean that there is an obligation to keep accounts. In some single-asset family trusts, it would be unduly expensive and disproportionate to the size and complexity of the trust to require formal annual accounts. In more complex trusts, trustees would need to keep and render detailed accounts. In the same way, the context of the obligation to provide information varies depending on how close or remote a beneficiary’s interest is. A trustee may not be required to provide information to all beneficiaries, but must provide information to some. If there is no beneficiary who can hold a trustee to account, there is no trust. The obligations on trustees to provide information to beneficiaries and to retain information are considered in more depth below.
Default content duties
3.26The proposed default content duties are a list of commonly accepted duties from judge-made law. We have expanded on the list included in the Fourth Issues Paper. Our aim here is to summarise and express the existing duties and not to prescribe how they apply in individual circumstances. We accept that there are different ways of expressing these duties and there may be some variations to the wording of these before we make our final recommendations. We acknowledge that there could be a tension between the broadly stated mandatory duties, which cannot be excluded, and the narrower default duties, which can be modified or excluded by the terms of a trust, where these overlap. For instance, there is some overlap between the mandatory duty to account and the default duty to keep and render accounts and provide information to beneficiaries. While it is possible to modify the default duty to suit the requirements of the particular trust, these elements are necessary for the mandatory duty and so they cannot be completely excluded. It will ultimately be a contextual question for the courts as to whether a particular attempt to modify or exclude a default duty in fact attempts to oust a mandatory duty.
3.27While the default duties are potentially excludable, we note that trust drafters will still need to be cautious when excluding duties. Trust drafters have to draft in such a way that the arrangement falls within the definition of a trust and the requirements for the creation of a trust. The attempted exclusion of too many default duties may be interpreted as an attempt to exclude a mandatory duty or may lead a court to find that no trust was intended.
3.28Below we discuss particular duties that have been identified by submitters as being questionable.
Duty to act without reward
3.29Whether the duty to act without reward should continue to be assumed to be a default duty was raised as an issue by Chapman Tripp. It suggested that this duty is almost always varied and that the law should accept the need of trustees to charge a market rate for their services as of right. We considered these concerns, but found that the duty to act without reward was an important part of the traditional understanding of the role of a trustee. It emphasises the personal nature of trusts and the relationship of trust and confidence that is reposed in a trustee. We recognise that many trust deeds will vary this duty, but consider that it is appropriate for it to remain a default duty. Unlike most of the other default duties, this one may be excluded completely, whereas most of the other default duties are more likely to be modified or tailored to the particular situation.
Duty to act unanimously
3.30Historically there has been a duty on trustees to act unanimously unless the trust deed provides otherwise. We considered whether this duty should be left out of the default duty list and majority decision-making be made the statutory default position. A majority of submitters were of the view that the duty to act unanimously should remain the default position as this was appropriate for most family trusts. The TCA considered that there would be retrospectivity issues if the default rule was changed as thousands of trust deed have been drafted under the assumption that unanimous decision-making was the default rule. The NZLS’s view was that the requirement to have unanimous decision-making provided a safeguard as parties will usually have to go to court to resolve disagreements, which was appropriate in their view. Those in favour of changing the rule, including the ADLS, were of the view that there are many types of trusts where unanimous decision-making is not appropriate and not used, and that allowing dissenting trustees permits their views to be represented and recorded, without leading to the resignation of trustees.
3.31We were convinced by the view that restating the ideal of unanimous decision-making as the default position would be beneficial. It is more appropriate for majority decision-making to be provided for in a trust deed where safeguards for the dissenting trustees, such as protection from liability for the consequences of a decision and exemption from participating in carrying out decisions with which they disagreed, can be included. The rule would continue not to apply to Māori land trusts as under Te Ture Whenua Māori Act 1993 trustees may act by majority.