Public – Item 4
RULES & ETHICS COMMITTEE
3 July 2007
CLASSIFICATION - PUBLIC
Amendment to the guidance to rule 2 of the Code –
Trustee Exemption Clauses and Limiting Liability
EXECUTIVE SUMMARY
Summary
1.
This paper asks the Committee to agree an amendment to the
guidance notes 66 and 67 to rule 2.07 (limitation of civil liability by
contract) of the Code of Conduct. The guidance notes say that where
preparing a trust instrument reasonable steps should be taken to
ensure that the client is aware of the meaning and effect of any clause
limiting the liability of a professional trustee. A submission was
received from the City of London Law Society (CLLS) asking, in
essence, that the guidance be disapplied in respect of commercial
trusts. This is attached as Annex 1. A meeting then took place
between representatives of the CLLS and the Law Society’s Wills and
Equity Committee and this resulted in a joint proposal for change set
out in Annex 2. This has been further refined to the version appearing
in the recommendations.
Recommendations
2.
That the Rules and Ethics Committee amends:
(a)
guidance note 66 by the insertion of the word “settlor” before the
word “client” in line 1 and the word “paid” before the word
“trustee” in line 3; and
(b)
guidance note 67 by the addition of the following words as a
final paragraph:
“The guidance set out in this paragraph and paragraph 66 does not
apply where it would be inappropriate because, for example, the trust is
created in the context of a commercial transaction and the solicitor is
not the trustee.”
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Annexes
Annex 1
Annex 2
City of London Law Society submission
CLLS and Wills and Equity Committee joint proposal for
change
Author
Date
Bronwen Still
25 June 2007
This paper is for policy decision
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Amendment to the guidance to rule 2 of the Code –
Trustee Exemption Clauses and Limiting Liability
Background
1.
When the Trustee Bill was considered by Parliament in 2000, concerns
were expressed that the use of trustee exemption clauses (TECs) was
not addressed. A TEC is a clause in the trust’s instrument which
excludes or restricts a trustee’s liability for breach of trust, either by
expressly excluding liability or by modifying the trustee’s powers and
duties. The concerns had arisen in the context of a limited number of
high profile cases where a number of beneficiaries had lost significant
sums of money due to the negligent administration of trust funds by
trustees. They had been prevented from recovering their losses
because of the operation of TECs in the governing trust deeds.
2.
As a direct result of these concerns, the Law Commission was asked to
conduct a consultation on the use TECs by professional trustees. The
conclusion was that the use of TECs should not be banned and their
use should not be governed by legislation. The best approach was to
deal with them by way of regulation targeting professional (i.e. paid)
trustees.
3.
As a result of this, in 2005 the Law Commission entered into
discussions with the Law Society about how best this could be
achieved. At that stage the Code of Conduct was in the final stages of
drafting and the Law Commission accepted the Law Society’s
conclusion that the most appropriate way of tackling the problem would
be through additional guidance to rule 2.07 which deals with the limiting
of liability through contract.
The Issues
4.
Rule 2.07 is set out below:
“2.07 Limitation of civil liability by contract
If you are a principal in a firm you must not exclude or attempt to
exclude by contract all liability to your clients. However, you may
limit your liability, provided that such limitation:
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(a)
is not below the minimum level of cover required by the
Solicitors’ Indemnity Insurance Rules for a policy of
qualifying insurance;
(b)
is brought to the client’s attention; and
(c)
is in writing.”
5.
The rule prevents any agreement which would limit liability below the
minimum level of cover required by the Solicitors’ Indemnity Insurance
Rules (currently £2m for firms and £3m for LLPs for any one claim).
Where liability is limited above the minimum level of cover, the rule
requires that this must be brought to the client’s attention in writing.
The purpose of guidance notes 66 and 67 is to apply the requirements
in the rule specifically to the TEC situation and to suggest that the
settlor should be made aware of the meaning and effect of the clause
before the trust is created. In other words, advice should be given
before the client agrees to it.
6.
The area of risk, therefore, concerns the settlor client’s awareness and
understanding of the TEC. It is often the case that the exemption
clause appears in the schedule of the trust deed and even if the settlor
reads the trust deed the impact and significance of the clause may be
overlooked. It was agreed that guidance should address this. The
following two paragraphs were, therefore, prepared by members of the
Wills and Equity Committee and incorporated into the text of the
guidance to the rule before the Code was made.
“66. Where you are preparing a trust instrument for a client and that
instrument includes a term or terms which has or have the effect of
excluding or limiting liability in negligence for a prospective trustee, you
should take reasonable steps before the trust is created to ensure that
your client is aware of the meaning and effect of the clause. Extra care
will be needed if you are, or anyone in or associated with, your firm is, or
is likely later to become, a paid trustee of the trust.
67.
Where you or another person in, or associated with, your firm is
considering acting as a paid trustee you should not cause to be included
a clause in a trust instrument which has the effect of excluding or
limiting liability for negligence without taking reasonable steps before the
trust is created to ensure that the settlor is aware of the meaning and
effect of the clause.
It would be prudent to ensure both that:
(a)
there is evidence that you have taken the appropriate steps; and
(b)
that evidence is retained for as long as the trust exists and for a
suitable period afterwards.”
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7.
Guidance note 66 deals with the situation where the solicitor is acting
for a settlor client, and paragraph 67 deals with the situation where
someone within a firm, although not necessarily acting for and advising
the settlor, is likely to be a trustee of the trust.
8.
It will be seen that the guidance requires that the solicitor (and/or the
potential solicitor trustee) should take “reasonable steps before the
trust is created to ensure that (the) client is aware of the meaning and
effect of the clause.” The guidance further recommends that the firm
retain evidence that these steps have been taken and that the
evidence is retained as long as the trusts exists, and for a suitable
period afterwards.
The City of London Law Society’s concerns
9.
Guidance notes 66 and 67 were drafted in conjunction with the Wills
and Equity Committee, but it has subsequently become apparent that
the City of London Law Society (CLLS) felt that the guidance went too
far in imposing requirements on solicitors acting for the trustees of
large commercial trusts. They make the points that, first, the trustee will
not be the solicitor(s) drafting the trust deed or anyone within the firm.
Any limitation of liability is not, therefore, for the benefit of their firm.
Secondly, their client (which would usually be an investment bank and
responsible for finding the trustee) would not want advice on the
limitation as it would incur extra time and costs and such clauses tend
to be drafted to a market standard format. Thirdly, that the Law
Commission did not want to target commercial trusts.
10.
They, therefore, discussed with the Wills and Equity Committee the
insertion of an additional sentence at the end of guidance note 67
which would effectively disapply the guidance to situations where the
parties “may be expected to understand the nature of the documents,
or it is customary for such commercial documents to contain such
provisions”. See Annex 2.
11.
Concerns were subsequently expressed about the wording being too
loose in disapplying the guidance where it states that the parties “may
be expected to understand the nature of the document . . . . “ This
would give solicitors a huge amount of scope to judge the intelligence
of the settlor and decide the settlor understood the nature of the
limitation. The wording of the sentence has now, therefore, been reworded and appears in the recommendation. The CLLS have agreed
the new wording and confirmation is awaited from members of the Wills
and Equity Committee, who will consider it at their meeting on 27 June,
that they are also content.
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12.
Finally, two other minor amendments to the guidance in paragraph 66
are suggested. The Committee is asked to agree to the insertion of (a)
the word “settlor” before the word “client” in the first line and (b) the
word “paid” before the word “trustee” in the third line. This brings
consistency with the wording in paragraph 67 and makes clear that the
guidance is aimed at professional, i.e. paid, trustees and that the client
is going to be the settlor.
Recommendations
14.
That the Rules and Ethics Committee amends:
(a)
guidance note 66 by the insertion of the word “settlor” before the
word “client” in line 1 and the word “paid” before the word
“trustee” in line 3; and
(b)
guidance note 67 by the addition of the following words as a
final paragraph:
“The guidance set out in this paragraph and paragraph 66 does not
apply where it would be inappropriate because, for example, the trust is
created in the context of a commercial transaction and the solicitor is
not the trustee.”
Annexes
Annex 1
Annex 2
City of London Law Society submission
CLLS and Wills and Equity Committee joint proposal for
change
Author
Date
Bronwen Still
25 June 2007
This paper is for policy decision
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ANNEX 1
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ANNEX 1
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ANNEX 1
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ANNEX 2
City of London Law Society
Briefing
Trustee Exemption Clauses (TEC)
Proposed amendment to Guidance
The City of London Law Society with the support of the Law Society’s Wills and
Equity Committee proposes an amendment to guidance to Rule 2.07 to clarify the
application of the guidance to commercial trusts.
The suggested wording (agreed by the CLLS and the Law Society) to be inserted
after paragraph 62 of the guidance (full text attached) is:
“The guidance set out in this paragraph and paragraph 61 does not apply
where the parties may be expected to understand the nature of the
documents, or it is customary for commercial documents to contain such
provisions”.
Background
Law Commission report
During the passage of the Trustee Bill in 2000, concern was raised about the use of
trustee exemption clauses, (ie a clause restricting or excluding trustee’s liability for
breach of trust.)
The Law Commission was asked to conduct a consultation on the use of TEC. In
their final report they recommended a practice rule approach to ensure proper
disclosure of exemption clauses.
Law Society consultation
The Law Society translated the Commission’s recommendation into guidance to
Conduct Rule 2.07. The City of London Law Society raised concerns that the
guidance did not reflect the findings of the Law Commission report and would require
solicitors to give unnecessary advice.
Representatives of the City of London Law Society and the Law Society’s Wills and
Equity Committee met to discuss the issue and agreed an appropriate amendment.
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ANNEX 2
Summary of CLLS concerns

Guidance does not reflect the Law Commission recommendations
The City via the Financial Markets Law Committee lobbied strongly for the
rules to be adjusted to reflect the situation relating to the use of commercial
trusts in the financial markets. The Law Commission accepted the arguments
and in response to this lobbying the Law Commission recognised that
disclosure to a settlor of a trustee exemption clause would be unnecessary
where the settlor acts in the course of business1 or the trustee is subject to
statutory regulation, eg authorised unit trust schemes. It also recognised that
pension trusts should be exempt from any such practice rule2. The Law
Commission therefore recommended that exclusions be inserted in any rules
to reflect this.
Without the CLLS proposed amendment, the guidance does not include any
reference to these exclusions.

The guidance requires solicitors to give unnecessary advice
The primary purpose of the Law Commission’s recommendations is to
facilitate settlor awareness of trustee exemption clauses (ie the party
providing assets to the trust) and it is the settlor who is identified by the Law
Commission as the appropriate recipient of the advice. By contrast, the
unamended guidance requires the solicitor to disclose an exemption clause to
their client for whom they are preparing a trust instrument.
The solicitor’s client is often not the settlor but the trustee, or the agent bank
or arranger, none of whom are the transaction settlors. Accordingly they will
not be and it is not envisaged by the Law Commission that as non-settlors
they will be interested in the effect of the exclusion clauses. Further they are
experienced corporate clients who do not require advice on clauses that are
usually in market standard format. Exemption clauses would be unnecessary
and would incur extra time and costs.
Agreed wording
The agreed wording deals effectively with both concerns raised by the CLLS.
Stella Dunn
8 May 2007
1
2
Paragraph 6.82, Law Commission Report on Trustee Exemption Clauses No.301, July 2006
Para. 6.85, Ibid.
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ANNEX 2
Text of Rule 2.07 and Guidance paragraphs 61 and 62
2.07 Limitation of civil liability by contract
If you are a principal in a firm you must not exclude or attempt to exclude by contract
all liability to your clients. However, you may limit your liability, provided that such
limitation:
(a)
is not below the minimum level of cover required by the Solicitors'
Indemnity Insurance Rules for a policy of qualifying insurance;
(b)
is brought to the client’s attention; and
(c)
is in writing.
Guidance
66.
Where you are preparing a trust instrument for a client and that instrument
includes a term or terms which has the effect of excluding or limiting liability in
negligence for a prospective trustee, you should take reasonable steps before
the trust is created to ensure that your client is aware of the meaning and effect
of the clause.
67.
Where you or another person in, or associated with, your firm is considering
acting as a paid trustee you should not cause to be included a clause in a trust
instrument which has the effect of excluding or limiting liability for negligence
without taking reasonable steps before the trust is created to ensure that the
settlor is aware of the meaning and effect of the clause. In either case extra
care will be needed if you, or anyone in, or associated with, your firm is, or is
likely later to become, a paid trustee of the trust.
It would be prudent to ensure both that:(a) there is evidence that you have taken the appropriate steps; and
(b) that evidence is retained for as long as the trust exists and for a suitable
period afterwards.
The guidance set out in this paragraph and paragraph 66 does not apply
where the parties may be expected to understand the nature of the
documents, or it is customary for commercial documents to contain such
provisions.
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