CONSIDERATIONS FOR PROPER CONSIDERATION:
TRUSTEE DECISION MAKING
Introduction
1. It is trite that when considering whether or not to exercise a fiduciary power a trustee
must consider all relevant matters and ignore all irrelevant matters. Every trustee in the
world knows this to be true (or certainly ought to, otherwise they have bigger issues
than that of proper consideration). But what does this actually mean? This short note
considers the nature and extent of the duty of consideration on Trustees.
This will
encompass the duty to periodically consider whether to exercise of a fiduciary power
and, if it is considered appropriate to exercise it, the duties of appropriate
consideration as to how it should be exercised.
General Comments on Powers
2. It is probably helpful, first of all, to set out what the shorthand terms usually employed in
this area refer to. The donor refers to the person who gifts a power to another. The
donor, in the context of a trust, is almost always the settlor of a particular trust. The
donee is the person to whom a power has been gifted, in the context of a trust this will
usually be the trustee, but could also be a third party (such as a protector) or, indeed,
the settlor himself (who can reserve powers to himself, thus making him both the donor
and the donee of a particular power). Any potential recipient of the benefit of a
power is an object of that power.
3. A power, in the context of a trust, is a legal authority conferred by a donor upon a
donee to dispose of or deal with property which is not his own. Another way of looking
at it might be that it confers an ability to do lawfully that which would, but for the
power, be unlawful.
4. Powers may be classified in any number of ways but, for the purposes of this note,
powers conferred on a trustee may, broadly, be classified as either fiduciary or
personal. The duty of consideration only applies to the exercise of fiduciary powers.
Personal powers must, of course, be exercised in good faith and only for the purpose
for which that power was given (to do otherwise would amount to a fraud on a power)
but there is no duty of consideration on the part of the donee.
Periodic Consideration
5. A donee of a fiduciary power owes a duty to the objects of that power to consider,
from time to time, whether and how to exercise it and reach a bona fide independent
conclusion (see Re Gestetner Settlement [1953] Ch. 672 at 688). It is not enough to
simply place a fiduciary power in a metaphorical drawer and forget about it. The
donee is not usually bound to exercise a fiduciary power at all; whether or not to
exercise a fiduciary power in a particular way, or at all, is usually a matter for the
discretion of the donee.
The donee is, however, under an obligation to consider
whether or not to exercise the power. The logic behind the imposition of a duty to
periodically consider the exercise of a fiduciary power is obvious – if there was no such
duty, a donee could simply never turn his mind to the power at all, and could not be
compelled to do so, which would result in the donor’s intentions in the creation of the
power failing to be fulfilled.
6. The duty in this regard on a trustee is to consider from time to time whether or not he
should exercise a particular fiduciary power and come to a bona fide independent
conclusion on the question. This is not simply a question of superficial reflection on the
matter. The trustee must apply his mind to the actual exercise of the fiduciary power in
question, such that there is an exercise of an “active discretion” as to whether or not to
exercise it (i.e. a conscious decision, properly taken, to either exercise the power or not
to exercise it). In order to make that decision, the trustee must have consideration to
the circumstances existing at the time.
A passive approach, where there is no
consideration as to the exercise or otherwise of a fiduciary power, and no thought as to
whether or not the circumstances existing at the time indicate that it ought to be used,
will not protect a supine trustee from liability for breach of trust.
7. This distinction is important, particularly in terms of trustee protection.
Imagine a
scenario in which a trustee considers whether or not to exercise a power and
determines, in good faith, that he would not exercise it at that point and, as a result, the
trust fund suffers a loss. Contrast that with a scenario in which a trustee simply does not
consider whether or not to exercise the power at all and so does nothing and the trust
fund suffers a loss. In the former case a trustee may well be protected from any loss
flowing from the decision to do nothing, whereas in the latter case a trustee will very
likely not be protected from liability. It is the difference between taking a decision
which later proves not to have been the ‘right’ decision and not taking a decision at
all. It must be right that the ‘active’ trustee is protected and the ‘supine’ trustee is not -
for it cannot be said that a trustee has complied with a duty of proper consideration
when there has been no consideration.
The Scope of the Duty
8. The starting point of the duty of proper consideration is that the discretion, being vested
in the trustee, is the trustee’s to exercise. The consideration in relation to a decision
must result in the trustee reaching a genuine, bona fide, independent conclusion. A
trustee will not be protected if he simply accedes to the wishes of the settlor (or anyone
else) in the manner of blind and unquestioning obedience. Of course, the settlor’s
wishes are always a material consideration in the exercise of fiduciary discretions and a
trustee would equally be failing in his duties if he ignored the wishes of the settlor. The
settlor’s wishes, however, are only one of the relevant factors which the trustee must
take into account – they should not displace the trustee’s independent judgment
otherwise the trustee’s decision making processes will be open to challenge.
9. The trustee must start with a consideration of the purpose of the trust and, underlying
that, the intended use of the power in fulfilling that purpose. It is at this point that the
settlor’s wishes, as indicated in the trust instrument, or in a separate letter of wishes, or
otherwise, come into play.
The trustee is also entitled to take into account, in
determining the purpose of the trust, what he understands to have been the settlor’s
intentions from the surrounding circumstances leading to the creation of the trust.
10. Once the purpose of the trust has been considered, it falls to the trustee to consider
whether the exercise, or not, of any particular fiduciary power is appropriate, or not, at
the point in time at which the decision is to be taken. This necessarily involves a duty to
address the considerations which inform the appropriateness of a particular exercise of
a power. This can be better expressed as the existence of a duty to inquire and a duty
to ascertain information which is necessary to a trustee’s proper consideration of the
question before him.
11. To what lengths then, must a trustee go to make inquiries and to ascertain information,
to ensure that he asks himself the right questions and addresses his mind to the relevant
factors? It would be ludicrous, and very costly, for the prudent trustee to exhaust every
possible line of enquiry in respect of issues which might be relevant to his consideration.
A trustee will not be held to have failed in his duty simply because his deliberations
have not taken into account every possible relevant factor, or disregarded every
irrelevant factor – that would be to set the bar too high (Pitt v. Holt [2013] UKSC 26). A
trustee is simply required to have had regard to such considerations as were sufficient in
the circumstances. Obviously, and perhaps unhelpfully, what constitutes ‘sufficient in
the circumstances’ will vary with each case and with the nature of the relevant power.
How to Exercise a Power
12. Having properly considered whether or not to exercise the power, a donee may very
properly come to the decision not to exercise it. However, once a donee has reached
the conclusion that it is appropriate to exercise a fiduciary power at the point he
considers doing so, he must then turn his mind to how the power should be exercised.
To a certain extent, the duties in respect of appropriate consideration of how to
exercise a fiduciary power overlap with the duty to inquire and ascertain. When a
trustee does give consideration to how to exercise a power he is under the following
duties:
a. To act honestly and in good faith – this means that the trustee’s consideration
must be genuine and responsible consideration;
b. To ask themselves the correct question – the trustee must not go beyond what
has been entrusted to him by the settlor;
c. To reach a decision open to a reasonable body of trustees – the decision must
not be perverse and one which no reasonable trustee could have reached on
the material before him; and
d. To take into account relevant matters and only those matters and must inform
himself of the relevant facts.
13. A trustee cannot simply abdicate any consideration of their own to the exercise of the
power and exercise it, or purport to do so, on the promptings and at the direction of
others. Where trustees were wholly ignorant of their duties, did not understand that
they had any discretion and executed appointments prepared by the settlor’s solicitor
without reading or understanding them, the court set the appointments aside (see
Turner v Turner [1984] Ch. 100). If a trustee simply blindly follows the direction of another
the purported decision is void ab initio as no decision has actually been made.
14. As stated, a trustee is under a duty to take relevant matters into account and ignore
irrelevant matters. The duty includes, where necessary, a duty to take advice from
appropriate experts such as lawyers, accountants, actuaries, surveyors or scientists.
Once obtained, a trustee cannot delegate his consideration of such expert advice, but
must assess the expert advice himself as best he can.
Clearly, trustees cannot be
bound to take into account all relevant matters – taken literally that would be absurd.
To hold a trustee to be in breach of duty for failing to consider every matter which he
might sensibly regard as relevant would at best be burdensome on the trustee and, in
cost and delay, on the beneficiaries; at worst it would paralyse decision-making. The
range of circumstances which require to be taken into account will depend upon the
context.
15. One issue in connection with the duty of adequate consideration is whether, and if so
to what extent, a trustee should consult with one or more beneficiary or class of
beneficiaries prior to making a decision as to the exercise of a power conferred upon
him.
It is clearly sensible for a trustee to keep himself apprised of the personal
circumstances of (at least) the principal beneficiaries in order to consider whether or
not a distribution ought to be made. Generally speaking, however, a trustee will not be
held to be in breach of trust if he has simply not consulted with the beneficiaries prior to
making a decision.
The law of trusts is concerned only with a trustee having
adequately informed himself before making a decision, it is not concerned (as is public
law) with the right of an individual to be heard before a decision is made (see Pitt v.
Holt [2011] EWCA Civ 197).
16. Nevertheless, the question as to whether a beneficiary might have a ‘legitimate
expectation’, either as to the manner in which a discretion should be exercised or, at
the very least, that the beneficiary will be consulted in respect of a decision, has been
considered by the Royal Court in Representation of N and the Matter of the Y Trust
[2011] JRC 135. A beneficiary alleged that a trustee’s decision as regards distribution of
the trust fund was contrary to his ‘legitimate expectation’ (built up over a number of
years) that he and his fellow beneficiary (his half-brother) would each receive 50% of
the trust fund.
The Royal Court held that the trustee’s decision had been made
appropriately. There was a strong judicial hint that it might have been better had the
trustee consulted with the beneficiary prior to taking the decision to deal with the trust
fund as it did, but the trustee’s assessment of the beneficiary’s needs and lifestyle was
correct and the decision properly taken.
A trustee must exercise its discretion
according to the circumstances that exist at the time, and cannot fetter the future
exercise of its discretions.
Remedying Inadequate Deliberation
17. If a trustee has failed in his duty to periodically consider whether to exercise a power
the Court may compel him to consider its exercise (see Re Hay’s Settlement Trusts [1982]
1 W.L.R. 202 at 209) or, ultimately, order his removal as trustee under its inherent
jurisdiction.
If there has been a failure on the part of a trustee to give adequate
consideration to how to exercise his powers, the trustee will be in breach of trust and
also potentially liable to be removed (as well as potentially liable for any losses to the
trust fund flowing from his breach). Other, less dramatic, actions may also be taken, to
unpick the decision and restore the position of the trust to that which it would have
been had the decision not been taken.
18. As stated above, the Court will not interfere with a trustee’s decision simply because
the Court would have reached a different decision – the discretion was given by the
settlor to the trustee, not to the Court. If the trustee fails to take into account relevant
matters, or takes irrelevant matters into account, the Court will overturn his decision but
it will not substitute its own. The decision remains one for the trustees. Accordingly,
having declared the decision ineffective, the Court will simply direct the trustees to
reconsider (see Kerr v British Leyland (Staff) Trustees Ltd (1986) [2001] W.T.L.R. 1071).
19. The requirement to take into account all relevant matters has obvious affinities with the
rule in Hastings Bass. This rule was described in Sieff v. Fox [2005] 1 WLR 3811:
“Where trustees act under a discretion given to them by the terms of the trust,
but the effect of the exercise is different from that which they intended, the
court will interfere with their action if it is clear that they would not have acted
as they did had they not failed to take into account considerations which they
ought to have taken into account, or taken into account considerations which
they ought not to have taken into account.” Emphasis added.
20. The judgment of the UK Supreme Court in Pitt v. Holt has somewhat modified the rule in
Hastings Bass. The rule in Pitt v Holt addresses the context within which the trustees
sought to exercise a power. The action taken by the trustee (or receiver in the case of
Mrs. Pitt) was certainly authorised, both in form and in substance. The question was
whether it was nevertheless taken in breach of the duty to take into account relevant
matters and, so, was voidable. If a trustee has taken specific professional advice (as to,
for example, tax consequences) the trustee has not failed in his duty to take into
account relevant matters because he has plainly considered them. The fact that the
advice was incorrect does not vitiate the decision because the decision was properly
taken.
21. The vast majority of applications made under the rule as it was understood prior to Pitt
v. Holt were made by trustees, or by beneficiaries with the support of the trustees, and
sought to set aside decisions which (usually) had resulted in unintended tax
consequences. The new law is less favourable to trustees, as it will be necessary to
allege a breach of trust in order to persuade the Court to intervene. This will, absent an
exemption clause, expose the trustees to prima facie liability for the consequences of
the breach of trust which must be alleged (that the trustee failed to take into account
material factors).
Even if protected by an exemption clause as to the actual loss
suffered by the trust fund, the trustee might still be liable for the costs of the application.
22. In Jersey, the effect of Pitt v. Holt has been considered (see, e.g. Re Onorati [2013 (2)
JLR 324]) but no final determination has been made as to whether or not Jersey will
adopt the Pitt v. Holt test, with the requirement that the failure must be so serious as to
amount to a breach of trust, or not. It seems likely that the Royal Court would adopt
the ‘corrections’ to the rule set out in Pitt v. Holt (see, for example, the comments of Sir
Michael Birt in Onorati at para. 17 of the judgment). It should be noted that this is a
separate jurisdiction from that of the Court to strike down a decision due to mistake,
which is usually concerned with the setting aside of dispositions into trust (the test for
which is set out in Jersey in Re the Lochmore Trust [2010] JRC 068).
23. It is clear from Pitt v. Holt that a failure to consider relevant matters when considering
the exercise of a fiduciary power renders the decision voidable not void. Outside the
Pitt v. Holt rule, the Court may strike down a decision of a trustee if he purports to
exercise his power capriciously, or for reasons which are irrational, perverse or irrelevant
to any sensible expectation of the settlor (Re Manisty’s Settlement [1974] Ch. 17).
24. What constitutes ‘capriciousness’ has recently been considered by the Royal Court in
Re Jasmine Trustees Limited [2015 JRC 196]. Unsurprisingly, the Court came to the view
that the holder of a fiduciary power must not exercise that power irrationally; the Court
will hold a decision to be invalid if it is a decision which no reasonable holder of the
power could arrive at (in effect, a Wednesbury unreasonableness test).
The Court
cannot intervene simply because it would have reached a different decision, it may
only do so where the decision reached falls outside the bounds within which
reasonable disagreement is possible.
25. In formulating the duties imposed on the holder of a power (in this case, a power of
appointment), the Court in Jasmine summarised these (in a non-exhaustive statement)
as follows:
a. To act in good faith and in the interests of the beneficiaries as a whole;
b. To reach a decision open to a reasonable appointor (i.e. it must not be an
irrational decision);
c. To take into account relevant matters and only those matters (i.e. not irrelevant
matters); and
d. Not to act for an ulterior purpose.
26. It follows from the above, that a failure on the part of a trustee to give adequate
consideration to a decision, in the sense of taking into account relevant matters and
not taking into account irrelevant matters, will potentially open the door to that
decision being struck down by the Court. Whether this exposes the trustee to liability for
the consequences of the irrational decision, or liability for the costs of the application to
remedy the decision, is unclear at present.
It is suggested here that, absent an
exemption clause or similar, there is no immediately obvious reason why a trustee
would not be held liable.
A Little Guidance
27. How does a trustee ensure that his considerations are adequate? How can he protect
himself from liability for a breach of trust should his decisions be challenged? What
follows are some short points of practical guidance. This is not an exhaustive nor a
proscriptive list, as what constitutes adequate consideration will vary with the
circumstances of each case.
28. The starting point must be to determine the purpose of the trust and the power which
has been given to the trustee to achieve that purpose. The terms of the trust instrument
and the content of any letter of wishes which has been provided will be instructive in
this regard. Equally the circumstances surrounding the creation of the trust will inform
the trustee as to the intentions of the settlor at the time of the creation of the trust.
29. Once the purpose of the trust and power has been established, the trustee is then
under a duty to inquire and ascertain. This is not limitless and will vary considerably from
case to case depending on the circumstances and the nature of the power to be
exercised. In the case of a decision to distribute, it is almost always likely to include
some enquiry into the size and composition of the beneficial class.
As mentioned
above, a sensible trustee would be well-advised to keep himself apprised of the
personal circumstances of the beneficiaries (not limited simply to the financial
circumstances of a beneficiary). In the case of the appointment of an investment
manager, it will be sensible to enquire as to the experience and expertise of the
potential candidate, the standing of the firm for which he works and the level of his
professional indemnity insurance (amongst other things).
30. In the case of ‘momentous’ decisions, a trustee should seriously consider making an
application to the Court for the approval of the decision. This is not a surrender of
discretion, and the Court will not refuse to approve the decision simply because the
Court would not itself have come to the same conclusion as the trustee. The Court will
usually approve a momentous decision if it can be shown that it is within the scope of
the powers conferred upon the trustee, that it is not irrational, has been arrived at in
good faith and is not made for an improper purpose.
Summary
31. One of the first words of advice that was given to me when I started in the law was that
one should never shy away from taking a decision. It is much easier to defend a
decision than it is to defend indecision. The same is true of the duties of a trustee. If a
trustee considers matters appropriately and makes a decision, in good faith, on the
basis of that consideration then he will seldom be criticised. This holds true even if the
decision is taken to do nothing.
32. The duty of proper consideration requires a trustee to ask himself, and to consider, the
right questions.
The duty also encompasses a requirement to make the necessary
inquiries to furnish himself with the necessary information to enable him to consider the
right questions. A failure to comply with this duty, in a respect which is fundamental to
the proper exercise of the power in question, is a breach of trust and actionable by the
beneficiaries.
33. Ultimately, a trustee cannot be expected to reach what with hindsight is considered to
be the ‘right’ decision. He is, however, always expected to do his best, in accordance
with the standard of a reasonably prudent man, to get to the ‘right’ decision. That is
the duty of proper consideration.
Dated this 25th day of February 2016
Jeremy Heywood
Partner
DD: +44 (0)1534 760 851
Email: jeremy.heywood@bcrlawjersey.com