It is common for a trustee’s liability to be limited in the deed of trust. Such clauses provide that “No trustee shall be liable for any loss not attributable to his or her own dishonesty …” or similar.
While this limitation of liability does not by itself protect the trustee from the world at large, such a limitation provides important protection against disaffected beneficiaries.
However, the extent to which such clauses actually protect trustees is less clear. While the scope of such clauses has been subject to some discussion in overseas jurisdictions of late, it is useful to consider the position in New Zealand.
While liability can be validly limited, given the obligations trustees owe beneficiaries, it is important to appreciate the extent to which liability can be limited. It is also important for a trustee to appreciate that when reliance on a limitation of liability clause is challenged, the trustee has the onus of establishing the application of the clause. Further, any exemption will be applied on the narrowest of grounds. Most importantly, honesty is somewhat narrowly construed for the purposes of limitation clauses. In the decision of Spencer v Spencer & Ors (under appeal) a case involving the management of a family trust, the facts of which may well mirror the management of so many family trusts, the High Court held that although the trustees may well have believed their actions to be morally justified (favouring the trust’s settlor over other beneficiaries), such actions can be dishonest for the purposes of exemption of liability clauses.
In Spencer the trustees were found to have acted dishonestly such that the limitation of liability clause did not apply and as a consequence the trustees became personally liable for trust losses.
At this point many trustees may stop reading as clearly, dishonesty on a such a scale that personally liability is assumed must be pretty serious. However, to stop reading now might be a little short-sighted. The breaches of trust noted in Spencer are for the large part so ordinary in the context of family trust management that the decision should be a wake up call to many trustees. The breaches of trust including:
• failing to make income payments to a named beneficiary on the basis that adequate income was available from elsewhere
• the settlor charging management fees through a related company
• paying inflated fees to a related company
• writing off debt against fees owing to a related company
• failing to take steps to recover outstanding debt
• failing to charge interest on outstanding debt
• failing to charge interest on advances to beneficiaries
• failing to recover rent from an associated company
• charging child beneficiaries with advances to the child’s parent
It could be argued that Spencer should be limited to its own facts, arising as it did from a relationship break down. However, any trustee acting for a family trust would be well advised to acquaint him or herself with the facts of Spencer and then decide how far the facts are from the day to day management of almost any other family trust.
The decision in Spencer v Spencer was largely, but not entirely, upheld by the Court of Appeal. The facets of the decision that were not upheld were those relating to the trustees’ liability for managment fees paid in breach of trust before the trustees were aware of the prohibition regarding the management fees; the trustees’ failure to charge interest on current accounts (the Court of Appeal holding that there is no general obligation to charge interest on current accounts in the context of a family trust); and the High Court’s finding on account of the children’s current accounts (that is the manner in which the children’s current accounts were dealt with was within the scope of the proper exercise of the trustees’ discretion).
See further at:
Spencer v Spencer  NZCA 449