Trustees contract personally. This means that unless the trustee’s liability is limited by agreement, a trustee is, in most circumstances, personally liable for any losses that arise. This is the case whether or not the trustee can benefit from the trust.
“… if the trustees meant to limit their liability, it was for them to see that the words were sufficient to make that clear”: Lord Blackburn in Muir v City of Glasgow Bank
For this reason it is common for independent or professional trustees to limit their liability to the assets of the trust when contracting with third parties such as banks. Trustees who are also beneficiaries can also limit their liability to the assets of the trust. However, in practice third parties will not usually agree to this.
All limitation of liability clauses are not created equally
For the majority of trustees, the most common situation in which liability needs to be addressed is in agreements for sale and purchase and banking documents.
When contracting with banks the three main ways in which trustees can incur liability is pursuant to a loan agreement, a mortgage agreement or a guarantee.
Liability can be limited for the purposes of any of these agreements. However, liability needs to be considered in the context of each agreement independently. That is, there is no point ensuring liability is limited in one of the documents and then overlooked in others.
As a general rule, banks will only limit the liaiblity of a trustee who cannot benefit from the trust. This trustee may, but need not be, referred to as an independent trustee or a limited liability trustee. Signing an agreement as “indpendent trustee” or “limited liability trustee” or similar, will not by itself limit a trustee’s liability.
“It is insufficient to exclude full personal liability by merely recording that the trustee is signing the document as trustee”: Potter J in Ellison v Scott
Identify trustees whose liability can be limited
A limited liability trustee (independent trustee) is a person who cannot benefit from the trust. This will usually be a professional such as accountant or lawyer or an independent person. However, care is required to review the deed to ensure that the independent person cannot in fact benefit from the deed of trust. For example, if the independent trustee is a relative, depending on how broadly beneficiairies are defined the indendent trustee may not be independent as defined for the purposes of a standard form limitation of liabilty clause. Where there is any doubt, the independent trustee should be identified by name, rather than by definition. Every limited liability clause should be reviewed before any trustee enters into a contract or other agreement as the clauses can change over time and it cannot be presumed that the clause will be the same as the last time.
As a matter of prudence, any independent trustee who is not suitably qualified should seek legal advice before entering into any bank documents.
Does the agreement include a standard limitation of liability?
If the agreement includes a limitation of liability clause, the next step is to review the clause. If the agreement does not include a limitation of liability clause, permission should be sought to include one.
Is the limitation of liability adequate?
The matters to take into account when reviewing the adequacy of a limitation clause will depend on individual circumstances. However, by way of general observation to be adequate a limitation of liability clause should:
- refer to the limited liability trustee by name or by definition
- identify the extent to which liability is limited (eg by reference to the value of the trust’s assets)
- identify the time at which the assets are valued
Time of valuation
The time at which assets are valued can be critical in the context of a limitation of liability clause. Common expressions used in limitation of liability clauses are:
- “the assets of the trust as they stand from time to time”
- “an amount equal to the value of the assets that are available to meet [the independent trustee’s] liability”
- “to the extent the value of the trust’s assets are available, from time to time, to meet [the independent trustee’s] liability”
- “the liability of [the independent trustee] is limited to the assets of the trust”
Care is required to establish that if there is a default, how will the value of the assets be measured? is it the value of assets at the time the loan agreement was entered into? Is it the value of the assets at the time of default?
Foundation Custodians Limited v Thornton in a case where the mortgagee argued that the trustee’s liability was fixed at the time the mortgage was signed, not the time of default. Accordingly, while there was no dispute as to whether the trustee’s liability was limited the question was at whether the limitation clause effectively introduced a level of personal liability in the event that the assets of the trust were insufficient to meet the debt.
The High Court held that the words “liability … will be limited” referred to some future date at which the issue of liability arises and that accordingly the independent trustee’s liability was limited to the value of the assets of the trust at the time the mortgage security was enforced. However, in Frimley Estate Ltd v Stonewall Homes Limited where the trustee’s liability was “liability limited to the value of the assets of the trust,” the trustee’s liability was defined by “an amount” that was to be calculated by reference to the value of the assets at a certain point in time. In this case the extent of liability was measured at the date it became unconditional and at which time the trustee had sufficient assets to meet the full claim.
These cases demonstrate the need to review each clause by reference to the nature of the contract and the understandings of the parties.
Right to indemnification
Even where liability is limited, and there are no issues regarding the value of the trust assets by which liability is to be measure, if a trustee has acted in breach of trust, or the trustee has no right of indemnification of trust assets in accordance with the terms of the deed of trust, a limitation of liability clause may not apply. This is because many limitation of liability clauses provide that the limitation will not apply if the trustee has acted dishonestly, or in breach of trust; or if the trustee has lost, or has no, rights if indemnification from the trust. As dishonesty does not have a moral construct for trust law purposes, such limitations can apply more commonly than is expected. See Spencer v Spencer.
So what’s a trustee to do?
Review every limitation of liability clause before entering into an agreement. Confirm or establish:
- that the independent trustee is an indpendent trustee for the purposes of the limitation
- at what time the value of the assets are measured if there is a default
- whether the limitation is void if the trustee is in breach or has lost the right of indemnity.
If the agreement does not include a limitation of liability, seek to have one included. If a limitation of liability cannot be agreed to, seek independent legal advice before signing. Independent legal advice means legal advice from a lawyer who is not acting for any of the other trustees or beneficiaries or the trust’s settlor(s).
- Muir v City of Glasgow Bank (1879) 4 App Cas 337 at pp 388–389
- Ellison v Scott  NZHC1590
- Foundation Custodians Limited v Thornton  NZHC 2031
- Frimley Estate Ltd v Stonewall Homes Limited [2009} NZHC 2391
- Spencer v Spencer