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Appointor; power of appointment, General, Trustee liability

The Price of Principles

Principles are important.

But who should fund them?

When acting as a trustee, it is generally accepted that the trustee will be reimbursed by the trust for any costs incurred.  However, it is important to appreciate that this principle has a caveat – the costs must be reasonably incurred.

New Zealand Māori Council v Foulkes provides a timely (and for the trustees in question an overdue and expensive) reminder of the need to maintain a sense of proportion when making decisions where a trust is expected to fund the consequences of those decisions.

The case relates to a question as to the construction of a trust deed and whether  a trust deed allowed two parties vested with a joint power of appointment of trustees to delegate that power to a third party.  The background to the matter is summarised at [2] of the judgment as follows:

“Sadly, what lies beneath these questions is a divisive and expensive dispute between representatives of the New Zealand Māori Council (the NZMC) and the Federation of Māori Authorities (FOMA), the two bodies jointly responsible for appointing Māori trustees under the Crown Forestry Rental Trust (the CRFT or the Trust).”

While the facts in the context of the case are complex – the underlying issue is of wide relevance and focuses on the nature of powers of appointment.  The Court of Appeal confirming that “… the power to appoint new trustees is of a fiduciary nature because the subject matter of the power is the office of the trustee. That office lies at the core of the trust and carries fundamental and onerous obligations to act in the best interests of the beneficiaries as a whole to the exclusion of the trustee’s own interest. And, as it reposes the settlor’s personal trust and confidence in the donee to exercise its own judgment and discretion, the power cannot be delegated to a third party. In this respect it does not matter that the party exercising the power is not itself a trustee; it is the object and purpose of the power, taken from the deed, that is decisive. Finally, because the power is fiduciary in nature, it must not be exercised for a collateral purpose.”

While there may be property rights in a power of appointment (see Clayton v Clayton) this does not mean that a power of appointment is a commodity that can be utilised as the appointor pleases.  In this regard the Court of Appeal was of the view at [24] that “What matters is that in every case the power is to be exercised according to the best interests of the beneficiaries and cannot be delegated.” Subject of course to the terms of the deed of trust.

At [27] the Court of Appeal goes further and confirms the intrinsically fiduciary nature of the power stating that:

“Any decision about appointing or removing trustees must always be made on a measured evaluation by reference to the deed, consistent with the fiduciary nature of the power, and not for any collateral purpose…”

A good lesson in trust law.  But the sting in this case is in the tail.  And it is a big sting.  The matters surrounding this case have, as noted above, been protracted.  Legal fees to date exceed $2 million.

Although Counsel for each side agreed that costs should be met by the Trust the Court of Appeal was not willing to concur stating at [33] that:

“… The result is that income has thus been diverted from the Trust’s primary purpose of funding treaty settlement claims to finance largely unproductive litigation. It is wrong that deserving beneficiaries must bear the cost of resolving a state of chronic dysfunction between parties whom the Crown would have expected to act in a responsible, cooperative and cost efficient fashion in the best interests of others.

The Court of Appeal then ordered at [34] that “each of the three parties participating in this appeal be indemnified from the Trust for their costs in the sum of $2,500 plus usual disbursements.”

An important reminder that the office of trustee is to be taken seriously and that when the money in question is not your own, accountability must never be forgotten.

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