Equity and Trust - Case Study Example

Equity and Trust: Introduction: As the legal definition goes a trust is a legal arrangement which is created when a person known as 'settlor' transfers property to another individual or a trust company known as 'trustee'. The property could be land or buildings, or movable property such as cash or shares. Regardless of his own personal interests and preferences the trustee has a fiduciary duty to act always in the best interest of the trust. A trustee is normally expected to hold and administer the trust property for the benefit of the trust beneficiaries in accordance with the purposes set down in the trust deed and according to general trust law. The law requires that a trustee exercises the same degree of diligence that a man of ordinary prudence would exercise in the management of his affairs. In this report we shall examine the role of the trustees and the standard care he is required to take in some specific instances and also the reasons for the difference in the standards of care in such instances in the light of established case laws and the provisions of the Trustee Act 2000. Case of Speight v. Gaunt (1883) 9 App case 1: " As a general rule, a trustee sufficiently discharges his duty if he takes, in managing he trust affairs, all those precautions which an ordinary prudent man of business would take in managing similar affairs of his own"- this was the court ruling in the appeal case of Speight v. Gaunt as early as in the year 1883. According to this settled law the standard care that a trustee is expected to take is limited to the extent that the trustee takes all precautions in administering the trust assets by taking such care which an ordinary prudent man of business would be taking in his own case. The trustee is exonerated from his liability so long as he proves that he has strictly followed the covenants of the trust deed and there is no willful deviation from the purposes for which the trust properties were put to use. The trustee is not expected to use any special skill or expertise with regard to the investment of the trust properties. As has been decided in the case of Fales v. Canada Permanent Trust Co.(1977) 2 SCR 302 "that of a man of ordinary prudence in managing his own affairs and traditionally the standard has been applied equally to professional and non-professional trustees. The standard has been of general application and objective". Hence traditionally there had been no distinction between professional and non professional trustees in the matter of deciding on the standard care to be exercised by the trustees with regard to the trust properties. This was the legal position at a time when the investment opportunities that were available for the trust properties were limited and hence there was no major problem encountered with the administration of the trust properties. However with the passage of time the possible avenues for investments had increased and this has created additional responsibilities for the trustees to consider the portfolios or assets in which they contemplate to invest the trust properties and decide whether the properties would be safe in such investments. Case of Learoyd v. Whiteley (1887) 12 App. Cas.727: "When the trustee serves both a life tenant and a remainderman beneficiary, the trustee must invest impartially and balance the preservation of the property for the remainderman with the need to produce a reasonable income for the life tenant"- this was the observation made in the case of Learoyd v. Whitely (1887) as regards the fiduciary position of the trustees. This ruling altered the degree of the standard care to be exercised by the trustees in that the responsibility of the trustee is extended to ensure that the safety of the investments is also taken into account while investing the trust property, so that the capital is not eroded. The argument of reliance by the trustee on a third person supposed to be an expert on the investments of the sort covered by the case will not exonerate the trustee from his fiduciary liability to the beneficiaries of the trust. It was held that the trustee has to compensate for the erosion of capital, even though it was not because of his negligence. The position of the trustees in such cases is further elaborated with the following discussions. As has been decided by Lindley J in re Whiteley (1886) 33 ChD 347 "The duty of a trustee is not to take such care only as a prudent man would take if he had only himself to consider; the duty rather is to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide. That is the kind of business the ordinary prudent man is supposed to be engaged in; and unless this is borne in mind the standard of the trustee's duty will be fixed too low." This historical decision has taken a deviation from the rule of law set in the case of Speight v. Gaunt in 1883 by providing that the prudential selection of investments has been the fiduciary responsibility of the trustee. This formulation of the prudent investor rule has been interpreted as requiring the fiduciary to ensure that the capital value of the fund remains in tact and as a corollary to avoid all investments of a hazardous or speculative nature. "In 1887, trustees were obliged to make "full inquiries" into the value of security on which they loaned estate funds and could not delegate this task to an appraiser. Though the appraiser was not shown to have acted negligently, the trustees were answerable for his underevaluation."1. Thus the responsibility of the trustee is subject to a fiduciary duty of reasonableness. This duty initially articulated by the courts of enquiry was expressed as being more than an obligation of honesty and good faith feeling. It also entailed a degree of care. "The standard of care to which a trustee is subject is an objective one and in the words of Dickson J. in Fales v. Canadian Permanent Trust Co. the trustee must show 'Vigilance, prudence and sagacity'. "Although a trustee is not required to be omniscient, he or she is obliged honestly to exercise his or her best judgment and to take the same care of the trust property as if it had been his or her own."2 Case of Bartlett v Barclays Bank Trust Co. Ltd (No.1) [1980] Ch. 515; [1980] 2 WLR 430;[1980] 1 All E R 139: In this case Barclays Bank was the sole trustees of the Bartlett trust and the sole assets of the trust were shares in the family company. 1. Jerome J. Curtis Jr. 1996 The Transmogrification of the American Trust Real Property, Probate and Trust Journal [Online] Available from http://www.findarticles.com/p/articles/mi_qa3714/is_199607/ai_n8749595 Accessed on 18th February 2007 2. A. Dimitri Lascaris (2004) Institutional Investors, Shareholder Activism and Class Actions: The Preservation of Market Integrity Benefits & compensation Digest Vol. 41 No 11 November 2004 [Online] Available from http://www.ifebp.org/PDF/webexclusive/04nov.pdf; Accessed on 18th February 2007 On the advise of the Barclays bank trust co as the merchant banker the trust changed its business to property development and with an intention to raise more capital the company was made public on the advise of the merchant bankers. In one of the speculative property development deals which ended in a disaster, the trust made a significant loss. Brightman J. held that the responsibility of the bank extends much more and the bank should have indulged itself more in the conduct of the business, than just receiving the information which an ordinary person would do. The argument that the bank had honestly and reasonably believed that the board of directors of the company are competent to run the business efficiently is not valid and acceptable. "In the Bartlett case the private company entered into a speculative property investment which subsequently failed: the trust company was held to have breached its duty of care to monitor the company's affairs and was held liable for the loss to the trust. The trustees will accordingly need to satisfy themselves as to the appropriateness of all such investments of trust assets."3 In the case of professional trustees, the expectations of standard care is higher in that the professional trustee needs to take steps to protect the capital of the trust fund from the results of inflation. If the professional trustee fails to do so then he will be liable to compensate the residuary beneficiaries whose capital has been eroded. 3. Douglass Pullen Trustees and the Investment of Trust Assets Journal Oxford University Press Volume 4 Issue 2 [Online] Available from http://www.trusts-and-trustees.com/pma/991 Accessed on 18th February 2007 Because of his professional expertise, the trustee is supposed to exercise the diligence a degree higher than expected of an ordinary prudent man. The law expects such professional trustees to use the special care and skill the trustee professes have. Trustee Act of 2000: Before the Trustee Act of 2000, the powers of investment vested on the trustees were restricted to the explicit provisions made in the trust deed. The Act replaces the out of date legislation and had made new provisions which gives wider powers to the trustees at the same time imposing the responsibility for a higher degree of care with respect to the investment of the trust properties. The Trustee Act 2000 imposes a duty of care on trustees which applies to: Exercise of their powers of investment Obligation to review the investments Obligation to review any arrangements with an agent or nominee or custodian The Act states that a trustee must exercise such care and skill as is reasonable in the circumstances having particular regard to: Any special knowledge or experience that the trustee has or claims to have Where the trustee is acting as such in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect a person acting in such a business or profession to have "The duty of care does not change the level of expertise trustees need. Trustees are not required themselves to acquire specialist investment knowledge. The duty of care does, however, mean that a trustee who has some specialist knowledge, for example by way of their profession, is expected to use it when acting as a trustee."4 By reasonable care it is meant that the trustees must take into account the nature, size and purpose of the organization. The trustees are also required to Take proper advice unless they reasonably conclude it is unnecessary or inappropriate to do so Follow the standard investment criteria which state that trustees must consider: the suitability of the investment being selected or reviewed for the organisation the need to diversify the organisation's investments. Conclusion: From the foregoing discussion it is understood that the responsibilities placed on the trustees with regard to the investment and administration of the trust properties have been enlarged to include a wider sense depending on the circumstances in which the trustees are acting. In Speight v Gaunt it was limited to the exercise of such prudence as an ordinary prudent person would do. While in the case of Learoyd v Whiteley the liability is extended to the preservation and safeguarding of the trust property ________________________________________________________________________ 4. Article: NCVO Investment: The Legal Framework [Online] Available from http://www.ncvo-vol.org.uk/askncvo/index.aspid=99 Accessed on 18th February 2007 from erosion by exercising a reasonable degree of care although a professional approach is not expected of the trustee in making the investments. In the case Bartlett v Barclays Bank Trust Co the liability for standard care of the trustees was further extended to render professional advise and involvement where the trustee is supposed to possess such skill and expertise. The trustee Act 2000 has done away the uncertainty in the law as to the expectations placed on the professional trustees indifferent circumstances in that section 1 of the Act clarified the position regarding the degree of care that can be expected of different categories of trustees in specified contexts. Read More