Contents

Chapter 5
Trustees’ duties

Duties of trustees

RECOMMENDATION

R2 The new Trusts Act should provide that:
(1) The following are the mandatory duties of a trustee (which will be implied into every trust and cannot be excluded from the trust relationship):
(a) to be familiar with the terms of the trust;  
(b) to act in accordance with the terms of the trust;  
(c) to act honestly and in good faith;  
(d) to act for the benefit of the beneficiaries or to further the purpose of the trust, in accordance with the terms of the trust;  
(e) to exercise stewardship over the trust property for the beneficiaries or the purpose of the trust; and  
(f) to exercise powers for a proper purpose.
(2) In the exercise of any duty, there is no requirement that beneficiaries are treated equally, as long as they are treated in accordance with the terms of the trust.
R3 The new Trusts Act should provide that:
(1) The following are the default duties of a trustee (which apply if and to the extent that they are not excluded or modified, explicitly or implicitly, by the terms of the trust or by statute):
(a) not to exercise any power directly or indirectly for the trustee’s own benefit;  
(b) to actively and regularly consider the exercise of the trustee’s powers;  
(c) not to fetter the future exercise of the trustee’s powers;  
(d) to avoid a position of conflict of interest;  
(e) to maintain accounts of the trust property that adequately identify the assets, liabilities, income and expenses of the trust and are appropriate to the value and complexity of the trust property;  
(f) not to be unfairly partial to some beneficiaries to the detriment of others;  
(g) not to make a profit (that has not been permitted by the beneficiaries);  
(h) to act without reward except where it has been permitted by the beneficiaries or is in accordance with the trustee’s right to be reimbursed for legitimate expenses and disbursements;  
(i) where there is more than one trustee of a trust, to act unanimously;  
(j) to manage the trust with reasonable care and skill; and  
(k) to invest prudently.
(2) These duties may be excluded or modified, explicitly or implicitly, by the terms of the trust but not to the extent that such alterations are inconsistent with the mandatory duties.

Current law

5.3 The duties of trustees are not set out in the Trustee Act 1956, but are found in centuries of case law. It is generally accepted that there are some fundamental duties which, if excluded, mean that the relationship does not constitute a trust. There are some duties which do not apply to every trust because trust deeds may alter the trustees’ obligations by explicitly including some duties and excluding others. The mandatory “irreducible core” of trustees’ duties was described in the English Court of Appeal by Millett LJ in the case of Armitage v Nurse as being to “perform the trusts honestly and in good faith for the benefit of the beneficiaries”.166 Millett LJ described this as the minimum obligation necessary to give substance to a trust.

The case for setting out the duties in the new ActTop

5.4Trustees’ duties are of central importance in a trust and a large number of New Zealanders, including many without legal training, are trustees. We understand that many trustees do not fully understand their obligations. It is worthwhile to include each duty in a simplified form in legislation. This would provide a clear and accessible base from which trustees can gain an understanding of their duties. It would have educative value and may encourage improved standards among trustees because of the greater prominence given to the duties in the law. It could be argued that the duties are sufficiently clear in the case law and that there would be little practical benefit in expressing the duties in a statute. However, our view is that the significance of the duties to the trust relationship warrants them being given greater attention by being stated in legislation.

5.5Most submitters throughout our consultation have agreed that this is a helpful approach. As a result of feedback we have received following the Preferred Approach Paper, we have attempted to reduce repetition and cross-over between different duties, and, where there is overlap, to make it clear what this means. We have clarified the wording of some of the duties to better reflect what was intended.

Nature of the duties provisionsTop

5.6We intend that these provisions should express, in a distilled form, the principles of law about the duties of trustees that can be gleaned from case law. They would not be a complete code of the law of trustees’ duties. The detail of how the law requires the duties to apply in practice would come from case law.

5.7We see this as being similar to the nature of the provisions on company directors’ duties in the Companies Act 1993.167 In its 1989 report upon which the reforms enacted in the Companies Act were based, the Law Commission described the intention of the recommendations relating to directors’ duties as to:168

… distil the general principles from the cases and express them in the statute, to make them more accessible. Such a statement of general principle was recommended by the Macarthur Committee and has been adopted by the Canadian and Australian Acts. The response to the [Law Commission’s] discussion paper indicated overwhelming support for similar reform.

5.8It is generally considered that the case law continues to be relevant in the law of company directors’ duties. It acts as an aid to the interpretation of the general principles in the Companies Act and is still relevant to the extent that the Companies Act does not address a particular duty or remedy for breach of a duty.169

5.9We recommend that the part of the new Act that includes the duties is subject to the qualification that nothing in the new Act prevents a court from having recourse to the general law of trusts and equity where that law is consistent with the purpose of the Act (see clause 1(3) of the indicative drafting in Appendix A). The intention is to allow the courts to continue to apply the nuances and exceptions to the duties that exist in case law.

Types of dutiesTop

5.10Our recommendations emphasise the distinction between duties that are mandatory and duties that are default. Mandatory duties are part of every trust relationship. They will be implied into every true trust, even where a trust deed attempts to exclude them. In some cases the attempted exclusion of a mandatory duty may be evidence that the settlor did not in fact have the requisite intention to create a trust but intended some other legal relationship.

5.11There are other duties that the courts have found to arise in a trust unless the trust deed states that they do not apply. We classify these as default duties. They are implied in the trust relationship if the trust deed is silent on the matter. We consider it is useful to have a list of duties that apply to a trustee in the absence of any trust term to the contrary. Some of these duties may be excluded outright (such as the duty to act without reward) and some may be modified to alter the extent to which they must be met (such as the duty not to be unfairly partial).

5.12The proposals in the Preferred Approach Paper also made a distinction between conduct duties, relating to a trustee’s standard of behaviour when carrying out his or her functions as a trustee, and content duties, which prescribe what a trustee must do and not do.170 We no longer consider that it is helpful to categorise duties this way, as it is not a straightforward distinction. Often duties will have an element of both conduct and content. The three categories that were previously proposed overcomplicated the duties provisions and defeated the intention to make trustees’ duties more accessible and comprehensible. Much of our formulation was driven by a desire for the mandatory duties to fit closely with the exemption clause provisions. We now consider that the current formulation is unlikely to create problems in practice. It was also pointed out to us that it makes little sense to talk about a negligent breach of the mandatory duties, because of the nature of these duties.

The mandatory dutiesTop

5.13Some commentators argue that the duty to act in good faith and honestly for the benefit of the beneficiaries (or a permitted purpose) is often considered the only mandatory obligation on trustees. We would argue that all of the mandatory duties we list in our recommendation are as vital to the existence of a trust as the obligation of honesty and good faith. They are necessarily implied by the trust relationship.

5.14The law of trustees’ duties has been developed through many cases over hundreds of years. Many of the duties are nuanced and apply differently in different circumstances. Our recommended duties summarise the general principle of each duty, without seeking to set out these nuances and variations. The formulation of the duties provisions in the indicative drafting (and clause 1(3) of the draft in Appendix A) preserves recourse to case law to assist in understanding and applying these duties.

5.15R2(1)(a) (clause 10(a) of the draft) uses the term “be familiar” rather than the previously suggested “understand” as this term recognises that it may not be possible or realistic for a trustee to objectively understand the terms of a particular trust deed. R2(1)(e) (clause 10(e)) uses the term “exercise stewardship” rather than “account to”. The latter term caused confusion with the narrower default duty to provide information and confusion as to whether the production of accounts was required. The intention is that trustees in a private trust are accountable to the beneficiaries. Using “stewardship” instead reduces the risk of confusion and better conveys the nature of the relationship.

The default dutiesTop

5.16The default duties in the recommendation are a list of commonly accepted duties from judge-made law. We summarise the existing duties and do not prescribe how they apply in individual circumstances. We acknowledge that there can be some tension between the broadly stated mandatory duties, which cannot be excluded, and the narrower default duties, which can be modified or excluded by the terms of a trust, where these overlap. For instance, there is some overlap between the mandatory duty to exercise stewardship and the default duty to maintain accounts. While it is possible to modify the default duty to suit the requirements of the particular trust, these elements are necessary for the mandatory duty and so they cannot be completely excluded. It will ultimately be a contextual question for the courts as to whether a particular attempt to modify or exclude a default duty in fact attempts to oust a mandatory duty or is incompatible with fulfilment of a mandatory duty.

5.17While the default duties are potentially excludable, we note that trust drafters will still need to be cautious when excluding default duties. Deeds have to be drafted in such a way that the arrangement falls within the definition of a trust and the requirements for the creation of a trust. The attempted exclusion of too many default duties may be interpreted as an attempt to exclude a mandatory duty or may lead a court to find that no trust was intended.

5.18During consultation we discovered that many readers perceived the list of default duties in the Preferred Approach Paper as prescriptive rules.171 They were concerned that the various exceptions and nuances in the law were not taken into account. Particular words, such as “evenhandedness” and “accounts”, were identified as problematic. We recognise that some duties are only relevant to certain types of trusts and not others or may be interpreted differently in different contexts, and that it is problematic to attempt to present these as general duties. We therefore intend to present only those duties that are universally applicable to trusts in the list of default duties, and to qualify them with suitable wording that shows that they can be departed from in a particular trust and are subject to case law exceptions.

5.19In order to avoid the confusion and concern exhibited by some submitters about the effect of the duties, we have clarified that none of the duties, mandatory or default, require that beneficiaries are treated equally. Clause 8 of the draft below states: “[t]he exercise of a trustee’s duty does not require that all beneficiaries are treated equally, provided that beneficiaries are treated in accordance with the terms of the trust”. This is particularly important in relation to R2(1)(d) (clause 10(d) of the draft), which requires trustees to act for the benefit of the beneficiaries, and R2(1)(f) (clause 18 of the draft), which requires that trustees are not unfairly partial to some beneficiaries to the detriment of others.

Standard of careTop

5.20A major departure from the proposals in chapter 3 of the Preferred Approach Paper is that we are no longer recommending that a general duty or standard of care be included alongside the mandatory and default duties. As a result of consultation feedback, we have reconsidered this proposal and are no longer contemplating that a general duty of care applies to every exercise of a duty, power or discretion of a trustee. We do not consider that this accurately represents the law applying to trustees. We no longer propose that a statutory standard of care apply to the determination of whether a breach of a duty has occurred, but leave this for the decision of the courts. Instead, it makes sense that the standard of care applies to the exercise of powers. The standard of care is addressed in paragraphs [6.33] to [6.41] alongside trustees’ powers.

Application to existing trustsTop

5.21The mandatory and default duties apply to all trusts, whether settled before or after the enactment of the new Act. The duties provisions represent the existing law and so do not change the basis on which existing trusts were settled. The clauses will be useful to make it clear to all trustees the obligations they are under. We recognise that existing trust deeds will not be written on the basis that there is a clear list of default duties that should be clearly overridden if they are not to apply, and instead may implicitly override the existing duties. If the existing deeds do not do this the trustees are already bound by the duties.

166Armitage v Nurse [1998] Ch 241 at 253. See also Millett LJ in Bristol and West Building Society v Mothew [1998] Ch 1 (CA) at 18.
167Companies Act 1993, ssĀ 131−138.
168Law Commission Company Law: Reform and Restatement (NZLC R9, 1989) at [186]. The “Macarthur Committee” refers to the New Zealand Special Committee to Review the Companies Act Final Report of the Special Committee to Review the Companies Act (Government Printer, Wellington, 1973).
169Company Law (online looseleaf ed, Brookers) at [CA131.01].
170Preferred Approach Paper, above n 164, at P5P7 and [3.16].
171Preferred Approach Paper, above n 164, at P7.