Contents

Chapter 6
Trustees’ powers

Standard of care

RECOMMENDATION

R13 The new Trusts Act should:
(1) Provide that, when exercising a power of administration, including a power to:
  • hold trust property;
  • maintain and develop trust property;
  • deal with trust property;
  • transfer trust property to any person;
  • insure trust property;
  • carry on a business;
  • appoint an agent, nominee or custodian;
  • appoint a delegate; and
  • any other power affecting the administration of trust property,
a trustee must exercise such care and skill as is reasonable in the circumstances, having regard in particular –
(a) to any special knowledge or experience that the trustee has or holds himself or herself out as having; and  
(b) if a person acts as a trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession.
(2) The standard of care does not apply to the exercise of a discretion to distribute trust property.
(3) The standard of care does not apply if or in so far as it appears from the terms of the trust that the duty is not meant to apply.

Standard of care when exercising a power of administration

6.33 An important objective of this project has been to rectify the limitations of the default powers that trustees have under the current law where there is no express provision in the terms of the trust. The current default position does not give trustees sufficient powers to administer trusts effectively. Earlier in this chapter we recommended giving trustees the powers of a natural person, unless the terms of a trust state otherwise. Yet, with the much broader empowerment of trustees in this way, there is a need to impose safeguards and make clear the obligations that ensure trustees act properly in exercising their powers.196

6.34The mandatory and default duties provide a degree of balance to guide the exercise of a trustee’s powers, but we consider that the standard of care is also an essential element to the framework of obligations on trustees. The standard of care directly addresses how the trustee’s powers are exercised. As with the duties of trustees, we recommend a general standard of care provision so that trustees have a clear and accessible statement of the standard of conduct expected of them.

6.35The standard of care provision is not intended to detract from the duties of trustees, which are their primary obligations. The standard of care does not impact upon whether and how a trustee chooses to exercise discretion, but once a trustee chooses to exercise a power, the standard of care directs the manner in which the trustee must exercise it.

6.36The standard of care is already a part of the legal framework for trusts in case law. It is not generally thought to be in itself fiduciary in nature,197 and is excludable under the terms of a trust. In the specific context of investment, a higher standard of care is already included in the Trustee Act.198 We propose in chapter 7 that the higher standard of care continues to apply to investment.

Changes from Preferred Approach PaperTop

6.37We recommend a standard of care based on the wording of the Trustee Act 2000 (UK). We have altered the wording relating to professional trustees from that proposed in the Preferred Approach Paper to directly reflect the United Kingdom’s wording.199 This framing of the standard of care accurately represents the existing case law position, so we do not consider that there is a significant risk that this provision will discourage professional trustees from offering their services. Any trustee that has knowledge or expertise will be held to a standard of care that takes into account this knowledge or expertise.

6.38Our previous proposals related the standard of care closely to the duties, but feedback indicated that such an extension was confusing. Applying the standard of care only to the exercise of powers achieves clarity.

6.39In the recommendation, and in clause 25 of the indicative draft, we have attempted to be more specific about when the standard of care is applicable, and when it is not, such as when it does not makes sense for the standard to apply in a context (for instance, in relation to the discretion to distribute property to beneficiaries). The point was made that the standard of care should not apply to the exercise of discretions that affect beneficiaries’ interests. Trustees are often given broad discretions in the terms of a trust about which decisions they may come to regarding the distribution of trust property to beneficiaries. Applying the standard of care in that context could open those discretions up to scrutiny as to whether the decision itself was reasonable, which is something that the settlors who gave those trustees the broad discretions would never have intended. It is the manner of how trustees carry out their powers, rather than what they decide to do in exercise of their discretions, that is relevant to the standard of care.

6.40We have also altered the recommendation so that it calls this obligation a “standard of care” rather than a “duty of care”, to avoid confusion with the trustee’s duties, which apply generally to all actions and functions of a trustee.

6.41 A submission on behalf of the Auckland Energy Consumer Trust, and supported by Energy Trusts of New Zealand Inc and a number of other energy trusts, expressed concern that the duties proposals in the Preferred Approach Paper may override its own standard of care provision in its trust deed. Because the standard of care in our recommendations is a default provision, it will not override specific provisions in those trust deeds.

196The Law Commission for England and Wales addressed the need for this balance when it recommended a general statutory duty of care, which was introduced in the Trustee Act 2000 (UK), s 1: Trustees’ Powers and Duties, above n 190, at [3.10].
197Wilden Pty Ltd v Green [2005] WASC 83 at [499]; Spread Trustee Company Ltd v Hutcheson & Ors (Guernsey) [2011] UKPC 13, [2012] 2 AC 194 at [60]; Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664 (CA). However some Australian commentators have contended that a trustee’s duty of care is a fiduciary duty (Anthony Goldfinch “Trustee’s Duty to Exercise Reasonable Care: Fiduciary Duty?” (2004) 78 ALR 678; GE Dal Pont “The Exclusion of Liability for Trustee Fraud” (1998) 6 APLJ 41).
198Trustee Act 1956, s 13B.
199Preferred Approach Paper, above n 185, at P5(1)(b).