A definitive case

Jersey's Court of Appeal defined gross negligence and wilful misconduct in a breach of trust case, Midland Bank Trustee (Jersey) & ors v Federated Pension Services (21 December 1995) unreported.

Article 26 (9) of the Trusts (Jersey) Law 1989 provides that trust terms cannot relieve, release or exonerate a trustee from liability for breach of trust arising from the trustee's own fraud, wilful misconduct or gross negligence.

For these purposes the court held that:

wilful misconduct requires that the guilty person recognises what he is doing is contrary to his duty as trustee, or represents recklessness by the trustee shutting his eyes to the probability that his misconduct is in breach of his duty;

gross negligence is a serious or flagrant degree of negligence not importing any question of intentional or reckless fault.

The defendant, the respondent to the appeal, was a professional English company trustee, albeit non-profit-making. It admitted committing a breach of trust by refusing to transfer the fund to a new trustee, the first plaintiff, in the wrongful belief that it needed customer agreement which the second plaintiff, founder of the occupational pension scheme, had rightly declined to provide. Once the defendant realised its error, it transferred the trust assets as originally directed, but by then the fund had suffered an alleged loss of about £800,000 on 30 June 1991 due to the new trustee's inability to invest the fund in a rising market.

The defendant trustee tried unsuccessfully to rely on an exculpatory clause in rule 29 of the trust scheme which provided: “Trustee indemnified: the trustee shall be indemnified against all liabilities incurred by it in the execution of the trusts hereof and the management and administration of the scheme and shall have a lien on the fund for such indemnity and the trustee shall not be liable for anything whatever other than a breach of trust knowingly and wilfully committed.”

In deciding the principles of construction to apply to the clause, the court referred to the UK Unfair Contract Terms Act 1977. As there was no such statutory regime in Jersey, the court said it was therefore “more important under Jersey law not to lose sight of the principle that exemption clauses are given no wider scope than that which the express words used, in the context of the contract construed as a whole, must clearly and necessarily have”.

However, this clause was not contained in a contract but in a trust deed and the trustee owed fiduciary duties to the beneficiaries which went beyond the usual obligations of two contracting parties in a commercial contract. The three appeal judges, therefore, found that the Jersey courts have to take as restrictive a view as is permissible and appropriate of clauses in a trust deed by which a trustee seeks to exclude liability for breach of trust.

Nevertheless, after reviewing the English and Commonwealth case law, the court felt the view that trustees could not exclude liability for gross negligence was a minority one.

Having incorporated the concept of the trust into local law, although not by statute, Jersey has regard to and often follows UK and Commonwealth trust authorities.

The principle that a professional trustee will be subject to a higher duty of care than an unpaid layman was confirmed.

On the facts of this case, the court concluded: “This was not mere negligence consisting of a departure from the normal standard of conduct of a paid professional trustee, but a serious, unusual and marked departure from that standard, which, on the correct interpretation of the words 'gross negligence' in Article 26 (9) as amended, amounted to gross negligence.”

Among other acts and omissions, the trustee had failed to obtain specific legal advice and to take the elementary step of finding out what its duty as a trustee was in these circumstances. This important decision may be useful for reasons other than that of defining gross negligence and wilful default under Article 26 (9).

The court highlighted the difference between exculpatory clauses in contracts and trust deeds. This distinction may have significant consequences where the same professionals act in different capacities for same trust.

For example, a law firm may offer its services to a client by incorporating the trustee company, then acting as directors, administrators and nominee shareholders of that trustee. The capacities in which they act may become confused.

Exculpatory clauses, which may not even exist in one or more of the relationships, may have different effects depending on whether a breach of trust or contract is alleged.