Jersey may have a long and well established finance industry with an enviable reputation for stability and prudence, but few of today's professional trustees will take on a trusteeship without some limitation of liability written into the trust instrument.
However, both the local legislature and the courts have actively curtailed the effect of such provisions.
While there are some limited areas where protection is conferred on trustees by statute – for example, where a trustee has appointed an agent in good faith and without neglect under Article 21 of the Trusts (Jersey) Law 1984 as amended (TJL) – the extent to which a trustee may be exonerated from liability by the settlor when establishing the trust is subject to a very important restriction.
Article 26 (9) of TJL provides that nothing in the terms of a trust shall relieve, release or exonerate a trustee from liability for breach of trust arising from his own fraud, wilful misconduct or gross negligence.
Not surprisingly, this article has led to lengthy debate before the courts as to what constitutes fraud, wilful misconduct and gross negligence.
The trust instrument in the case of West v Lazard Brothers 1993 contained two exculpation provisions, one of which purported to protect the trustees against everything except fraud and the other against everything except wilful and individual fraud and wrongdoing.
The first of these clauses was struck out by the court to the extent that it offended against Article 26 (9). The court considered it void as repugnant to the fundamental concept of a trust and there was a strong indication that if the the validity of the trust had been challenged, the clause might have been one of the central points of any argument against the trust being upheld. The second of these clauses gave the court no such concern and was accepted subject to the limitations imposed by Article 26 (9) of TJL.
Considerable time was devoted in the case to considering what was meant by “fraud” and reference was made to a number of early authorities which drew a distinction between “dol”, a civil wrong, and “fraude”, which referred to a criminal act. The court concluded that, in the context of TJL, fraud did not require criminal dishonesty but could include conduct which was unconscionable to the relationship between the parties, where the trustee's conduct has gone beyond mere incompetence or inefficient administration.
The trust on which West v Lazard centred had been established before TJL and the defendant's lawyer had attempted to argue that West should be bound by the terms of the trust instrument on the basis of the old Jersey law maxim La convention fait la loi des parties. However, this was dismissed by the court as there was no evidence that West had ever seen the trust instrument.
The scope and effect of exculpation clauses also came under the microscope at the Jersey Court of Appeal on 21 December last year in the case of Midland Bank Trustee (Jersey) & ors v Federated Pension Services, examined on page 28 of this supplement. There were a number of technical issues considered by the Court of Appeal, not least the fact that the scheme had been set up in the early 1970s and, therefore, could an amending law which came into effect in 1989 apply?
However, the Court of Appeal found Federated Pension Services had been guilty of gross negligence, which it described as meaning a serious or flagrant degree of negligence, not requiring intentional or reckless fault.
In both West v Lazard and the FPS case, the fact that the trustees were paid professionals was an important factor. Justice Brightman's often quoted words in the UK case of Bartlett et al v Barclays Bank Trust Co (1980) on the higher duty of care due from a body which undertakes a specialised business of trust management, such as a trust corporation, appear in both judgments.
There is no doubt that those who present themselves as having particular expertise in the area of trust management (and charge fees according to that expertise) will be expected to exercise the skill they profess at all times.
Any provision in a trust instrument purporting to limit the liability of such trustees will be strictly construed by the Jersey courts, which have shown they are both willing and able to defend the legitimate claims of beneficiaries against trustees who are in breach of their duties under the trusts they administer.