Textbook Chapter 17 (17.1-17.37).
Speight v Gaunt (1883) 22 ChD 727 (Jessel MR, Lindley LJ).
Cowan v Scargill  Ch 270, (286 to end).
Harries v Church Commissioners (1992) 1 WLR 1241 (per Nicholson VC at 1246-8).
Trusteeship present opportunities for the trustee to betray the trust reposed in them. Equity imposes strict obligations on the trustee to ensure the trustee’s proper performance.
- Duties are enforceable through remedies and also by the award of the constructive trust.
- There are a significant number of positive duties imposed on the trustee in addition to fiduciary obligations which require the trustee to refrain from making an illicit profit from the trust or allowing a conflict of interest to exist.
- Positive duties are most relevant to express trusts because resulting and constructive trusts do not impose obligations which are as extensive on the trustee.
Sources of the trustee’s duties and powers
The sources of the trustee’s duties and powers are the trust instrument, statute and equity.
- If no trust instrument exists, obligations will be deduced from evidence of the intention of the settlor, as well as being imposed by equity and statute.
- Supremacy is given to the trust instrument except in those cases where a statutory duty cannot be altered by the trust instrument (these vary across Australian jurisdictions).
Duties on assumption of trusteeship
Duty to adhere to the terms of the trust
The primary duty of trustees is to adhere strictly to the terms of the trust, which reflect the settlor’s wishes, or to the contract - for example, in the case of superannuation trusts.
- The trustee must obtain complete information about the terms of the trust, the trust property and the identity of the beneficiaries, assuming that they can be identified.
- If any question arises about the construction of the provisions of the trust the trustee should approach the court for determination of the question or risk being in breach of trust.
- Departures from the strict terms of the trust instrument are sometimes allowed or even required by legislation, public policy or at the request of all sui juris beneficiaries. The court also has the power to excuse what would otherwise be a breach of trust.
- Facts: Trustees believed provisions of the trust gave them power to distribute trust assets to various charities. After they had distributed a large amount, the testator’s next of kin challenged the validity of the distributions.
- Held: The trustees’ interpretation of the provision was incorrect. The distribution was invalid and therefore the next of kin were entitled to receive the assets. The trustees were personally liable for breach of trust.
Duty to ‘get in’ the trust assets
Incoming trustees are under a duty to ensure that trust assets are under their control.
- There will be no difficulty when the trust has been created by self-declaration, however, where it is created by transfer of property, some step may remain to be taken to perfect the trustee’s title to the property.
- Where the trustee is replacing a former trustee or is appointed as an additional trustee, this duty extends to checking whether the original trustee has breached the trust. The new trustee is required to pursue the former trustee or any third party involved in the breach of trust for compensation.
Ongoing management duties
Investment of trust funds
Possibly the most important ongoing duty. Discussed in Chapter 18.
Duty to keep assets separate
Trust assets must be kept strictly separate from the trustee’s own assets. Where the trustee is trustee of multiple trusts, each trust’s asset must be maintained separately unless the terms of the trust instruments allow mixing.
Keeping and rendering accounts
Trustees are under a duty to keep and render accurate accounts. This is a core that cannot be excluded by the trust instrument.
- The trustee must be in a position to render the accounts to beneficiaries when asked, failure to do so may be a ground for removal.
- Accounts must include all relevant information concerning the property and financial affairs of the trust, such as information about assets, investments, appointments, income and expenditure, capital and income allocation and taxation.
- Documents proving figures, such as receipts, bills and tax returns also form part of the trust accounts.
- Although disclosing trust documents might tend to reveal the trustee’s confidential decision-making processes, this will not excuse them from having to disclose documents, subject to the discretion of the court.
- In Schmidt v Rosewood Trust Ltd, the Privy Council remarked that beneficiaries have a strong claim to see trust accounts so that they can assess the propriety of the trustee’s conduct.
Duty to give information to beneficiaries
Information concerning entitlements
Trustees are not generally obliged to volunteer information to beneficiaries, however, some information is so important to the beneficiary that trustees are under a positive obligation to disclose it. This particularly relates to the duty to inform beneficiaries of their entitlements under the trust.
- In Hawkesley v May, trustees were in breach when they failed to inform a beneficiary of his entitlement when he became an adult.
- The position of discretionary trusts in this regard is less certain because it may be unlikely that a distribution will be made in favour of certain potential beneficiaries or the class of beneficiaries may be so numerous that it would be impractical to inform all discretionary objects of their potential entitlements.
Other information concerning the trust
Recent cases have suggested that allowing beneficiaries to inspect trust documents is an application of the court’s inherent jurisdiction to supervise trusts.
- Any right the beneficiaries have to inspect trust documents is not an unqualified right to see all documents.
- Beneficiaries do not have the right to inspect documents in possession of trustees created for their own purposes, such as correspondence between co-trustees, and between trustees and beneficiaries, and agendas and minutes of trustee meetings.
- Where an inspection of trust documents would tend to reveal the trustee’s reasons for reaching a decision, the trustee is not obliged to allow inspection.
- In Schmidt v Rosewood, protection of confidentiality was described as “one of the most important limitations on the right to disclosure of trust documents.”
It is uncertain whether the following case will be followed in Australia:
Schmidt v Rosewood Trust Ltd
- Facts: A father had established a discretionary trust under which his son was one of the beneficiaries. After the father’s death, the son, suspecting misappropriations had occurred, applied for disclosure of documents relating to the administration of the trust. The trustees rejected his application on the grounds that he did not have a vested interest in the trust property.
- Held: The Privy Council rejected the argument that a beneficiary had to show a proprietary interest in the trust in order to seek disclosure of documents.
- The right to seek the disclosure did not depend on holding a vested interest in the trust.
- The court’s power to order inspection is discretionary and therefore the beneficiary will not be granted access in every case.
- Decisions are based on balancing the beneficiary’s interest in disclosure against the trustee’s interest in preserving confidentiality.
Rouse v IOOF Australia Trustees Ltd
- Facts: A beneficiary was involved in a legal dispute with trustees. It sought access to the trustee’s brief to legal counsel and correspondence between the trustee and other beneficiaries.
- Issue: Should access to documents be restricted where disclosure is contrary to the interests of the trust?
- Held: The court held that the trustee could, in limited circumstances, decline to give information to beneficiaries “where the trustee has reasonable grounds for considering that to do so will not be in the interests of the beneficiaries as a whole, and will be prejudicial to the ability of the trustee to discharge its obligations under the trust.”
Memoranda or letters of wishes
These are documents provided by the settlor at the time of creation of the trust, which commonly narrow down the class of beneficiaries to a group the settlor primarily intends to benefit. They give ‘guidance’ to the trustee by stating the settlor’s preferences.
- In Hartigan Nominees Pty Ltd v Rydge, the NSW Court of Appeal held that beneficiaries were not entitled to inspect the memorandum. In dissent, Kirby P would have required an express request from the settlor that the letter remain confidential.
- In the English decision of Breakspear v Ackland, Briggs J held that a letter of wishes delivered separately from the trust instrument is inherently confidential in nature and therefore beneficiaries were not entitled to inspect it, subject to the court’s overriding discretion to oversee administration of trusts.
Duties of performance
Duty of care
There are some differences between the tortious and equitable standard of care (which developed first).
- In contrast to the reasonable person, equity requires the trustee to carry out duties according to the standards of an ordinary prudent business person, regardless of the personal attributes of the trustee.
- As in tort, there must be a loss to the trust estate before the trustee is liable to pay compensation, although the beneficiary may still be able to complain of breach of trust in spite of suffering no financial loss.
- The “ordinary prudent business person” standard applies to the day-to-day management' of the trust. The standard of care to be exercised by trustees when investing is now defined by trustee legislation (discussed in Chapter 18 of the textbook).
Speight v Gaunt
- Facts: A trustee employed a stockbroker to invest trust money. The stockbroker stole the trust funds given to him to pay for the purchases. The beneficiaries later sued the trustee.
- Held: Jessel MR held that the trustee was not liable for breach of trust as a trustee “ought to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own, and beyond that there is no liability or obligation on the trustee.”
- As it was in the ordinary course of business to employ a stockbroker to carry out brokerage, the trustee had acted with sufficient care.
Duty to act impartially
- The trustee must act impartially between individual beneficiaries.
- The trustee must act impartially between different classes of beneficiaries.
Allegations of impartiality concerning different classes of beneficiaries often involve disputes between income beneficiaries (who are interested in the income produced by the trust estate) and capital beneficiaries (who are interested to see the corpus grow). The two classes may disagree on investment strategies.
- It may not be possible for a trustee to act in a way that benefits all individual beneficiaries but this is not the duty imposed; the trustee is required to act in the interests of all beneficiaries as a whole – to exhibit “fairness”.
Tanti v Carlson
- Facts: After the Second World War the government regulated land-sale prices. A trust decided to sell land and to divide the proceeds amongst the beneficiaries. One of the beneficiaries was the wife of a trustee. She was allowed to purchase the property from the trust at the regulated market price, far below its market value. Other beneficiaries had also offered to purchase the property at that price.
- Issue: Favouring one beneficiary over another.
- Held: Allowing one beneficiary to purchase at the greatly reduced rate gave her an advantage at the expense of other beneficiaries. The correct course of action the trustees should have taken was to apply to the court for directions.
Duty to act personally
Trustees must act personally and cannot delegate their decision-making power. They must also act unanimously with other trustees and cannot delegate decision-making to one of their number. This duty has several overlapping aspects to it:
- This duty is subject to some exceptions. The trust instrument may allow delegation and legislation in NSW is designed to cover short-absences from office.
- Not acting under dictation.
- This duty extends to attempts by the beneficiaries to dictate action to trustees (Re Brockbank). It is common for commercial trusts to allow the beneficiaries or a third party such as a lender, to dictate a course of action to the trustee.
- Not fettering discretion.
- Trustees should not bind themselves to make a decision at some time in the future or make it in a predetermined fashion (Re Vestey’s Settlement).
- Acting unanimously.
- If the trustees defer to one trustee, who makes all the decisions, they may be liable for breach of trust for having failed to properly consider the exercise of their discretions.
- In Sky v Body, Street J said that the trustees “do not hold several offices – they hold a single, joint, inseparable office. If conflicting business considerations lead to such a divergence that the trustees are not able to act unanimously, then... they cannot act.”
- Where one of the trustees commits a breach of trust, the rest will also be liable unless otherwise excused by the court or able to invoke the “wilful default” provision (discussed in Chapter 20).
- A trustee who fails to act unanimously will not be entitled to claim indemnification unless the trust benefited from the expense.
- A dysfunctional group of trustees which is unable to agree should seek the advice of the court (Cowan v Scargill).
- Appointing agents.
- Trustees can appoint agents to implement their decisions. Their duty of prudence requires they take sufficient care in the agents’ appointment and supervision.
- Trustees must appoint an appropriate agent, suitably qualified to perform the task in question and must properly supervise that performance.
- Facts: One of the two trustees wished to retire and the beneficiaries wanted a professional trustee to replace him. The trustee disagreed, believing the professional’s fees would be too high. The beneficiaries sought an order directing the trustee’s consent to the appointment.
- Issue: Beneficiaries dictating to the trustee.
- Held: The beneficiaries could not dictate the exercise of the trustee’s discretionary powers; they had to either “put up” with the trustee’s exercise of power or wind up the trust.
Re Vestey’s Settlement
- Facts: Trustee’s of a discretionary trust decided they would make distributions of money to objects in predetermined proportions.
- Issue: Fettering power.
- Held: A decision taken now to distribute in a given way until further notice is void as it is an attempt to bind the trustees at the time the discretion should be exercised.
Cowan v Scargill
- Facts: Half of the trustees of a miner’s pension were appointed by the miner’s union and the other half by employers. They were unable to unanimously agree on adoption of a proposed investment plan.
- Issue: Trustee disagreement (not acting unanimously).
- Held: In application for directions, it was ordered that the plan be adopted.
Duty to consider exercise of powers
The principal distinction between the concepts of a trustee’s duty and a trustee’s power is that a duty must be performed. Performance can be demanded by any object and will be enforced by the court.
- A trustee is required to consider periodically whether or not to exercise a power, consider the range of objects of the power and consider the appropriateness of individual appointments (Re Hay’s Settlement Trust).
Turner v Turner
- Facts: A settlor established a trust and installed various relatives as trustees, none of whom understood the duties imposed on them by the trust. They effectively “rubber-stamped” all of the decisions the settlor took concerning the running of the trust. The trustees signed documents making appointments under their power of appointment.
- Held: The appointments had been invalidly made as the trustees had not considered the exercise of their power before making them. They did not even appreciate that they had a discretion upon which to act.
Particular aspects of the trustee’s fiduciary obligations
The most important aspects of the fiduciary obligations, as they apply to trusteeship, are:
- The duty to act gratuitously
- The self-dealing rule
- The fair dealing rule
Duty to act gratuitously
The “no-profit” rule forbids unauthorised profit-making by fiduciaries. Therefore, unless a profit or fee has been authorised, the trustee must perform duties free of charge, regardless of how arduous or time-consuming they are.
- A trustee is not required to underwrite a trust and can always seek indemnification for outlays incurred during the running of the trust.
- The duty to act gratuitously can be altered by the trust instrument to allow a trustee to charge for services rendered. It is also possible for the trustee and sui juris beneficiaries to agree on remuneration.
- Courts can also award fair compensation for carrying out their duties even if there is no such allowance in the trust instrument. Explicit statutory provisions usually give the court great discretion than equitable powers as to the award of compensation to trustees. For example, in Re Moore, a trustee gave all his time to running the business of the trust. The court granted him remuneration but it was at a modest level, given the work involved.
The self-dealing rule
The trustee is uniquely placed to appreciate the value of trust assets. The risk of the trustee using that information for personal advantage is so great that it is forbidden from purchasing trust assets from the trust.
- It is irrelevant whether the trustee has paid full market value for the asset or the sale was otherwise fair in all respects. In Calvo v Sweeney, it was held that the right of the beneficiary to have the sale rescinded will not be refused merely because the court believes the transaction to be fair.
- Self-dealing may be permitted under the trust instrument and the court can also give permission. The court’s permission is usually granted in cases where the sale will be of obvious benefit to beneficiaries.
- If the voidable sale cannot be set aside because the trustee has on-sold the property to a bona fide purchaser for value without notice, the trustee must account to the beneficiary for profits or compensate the beneficiary for any loss.
Patros v Patros'
- Facts: A husband who was the sole registered owner of a family home died.
- Issue: Self-dealing benefiting beneficiaries.
- Held: His widow (and trustee of his estate) was allowed to purchase the family home from the trust in order to provide accommodation for the couple’s children.
The fair dealing rule
The self-dealing rule does not apply where a trustee purchases a beneficiary’s interest in the trust. Equity recognises the beneficiary’s right to trade in the asset which belongs in equity to him/her.
There is still a risk that the trustee could misuse their superior knowledge. Equity guards against that risk by overseeing the transaction at the suit of the beneficiary and setting aside the transaction unless the trustee can satisfy the court that the transaction was proper. The onus is on the trustee to show that:
- They have not taken advantage of their position as trustee
- They have made full disclosure to the beneficiary
- The transaction is fair, honest and at arm’s length
Duties on winding up a trust
Express trusts continue for a finite time, under one of the following options:
- a) The trust property vests in those who are entitled to it at the termination date.
- b) A trust may be terminated earlier by the exercise of a right of revocation of the trust contained in the trusts instrument.
- c) A court may order termination.
- d) The beneficiaries may terminate under the rule in Saunders v Vautier.
Upon the winding up of a trust:
- The trustee is required to give notice to require all interested persons to submit their claims and then, at the expiration of the time mentioned in the notice, distribute the fund.
- The trustee is entitled to have the trust accounts examined by the beneficiaries so that a formal discharge can be obtained from them.
- Any amount owed to the trustee pursuant to a right of indemnity has priority over the interests of the beneficiaries.
- If a potential beneficiary cannot be found, trustees can apply to the court for an order permitting them to distribute the trust fund as if the beneficiary were dead but without prejudice to the beneficiary’s rights should they return or be found to have acquired a vested interest in the trust.
- Alternatively, the trustee can take out a “missing beneficiary” insurance policy. In Re Evans, a beneficiary had been missing for 30 years and was presumed dead. His sister, the trustee, wanted to wind up the trust, and took out an insurance policy to pay him his share of the trust should he return, which he did. She was allowed to claim the insurance premium as a valid trust expense.
- ↑ Textbook, pp 279.
- ↑ Textbook, pp 279-80.
- ↑ Textbook, pp 280-1.
- ↑ Sui juris beneficiaries are those of full age and capacity.
- ↑  Ch 465.
- ↑ Textbook, pp 281-2.
- ↑ Textbook, pp 282.
- ↑ Textbook, pp 282-3.
- ↑  2 AC 709.
- ↑ Textbook, p 283-4.
- ↑  1 QB 304.
- ↑ Textbook, pp 284—7.
- ↑  2 AC 709.
- ↑  2 AC 709.
- ↑ (1999) 73 SASR 484.
- ↑ 1992) 29 NSWLR 405.
- ↑  All ER 260.
- ↑ Textbook, pp 287-8.
- ↑ (1883) 22 Ch D 727.
- ↑ Textbook, pp 288.
- ↑  VLR 401.
- ↑ Textbook, pp 289-91.
- ↑ (1970) 92 WN (NSW) 934, 935.
- ↑  Ch 206.
- ↑  2 All ER 891.
- ↑  Ch 270.
- ↑ Textbook, pp 291-2.
- ↑  3 All ER 786.
- ↑  Ch 100.
- ↑ Textbook, pp 292.
- ↑ Textbook, pp 292-3.
- ↑ Sui juris beneficiaries are those of full age and capacity.
- ↑  VLR 132.
- ↑ Textbook, pp 294.
- ↑  NSWSC 719.
- ↑  VSC 83.
- ↑ Textbook, pp 294-5.
- ↑ Textbook, pp 295-6.
- ↑ (1841) 4 Beav 115. See textbook [13.3].
- ↑ Called a “Benjamin order”.
- ↑  2 All ER 777.