Leicester De Montfort Law School

LLB Equity & Trusts

The Administration of Trusts

Investment & Delegation

LEARNING OUTCOMES
By the end of this topic you should be able to:-
1. Understand what is meant by investment;
2. Understand what the duty of investment is;
3. Advise on what types of investment a trustee is permitted to make;
4. Understand what is meant by the trustees’ duty of care when making
investments and apply this to a practical situation;
5. Understand and apply the standard investment criteria;
6. Identify a breach of the trustees’ duty and advise on the potential liability of
the trustee for such a breach;
7. Understand when a trustee can delegate their functions, what functions can
be delegated and who a trustee can delegate to;
8. Understand what is meant by the trustees’ duty of care when delegating their
functions and apply this to a practical situation;
9. Understand and advise on the liability of trustees for the actions of their
agents.

INTRODUCTION:
As we know, trustees hold the legal title to the trust property for the benefit of the
beneficiaries. In practice, trustees fall into three groups:-
Non professional trustees – relatives, friends
Professional trustees – solicitors, accountants
Trust Corporations – banks, public trustee
It is usual to appoint a mixture of trustees.
As legal owner of the trust property, trustees have the right to deal with the trust
property as any other legal owner would. However, the trustees should in general act
in the best interests of the trust. (See separate notes on Fiduciaries).

Trustees have certain powers and duties as a result of their position which can
arise from the trust instrument, the common law or legislation.

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THE TRUSTEES DUTY OF INVESTMENT
As a general position, the duty of the trustee is to do the best for the beneficiaries.
This is usually taken to mean financially.

Meaning of “investment”
An asset which produces an income is clearly an investment. Re Wragg [1919] 2 Ch
58 “to employ money in the purchase of anything from which interest or profit is
expected and which property is purchased in order to be held for the sake of the
income which it will yield.” per P.O. Lawrence J.

An asset which produces a capital appreciation may also qualify: Cowan v Scargill
[1985] Ch 270

Where does the duty of investment come from?

1. The duty can be set out in the trust instrument itself. If this is the case, then the
extent of the duty will be a matter of construction.

Re Harari’s Settlement Trusts 1949

In this case a settlor recited the transfer of some securities to trustees in his
settlement. In the settlement he directed the trustees to hold the investments but
gave the power to retain it in its present form or realise the investments and invest in
such investments as they may deem fit.
It was held that on a true construction, the trustees had power, under the express
power of investment, to invest in any investments they deemed fit.

2. Historically, the duty was governed by the Trustee Investment Act 1961
3. The duty is now governed by the Trustee Act 2000.

What is the duty of investment?

In general terms the duty of investment is to:-
Invest in a way so as to be even handed between the beneficiaries (eg income and
capital beneficiaries)
Balance the risk and return

“The trustees must act fairly in making investment decisions which may have
different consequences for different classes of beneficiaries” – Hoffman J Nestle v
National Westminster Bank plc [1994] 1 All ER 118

The historical position:-

Historically, the law favoured a very narrow, low risk approach to investments.
Trustees were provided with a list of what were deemed to be suitable investments.
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Provided the trustees invested the trust property in these listed investments, they
would not be in breach of trust. The list was generally restricted to investment
consols, fixed interest government securities that were deemed to be safe
investments providing a reasonable return. This is what is known as the “legal list”
approach. It was ideal for non professional trustees. However, this approach was
criticised due to:- Evidence of superior long-term performance of equities;
investment in private companies was prohibited; and no statutory power to invest in
land - Re Power’s Settlement Trusts [1951] Ch. 1074

The modern position:-

The trustee’s duty of investment, in the absence of any express power in the trust
instrument is now governed by the Trustee Act 2000 (TA) which came into force on
1st February 2001. The TA, in contrast to the earlier “legal list” approach now adopts
a “prudent investor” approach. This means that the trustees can invest in any types
of investments provided that they act prudently in doing so.

Investment under the Trustee Act 2000

The General Power of Investment - Section 3
Section 3 of the TA provides a general power of investment. The trustee as legal
owner of the trust property is entitled to invest as if he were “absolutely entitled”.

S3 (1) Subject to the provisions of this Part, a trustee may make any kind of
investment that he could make if he were absolutely entitled to the assets of the
trust.

(2) In this Act the power under subsection (1) is called “the general power of
investment”.

Additional Power - Section 6

Section 6 provides that the general power is in addition to anything expressly stated
in the trust instrument.

S6 (1) The general power of investment is –

(a) in addition to powers conferred on trustees otherwise than by this Act, but
(b) subject to any restriction or exclusion imposed by the trust instrument or by any
enactment or any provisions of subordinate legislation.

Power to invest in land - Section 8

Section 8 provides a power to invest in land, which was previously prohibited.

S8 (1) A trustee may acquire freehold or leasehold land in the United

Kingdom
(a) as an investment
(b )for occupation by a beneficiary, or
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 (c )for any other reason.

The Duty of Care – Section 1

Although trustees have a power to invest in any types of investment they must
exercise a duty of care when deciding where to invest the trust property.

S1 (1) whenever the duty of care under this subsection applies to a trustee, he must
exercise such care and skill as is reasonable in the circumstances, having regard in
particular –

(a) to any special knowledge or experience that he has or holds himself out as
having, and
(b) if he 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.

The duty of care applies in the circumstances laid down in Schedule 1.

SCHEDULE 1

APPLICATION OF THE DUTY OF CARE

Investment

1. The duty of care applies to a trustee –

(a) when exercising the general power of investment or any other power of
investment, however conferred;
(b) when carrying out a duty to which he is subject under section 4 or 5 (duties
relating to the exercise of a power of investment or to the review of
investments).

Acquisition of land

2. The duty of care applies to a trustee –

(a) when exercising the power under section 8 to acquire land;
(b) when exercising any other power to acquire land, however conferred.

What is the duty of care

As a result of Section 1, and Schedule 1 Trustees are expected to act reasonably
when making investment decisions.

What is meant by reasonable care?

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Rather unhelpfully, this is not defined in the TA and so in order to determine what is
meant by reasonable care, we must look at earlier case law.

Prior to the TA, trustees were expected to act as an “ordinary prudent man of
business” when exercising their duty of care in terms of investment.

How was this interpreted?

Speight v Gaunt (1883) 9 App. Cas. 1

A trustee is not expected to act any more cautiously than a normal person when
managing their own affairs.

In this case the trustee paid the trust money to a broker on the strength of a written
“bought note”, which showed that the broker had bought securities to that amount.
The broker had infact never purchased such securities and the fraud was not
realised until after he was declared bankrupt and the money lost. The trustees were
not liable as the payment of funds to a broker in that way was in accordance with
standard business practice when purchasing securities.

“A trustee is not bound because he is a trustee to conduct in other than the ordinary
and usual way in which similar business is conducted by mankind in transactions of
their own. It could never be reasonable to make a trustee adopt further and better
precautions than an OPMB would adopt…”

Learoyd v Whiteley (1887) 12 App Cas 727

A higher degree of care is not expected of someone simply because they are a
trustee. However, the test is what level of skill and care would an OPMB adopt if
investing money for others not just himself.

“… the duty of a trustee is not to take such care only as a prudent man would take if
he had only himself to consider; the duty rather is to take such care as an ordinary
man would take if he were minded to make an investment for the benefit of other
people for whom he felt morally obliged to provide”

Re Lucking’s Will Trusts [1967] 3 All ER 726

A trustee is expected to take extra steps when exercising his duty of care when the
trust property consists of a controlling shareholding in a company.

In this case the trust property was a majority of shares in a family business which
were held on trust for the family members. One of the trustees, a family member,
installed his friend as manager of the company. The friend drew large amounts of
funds from the company for his own use and this was not detected until it was too
late. The trustee was held liable. J Cross indicated that in such circumstances the
trustees should seek some representation on the board of directors.

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“trustees holding a controlling interest ought to ensure so far as they can that they
have such information as to the progress of the companies affairs as directors would
have. If they sit back and allow the company to be run by the minority shareholders
and receive no more information than shareholders are entitled to, they do so at their
risk if things go wrong”.

However, the need for representation on the board was questioned in

Bartlett v Barclays Bank Trust Co. Ltd [1980] 1 All ER 139

In this case J Brightman stated that it wasn’t the trustees’ duty to always ensure
representation on the board, this was just one way of ensuring the trustees know
what is going on. What is appropriate depends on the facts. J Brightman suggested
that getting copies of the minutes of meetings, agendas and accounts could be
appropriate.

Is a higher standard of care placed on professional trustees/trust

corporations?

Historically, no higher duty of care was placed on professional trustees although

there were obiter statements made in Re Waterman’s WT [1952] 2 All ER 1054 and
Nestle v National Westminster Bank plc [1994] 1 All ER 118 suggesting that there
should be.

However, section 1 clearly states that when exercising reasonable care and skill
regard should be had to any special knowledge or experience of the trustee. This
clearly imposes a higher standard on a professional trustee.

The Standard Investment Criteria - Section 4

This provides that when making an investment the trustee must also have regard to
the Standard Investment Criteria.

S4 (1) In exercising any power of investment, whether arising under this Part or
otherwise, a trustee must have regard to the standard investment criteria.

S4 (2) A trustee must from time to time review the investments of the trust and
consider whether, having regard to the standard investment criteria, they
should be varied

S4 (3) The standard investment criteria, in relation to a trust, are –

(a) the suitability to the trust of investments of the same kind as any particular
investment proposed to be made or retained and of that particular investment
as an investment of that kind, and
(b) the need for diversification of investments of the trust, in so far as is
appropriate to the circumstances of the trust.

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When considering the need for diversification of investments the Court will consider
the whole investment portfolio. Overall is there an adequate balance between
high/low risk investments. The court will not simply look at just one investment. This
is known as the “ modern portfolio theory”. Nestle v National Westminster Bank

Need to obtain advice - Section 5

This imposes a duty to obtain and consider proper advice before making investments
(unless unnecessary or inappropriate):

S5 (1) Before exercising any power of investment, whether arising under this Part or
otherwise, a trustee must (unless the exception applies) obtain and consider proper
advice about the way in which, having regard to the standard investment criteria,
the power should be exercised.

(2) When reviewing the investments of the trust, a trustee must (unless the exception
applies) obtain and consider proper advice about whether, having regard to the
standard investment criteria, the investments should be varied.

(3) The exception is that a trustee need not obtain such advice if he reasonable
concludes that in all the circumstances it is unnecessary or inappropriate to do so.

(4) Proper advice is the advice of a person who is reasonably believed by the trustee
to be qualified to give it by his ability in and practical experience of financial and
other matters relating to the proposed investment.

Ethical Investing
The trustee’s duty is to do their best for the beneficiaries. This usually means
financially.

Buttle v Saunders [1950] 2 All ER 193

In this case the trustees were held to have an overriding duty to obtain the best price
on a sale of property. They should therefore have considered a higher offer for the
property even though they felt morally obliged to honour an earlier lower offer.

Cowan v Scargill [1985] Ch 270

This case confirmed that if the purpose of the trust was to provide financial benefits
then the best interests of the beneficiaries would normally be their best financial
interests. Personal interests and political views were to be put aside in deciding
whether to invest abroad. In this case the issue was whether the scheme established
to run the miners pension fund could invest overseas in industries which competed
with coal.

With regard to charitable trusts, the trust can exclude certain investments (eg
armourments) but the trust cannot pursue a complete policy of ethical investment
which could be detrimental to the value of the trust fund. Harries v Church
Commissioners for England [1992] 1 WLR 1241

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Trustees Liability
Trustees are liable for both failing to do what they ought to do and doing what they
shouldn’t do. They are liable to compensate the trust for any loss suffered and to
account for any gain made.

Where the trustee breaches trust, they are liable to make good the loss.

Bartlett v Barclays Bank Trust Co. Ltd [1980] 1 All ER 139

In this case it was held that the duty of care imposed on a professional trustee was
higher than the standard of care of the OPMB test. The defendant trustee failed in its
duty to the trust and was liable to make good the loss suffered by the trust.

The defendant trust corporation suggested to a private company, of which the trust
owned 99.8% of the shares that it should go public. The directors wanted to go into
property development to which the trust corporation did not object. Of the two
property developments undertook, one failed and although one succeeded there was
an overall loss.

The measure of damages is one of restitution. The trustees must fully compensate
the trust for any loss arising from the breach.

A trustee who commits a breach of trust is not liable to compensate a beneficiary for
loss suffered if the loss would still have occurred regardless of the breach.

Target Holdings Ltd v Redferns [1995] 3 All ER 785

“the basic rule is that a trustee in breach of trust must restore or pay to the trust
estate either the assets which have been lost… or compensation for such loss…
thus the common law rules of remoteness of damage and causation do not apply”

Where trustees retain investments improperly, they will be liable for the difference in
value between the value when it should have been sold and its present value. The
key principle is restitution to the trust.
Fry v Fry (1859) 27 Beav 144

Where the trustees make a loss on one unauthorised transaction but make a profit
on another, they cannot set off the loss against the profit.
Dimes v Scott (1828) 4 Russ 195

If the gain and loss are part of the same transaction, the rule against set off does not
apply.
Fletcher v Green (1864) 33 Beav 426
Bartlett v Barclays Bank Trust Co. Ltd [1980] 1 All ER 139

Defences for Breach of Trust.

1. To seek a contribution from his/her other trustees.

Normally this will be an equal share subject to the court's discretion under the Civil
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Liability (Contribution) Act 1978 to adjust the contributions. Exceptionally a trustee
who has been guilty of fraudulent conduct cannot seek a contribution from co-
trustees.

2. Exceptionally one trustee may have to indemnify the co-trustees i.e. take
the entire liability:
i) where the active trustee is a solicitor and the other trustees can prove that
they relied upon his expertise.
ii) where one trustee has control of the trust monies and misuses that money.
iii) if the trustee is also a beneficiary then he may be required to indemnify to
the extent of his/her beneficial interest.

3. Consent/acquiescence/release of a beneficiary.
For example, an adult beneficiary consents in advance to the trustee's breach; or
confirms the trustee's action after the event; or knowing of the breach grants the
trustee relief from liability.
In each of these cases the beneficiary cannot bring an action against the trustee.
It is clear that a beneficiary is only regarded as consenting if he has knowledge both
of his own rights and that the events concerned will affect those rights. It is less
clear whether he needs to realise that the events would amount to a breach of trust
before the consent is effective. The modern view appears to be that there is no
formal requirement of realising the legal consequences of the consent etc but that
the court should look at the entire circumstances to see if it is 'fair and equitable' that
the beneficiary's actions should be regarded as relieving the trustee from liability.
See Re Paulings Settlement [1963] 3 All ER 1 and Holder v Holder [1968] 1 All
ER 66

The consent must be freely given by an adult. In particular there is a risk that the
nature of the relationship between trustee and beneficiary means that there will be
undue influence exerted which would vitiate the consent. Such undue influence
could also be exerted by someone other than the trustee - see Re Paulings
Settlement where beneficiaries as old as 30 were held to be under the undue
influence of their father and thus the trustees had no defence to wrongful payments
made to them.

4. Impounding of a beneficiary's interest

This differs from the above in that this is an action against the beneficiary for the
value of his/her beneficial interest. It is a discretion of the court provided by s62
Trustee Act 1925 where the beneficiary has instigated or requested the breach or
has consented in writing. The beneficiary must be aware that the actions will amount
to a breach of trust.

5. Limitation Act 1980

Generally there is a period of 6 years (from the accrual of the action) in respect of
actions for breach of trust by virtue of s21(3) but there is no limitation period in cases
of fraud or an action to recover property.

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6. Discretionary relief

S61 Trustee Act 1925 provides:

“If it appears to the court that a trustee...is or may be personally liable for any breach
of trust...but has acted honestly and reasonably, and ought fairly to be excused for
the breach of trust... then the court may relieve him either wholly or partly from
personal liability for the same”.

Re Paulings and Bartlett v Barclay's Bank Ltd [1980] 1 All ER 139 are among the
many cases which suggest that it will be less likely for this section to be used in the
case of a professional trustee than in the case of an unpaid trustee.

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DELEGATION OF TRUSTEES FUNCTIONS
Can Trustees delegate?
The position prior to 1925:
Very early on it was thought that a trustee must act personally in exercising his
duties/powers and as such could not delegate in accordance with the equitable
maxim “Delegatus not potest delegare”.

However, it was realised early on that this was unrealistic and it was confirmed in
Ex parte Belchier (1754) that it was permissible to delegate in cases of “legal” or
“moral” necessity.

Speight v Gaunt (1883) 9 App Cas 1

If a Trustee did delegate, they were only liable for the acts of their agent if they
had failed to act as an OPMB in relation to the delegation

Fry v Tapson (1884) Ch D 268

This case confirmed that trustees could only delegate duties NOT discretions and
that delegation could only take place within the normal course of business

Rowland v Witherden (1851) 3 Mac & G 568

Imposed a duty on a trustee to supervise any agent they appointed.

The position under the Trustee Act 1925:

Prior to the implementation of the TA 2000 the position was governed by the TA
1925 ss 23(1) 30(1). There was considerable confusion in this area of law at the
time largely caused by a very dubious decision in the case of Re Vickery [1931]
1 Ch 572 which interpreted the 2 main sections of the legislation, many argued
incorrectly.

Although this is of no relevance to us now as both sections have been repealed

by the TA 2000 the debate is quite interesting.

S23(1) provided that a trustee wasn’t liable for the acts of an agent if the agent
was appointed in “good faith”.

S30(1) provided that a trustee would only be liable for things arising through his
own ‘wilful default”. An objective OPMB test. Wilful default had been interpreted
to mean imprudence.

In Re Vickery an executor employed a solicitor who had previously been

suspended twice from practice. The solicitor absconded with the money. The
court held that this wasn’t due to the executors’ willful default. In this case a
subjective test was applied to s30(1) allowing for the “honest idiot”. J Maugham

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interpreted willful default to mean intentional recklessness.

The current position:

This is governed by the Trustee Act 2000

Delegation under the Trustee Act 2000

Power to appoint agents – Section 11

This section gives trustees the power (if not conatained in the trust instrument) to
appoint agents. However, trustees can only delegate their “delegable functions”.

S11 (1)…the trustees of a trust may authorise any person to exercise any or all
of their delegable functions as their agent.

S11 (2) In the case of a trust other than a charitable trust, the trustees’ delegable
functions consist of any function other than –
(a) any function relating to whether or in what way any assets of the trust
should be distributed,
(b) any power to decide whether any fees or other payment due to be
made out of the trust funds should be made out of income or capital,
(c) any power to appoint a person to be a trustee of the trust, or
(d) any power conferred by any other enactment or the trust instrument
which permits the trustees to delegate any of their functions or to
appoint a person to act as a nominee or custodian.

Persons who may act as agents – Section 12

Anyone except a beneficiary under the trust.

S12 (1)…the persons whom the trustees may under section 11 authorise to
exercise functions as their agent include one or more of their number

S12 (3) the trustees may not under section 11 authorise a beneficiary to
exercise any function as their agent

Linked functions and asset management functions Sections 13 and 15 If a

trustee delegates any of their asset management functions (eg investment
functions) extra conditions must be satisfied.

S15 (1) The trustees may not authorise a person to exercise any of their asset
management functions as their agent except by an agreement which is in or
evidenced in writing.

S15(2) The trustees may not authorise a person to exercise any of their asset
management functions as their agent unless –

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 (a) they have prepared a statement that gives guidance as to how the
functions should be exercised (“a policy statement”), and
(b) the agreement under which the agent is to act includes a term to the
effect that he will secure compliance with –
(i) the policy statement, or
(ii) if the policy statement is revised or replaced under section 22,
the revised or replacement policy statement.

S15 (3) The trustees must formulate any guidance given in the policy statement
with a view to ensuring that the functions will be exercised in the best interests of
the trust.

S15 (4) The policy statement must be in or evidenced in writing.

S15 (5) The asset management functions of trustees are their functions relating
to –
(a) the investment of assets subject to the trust,
(b) the acquisition of property which is to be subject to the trust, and
(c) managing property which is subject to the trust and disposing of, or
creating or disposing of an interest in, such property.

The Duty of Care

As with the duty of investment, when delegating their functions, a trustee must
have regard to the duty of care.

When does the duty of care apply? – Schedule 1 para 3

3. – (1) The duty of care applies to a trustee –
(a)when entering into arrangements under which a person is authorised
under section 11 to exercise functions as an agent…
(b) when carrying out his duties under section 22….

(2) …entering into arrangements …includes in particular –

(a) selecting the person who is to act,
(b) determining any terms on which he is to act, and
(c) if the person is being authorised to exercise asset management
functions, the preparation of a policy statement under section 15.

Review of agents – Section 22

S22 (1) While the agent, nominee or custodian continues to act for the trust, the
trustees -
(a) must keep under review the arrangements under which the agent,
nominee or custodian acts and how those arrangements are being put into
effect.

(b) if circumstances make it appropriate to do so, must consider whether

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 there is a need to exercise any power of intervention that they may have,
and

(c) if they consider that there is a need to exercise such a power, must do
so.

(2) If the agent has been authorised to exercise asset management functions, the
duty under subsection (1) includes, in particular –

(a) a duty to consider whether there is any need to revise or replace the
policy statement made for the purposes of section 15,

(b) if they consider that there is a need to revise or replace the policy
statement, a duty to do so, and

(c) a duty to assess whether the policy statement …is being complied
with.

Liability for agents – Section 23

A trustee is only liable for the acts of an agent if the trustee has failed to comply
with the duty of care when entering into arrangements or when carrying out his
supervision duties.

s23 (1) A trustee is not liable for any act or default of the agent, nominee or
custodian unless he has failed to comply with the duty of care applicable to him,
under paragraph 3 of Schedule 1 –

(a) when entering into the arrangements under which the person acts as
agent, nominee or custodian, or

(b )when carrying out his duties under section 22.

Trustee exclusion clauses

S30 (1) Trustee Act 1925 (repealed)
“A trustee shall be chargeable only for money and securities received by him…
and shall be answerable and accountable only for his own acts, receipts,
neglects or defaults…nor for any other loss, unless the same happens through
his own wilful default.”

Armitage v Nurse [1998] Ch 241 CA

This case determined that an exclusion clause protecting a trustee from liability
unless through his own “actual fraud” was valid.

LJ Millet stated that the overriding duty of a trustee was to act honestly and in
good faith. Therefore you could exclude liability for negligence as this did not
impact on the duty of honesty and good faith. You could relieve liability even if

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there was a deliberate breach provided that the trustee had an “honest belief”
that they were acting in the beneficiaries’ best interests.

TA 2000 Sch 1, para. 7

“The duty of care does not apply to powers conferred by a trust instrument if or in
so far as it appears from the trust instrument that the duty is not meant to apply.”

Walker v Stones [2000] 4 All ER 412, 443-4 (CA)

In this case the court stated that the test for dishonesty will depend upon the
trustee. A higher test will be applied for a solicitor trustee.

SEMINARS

In the Investment & Delegation Seminars we will aim to develop

your:

1. Understanding and application of the legislation and case

law relating to a trustees' duty of investment and
delegation of trustees' powers; and
2. Problem solving skills.

REMEMBER:

Seminars provide you with the ability to discuss answers to

the questions set. They will help you to clarify any
misunderstanding you may have of a topic area and give you the
opportunity to receive feedback on your understanding. They will
also provide invaluable guidance in approaching exam based
questions.