PRIVATE CLIENT NEWS, AUGUST 2009

Trustees' Liability

Many trustees believe that they carry no personal liability for the activities or obligations of the trust. This cautionary tale outlines how you can be caught out through a simple oversight, and what you can do to limit your liability if you are a trustee.

Mrs Jaques thought that she only signed the loan agreement with UDC Finance Limited as a trustee of the Jaques Family Trust (No. 2) ("Trust"). When UDC took Court action against the Trust, Mrs Jaques took no part in the proceedings. She was surprised when, as UDC had not been able to recover funds from the Trust, it then took bankruptcy proceedings against her.

"I am a trustee" Mrs Jaques claimed. "UDC knew I was a trustee. It even had a copy of the trust deed showing that my liability was limited to the assets of the Trust."

Mrs Jaques' plea brought no joy.

The legal position is that a trustee is personally liable for trust transactions.

There is often a limitation of liability clause in a trust deed. However, the effect of the trustee limitation clause is to provide the trustees with protection against claims by a beneficiary.

There is also a right of indemnification from the trust fund under section 38(2) of the Trustee Act 1956 and, often, under the terms of the trust deed. However, this only assists to the extent that the trust assets are able to be used to reimburse a trustee for his or her personal liability.

When a trust fund is exhausted, as it was for the Trust, the trustee cannot seek reimbursement.

However, all would have been quite different for Mrs Jaques if there had been a clause in the loan agreement with UDC stating that her liability was limited to the assets of the Trust.

If a trustee expects not to be personally liable then he/she must always ensure that a limitation of liability clause is included in all contractual documents with third parties.

The limitation of liability clause will limit the liability of the trustee to the assets of the trust which the trustee is able to access to repay the liability, except if the trustee acts fraudulently or dishonestly. Most third parties are quite happy to put such clauses in at the time of contracting, especially with respect to independent trustees.

Mrs Jaques' case gives a timely reminder of long established case law - that a trustee must be very careful when entering into contracts with third parties. If you are an independent trustee then the first thing that you should do when reviewing a contract is look for your limitation of liability clause.

We are always happy to assist with reviewing contractual documents for trustees.