In our previous article, we covered DPAs – what they are, why they are being introduced, the draft legislation and the implications for Jersey. The legislation- The Criminal Justice (Deferred …
English Court of Appeal decision arguably results in higher burden for trustees of Jersey-Law trusts
To wilful men the injuries that they themselves procure must be their schoolmasters
– King Lear, Shakespeare.
A recent decision of the English Court of Appeal appears to have introduced a difference of approach between the UK and Jersey in relation to an issue which is important to trustees of Jersey trusts (and indeed to anyone acting in a fiduciary capacity).
The issue relates to the extent and circumstances in which a trustee can exclude or reduce liability in the event of what might otherwise be regarded as a breach of trust.
In the recent English case of Barnsley v Noble  EWCA Civ 799, the Court of Appeal considered the meaning of wilful wrongdoing, albeit in the slightly different context of a will trust. (The Court found that there was no difference in this context between wilful default, wilful misconduct and wilful wrongdoing.)
Barnsley v Noble concerned the proper interpretation of an exoneration clause contained in a will, intended to relieve the trustee/executors under will trusts of personal liability in respect of certain alleged breaches of duty by them.
The facts, briefly stated, were that a father’s will created a will trust in favour of family members, for valuable assets including business interests and property holdings. The family members – one of whom was one of the executors – negotiated between them a demerger of the business empire over a period of time. The executor son was to take the business portfolio and another son and family members were to take the property portfolio.
The businesses (but not the property interests) were entitled to reclaim VAT previously paid as it was held to have been unlawful for HMRC to claim it. During the negotiation of the demerger, the basis for reclaiming VAT changed; the House of Lords decided (in an unconnected case) that a limitation period on reclaims which HMRC purported to rely on was in breach of EU law and, therefore, inapplicable. This substantially increased the potential VAT reclaim for the business interests.
Subsequent to the demerger, when the fact of the significantly greater VAT reclaim became clear, the family members who had taken the property portfolio issued proceedings, on the basis that they had been misled. Part of the claim was for breach of fiduciary duty against the brother who was the executor of the will and trustee under the will trusts (and who had taken the business portfolio and therefore the benefit of the substantial VAT reclaim) in not disclosing the relevant information on the VAT reclaims.
The relevant issue for present purposes was whether the executor could rely on an exoneration clause contained in the will.
The question was the extent to which ‘wilful’ was to be translated as intentional.
Put another way, is it merely the act of the trustee which has to be wilfully or knowingly done, or is it also necessary for that act to be knowingly and intentionally a breach – described as ‘an awareness of wrongdoing’?
The Court of Appeal concluded that the words wilful wrongdoing required an awareness of wrongdoing, not merely an awareness of the act itself. Therefore conscious wrongdoing was necessary in order to come within the exceptions to the exoneration clause and, therefore, potentially visit liability on the executors. They agreed with the court of first instance that in failing to give complete information about the VAT reclaims the executor was ‘not deliberately or consciously acting in a way he knew to be wrong.’
Citing Lewis v Great Western (1877) 3QBD 195, the Court of Appeal agreed that ‘In short, the misconduct, not [merely] the conduct must be wilful.’ (Emphasis added). To conclude otherwise – that the fiduciary need only intentionally carry out the act, irrespective of an appreciation of the consequences – was illogical. Indeed the alternative interpretation put forward for the plaintiffs was considered to give rise to ‘an absurdity’ – a non-professional executor would not be protected from the consequence of any intentional act or omission even where he acted in good faith and with good intentions, whereas he would be protected against the consequences of any unintentional act or omission even where he acted in bad faith and with the worst of intentions.
There does appear to be clear logic for this decision.
In any event, on the face of it this is good news for trustees.
The problem for Jersey trustees is that there is Jersey authority – of some weight and duration – which takes a different view. The first point of reference for the Royal Court is, of course, Jersey Law. It is only in the absence of Jersey statute or authority that we will look to a different jurisdiction – often the UK.
That binding Jersey authority is the 1995 Jersey Court of Appeal decision in the case of Midland Bank v Federated Pension Services  JLR 352.
In that case, by the time the matter came before the Jersey Court of Appeal, the relevant conduct of the trustee was admitted, and admitted to be a breach. It was accepted by both parties that the trustee did not know that the conduct was contrary to its duties as trustee at the time.
The relevant exculpation clause was at Rule 29 of the deed and stated as follows:
‘…the trustee shall not be liable for anything whatever other than a breach of trust knowingly and wilfully committed.’
The Jersey Court therefore had to consider, amongst other issues, the extent to which the trustee could exclude liability in the context of the (then) Article 26(9) – now Article 30(10) – of the Trusts (Jersey) Law 1984 which prevents a trustee excluding liability for fraud, wilful misconduct or gross negligence.
As the Jersey Court stated, the rival construction of the words ‘knowingly and wilfully committed’ were
- the trustee is liable if it knowingly and wilfully commits an act which amounts to a breach of trust or
- The trustee is only liable if it knowingly and wilfully commits an act which at the time of commission is known to the trustee to be a breach of trust.
Clearly, applying the dicta in Barnsley v Noble, the proper construction as a matter of English law will be (b).
However, the Jersey Court of Appeal in Midland concluded that the answer was (a), despite an acknowledgment that authorities in relation to companies’ articles of association and trust deeds confirmed that ‘wilful default’ involved knowledge that the act is a default.
The Jersey Court cited the Lewis case (referred to above) but distinguished that authority on the basis that its support for proposition (b) was ‘diminished when there are taken into account the different context and the difference of wording’ – Lewis related to damaged cheese which was packed in a way which the railway transporter did not appreciate would lead to damage (although the words in question – ‘wilful misconduct’ – were the same).
The main clue to the different conclusions may come from the fact that the Midland authority dates from 1995. The Jersey Court made reference to some old cases – Lewis from 1877, In re Leeds and In Re City Equitable from 1925 and Re Vickery from 1931.
Since Midland, (and available for consideration in Barnsley v Noble) a number of relevant and important authorities have arisen – Armitage v Nurse (1998), Bonham v Fishwick (2008) and importantly the Privy Council decision (in relation to a Guernsey trust) in Spread Trustee in 2011. All support the contention that more than wilful conduct is required.
On the face of it therefore, at present a Jersey trustee – or an English trustee of a Jersey trust – will potentially be held to a higher standard of conduct than its English counterpart – a ‘mere’ wilful act even if not known or understood to be a breach will not be capable of exculpation by the usual clause.
It may be that the principle in Midland will in due course be reviewed and overturned so as to bring us in line with the English position. Whilst it is a Jersey Court of Appeal decision and as such is prima facie binding authority on Jersey’s Royal Court, a Jersey Court looking at this issue again in the light of the persuasive Privy Council decision in Spread may well find a way of adopting that reasoning.
In Heinrichs and others v Pantrust International SA and others  JRC 006, an act of wilful default was found to have occurred, as a preliminary to an application for an account. However that appears to have been without any analysis of the issue, in circumstances where there was evidence of secret interest turns and fabrication of documents and accounts.