The Legal Obligations of a Trustee – Proactive not Reactive

Trustees must look forward towards the risks on the horizon. Proactive responses to emerging issues are essential to fulfil the duties of a trustee. Too often trustees are not sufficiently aware of their legal obligations and the issues they may face.

A trustee is obliged to fulfil the terms of the trust instrument (usually a trust deed). In doing so, the trustee must determine in what proportion the capital and income of the trust will be distributed to the beneficiaries. Given the trustee holds legal title to the trust’s assets, he or she owes fiduciary duties to the beneficiaries who hold the equitable title in those assets. Fiduciary duties include:

  • the duty to act honestly and in good faith;
  • the duty to act with due care, skill and diligence in relation to the best interests of beneficiaries;
  • the duty to avoid conflicts of interests; and
  • the duty not to profit from the trust.

A trustee who breaches one of their duties risks being liable for any loss arising from that breach.

In 2017 there were numerous reports that sixty of the 100 largest superannuation funds in Australia were failing to comprehensively assess the impact of climate change on their investment portfolios and failed to disclose that assessment to their shareholders and members.

Trustee directors have an implied obligation to proactively assess emerging risks including the threat of climate change to the extent that it may intersect with a beneficiary’s financial interests in a superannuation fund. Failing to consider such a material risk as climate change has left many trustee directors at risk of breaching their duty to members.

Climate change is not just a matter of rising sea levels, but note that Local Government on the South Coast has already resolved to stop repairing roads or permit improvements in certain low lying areas.

In some commercial arrangements, the courts are willing to allow the parties to reduce the fiduciary content of a trustee’s obligations almost entirely. However, in doing so, the arrangement may then cease to be a trust and may be re-characterised as “something else.” In Leerac Pty Ltd v Garrick E Fay [2008] NSWSC 1082 the NSW Court of Appeal held that other than the irreducible core of trustee obligations to act “honestly and in good faith”, it is not contrary to public policy to exclude a trustee’s liability even for gross negligence. But it is contrary to public policy to exclude a trustee’s liability for dishonesty or bad faith. Thus, if the trustee takes a risk in good faith with the best intentions but defaults on that action, the trustee can be protected by an exemption clause which excludes personal liability.

How to limit your liability?

Trustees usually seek to limit their personal liability through express written limitation clauses protecting them from personal loss, and the risk of insolvency through indemnities from the trust fund. The lack of uniformity in limitation clauses has led to differences in style, content and quality of the clauses. The courts often treat limitation clauses with caution as poor drafting of the clause can lead to unintended consequences. However, the advantages of a limitation clause usually outweigh the caution with which Courts treat them. Some of those advantages include:

  • a reimbursement right (the trustee’s right to replenish its own assets where it has discharged trust liabilities personally); and
  • an exoneration right (the trustee’s power to apply trust assets directly to discharge trust liabilities).

Both rights are often conflated as they save trustees from the consequences of incurring trust liabilities. However, the former is for the trustee’s personal benefit while the latter forms part of a general power enabling the trustee to apply trust assets.

Ultimately, proactive (not reactive) solutions are required by trustees to foresee the risks of emerging issues and ensure that trustees act within the scope of their legal obligations to secure the financial interests of the beneficiaries, and not simply rely upon the ‘exoneration right’ in any trust document.

If you require legal advice regarding your options as a trustee, please contact us.