Trustee exoneration clauses: a high hurdle to overcome

Trustee exoneration (or exemption) clauses are common in trust deeds. As the name suggests, such clauses generally provide that the trustee shall not be liable for any loss or damage occasioned to the trust or its assets except in certain specified circumstances.

 

A recent decision of the England and Wales High Court of Justice, Sofer v SwissIndependent Trustees SA [2019] EWHC 2071 (Ch) (02 August 2019), confirms just how difficult it can be for a beneficiary of a trust who is looking to sue the trustee to overcome an exoneration clause. The case is relevant to Australian practitioners given the "relative homogeneity of trust law in … Commonwealth jurisdictions" (at [69]).

Background facts

In 2006 Mr Hyman Sofer caused a family discretionary trust, the Puyol Trust, to be established. The beneficiaries were Mr Sofer and members of his family including his son, Robert. The trustee of the trust was SwissIndependent Trustees SA (or 'SIT' for short), a professional trustee firm based in Geneva, Switzerland.

Commencing shortly after its creation, SIT made considerable payments out of the Puyol Trust to Mr Sofer at his request. The payments were recorded as interest free and non-recourse loans, repayable on demand. They were made pursuant to an express power to lend trust assets to any beneficiary on such terms as the trustee may in its absolute discretion think fit.

In 2012 Mr Sofer requested that SIT in its capacity as trustee of the Puyol Trust make a new loan to him of around $3.2 million. SIT exercised its discretion to do so after all the beneficiaries of the Puyol Trust had signed a deed indemnifying SIT from all claims arising out of the existing loans (totalling around $10.2 million) and the new loan to Hyman Sofer.

Mr Sofer passed away in 2016. In 2018, his son Robert Sofer commenced proceedings against SIT for recovery of all loans which had been made to his late father out of the Puyol Trust, amounting to around $19 million. He claimed that SIT had made each of the purported loans in breach of a clause in the trust deed which said that the trustee must not pay, convey or transfer any part of the corpus of the Trust to any beneficiary prior to the date of death of Mr Sofer. SIT responded by applying to have the proceedings struck out on the basis "that the statement of case discloses no reasonable grounds for bringing or defending the claim". Alternatively, SIT applied for summary judgment to be entered in its favour on the basis that Robert had no real prospect of succeeding on his claim.

The main basis of the strike out application was an exoneration clause in the trust deed, which stated the trustee shall not be liable or responsible for any "loss or damage to this Trust or any assets of this Trust howsoever arising except where the same shall be proved to have been caused by acts done or omissions made in personal conscious and fraudulent bad faith by the trustee charged to be so liable" (emphasis supplied).

Consideration

His Honour Judge Paul Matthews stated at [29] that "in order to avoid the risk of being struck out for failing to plead sufficient facts to amount to a cause of action, the claimant must allege conduct which would amount to such a cause of action even taking into account the exoneration clause". His Honour also observed that the rules which govern both pleading and proving a case of fraud or dishonesty are very strict. The facts, matters and circumstances relied on to show that the defendant was fraudulent or dishonest must be set out in the statement of case, and particulars of facts which are consistent with honesty are not sufficient (at [36]).

After considering the leading decisions dealing with exoneration clauses and the legal definition of dishonesty, his Honour concluded at [65] that the claimant's statement of case will allege a fraudulent or dishonest breach of trust capable of overcoming a trustee exoneration clause of the kind in the present case if, and only if, it alleges that the defendant, being a professional trustee, both:

(1) committed a deliberate breach of trust (that is, knew it was committing a breach of trust), and

(2) either (a) knew, or was recklessly indifferent as to whether, it was contrary to the interests of the beneficiaries, or (b) believed it to be in the interests of the beneficiaries, but so unreasonably that no reasonable professional trustee could have so believed.

His Honour ultimately concluded that neither Robert Sofer's original statement of case, draft amended statement of case (version A) or further draft amended statement of case (version B) met the above requirements. Accordingly, a case of fraudulent or dishonest breach of trust had not been pleaded (and was not proposed to be pleaded) and the exoneration clause covered the claim. Judge Matthews therefore ordered that the claim as originally drafted be struck out and refused to give permission for Robert Sofer to amend his statement of case in either of the forms proposed.

His Honour went on to further determine that summary judgment should be entered in SIT's favour because of the deed of indemnity which Robert signed in 2012. That deed both in the recitals and the operative provisions described the disputed payments as loans. His Honour therefore found that Robert was now estopped from bringing the present claim, founded upon an allegation that the payments were actually advances of corpus, by virtue of principles of estoppel by convention.

Take aways

The key points to take away from the above case are threefold. First, both trustees and beneficiaries ought to be alive as to whether the trust deed contains an exoneration clause, and if so, precisely what is the scope of that clause. If the trust deed does contain an exoneration clause then it is likely that the trustee will not be liable to the beneficiaries for negligence (even gross negligence) or ordinary breach of trust, but only for fraudulent or dishonest breach of trust.

Secondly, if a beneficiary wishes to seek to overcome an exoneration clause then the requirements for pleading and particularising such a claim are very stringent indeed. This is consistent with the grave seriousness of the allegation.

And thirdly, if a trustee is in doubt about a proposed act or omission, and specifically as to whether this may potentially expose it to an action for breach of trust in the future, then it should consider requesting the beneficiaries to sign a deed of indemnity that specifically covers and authorises the act or omission in advance. Principles of estoppel will make it very difficult for a beneficiary to avoid the terms of such a deed which it has previously signed.

McCabe Curwood's litigation and dispute resolution team has a great deal of knowledge and experience in relation to family discretionary and other types of trusts, acting for both trustees and beneficiaries. Do not hesitate to contact us if you require any assistance in this area.

Contributors

Nathan Jones Special Counsel