Trustees’ Obligation to Resign in a Conflict Situation - 30 September 2008

The Royal Court recently delivered a judgment in the case of E L O & R Trusts (2008) JRC150.

The application arose out of Representations seeking determination as to whether Trustee 1 should retire or be removed as the Trustee of four Trusts. Before the application was heard, Trustee 1 had agreed to retire. The Applicants submitted that Trustee 1 had acted unreasonably in not retiring earlier and accordingly that Trustee 1 should not receive its legal costs from the Trust Funds. Moreover, the Applicants sought an order that Trustee 1 be ordered to pay the costs of the other parties on an indemnity basis.

The background to the dispute was that the parents of two warring brothers had established 12 discretionary settlements governed by Jersey Law. In each case Trustee 1 was appointed as the Trustee of the settlements.

Against the background of the disagreement between the two brothers, the parents exercised their respective powers as Settlors and appointed co-trustees to the Trusts to act with Trustee 1. Once the appointment of co-trustees had been made in December 2005, Trustee 1 was asked to resign but did not do so until 13 May 2008. The judgment gives a detailed account of the reasons why the Trustee chose not to resign.

The Court took the opportunity to remind itself of the nature of fiduciary duty. It adopted the comments of Millet LJ in Bristol & West Building Society -v- Mothew (1996) 4 ALL ER 698. I do not propose rehearsing those observations save to say that the expression of fiduciary duty is properly confined to those duties which are peculiar to fiduciaries and the breach of which attracts legal consequences differing from those consequent upon the breach of other duties. The Royal Court found that it could, of course, remove a trustee where it had failed to recognise a conflict and that a trustee may only be denied an indemnity for its costs from the trust fund if it had acted unreasonably. The Court noted that this was a high hurdle.

Having reviewed the facts, and despite noting that Trustee 1 had acted in good faith and was not being deliberately obstructive, the Court found that this was an elementary case of plain and obvious conflict of interest. The Court stated that the position was so obvious that there was justification [for the Trustee] seeking directions of the Court and accordingly the costs were unreasonably incurred and Trustee 1 was not entitled to the usual indemnity. The Court also found that certain of the proceedings arose only as a result of the withdrawal of other proceedings and from the continued refusal of Trustee 1 to retire. Trustee 1 was therefore also ordered to pay the costs of some of the parties to the litigation.

The Court issued an important postscript. The judgment in this case was not to be taken as support for the proposition that a trustee must retire immediately upon being requested to do so and that a trustee would be deprived of its costs if it seeks the directions of Court before agreeing to retire. The decision in this case was such that it was thoroughly unreasonable of Trustee 1 not to recognise that it was in an impossible position and had no option but to retire.

The Court commented that there are a number of reasons for tensions to arise between a trustee and a beneficiary and it would often be reasonable for a trustee to seek a decision from the Court before agreeing to retire or opposing an application for removal. Everything depends upon the facts of each case. The Royal Court concluded that the general approach remains that a trustee which has acted in good faith in what it perceives to be the best interests of the Trust and the beneficiaries as a whole will not be deprived of its costs unless it has behaved unreasonably.