Professional Negligence Claims are a fact of life; trustees are human and will make mistakes. Decisions can be criticised even when proper care is taken. Many cases involve handling sensitive family issues and, at times, a beneficiary will disagree with the trustee’s exercise of their discretion.
Given how quickly emotionally sensitive situations can spiral out of control, trustees need to be aware of the steps they can take should they find themselves under scrutiny. So what should a trustee do when a complaint or claim is made?
A Helping Hand
The first step for any trustee finding themselves in such a situation is to notify their insurers and seek advice from their broker. Any insurance policy is likely to require that insurers are notified promptly of any claim or, indeed, any circumstance that might give rise to a claim.
Failure to take this step may jeopardise the right to a recovery under the policy. Not only this, but the trustee may also lose out on the valuable assistance their insurers can provide in helping them to defend the claim.
Pinpoint The Problem
The next priority is to gain a full understanding of the matter at hand. Not only does the trustee need to know exactly what it is that they have allegedly done, but also what they should have done differently. The trustee must also comprehend the alleged consequence of the supposed act or omission to gain a complete picture of the situation.
To defend a claim, start by understanding the problem.
The Ministry of Justice’s Pre-action Protocol1 provides a list of required information that the claimant needs to provide before litigation, as well as detailing the steps that should be followed. Sometimes protocols will not apply, but even in these cases, the people involved are still expected to exchange information to see whether resolution is possible outside court.
Clarity is vital: failing to be transparent and coherent could have financial repercussions further down the line.
Moving In The Right Direction
The trustee should also take independent advice on multiple levels. In most cases, the fallout from the situation will have left the trustee with critical questions about their role and their future. They should seek guidance on whether it is genuinely feasible to continue in the role or, indeed, whether it is time to retire.
On top of this, legal advice will be essential to assess the merits of the allegations, and consider how to defend and resolve them. For instance, would it help to get together in a room and try to resolve differences? Should this be done with or without lawyers? Could a mediator help take the heat out of the situation? Should a settlement offer or apology be made? Would the trustee rather defend it under cross-examination in around 18 months’ time? Seeking legal advice will allow the trustee to consider the available options and make a sound decision as to which one will be most beneficial.
Keeping Tabs
All documents must be preserved until the dispute is resolved. In these situations, the word ‘document’ refers to everything from emails to handwritten scribbles, diaries and anything else that might be relevant to the issues in dispute. Complying with this requirement is key to creating a solid defence. The trustee will do well to keep their files in good order: the state of such documents creates an impression of their professionalism.
The trustee may also need to consider asking the claimant for documents, and to answer document requests from a beneficiary. Legal advice may be needed as to what should be provided.
Financial Cover
A trustee is generally entitled to any costs and expenses properly incurred on behalf of the trust fund. However, this will rarely apply when it comes to the costs of a legal battle between a trustee and a beneficiary, so the trustee may have to fund their defence costs out of their own pocket if no insurance cover is available. The court will decide the issue of costs, and it will usually depend on who emerges as winner.
Trustee liability insurance is a blessing in this situation, as it will usually include the cost of defending a claim, as well as covering any damages that might be awarded against the insured trustees.
Knowing The Limits
In some cases, the trustee will want to consider the England and Wales Limitation Act 1980. A time bar is a particularly important weapon, as it can provide a complete defence, regardless of the merits of the claim. The general rule is that a beneficiary cannot take action if six years have passed since the date of the breach of trust, regardless of when any loss resulted.
While this could be an important factor for the trustee to bear in mind, the time bar will not apply to beneficiary claims when the trustee has committed an act of fraud.
This includes instances of dishonesty, pursuing a course of action against the interests of a beneficiary, or being recklessly in different to a beneficiary’s needs and requirements.
In some cases, the clock of the limitation period will only begin to tick when the person submitting the claim has discovered the fraudulent activity, deliberate concealment or mistake from which relief is being sought.
The Small Print
Trust deeds commonly include exoneration clauses exempting trustees from liability. The scope of the clause will depend on the wording; however, a trustee can never be exempted from their own dishonesty or recklessness.
Where breach of trust has been established, a court may still excuse a trustee from personal liability where they have acted honestly and reasonably and, in the court’s view, ought reasonably to be excused. In practice, it is difficult to persuade the court to exercise its discretion. This is a ‘last resort’ card to play.
In Practice
Consider the following case as an example of these principles. Let’s say that trustees have invested money in a fund that did not perform well. In response, the beneficiaries pursue a claim against the trustees alleging that the trustees were reckless by failing to seek advice before making the investment and neglecting to monitor the fund after the investment was made. This allegation constitutes a breach of the Trustee Act 2000.
This is where documentation becomes vital. Evidence of the trustees’ decision-making, and subsequent review of the investment, becomes crucial to defending the claim. Documents such as trustee meeting minutes are scrutinised for any indication of the breach. In this example, the trustees also seek specialist advice, considering what they have been told rather than blindly accepting the advice. If the advice given was wrong, the trustees may consider a claim against the advisor.
For the claim against the trustees to succeed, it will be necessary to prove not only that there has been a breach of duty, but that the breach caused loss. In other words, it must be established that the loss would not have occurred if it were not for the breach of duty.
In the context of a failed investment, expert evidence will be required to establish what the value of the trust fund would have been had an investment instead been made in whatever alternative the beneficiaries allege was appropriate.
This avoids the trustees being liable for losses caused by factors beyond their control, such as a fall in the stock market or general economic events.
Trustees need to keep in mind the following four key factors when they find themselves in the firing line:
- Notify insurers as soon as possible –they can help in the defence.
- Legal advice will be essential in devising a strategy.
- A good defence also relies on good administration, so trustees should be sure to keep their documents in order.
- Accidents happen, and trustees should not lose heart if they make an honest mistake that results in a claim against them: resolution will be possible.
Claire Roake Is A Principal Associate and Virginia Hickley is a Partner at Mills & Reeve
This article was published in STEP Journal Volume 25/Issue 6