CONTROL OF TRUSTEE DISCRETIONS



The Converyancer 1989



By N. D. M. PARRY*





A trustee may have a wide range of discretions conferred either by the terms of the trust or under the provisions of the general law. These can relate to the disposition of the trust property itself, often referred to as dispositive discretions, or to its management, often referred to as administrative discretions. The extent to which the exercise of these discretions is subject to control by the courts is surprisingly unclear. The purpose of this article is to review the current state of the law, principally as regards dispositive discretions, and to consider the extent to which clarification or reform may be necessary.





DISPOSITIVE DISCRETIONS



The expression "discretion" in this context denotes an authority vested in trustees, either expressly by the terms of the trust instrument or by the general law, to dispose at their discretion of the trust fund, whether capital or income, in favour of some or all of the beneficiaries. It therefore includes the authority to apply trust property under a discretionary trust, powers of appointment conferred on trustees and dispositive powers such as those conferred by sections 31 and 32 of the Trustee Act 1925 in respect of maintenance and advancement.



Where a dispositive discretion is expressly conferred upon a trustee a preliminary consideration in determining the extent to which the exercise of that discretion will be subject to review, is whether there is any qualification imposed upon it. There seems to be considerable doubt currently as to whether there is any significance in the discretion being qualified by such expressions as "uncontrollable" or "absolute." The present state of the authorities leaves the law unclear.



The case which is often regarded as the leading authority on the degree of control which will be exercised by the courts over trustees' dispositive discretions, the House of Lords' decision in Gisborne v. Gisborne,(1) concerned just such a discretion. This decision is regarded by many(2)

as having established that a trustee who has an "absolute" or "uncontrollable" discretion will not be subject to challenge in the courts provided that the discretion is exercised bona fide. It concerned a testamentary trust which authorised trustees "in their discretion, and of their uncontrollable authority" to apply income for the maintenance and benefit of the testator's widow. The widow, who was of unsound mind, was also entitled absolutely to income under her marriage settlement. An action was brought on behalf of the widow for a declaration that, in accordance with Chancery practice, the income from her husband's estate, being the fund in which she had a limited interest, was to be the primary source for her maintenance. The House of Lords dismissed the widow's appeal without hearing argument in reply. In so doing they treated the issue principally as one of construction of the will. Lord Cairns L.C., in giving the leading speech, examined both the circumstances surrounding the making of the will as well as its precise wording. Treating the issue as one of construction he came to his decision without reference to previous authorities.(3) In addition, his pronouncement of the principle upon which the court would intervene to control the discretion is surprisingly brief: "Their discretion and authority, always supposing that there is no mala fides with regard to its exercise, is to be without check or control from any superior tribunal."(4)



It seems to have been this passage in particular which has been taken as establishing the principle that the court will not interfere except in the case of mala fides. The other speeches in Gisborne suggest the principle may be somewhat wider. Thus Lord Penzance stated that "the trustees exercised a reasonable discretion" and Lord O'Hagan referred to "a reasonable question of expediency having arisen" and on that question the trustees' decision "had not been at all unreasonable." In all the speeches, however, importance was placed on the wording of the will. It cannot be assumed, therefore, that had the qualification "uncontrollable" been omitted, the decision of the House of Lords would have been the same. Lord Cairns in particular opined that "larger words than those it appears to me it would be impossible to introduce into a will."



Further uncertainty as to the test to be applied by the courts in reviewing the exercise of trustees' dispositive discretions which are qualified, has arisen from the later decision of the House of Lords, on appeal from Scotland, in Dundee General Hospitals v. Walker.(5) It has been doubted whether this decision is authoritative of the principles applicable in English law.(6) In this context it is relevant to refer to the comments of Lord President Cooper in the Court of Session in this case, where he stated that:



"This Court does not possess the jurisdiction over trusts which the Court of Chancery enjoys in England, and in Scotland an arbiter is entitled to err honestly within the limits of his reference; and, if he does, he cannot be corrected. In earlier times ... the Scottish Courts seem to have been disposed to define their powers of intervention somewhat elastically ... but from the time of Gisborne the law perceptibly stiffened ..."(7)



He then made express reference, without disapproval, to an assertion by Lord Kyllachy in MacTavish v. Reid's Trustees(8) that in the absence of mala fides the court cannot review the exercise of a trustee's discretion. This would seem to equate the position under Scottish law to that accepted by several authors(9) as applicable in England after Gisborne. If this is so, what light does the Dundee case throw on the subject? The decision of the House of Lords in that case is somewhat elliptical. The terms of the will were unusual and the trustees did not have a dispositive discretion in the usual sense. They had to apply a legacy in favour of a hospital if "in their sole and absolute discretion" they were satisfied that, at the date of the testator's death, the hospital had not been taken over by, or placed under the control of the State. So it was really a gift subject to a condition precedent that the trustees had to be satisfied as to a certain state of fact. The trustees having decided that they were not so satisfied were challenged by the hospital. There was no allegation of mala fides but rather that the trustees had acted unreasonably in arriving at their decision. The House of Lords were prepared to proceed, without actually deciding the issue, on the basis that the appropriate test was whether the trustees' decision was unreasonable, in the sense that no reasonable person could have come to that decision.(10) Even on that basis the House of Lords were unanimous in finding in favour of the trustees. There were, however, reservations expressed in all the speeches as to whether that test was the correct one. In view of the special facts of the Dundee case, coupled with the failure of the House of Lords to consider the appropriate test to be applied in reviewing the exercise of trustee discretions, the significance of this decision as authority for any general principle must be questionable.



Where the discretion is unqualified, it is unclear whether the court can exercise more extensive control over the exercise of such discretion. Some consider the same principles apply as where the discretion is qualified.(11) Much depends, however, on the interpretation placed upon Gisborne. Thus it is stated in Underhill and Hayton(12) that the House of Lords placed no emphasis on the qualification "uncontrollable." This view is difficult to accept having regard to the reliance which was placed on the wording of the will in that case. Others consider the issue to be more open,(13) which would seem to be more consistent with the case law, which leaves the significance of trustee discretions being qualified in some doubt. Thus shortly after Gisborne, Re Hodges,(14) in which Gisborne was not cited, Malins V.-C. considered that the absence of any such qualification entitled him to use his own judgment as to the amount of maintenance payable to infants. By contrast in Tabor v. Brooks,(15) in which Gisborne was cited, he approved his earlier decision but held that the use of such a qualification prevented him from controlling the exercise of trustees' powers of maintenance, although he clearly disapproved of their decision. Some five years after Gisborne, Chitty J., who had been leading counsel for the trustees in that case, applied the decision in Tempest v. Lord Camoys.(16) This case concerned an administrative rather than a dispositive discretion in that it related to a power conferred on trustees to purchase land "in their absolute discretion." The terms of the trust, however, required that in the circumstances of the case land should be purchased. Chitty J. equated this power for the purpose of its review with that in Gisborne upon which, perhaps not surprisingly, he placed considerable reliance in deciding that, in view of the wording of the will, he had no power to control unless there was bad faith. When the case came before the Court of Appeal(17) the issue was treated as one of principle rather than precedent(18) and less significance was attached to the fact that the discretion was qualified by the use of the word "absolute."(19) Jessel M.R. framed the court's power to control the exercise of trustees' discretion in terms of preventing them from using it "improperly." This view, that even where the trustees have an absolute discretion the courts can intervene if it is exercised improperly, was supported obiter in the recent decision of the Court of Appeal in Bishop v. Bonham,(20) when the Court drew an analogy with the exercise by a Mortgagee of his power of sale.



So the current state of the law seems to leave the issue as to whether the qualification of trustees' dispositive discretions makes any difference to the extent of the courts' power to control such discretion in some doubt. This is hardly surprising in view of the failure by the courts to state explicitly the basis upon which they will intervene to control the exercise of trustees' discretions. Coupled with this is a failure to articulate the sense in which "mala fides" and "improper" are being used. It has been made clear recently in the

public law context that "bad faith" is to be equated with "dishonest."(21) A similar view was expressed in relation to trustees' dispositive discretions shortly after Gisborne by Cotton L.J., during the course of argument in Re Lofthouse,(22) at least in so far as "dishonesty" included perverseness. It is by no means clear, however, that it is generally construed so narrowly in this context. It has been argued by Professor Cullity(23) that it extends inter alia to unreasonable decisions in the sense that no reasonable man could have arrived at the trustee's decision. If it does indeed extend this far then it is difficult to disagree with his conclusion that mala fides in this context refers to a concept which is sufficiently broad to make the use of the term undesirable. Any allegation of mala fides or bad faith would seem to impugn the integrity of the trustee and in view of the recent trend to construe it narrowly in other contexts it would seem appropriate to confine its use to the sense favoured by Cotton L.J. above. It is implicit in some of the recent judicial dicta that the issue of good faith is separated from whether the trustees have taken account of irrelevant considerations or failed to take account of relevant ones.(24)



At a more general level the interesting suggestion has been made by one commentator (25) that as regards trustees' discretions which are unqualified, the balance of authority favours interference where the exercise even if honestly done is improper or unreasonable, on a basis akin to that in the public law context under Wednesbury.(26) This test of reasonableness would seem to be the same as that upon which the House of Lords proceeded in the Dundee case, without deciding the appropriateness of its application in this context. The status of that decision as authority for any general principle has been doubted above. There is, however, a significant passage in Lord Reid's speech in Dundee which it is submitted most accurately summarises the basis upon which the court will intervene as follows:



"If it can be shown that the trustees considered the wrong question, or that, although they purported to consider the right question, they did not really apply their minds to it or perversely shut their eyes to the facts, or that they did not act honestly or in good faith, then there was no true decision and the Court will intervene ..."(27)



This statement makes the distinction between what are the two established grounds for interference; lack of good faith or honesty, and a failure to consider only legally relevant factors. The former can be correctly characterised as "mala fides," the latter more appropriately as "improper." Both of these are considerably narrower in their scope than the Wednesbury principle of unreasonableness. It would lead to considerable clarification of the law in this area if these three separate grounds for interference were recognised as such. Whilst the authorities are ambiguous as to the extent to which the courts can intervene on the basis of mala fides and improper exercise, it would seem in principle that trustees' discretions should be reviewable on either of these grounds, whether or not the discretion is qualified by such expressions as "absolute" or "uncontrolled," on the basis that, as per Lord Reid above, there has been no proper decision.



More contentious is the issue of review on the Wednesbury ground of reasonableness, in the sense that the trustees' decision was such that no reasonable person could have arrived at it. In practice a challenge on this ground is unlikely to succeed, in circumstances where neither of the other two grounds referred to above is made out, for the simple reason that there is no requirement upon trustees to give reasons for their decisions.(28) It would also represent a considerable development in legal principle for the introduction in a private law context of the principles akin to those of judicial review which until now have been confined to dealing with the control of statutory discretions vested in public authorities and agencies. The concept of reasonableness in the public law context has proved capable of widely differing interpretations(29) and very uncertain in its application.



Despite judicial pronouncements to the contrary(30) it can also lead to the courts coming dangerously close to determining the merits of a particular decision rather than its legality. It seems far from clear that to establish a substantive ground of challenge to the exercise of trustee discretions based on the Wednesbury concept of reasonableness would necessarily be an advance.



ADMINISTRATIVE DISCRETIONS



In the context of the exercise of trustee management or administrative discretions, for example the power of investment, reasonableness is an issue, not in the Wednesbury sense but in the notion of the duty of care imposed upon trustees to exercise the care and skill of the ordinary prudent man of business.(31) Here equity has been concerned to impose a requirement of competence upon trustees in the running of the trust which necessarily involves the imposition of some objective test, albeit formulated somewhat earlier and in different terms from that in Donoghue v. Stevenson.(32) This function of the trustee is essentially different from that of the dispositive discretion where the trustee decides how to exercise his or her freedom of choice, within the terms of the trust, as to the application of the trust property. This difference was brought out in the majority decision of the High Court of Australia in Elder's Trustee and Executor Co. Ltd. v. Higgins.(33) The issue in that case was whether the trustee had been in breach of duty by failing to exercise an option to purchase adjoining lands to those subject to the trust, which had been granted on terms favourable to the trust. The trustee's argument was that it had considered whether to exercise the option and having decided honestly and bona fide not to do so it was not liable if the discretion had been exercised unwisely. In rejecting this argument the majority,(34) having considered Gisborne, drew the following distinction:



"There is no question that a trustee to whom a discretion is specifically given is protected if he exercises it in good faith, whether the result turn out to be good or bad. And, as the court will presume that he acted bona fide, the onus is thus on those impeaching his acts to prove the contrary. But we are not in this case concerned with a particular discretion specifically given by the trust instrument, but with the general duty of a trustee holding property for persons in succession ..."(35)



There is little recent authority on the content of this general duty. The ordinary prudent man of business test formulated at the end of the last century, continues to be generally applied with little discussion of its extent. It has been cogently argued that this places too high a burden on the unpaid non-professional trustee.(36) The most significant change has been the recognition that a higher-standard of care is required of professional trustees.(37) The present position is still open to the criticism that it fails to make sufficient allowance for the knowledge and experience of the particular trustee when this is someone without professional skill. The Law Reform Committee in its twenty-third report(38) considered the suggestion that such trustees should simply be required to exercise that degree of skill and care in the management of the trust which they were accustomed to exercise in the management of their own affairs. Not surprisingly they rejected this suggestion on the basis that it introduced a subjective test which would leave the beneficiaries unprotected against the idiosyncracies of particular trustees who might be accustomed to exercise a very low degree of care in their own affairs. A balance could, however, be struck between adequate protection for the beneficiaries and a realistic burden on lay trustees by requiring them to exercise such skill as could reasonably be expected of someone with that person's knowledge and experience.(39) This would retain a degree of objectivity in the standard of care required and lessen the anomaly that at present lay trustees have to fall back on the protection afforded by section 61 of the Trustee Act 1925, which places on them the burden of establishing that they have acted honestly and reasonably, and ought fairly to be excused,(40) whereas professional trustees often seek to protect themselves by requiring the inclusion in the trust instrument of an appropriately worded clause restricting their liability for breach of trust.(41)



CONCLUSION



The primary need so far as judicial control of dispositive discretions is concerned is for clarification of the circumstances in which the court will intervene. The confusion as to the significance of the discretion being qualified by expressions such as "absolute" should be removed. Such qualifications should not place a limit on the court's jurisdiction to intervene in circumstances where it would otherwise be appropriate for it to do so. Such intervention should be on the basis of mala fides, which should be construed narrowly as limited to the issue of honesty or integrity, and impropriety, in the sense of failing to take account of all (or only) legally relevant factors. In the case of administrative discretions the need is not only for clarification as to the extent of the duty of care required of trustees but also for a more realistic requirement to be imposed on the lay trustee by limiting the liability to what could be reasonably expected of someone with that person's knowledge and experience.



1.

2. See Underhill & Hayton, Law Relating to Trusts and Trustees (14th ed., 1987), p. 586. Pettit, Equity and The Law of Trusts (5th ed., 1984), p. 331. Snell's Principles of Equity (28th ed., 1982), p. 234.

3. Lord Cairns generally reasoned from principle rather than precedent, see Stevens, Law and Politics (1979), pp. 115-116.

4. Ibid. at p. 305.

5. [9521] S.C.(H.L.) 78,[19521 1 All E.R. 896.

6. See, e.g. Hanbury & Maudsley, Modern Equity (13th ed., 1989), p.481.

7. [1950] S.C. 406 at 437.

8. 12 S.L.T. 404 at 405.

9. See n. 2 above.

10. This seems to have been a result of a concession made on behalf of the trustees, see Lord Reid ibid. at p. 92.

11. See, e.g. Underhill & Hayton op. cit. p.586, M. Cullity, "Judicial Control of Trustees' Discretions" (1975) 25 U.T.L.J. p. 99 at p. 113.

12. op. cit. p.586.

13. See, e.g. Pettit op. cit. p.33 1.

14. (1878) 7 Ch. D. 754.

15. (1878) 10 Ch.D. 273.

16. (1882)21 Ch.D. 571.

17. Ibid. at p.576.

18. No authorities were cited by the Court of Appeal but the significance of the principle was reflected in Jessel M.R.'s statement that "it is very important that the law of the Court on this subject should be understood." ibid. at p.578.

19. Although Jessel M.R. referred to the trustees' "uncontrolled discretion" and Brett L.J. to their "absolute discretion."

20. [1988] 1 W.L.R. 742 at 753.

21. See Cannock Chase D. C v. Kelly [1978] 1 All E.R. 152. R. v. Port Talbot B.C, [1988] 2 All E.R. 207.

22. (1885) 29 Ch.D. 921 at 929.

23. (1975) U.T.L.J. p.99 at p.117.

24. See, e.g. Re Hastings Bass [19751 Ch. 25 per Buckley L.J. at 41.

25. A. Grubb [1982] Conv. p. 432 at p. 438. See also Moffat & Chesterman Trusts Law: Text and Materials (1988), p. 439.

26. [1948] 1 K.B. 223.

27. [1952] S.C.(H.L.) at p.92.

28. See Re Londonderry's Settlement [1965] Ch.918.

29. See generally De Smith's Judicial Review of Administrative Action (4th ed. 1980), pp. 346-356.

30. See, e.g. Chief Constable of North Wales v. Evans [1982] 3 All E. R. 141 at 154.

31. Learoyd v. Whiteley (1887) 12 App.Cas. 727.

32. [1932] A.C. 562 and see A. M. Kenny (1982) 126 S.J. p. 631, suggesting the extension of tortious principles to trustees.

33. (1965) 113 C. L. R. 426, cited by Cullity supra.

34. Dixon C.J., McTiernan and Windeyer JJ.

35. Ibid. at p. 448.

36. Per D. Paling (1973) 37 Conv. p. 48.

37. See Re Waterman [1952] 2 All E.R. 1054, Bartlett v. Barclays Bank [19801 Ch. 515, [1980] Conv. p. 155 G. Shindler.

38. Cmnd. 8733 (1982) at P. 7.

39. CF. the duty of care owed by directors towards the company, considered by the Law Reform Commitee, ibid. at p. 7.

40. For an early criticism of the forerunner of s.61, the Judicial Trustees Act 1896, section 3, see F. H.Maugham (1898) 14 L.Q.R. p.159. Section 61 also applies to professional trustees, but the court is less likely to apply it in their favour; see Re Pauling's Settlement Trusts [1964] Ch. 303.

41. For a discussion of the efficacy of such clauses, see Paul Matthews [19891 Conv. p.42.

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