Trustees often seek to limit their liability in the form of exoneration clauses in trust deeds. As such, it is generally difficult for a beneficiary to challenge a trustee’s decision that falls within the scope of the exoneration clause.
In Sofer v SwissIndependent Trustees SA  EWHC 2071 (Ch), the England and Wales High Court confirmed just how high the bar can be for beneficiaries to overcome the limitation on liability provided by exoneration clauses and also set out a test for doing so. Here the defendant (the trustee) applied for striking out or summary judgment of a claim pursued by a beneficiary for breach of trust, on the basis that the trustee’s relevant action was covered by an exoneration clause. The strike out was granted.
The judgment is also noteworthy in particular for Hong Kong and Australian trustees and beneficiaries. The judge relied on both English and Australian case law and highlighted that “the relative homogeneity of trust law in this and other Commonwealth jurisdictions” meant the Australian case law had “considerable persuasive value”.
The dispute revolved around a discretionary family trust (the Puyol Trust) set up by Mr Sofer and managed by SwissIndependent Trustees SA (SIT) as the trustee. Mr Sofer and other family members were beneficiaries of the trust and the Puyol Trust was entirely discretionary in nature. The trust instrument was governed by English law.
The Puyol Trust contained an exoneration clause limiting the trustee’s liability for any loss or damage in relation to (i) any power exercised under the trust or alleged failure to exercise such power and; (ii) any of the trust’s assets unless caused by omission or fraud.
The case hinged on two particular clauses in the trust deed:
- That the trustee may lend any money to any beneficiary on such terms as the trustee (in their absolute discretion) thinks fit (“Lending Clause“); and
- The trustee must not transfer any part of the trust assets prior to the death of Mr Sofer (“Non-distribution Clause“).
Over a period of ten years, the trustee made a number of considerable payments, on very favourable terms, out of the trust to Mr Sofer. The trustee made the payments on the basis of the Lending Clause. At the time of Mr Sofer’s death, he left a debt of around US$19m to the trust which his estate could not pay. The trustee had also obtained further deeds of indemnity in relation to the payments.
The claimant (Mr Sofer’s son and a beneficiary) alleged that the payments were gifts and not loans and that the trustee had no power to make them in accordance with the Non-distribution Clause and therefore the payments had been made in breach of trust.
The claimant argued that the exoneration clause had no application on the facts of the case and that the deeds of indemnity were ineffective. The claimant sought compensation from the trustee, declarations of the nature of the payments and for the trustee to be replaced.
The trustee argued that the payments were believed to have been made for the benefit of the beneficiaries and, in any case, that the claimant’s case was not strong enough to set aside the exoneration clause.
His Honour Judge Paul Matthews held that to overcome an exoneration clause, a claimant’s statement of case must show that the trustee:
- Deliberately breached the terms of the trust; and
- Knew or recklessly overlooked whether the action was in the best interest of the beneficiaries or that no reasonable professional would have thought the action was in the best interest of the beneficiaries.
Only if these are met can it be viably argued that a trustee’s breach was dishonest or fraudulent such as to overcome the terms of the exoneration clause.
With this in mind, the judge found that the claimant’s statement of case fell short of the above requirements and therefore ordered for the claim to be struck out.
This judgment should provide some comfort to trustees albeit that this case only dealt with the sufficiency of the pleadings in this matter, rather than deciding the issue after a full trial. It should also remind trustees of the importance of well drafted exoneration clauses. However, trustees should always have regard to the terms of payments or loans made to beneficiaries to ensure they are in line with the terms of the trust documentation.