A small sampling of those risks include:

1. Personal liability for allowing trust funds to be invested in risky investments, eg unsecured advances to companies that later prove to be of doubtful solvency, or shares in companies that later go broke.
2. Personal liability for not properly considering the interests of various classes of beneficiaries when making distributions to the beneficiaries.
3. Personal liability on contracts entered into by the trust.

While professional trustees usually keep a good lookout for personal liability arising under (1) and (2) above, they sometimes overlook (3). It is a cardinal principle of trust law that the trustees are generally personally liable without limit of liability on contracts and obligations entered into by their trusts. Because of this, lawyers who draft contracts
and obligations for trusts will generally insert a limitation of liability clause for all the trustees or at least for those trustees who have no interest as a beneficiary in the trust (independent trustees).

A well drafted trustee limitation of liability clause will generally shield independent trustees, including professional trustees, from personal liability on trusts borrowings, contracts, and other obligations. However, a trustee limitation of liability clause must be well drafted to be effective in all or in at least most situations, and many trustee limitation of liability clauses are inadequate in my personal opinion. The inadequacy of one commonly used trustee liability limitation clause was exposed in the recent High Court case of Frimley v Stonewall Homes Limited (2010) 2 NZTR 20-037. In that case Frimley sued Stonewall Homes Limited for damages arising out of the breach of contract, where Stonewall Homes Limited was sole trustee of a family trust, and where Stonewall had the supposed benefit of a trustee liability limitation clause where the relevant words provided:

".............[the independent trustees] liability under this agreement shall not be personal and unlimited but shall be limited to an amount equal to the value of the assets of the trust that are available to meet that personal liability..........."

The problem that arose here, from the trustee's perspective, was that the clause did not specify
when the assets of the trust were to be measured for the purposes of assessing the trustees liability.The damages claim against the trustee was $521,226.00. At the date the contract became unconditional, the trust's net worth was $694,000.00; at the date of breach, the trust's net worth was $499,000.00, and at the date of judgment against the trustee the trust's net worth was negative as it had in the meantime distributed all its assets to its beneficiaries. The followingpossibilities confronted the Judge:

1. If the trustee limitation of liability clause applied at the date the contract became unconditional, then judgment would be for the full amount claimed of $521,226.00 as the trust's net worth exceeded that sum at that date;
2. If the clause applied at breach, then the plaintiff would be entitled to judgment for $499,000 as that was the trust's net worth at the date of breach of contract;
3. If the clause applied at the date of judgment, then the plaintiff would not be entitled to any judgment as the trust's net worth was by then, negative.

The Judge chose option (a) and gave the plaintiff judgment for the full $521,226.00, and the
independent trustee became liable for that full amount.
How could the result have been better for the independent trustee? One way would be to reword
the trustee limitation of liability clause to read:

"The independent trustee's liability under this agreement shall not be personal and unlimited
but shall be limited from time to time and at all times to the net assets of the trust then in that
trustee's hands and available to meet that liability or which would have been in that trustee's hands and so available but for any dishonesty or wilful breach of trust by him;
for the purposes of this clause the phrase 'net assets' means all the assets of the trust
for the time being less all its liabilities for the time being but excluding any liability arising
under this contract".

Rewording the trustee's limitation of liability clause along these lines means the time of
assessing the personal liability of a professional trustee or independent trustee would usually be the date of judgment, unless of course the trustee has wilfully attempted in the meantime
to denude his trust of assets by distributing them to the beneficiaries, which would bring into play the dishonesty exception.

The Lesson For Professional Trustees

Read any trustee limitation of liability clauses carefully and ensure they are sufficiently robust to give you as a professional trustee adequate protection.

Written by Dennis J King – Director   www.denniskinglaw.com  

Disclaimer: This newsletter discusses its topic in general terms and should not be relied upon as legal advice.