By Carey Olsen managing partner John Greenfield and senior associate Kelly Walton. This publication is grateful to Carey Olsen for allowing it to use its guidance on this complex and important area of trust law.

Having sat for two full days in December 2010, the long-awaited landmark decision of the Judicial Committee of the Privy Council, in the appeal by Spread Trust Company against Hutcheson and others, was delivered on 15 June 2011.

The 67-page reasoned judgment is remarkable in many ways. First, it covers some very important and complex issues of trust law that have significance not only for professional trustees and legal practitioners in the Channel Islands but also in the UK and elsewhere. Second, the fact that these issues are finely balanced is reflected in the highly unusual split decision (3:2) of the judges.

The case itself concerned the effect of a clause in a long-established Guernsey trust deed exonerating the trustees for anything but for wilful and individual fraud and wrongdoing on the part of the trustee. Under the terms of this clause the trustees could escape liability for gross negligence, if the law permitted.  The deed was established before statutory legislation prohibiting such exoneration had been enacted in Guernsey.

The Privy Council ruled that the provision in Guernsey law, that trustees must act “en bon père de famille” (as the good father), did not invalidate the exoneration clause – overturning both the Royal Court of Guernsey and the Guernsey Court of Appeal on this issue.

In other words, the fact that Guernsey trustees must act “en bon père de famille” does not invalidate a clause in a trust deed that seeks to exempt a trustee from any liability for its own acts of gross negligence. The Privy Council ruled that Guernsey law should follow English law in this area. The Privy Council’s decision could mean that the “en bon père de famille” provision, which is rooted in Norman customary law and is part of Guernsey’s statutory legislation, no longer has any significance for trustees despite it being a key distinction between English and Guernsey law.

Privy Council Law Lord Clarke stated: “If, as is common ground, the essential obligation is to act as a prudent trustee would act, namely with reasonable care and skill, it can be said with force that the core obligation of a person acting “en bon père de famille” includes a duty to act with reasonable care and skill and thus without negligence.”

What it means in plain terms

In other words, the Guernsey law requirement to act “en bon père de famille” does not provide for any additional or different responsibilities or duties for a Guernsey trustee to that of an English trustee.

The circumstances under Guernsey common law or customary law where a trustee could lawfully exclude its liability from a breach of trust had never previously been determined.  The English Court of Appeal had ruled upon thisin the 1998 case of Armitage vs Nurse.  However, a significant number of trust specialists believe that the wrong decision was reached in the Armitage case and it has not been robustly endorsed.

Indeed, two of the Law Lords did not agree with the ruling regarding “en bon père de famille”. Lady Hale reminded the court that this case was about the law of Guernsey (as opposed to that of England and Wales or indeed Scotland which was also reviewed in depth). She also reminded the court that the law of England was by no means clear and unanimous on this point.  She referred to a number of concerns about the decision in Armitage vs Nurse. 

Lord Kerr agreed with Lady Hale noting the Guernsey Court of Appeal’s conclusion: “That the law of trusts in Guernsey should not slavishly follow English Trust Law on the question of whether gross negligence could be exempted by a settlement provision.”

The impact of the Hutcheson case to English trust law, and similar trust law in common law jurisdictions, cannot be overemphasised. It took the Board an unusually long six months to consider and deliver its ruling, which indicates just how important they believed their judgment would be.

Where does this leave trustees, beneficiaries and legal advisors?  A trustee can no longer rely upon an exoneration clause to exclude liability for gross negligence for any breaches occurring after 19 February 1991.  Most claims pre-1991 will now be statute barred (subject to a very few exceptions).  The case will be a major aid to legal advisors in assessing the chances of a claim being successful against trustees.  The Board opined that Guernsey’s law of trusts originated from English Law (and not Norman Law) and therefore English principles will apply unless it is inconsistent to a provision of Guernsey customary or statute law.

The claim will now be referred back to the Royal Court of Guernsey for trial.

This case is an instance of Guernsey leading the world in testing case law and providing a channel for change.