1 Trusting in law and morality
In a pathbreaking paper published in 1993, Roger Cotterrell explored the links between the legal concept of trust and the morality of trusting. He examined the history of the evolution of the trust from its medieval origins until the early 1990s, when commercial and social welfare applications of the express trust assumed their modern form. Cotterrell argued that the legal institution of the trust was initially grounded in the moral conception of placing trust and confidence in another person:
‘To trust someone is to take a relatively open-ended risk of relying on him or her. Trusting involves relying on that person’s goodwill in a range of circumstances that usually cannot be comprehensively defined in advance’ (Cotterrell Reference Cotterrell1993, p. 78).
He proceeded to identify a growing ‘moral distance’ between the trustee and the beneficiary in some modern applications, such as pension fund trusts and large charitable trusts. Trustees (or the directors of a trustee company) are less knowledgeable about the personal circumstances of objects of the trust than the trustees of the so-called traditional family trust. Computer programmes have replaced individual trustees as the arbiters of discretionary benefits. The distancing of trustees from beneficiaries also impedes the discovery of breaches of trust. Moral distancing is reflected in provisions commonly inserted into contemporary trust instruments which emphasise the lack of interpersonal trust between trustee and beneficiary. An obvious example is the widely drawn exculpation clause which negates or qualifies many trust obligations. Other devices, such as the insertion of bare trusts into commercial contracts, particularly construction and lending agreements, are designed principally to make the funds inaccessible to the creditors of the parties – ‘bankruptcy remote’, in the jargon of the promoters of these arrangements – and have nothing to do with the reposing of trust.
As Cotterrell noted, the size of many welfare trusts, combined with the interposition of layers of management between trustee and beneficiary, ‘tends to reduce emphasis on fiduciary bonds in trust analysis, and blurs the nature of trust relationships’ (ibid., p. 92). Adapting an argument of a leading theorist of the social relations of trust, Niklas Luhmann, he argued that, while interpersonal trust has not been superseded, in large areas of life it has been overlaid by confidence in systems (Luhmann Reference Luhmann1979; Luhmann Reference Luhmann and Gambetta1988, p. 94). Confidence in systems can of course be misplaced, as pension scheme scandals have demonstrated. Moreover, confidence in the systemic delivery of benefits can hardly be described as a voluntary reposing of trust. The confidence reposed in a formal trust structure by an individual pension contributor or investor in a managed investment scheme is an artificial construct, based on acceptance of non-negotiable contractual terms and overlaid by a bafflingly complex scheme of statutory regulation.Footnote 1
The conclusion Cotterrell drew from the diminution of trust in systems was pessimistic: ‘people vote with their feet, so to speak. They avoid reliance wherever possible on structures or systems that they no longer trust’ (Cotterrell Reference Cotterrell1993, p. 94). In practical terms this means that money will be withheld or withdrawn from distrusted systems. But withholding or withdrawing funds is impossible if legislation or employment contracts compel employees to invest in a pension fund trust. Opting out of systems is not a realistic possibility if a trust-based welfare system is compulsory.
The aim of this paper is to explore the problems raised by ‘moral distancing’ in the law of express trusts. How does ‘moral distancing’, as identified by Cotterrell, affect the law and administration of trusts? Can equity doctrine restore the ideal of personal trust to the institution of the trust? These are large questions to which there are no simple answers. This paper argues that a significant source of current dissatisfaction with the legal institution of the trust derives from the so-called ‘contractualisation’ of trusts (cf. Yip and Lee Reference Yip and Lee2017). The meaning of ‘contractualisation’ is discussed in the next section. The conclusion will be that the default character of most trust obligations, not least exemption clauses excluding personal liability for breach of trust, is a major cause of moral distancing.Footnote 2 Although it is the settlor who, at least as a matter of form, if not always of substance, decides whether or not to modify a default rule in the trust instrument, the consequences of that decision are borne primarily by the beneficiary, whose rights may be significantly curtailed by the terms of the contract. The focus of the article is therefore on the impact of trust law’s default rules on the trustee–beneficiary relationship.
The final, more polemical, section of the paper argues that theorists of trusts law who have applied either autonomy or law-and-economics perspectives to the trust have paid insufficient attention to the mandatory rules of trusteeship. Some applications of fiduciary principles and of the trustee’s duty to account cannot be excluded by a provision in the trust instrument, however widely drawn. The primary aim of these applications is to uphold moral integrity within the institutional model of express trusts. It is true to say that contractual drafting techniques have attenuated the rights of beneficiaries of express trusts, but equitable doctrine is not without resources to overcome problems of contractual overreach.
2 Contractualisation and trusts
‘Contractualisation’ compendiously describes, in this context, two distinct relations between trust and contract. The first is the insertion of contracts into the trust relationship. Here we are in the realm of Lord Wilberforce’s ‘flexible interplay of law and equity’Footnote 3 in which the beneficiary’s rights are determined by the terms of the contract between the trustee and the beneficiary who has provided consideration. The second relation concerns the trust itself, which is conceived, both by law-and-economics theory and in practice, as a system of default rules (Clarry Reference Clarry, Criddle, Miller and Sitkoff2019; Langbein Reference Langbein2004). Both relations create moral distance insofar as they substitute the self-interested norms of contract law for the morality of entrustment.
Classical economic theory assumes that a contract, entered into voluntarily, optimises the welfare of parties having opposing interests in the subject matter of the contract (Cooter and Ulen Reference Cooter and Ulen2016, pp. 283–87). Absence of a trusting relationship is a presupposition of arm’s length contracting. Assuming that a trust satisfies the basic preconditions of validity, equity has only a limited role to play in regulating positions of power and dependence between the parties to a contractualised trust.Footnote 4 Because courts do not review adequacy of consideration, inequalities of bargaining power are of no concern unless the circumstances surrounding the formation of the contract justify intervention on the grounds of duress, undue influence, unconscionability or on a statutory ground.Footnote 5 Exemption clauses (exculpation clauses in traditional trusts terminology) excluding or modifying trustee obligations are enforceable, though subject to the principle that they will be construed, in doubtful cases, against the party seeking to rely on the clause. In contrast to contracts, which are bargains in theory if not always in practice, most trust beneficiaries are not even formally party to the bargain struck between settlor and trustee, being third parties to that contract.Footnote 6
The focus of this paper is on the second aspect of contractualisation, namely the analysis of the trust as a system of default rules. The problem of unequal contracts between trustees and beneficiaries, insofar as it cannot be solved by contract doctrine, is best left to the legislature, which can redress asymmetries of information and resources by imposing mandatory obligations on the trustee.Footnote 7
Default rules, on the other hand, permeate all express trusts, whether contractual or donative. The defaultable rules consist of duties, such as the prohibition of conflicts of interest, as well as powers, such as those contained in trustee legislation dealing with investment, sale and raising money on the security of trust property. The pliability of the rules is usually applauded as an example of the flexibility of the trust concept. But recent sociological and legal writing on the trust has drawn attention to the ulterior motives for which the much vaunted equitable flexibility can be applied. ‘Massively discretionary’ trusts have been designed to avoid the reach of tax, family property, inheritance and bankruptcy laws (Dagan and Samet Reference Dagan and Samet2022; Smith Reference Smith2017). The practice has been reinforced by recent theorisation of the express trust as a legal facility that subverts by avoidance the application of other laws (Bennett and Hofri-Winogradow Reference Bennett and Hofri-Winogradow2021).Footnote 8 The subversive role played by the trust in entrenching inequality of wealth by enabling funds to be transferred to trust-friendly tax havens has been explored in depth by sociologists and legal writers (Barnett Reference Barnett, Liew and Harding2021; Harrington Reference Harrington2016; Pistor Reference Pistor2019).
These applications emphasise the dark side of the express trust as a facility: the default rules enable ownership of assets to be diffused so that the incidence of tax and other laws is avoided. The professionals establishing cross-border trusts adopt what Brooke Harrington terms a culture of ‘creative compliance’ which conforms meticulously to the form of the law, but not to its spirit. The advantages of the trust, from a wealth management perspective, are secrecy, the sparseness of regulation (particularly compared to companies) and flexibility of design, which exceeds that of rival legal structures (Harrington Reference Harrington2016, pp. 173–77). An important aspect of flexibility of design is the ability to reshape the equitable default rules to serve the avoidance aims of the settlor.
The trusts described in the last two paragraphs depend, at one level, on a genuine reposing of personal trust and confidence that Cotterrell deplores as missing in other contemporary trust applications. A feature of the wealth management industry described by Harrington in Capital Without Borders is that it rests on relationships of trust that are close and sometimes intense. She observes that ‘wealth managers are bound by special rules that foreground socioemotional aspects of client relations, such as trust’ and that ‘the fiduciary role shades into social work through its connection to intrafamily conflict’ (Harrington Reference Harrington2016, pp. 82, 84). But we need to be clear about the precise relationship of trust that is in issue here. The relationship of settlor and wealth adviser, described by Harrington, is characterised by a high degree of person-to-person trust. But the trust structures created by the wealth advisers, on the other hand, are premised on the absence of a trusting relationship. Although the avoidance aims of the arrangement are shared, no meaningful affective relationship subsists between the trustee and beneficiary entities. The entities themselves are often constituted as abstract purposes lacking legal personality (charitable or non-charitable, depending on the law governing the validity of the trust), and not as human beneficiaries. The principal aim of the drafter of the arrangement is to foolproof it against the claims of tax authorities, family claimants and creditors. The trust documentation of ‘avoidance industry’ trusts employs the language of trust while negating its substance.
The emphasis of this paper is on the potential of defaultable rules for abuse by contractual modification. It would be remiss, however, to deny their capacity to enhance relationships of trust. Trust default rules, like implied terms in contracts, are formally neutral; it is for the drafter to determine the ends they serve. Exemption clauses in trust instruments have advantages: their inclusion can reduce the costs of trust administration, including insurance costs.Footnote 9 But the breadth of the clauses undoubtedly dilutes the quality of performance a beneficiary can expect from a trustee in important respects. As the Law Commission noted in its review of exemption clauses: ‘the beneficiary is the least able to secure adequate protection of his or her interests’.Footnote 10
Even beneficiaries who have not provided contractual consideration merit some protection from the broad sweep of exemption clauses. After all, the maxim ‘equity does not assist a volunteer’ does not apply to a properly constituted trust. An object of a discretionary trust has a reasonable expectation of due performance of the obligations of the trust by the trustee, notwithstanding the fragility of her interest under the trust and the corresponding width of the trustee’s discretion.
Two currently dominant theories of the express trust, discussed in the next section, justify the analysis of the express trust as a system of default rules. For autonomy theorists, who view the trust as a facility for enhancing a property owner’s choices in disposing of her property, default rules are a necessary expression of her autonomy. For law-and-economics writers, for whom the trust is functionally a third-party contract, default rules save bargaining costs by mimicking the terms the settlor and trustee would have chosen if they could contract without transaction costs (Ayres and Gertner Reference Ayres and Gertner1989). Both justifications, however, overlook the potential of default rules to undermine the foundation of trust on which equity’s trust is built.
3 Default rules in trusts scholarship
3.1 The trust as an expression of individual autonomy
Justifications of the express trust as an expression of the individual autonomy of the settlor rest on the premise identified by H. L. A. Hart that a trust, like a will, is an amenity or facility that enables people to ‘realise their wishes, by conferring legal powers upon them to create, by certain specified procedures and subject to certain conditions, structures of rights and duties within the coercive framework of the law’ (Hart Reference Hart1994, p. 96; Liew Reference Liew2021).Footnote 11 Trusts law has ‘an enhancing potential, in that it allows people to form more complex and sophisticated legal relations with others’ (Liew Reference Liew2021, p. 694). It is conceded that trusts often serve ends that might be considered economically or socially regressive, such as reinforcing inequalities of wealth. But, as Ying Liew, who has authored the most comprehensive autonomy-based justification of trusts law, observes, ‘as a facilitative body of law, express trusts are ill-suited to deal with the question of ultimate ends’ (Liew Reference Liew2021, p. 749). The ‘heavy lifting’ (Liew Reference Liew2021, p. 750) must be accomplished by other areas of law, such as tax, family and insolvency law. Employing the language of ‘facility’ does, however, eliminate the morality of personal trust from autonomy explanations of the trust. Since the trust itself is, on Liew’s analysis, a morally neutral concept, the application of default rules to limit or remove the beneficiary’s rights is of no particular concern to the autonomy theorist.
In a recent article Lusina Ho and Matthew Harding have proposed a justification of the trust in terms of the personal commitments of both settlor and trustee (Ho and Harding Reference Ho and Harding2025; cf. Mitchell Reference Mitchell2014). The basic idea is simple. When disponers place assets in a trust ‘for enduring stewardship’Footnote 12 they and the trustees ‘commit themselves to a governance regime in which no party can override the disponers’ objectives and all parties have the welfare of the trust in mind’ (Ho and Harding Reference Ho and Harding2025, p. 247). Theirs is an expanded version of an autonomy theory of trust that recognises the creation of a trust as the exercise of individual autonomy by a holder of property rights, but it goes further in emphasising the disponer’s and trustees’ ongoing commitment to the disponer’s aims in constituting the trust. This is described as an ‘unwavering commitment’. The commitment is qualified by the beneficiaries’ right to terminate the trust under the principle of Saunders v Vautier Footnote 13 and presumably also by the court’s power to respond to unforeseen contingencies by approving a variation of the terms of the trust under variation of trusts legislation.Footnote 14
The authors emphasise the equitable techniques developed to prevent departures from the initial commitment by both settlor and trustee. For example, in the recent Privy Council decision of Grand View Private Trust Co Ltd v Wong Footnote 15 it was held that the trustees of a discretionary family trust, acting at the behest of the settlors, had exercised their fiduciary powers improperly when they purported to add a purpose trust (permissible under Bermudan law governing the trust) as an object of the trust, and to remove an existing class of objects who were members of the settlor’s family. The exercise of the power contained in the trust instrument entitling the trustees to add or remove beneficiaries was improper because the aim (or commitment) of the trust was to benefit family members.
The footnotes to the Ho and Harding paper reveal the influence of Cotterrell’s analysis of how interpersonal trust relates to the institution of the trust (Ho and Harding Reference Ho and Harding2025, fn. 1, 12). Their ‘commitment’ model of the trust can plausibly be analysed as a juridical version of Cotterrell’s social conception of personal entrustment. Cotterrell, however, examines the role played by the morality of trusting at the point of creation of a trust, whereas the ‘commitment’ model places stress on the preservation of the initial commitment for the trust’s duration.
The characterisation of the express trust as a commitment made by the parties involved in its constitution is convincing, although the language of commitment might be thought to add little to the traditional equitable terminology of obligation. But the subject matter of the commitment requires elucidation. Commitments can be unwavering, but unwavering commitments are not always absolute. A trust instrument incorporating an exculpation clause excluding the trustee’s personal liability for breach of trust makes a highly qualified commitment to performance of the trust. This is precisely what the default structure of trusts law allows. The plasticity of the trust as a system of default rules enables a trustee to avoid the legal consequences of reneging on her initial commitment except in cases where reneging amounts to fraud.Footnote 16 The second part of this paper examines trust obligations which are not defaultable. But it suffices to note for now that the commitments settlors and trustees make to each other are in practice highly conditional in many contemporary trusts. The chapters in trusts textbooks which expound the obligations of a trustee present an idealised model of trusteeship which is heavily qualified in practice.
3.2 Trust as a deal
Law-and-economics scholarship has comfortably accommodated the express trust within the heuristic framework it applies to contract law.Footnote 17 The classic account of ‘the trust as a deal’ was written thirty years ago by John Langbein (Langbein Reference Langbein1995). For Langbein the trust is ‘a bargain about how the trust assets are to be managed and distributed’ (Langbein Reference Langbein1995, p. 627). As such, ‘the deal between the settlor and trustee is functionally indistinguishable from the modern third-party-beneficiary contract’ (ibid.). Langbein does not argue that the settlor–trustee relationship is a contract – though contracts do in fact connect the parties in many trusts, such as pension trust fund and managed investment schemes. But the relationship is consensual in the sense that it is entered into voluntarily, often pursuant to an agreement formally or informally made between settlor and prospective trustee. Someone purportedly appointed as trustee who has not consented to the appointment can disclaim the office; acceptance of trusteeship is itself defaultable (Liew and Mitchell Reference Liew and Mitchell2017, pp. 134–35).Footnote 18 Once trusteeship has been accepted (or not disclaimed), equity and trustee legislation supply a sophisticated framework of default rules around which the parties can bargain, so that the trust operates functionally as a contract for the benefit of third parties.
Conceptualising the trust as a third-party contract sheds some, albeit limited, insight into the law of trusteeship.Footnote 19 The default powers conferred on trustees by trustee legislation can plausibly be analogised to, for example, the default rules contained in the Sale of Goods Act relating to the passing of title in goods.Footnote 20 Even a trustee’s personal liability to pay compensation for a breach of trust is a default liability, in that the law permits modification or exclusion except in cases of actual fraud.Footnote 21
The permissive character of trusteeship law can, however, be overstated. It is untrue to say that in trusts law ‘[a]ll rules are freely variable by contract in advance’ (Easterbrook and Fischel Reference Easterbrook and Fischel1993, p. 432). Some trust obligations are mandatory, as recent economic theorists have acknowledged. In economic theory, the imposition of a mandatory rule is justifiable where no fully informed settlor would agree ex ante to modifying the obligation, such as the trustee’s duty to exercise powers for proper purposes.Footnote 22 Another justification for recognising a mandatory trusts rule is that it is essential to the definition of a trust. A simple example is that a trustee is not allowed to misappropriate trust property. This rule establishes the demarcation line between trust and ownership, thereby reducing third-party information costs (Sitkoff Reference Sitkoff, Gold and Miller2014, pp. 204–206).
The law-and-economics conception of the trust as a third-party contract provides the only theoretical account of trusts which purports to explain contractualisation in trusts law. Its success in this respect is not surprising since it treats contractualisation, not as a phenomenon of the contemporary trust requiring justification, but as the essential explanation of all trusts. But the account is problematic for three reasons. The first is that the distinction between the default and mandatory rules of trusts law, on which the conception rests, is uncertain and contested. This concern will be addressed in the next section of the paper.
The second reason is that the law-and-economics analysis mischaracterises the rights and powers of a beneficiary. The bundle of rights and powers vested in a trust beneficiary are not equivalent to those, if any, which a third-party contractual beneficiary is entitled to exercise. The trust beneficiary is entitled to hold the trustee accountable for the administration of the trusts, to prevent abuses of powers vested in the trustee and – outside American trust jurisdictions – the power to terminate the trust.Footnote 23 The beneficiary may also, depending on the nature of her interest in the trust, have rights in its subject matter, entitling her to trace and recover the proceeds of misapplied trust property. In contrast, the rights of a third-party contractual beneficiary to contractual performance are defined by the terms of the contract, to the extent that the terms are enforceable under the doctrine of privity of contract. The distinction between the legal status of the trust beneficiary and third-party contractual beneficiary is functional, as well as doctrinal: the practical means of ensuring performance of trust obligations is qualitatively different from that of ensuring performance of a contract.
The third reason why the law-and-economics theorisation of the express trust is problematic, and the reason most relevant to the thesis of this paper, is that it has no solution to the decline in the morality of trusting identified by Cotterrell. As has been noted, a significant cause of moral distancing is the importation of standard-form exculpation clauses into trusts which exploit inequalities of bargaining power between trust corporations, on the one hand, and settlors and beneficiaries on the other hand. Because the theory assumes that the self-interested norms of contract law are equally applicable to trusts law, there is no place, on this analysis, for the application of a beneficiary-focused morality of trusting.
Whether a trust can meaningfully be analogised to a third-party contract ultimately depends on the fundamental assumption that most trust rules operate as default rules. The correctness of this assumption must now be examined.
4 Mandatory trusteeship rules
One of the most frequently cited dicta in trusteeship law is Millett LJ’s aphorism in Armitage v Nurse that ‘there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of the trust’.Footnote 24 The precise content of the ‘irreducible core’ of non-excludable trust obligations is, however, no clearer now than when the dictum was delivered over twenty-five years ago. Only the trustee’s duty to act in good faith has been found to be incontrovertibly ‘irreducibly core’ so as to be immune from emasculation by contractual exclusion.Footnote 25 In Citibank NA v MBIA Assurance SA Footnote 26 effect was given to a clause in a securitisation trust instrument providing that the trustee, when acting at the direction of the guarantor of notes issued to one class of investors, ‘shall not be required to have regard to the interests of the Noteholders [beneficiaries]’ in the exercise of its discretions, and must instead give effect to the wishes of the guarantor.Footnote 27 In defence of this clause, the Court of Appeal observed that it did not purport to exclude the trustee’s duty to administer the trust in good faith.Footnote 28 But to assert that the trustee’s duty of good faith is a core obligation of trusteeship is not to claim very much since obligations of good faith are commonly found elsewhere in the law. The duty of good faith applies, for example, to some contractual duties (Stapleton Reference Stapleton1998).
Facilitative legal institutions such as contracts, wills and trusts all contain a central core of obligation which cannot be excluded because the obligation defines the institution. For example, a purported contract entitling a service provider to perform any or no service at all will not constitute a contract.Footnote 29 As was noted above, the trustee’s ‘duty’ not to misappropriate trust property is a core obligation because it distinguishes the trust from ownership. It is so intrinsic to the idea of trust that clauses in trust instruments enumerating the obligations of trustees do not bother to mention the ‘duty’ not to misappropriate. An obligation not to steal another’s property is implied by the definition of a trust and goes without saying.
The classification of other core obligations as mandatory or default is contentious. Two obligations are fundamental to the debate on the core obligations of trusteeship. They are the fiduciary obligations of trustees and the duty of trustees to account to the beneficiaries for their performance of the trust. But the debates concerning the mandatory characteristics of these duties are confused, and both duties require unpacking before their core, non-excludable elements can be identified.
4.1 Fiduciary obligations
A significant and welcome scholarly development in recent years has been the renewed attention paid to the trustee’s duty of loyalty (Smith Reference Smith2023). A basic proposition of trusts law is that trustees owe a non-excludable duty to be loyal to the beneficiaries. But the proposition, though fundamental, only holds true at a high level of generality: the loyalty required of trustees is divisible into other, more concrete obligations. Some of these obligations are mandatory; others are defaultable. One specific manifestation of loyalty is the trustee’s duty of fidelity to the terms of the trust: failure to comply with the terms amounts to disloyalty to the settlor’s intentions, as expressed in the trust instrument.
The trustee’s duty to comply strictly with the terms of the trust is a prescriptive fiduciary obligation. Although fiduciary obligations are often described as proscriptive, not prescriptive (Conaglen Reference Conaglen2010, pp. 201–203),Footnote 30 with the consequence that the affirmative duties imposed on trustees are labelled ‘equitable’ and not ‘fiduciary’, it is hard to discern why the trustee’s duty of fidelity to the terms of the trust should not be classified as fiduciary. Like the paradigmatic fiduciary duties proscribing unauthorised conflicts of interest and profit-making, the duty to observe strictly the terms of the trust is firmly grounded in the policy of promoting disinterested loyalty to the beneficiaries whose welfare is defined by those terms. The complete armoury of equitable relief is available to remedy any deviation from the strict letter of the trust, for example by setting aside payment of trust money to a non-beneficiary.Footnote 31 The relief in such a case is analogous to that awarded in the well-established line of authority relieving against abuses of fiduciary discretion in making an appointment. Relevantly, from the perspective of this paper, the trustee’s duty of fidelity to the terms of the trust instrument cannot be negated by an exclusion clause, however widely drawn. A provision in a trust instrument which purported to immunise the trustee from personal liability for not complying with the terms would be inconsistent with the very notion of a trust.Footnote 32
The obligations most often described as fiduciary are the distinct but overlapping equitable prohibitions of unauthorised conflicts of interest and unauthorised profit-making.Footnote 33 As the adjective ‘unauthorised’ indicates, these are default obligations. They are strict, but the duty to comply with them can be modified or even excluded by the terms of the trust instrument.Footnote 34 The exclusion can be express, as in a ‘carve out’ clause which expressly permits a trustee to act as trustee of another trust.Footnote 35 Alternatively, it can be implied in circumstances where the trustee is known by the settlor at the time of creation of the trust to owe fiduciary obligations, either as a trustee or in some other capacity, to a third party. In Boardman v Phipps Footnote 36 Lord Upjohn gave examples of how the ‘no conflict’ proscription is modified to meet the situation of a trustee of two trusts:
‘A, as trustee of two settlements X and Y holding shares in the same small company, learns facts as trustee of X about the company which are encouraging. In the absence of special circumstances (such, for example, that X wants to buy more shares) I can see nothing whatever which would make it improper for him to tell his co-trustees of Y who feel inclined to sell that he has information that this would be a bad thing to do. Another example: A as trustee of X learns facts that make him and his co-trustees want to sell. Clearly he could not communicate this knowledge to his co-trustees of Y until at all events the holdings of Y have been sold for there would be a plain conflict, reflected in the prices that might or might possibly be obtained.’Footnote 37
The prohibition of unauthorised conflicts of interest is implicitly modified in the case of trustees of two or more trusts, just as it is in the case of company directors, agents and other fiduciaries who act in multiple capacities.Footnote 38
But the fact that the ‘no conflict’ and ‘no profit’ proscriptions are defaultable does not mean that the entirety of fiduciary law is susceptible to exclusion or modification. A significant body of equity jurisprudence is concerned with judicial review of the exercise of fiduciary powers. Fiduciary powers must be exercised for proper purposes and in accordance with what the trustee or other powerholder considers to be in the best interests of the objects of the power.Footnote 39 The duty is one of ‘fair consideration of the subject’,Footnote 40 which embraces the duties to consider only matters which are relevant and not to take into account irrelevant matters.Footnote 41 The duty of ‘fair consideration’ is mandatory. In Pitt v Holt, Futter v Futter Footnote 42 provisions in the Futter settlement contained an exoneration clause stating that ‘in the professed execution of the trusts and powers hereof no trustee shall be liable for a breach of trust arising from a mistake or omission made by him in good faith’. Lord Walker, delivering the judgment of the Supreme Court, stated that the clause would not preclude judicial review of an exercise of fiduciary discretion. Moreover, an injunction could be granted to prevent a breach of trust and, in an appropriate case, the trustee could be removed from office.Footnote 43 The same point had previously been made by Lord Sumption in the context of fiduciary duties exercisable by company directors:
‘The [proper purposes] rule is not a term of the contract and does not necessarily depend on any limitation on the scope of the power as a matter of construction. The proper purposes rule is a principle by which equity controls the exercise of a fiduciary’s powers in respects which are not, or not necessarily, determined by the instrument.’Footnote 44
The ‘no conflict’ and ‘no profit’ prohibitions therefore do not comprise the entire universe of fiduciary obligations (cf. Smith Reference Smith, Gold and Miller2014, p. 149). Two core obligations of trusts law are that (i) a trustee must comply with the terms of the trust instrument, and (ii) trustees must exercise their discretionary powers for proper purposes. Both obligations are fiduciary, in the sense that they are discrete applications of the trustee’s basal obligation of loyalty to the beneficiary. Neither can be excluded or refashioned by the terms of the trust instrument.
The obligations also operate as important doctrinal constraints on the kind of moral distancing which occurs when the trustees are tempted to depart from the purposes of the trust prescribed by the settlor. Both enforce the trust and confidence reposed by the settlor, as expressed in the terms of the trust instrument, against attempts by the trustees either to ignore inconvenient provisions in the instrument or to convert the trust to serve alternative purposes.
4.2 Accountability
Every trusts law textbook includes a section on the trustees’ duty to account to the beneficiaries for the performance of their obligations. Unfortunately, judicial and academic discussions of that duty have become excessively fixated on the trustees’ accountability to replenish the trust fund, either as a substitute for misapplied trust money or as reparation for loss. As debates have swirled around the leading decisions on equitable compensation for breach of trust, Target Holdings Ltd v Redferns Footnote 45 and AIB Group (UK) Plc v Redler, Footnote 46 scholars have had to relearn, if they did not already know, the different types and functions of the account of administration in common form and the account on the basis of wilful default. Quantifying compensation for breach of trust turns (or ought to turn) on the distinction between substitutive compensation, being a monetary substitute for the performance of the trust akin to specific performance, and reparative compensation, which is functionally equivalent to common law damages although it applies different principles of quantification. This distinction is fundamental to the assessment of compensation for breach of trust, but the point of the distinction is apt to be lost when it is obscured by the archaic terminology carried over from the pre-Judicature Act processes for the taking of accounts in Chancery.
A trustee’s accountability to the beneficiaries goes beyond, however, the submission of accounts and making up any deficiency revealed by the account taking. A trustee must also, when requested, provide detailed information relating to the subject matter of the trust,Footnote 47 as well as informing a beneficiary, who is entitled to a share of the trust fund on attaining the age of majority, of that interest.Footnote 48 Accountability is only meaningful if beneficiaries, including objects of discretion, are made aware of their rights.
Accountability also requires the trustee to give the beneficiaries access to trust documents.Footnote 49 In Schmidt v Rosewood Trust Ltd Footnote 50 the Privy Council authorised the disclosure of trust accounts and other information to the object of a discretionary trust who was found to have a sufficient interest to justify disclosure. The decision was based, not on any proprietary right a beneficiary might have in trust documents, but on the court’s inherent jurisdiction to supervise the administration of trusts.Footnote 51 Situating the claim in the court’s supervisory jurisdiction means that the beneficiary’s right to inspect trust documents cannot be abridged or excluded by an exemption clause. The scope of the beneficiary’s right to information will be determined by the court and not by any provision in the trust instrument.Footnote 52 It is now beyond doubt that providing information to beneficiaries is an ‘irreducible core’ duty of trustees, albeit one depending on the exercise of judicial discretion to determine its extent and mode of compliance. It is, for example, a matter for the court exercising its supervisory jurisdiction to draw the line between information that is confidential to the trustees and information that must be disclosed to the beneficiaries.
The exercise of a court of equity’s supervisory jurisdiction over a trustee’s performance of her duties adds a crucial dimension to the enforcement of trust obligations. A trustee is not only accountable to a beneficiary for the due performance of her duties. She is also accountable to the court which can determine how trust duties are to be carried out. As has been said, ‘[o]rders in the exercise of equity’s supervisory jurisdiction over trusts represent the most intense form of administration at the behest of equity courts’ (Turner Reference Turner and Turner2016, p. 18).
A correct appreciation of the extent of the court’s supervisory jurisdiction to enforce the trustee’s duty to account carries significant implications for restoring trust and confidence to the trust relationship. Schmidt v Rosewood Trust Ltd establishes that the benefits of curial supervision extend to objects of discretionary powers, who otherwise have limited recourse to equity. The benefits also include the power to override the terms of an exemption clause if to do so would promote the proper administration of the trust.
The decision in Schmidt v Rosewood Trust Ltd arguably weakens the claim of a beneficiary of a fixed trust which had previously been held to rest on the beneficiary’s interest in trust property.Footnote 53 But defining a beneficiary’s right of access to trust documents in terms of her property rights involves what has been judicially described as an ‘unilluminating circularity’.Footnote 54 A discretionary framework within which issues such as the confidentiality of documents, the reasons for seeking disclosure and the likelihood of objects of powers receiving trust benefits can be evaluated and balanced is preferable to applying the conclusory language of property law.
Accountability, when coupled with the court’s power to ensure due administration of a trust, is a concept that extends beyond enforcing rigorous accounting standards.Footnote 55 Correctly understood, it applies to all aspects of trust administration, including the exercise of trustees’ dispositive and managerial powers. It is subject to the overriding precept that the court will not substitute its own discretion for that of the trustees.Footnote 56 Like the ‘proper purposes’ doctrine discussed earlier, it ensures that the essential purposes of the trust are not subverted by ulterior motives. In contrast to that doctrine, however, the trustees’ actions will be assessed, not against the settlor’s objectives, as specified in the trust instrument,Footnote 57 but against the standard of competent administration that a court expects trustees to observe, having regard to the nature of the trust and the professional status of the trustees.Footnote 58 A vigorous judicial re-assertion of the trustee’s duty to account is perhaps the most effective response to Cotterrell’s concern that, in many large- scale trusts, the interests of trustees are increasingly diverging from the expectations of beneficiaries.
5 Conclusion
Legal doctrine is poorly adapted to solve social problems, such as the increasing ‘moral distance’ between trustees and beneficiaries identified by Cotterrell. Some consequences of moral distancing, such as the maladministration of pension and investment trusts by technology which impersonalises the trustee–beneficiary relationship, can only be eradicated by legislation.Footnote 59 But equity is not totally powerless, and its doctrines can be applied, to a greater extent than is generally realised, to prevent the attenuation of the rights of beneficiaries by the application of drafting techniques.
This article has argued that a significant cause of moral distancing is the application of contract techniques – ‘contractualisation’ – to the drafting of trust instruments. Contractualisation finds expression in the characterisation of most trust obligations as defaultable, in the sense of being susceptible to modification or exclusion by the terms of the trust. While the creative adaptation of default rules serves the aims of the settlor, the beneficiary’s expectation that the trust will be properly administered is often compromised by provisions in trust instruments which default out of basic obligations. Two solutions are proposed. The first requires identification and enforcement of those fiduciary obligations that are mandatory because they are central to the definition of a trust. The second is an appreciation that the accountability of the trustee to the beneficiary for the due administration of the trust is not confined to the production of accounts but encompasses many other essential and non-excludable obligations of trusteeship. Accountability for due administration is owed to a court exercising equity jurisdiction, as well as to the beneficiary. Taken together, the proposed solutions show that equity has the resources to prevent the continued depersonalisation of trusts law by the application of contractual techniques.
Acknowledgements
Thanks to the editors, referees and to Maria Hyland for their comments on earlier iterations of this paper. The usual disclaimer applies.
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