Nestle v National Westminster Bank Plc

A trustee must exercise the care of an ordinary prudent person investing for beneficiaries whom that person feels morally bound to provide for. Prudence depends on contemporary economic conditions, the authorised investment powers, risk, income, capital growth and the need to treat successive beneficiaries fairly.

A misunderstanding of investment powers or failure to review investments does not alone justify compensation. The claimant must prove that the trustee consequently made, or omitted, an imprudent investment decision and that the trust thereby suffered loss. Loss cannot be presumed from poor administration or performance below a market index. Presumptions against a defaulting trustee may assist in quantifying an established loss, but cannot establish that loss occurred.

The appellant became absolutely entitled in 1986 to capital held under her grandfather’s will. She alleged that the respondent bank, as trustee, had misunderstood its investment powers, failed to review the portfolio regularly, retained excessive fixed-interest investments, inadequately diversified its equities and favoured overseas-resident life tenants over her interests as remainderman.

Hoffmann J dismissed the claims after trial. The appellant sought inquiries comparing the actual fund with the value it would have attained under proper management, followed by payment of the difference.

The central issues were whether the bank’s investment administration involved actionable breaches of trust and whether any such breach was proved to have caused loss.

1. Appeal dismissed unanimously. The bank’s administration attracted substantial criticism, but the appellant failed to prove a breach of trust which caused loss to the trust fund.

2. Per Dillon and Staughton LJJ, the bank misunderstood the breadth of the will’s investment clause and ought to have obtained legal advice. It was also required to review the investments regularly, though not necessarily by rebalancing the portfolio annually. Those administrative failings did not themselves establish an actionable breach. The appellant had to identify an investment decision which a prudent trustee should not have made, or an omitted decision which such a trustee should have made.

3. The governing standard was the care of an ordinary prudent person investing for others whom that person felt morally bound to provide for. Prudence had to be judged by the economic and financial conditions prevailing when each decision was made. The bank’s performance could not be condemned with hindsight or merely because it fell below the BZW Equity Index.

4. The trustee had to administer the fund fairly or impartially between life tenants and the remainderman. The overseas residence of the life tenants, the income-tax advantages of exempt gilts and the potential estate-duty or capital-transfer-tax saving were legitimate considerations. The tax advantages also protected capital and justified the bank’s broad policy, although an income-tax advantage would rarely justify more than a modest preference for income over capital growth.

5. Per Dillon LJ, a decision made for an erroneous reason does not create liability if, viewed objectively, good and sufficient reasons supported it. The decision to invest the Winterbourne proceeds in fixed-interest stock was objectively defensible because the annuity fund already had a high equity content.

6. All three Lord Justices held that the appellant had to prove loss caused by breach. Loss could not be presumed merely from the bank’s misunderstanding, inadequate reviews, lack of diversification or disappointing performance. Presumptions against a defaulting fiduciary might assist in assessing the amount after causative loss had been shown, but could not substitute for proof that loss occurred. The evidence did not establish that a prudent alternative policy would have produced a fund of greater net value after taxation.

1. Court of Appeal: The appellant’s appeal was dismissed unanimously, with costs. Leave to appeal to the House of Lords was refused.
2. High Court, Chancery Division: Hoffmann J dismissed all the appellant’s claims after trial on 29 June 1988. No report or neutral citation is stated in the judgment.