Armitage v Nurse

A trustee exemption clause excluding liability except for loss caused by the trustee’s own actual fraud protects the trustee against negligence, however gross, and deliberate but honest breaches of trust. Actual fraud means dishonesty: the trustee must know that the intended course is contrary to the beneficiaries’ interests or be recklessly indifferent to that question.

The irreducible core of a trust requires honest and good-faith performance for the beneficiaries’ benefit. It does not include duties of skill, care, prudence and diligence, so a clearly worded exclusion of liability for gross negligence is valid.

Fraud must be pleaded clearly and with particularity. Under the Limitation Act 1980, honest breaches are subject to the statutory limitation period, while dishonest breaches are not.

Armitage v Nurse concerned an action by the principal beneficiary against the trustees and the personal representatives of deceased trustees. The settlement had arisen from a court-approved variation under the Variation of Trusts Act 1958. It contained a wide exemption clause protecting each trustee from liability for loss unless caused by that trustee’s own actual fraud.

Jacob J determined preliminary questions concerning the scope of that clause, a narrower farming-business clause, and limitation. He held that the wide clause answered the pleaded claims, that the narrower clause did not, and that the claims concerning breaches before June 1987 were not statute-barred. The beneficiary appealed the first ruling. The defendants cross-appealed the other rulings and the restriction placed on recouping their costs from the trust fund.

The central questions were whether actual fraud meant dishonesty, whether liability for gross negligence could validly be excluded, whether dishonesty had been sufficiently pleaded, and when limitation began to run against a beneficiary whose interest had not fallen into possession.

Millett LJ delivered the substantive judgment. Hirst and Hutchison LJJ agreed.

1. Disposition. The appeal and cross-appeal on the preliminary questions were dismissed. The order restricting the defendants’ right to recoup costs from the trust fund was set aside and replaced by a conditional right of recoupment. The beneficiary was permitted an opportunity to seek amendment after inspecting the trust documents.
2. The wide exemption clause. “Actual fraud” meant dishonesty, rather than constructive or equitable fraud. A trustee acts dishonestly by pursuing a course known to be contrary to the beneficiaries’ interests, or by being recklessly indifferent to whether it is contrary to those interests. Personal gain is unnecessary. A deliberate breach committed honestly in the believed interests of the beneficiaries is not fraudulent. The clause therefore protected the trustees against indolence, imprudence, want of diligence, negligence, gross negligence and wilful but honest conduct.
3. Validity. A trust has an irreducible core of enforceable obligations. Its minimum content is the duty to perform the trusts honestly and in good faith for the beneficiaries’ benefit. Duties of skill, care, prudence and diligence are not part of that core. English law distinguishes fraud and bad faith from negligence, however gross, while treating ordinary and gross negligence as differences of degree. A clearly worded clause may therefore exclude liability for gross negligence without being repugnant to the trust or contrary to public policy. Legislative reform, if desired, was a matter for Parliament.
4. Pleading dishonesty. Fraud must be alleged clearly and with particularity. Technical or emphatic words such as “wilfully” and “recklessly” do not suffice where the pleaded facts remain consistent with innocence. The allegations before the court amounted at most to neglect, incompetence or gross negligence. The equivocal allegation that the trustees pursued a policy “designed” to benefit non-beneficiaries could not support a finding of fraud without amendment.
5. Other preliminary questions. The farming-business clause protected the trustees against trading losses arising from carrying on the authorised business. It did not protect imprudent investment in that business or failure to ensure proper management. Under section 21(1)(a) of the Limitation Act 1980, fraud and fraudulent breach of trust required dishonesty. An honest breach was subject to six years’ limitation, absent deliberate concealment. Before the beneficiary attained 25, her right to be considered for payments did not constitute an interest in possession. Her interest was future, so time had not begun to run under section 21(3).
6. Costs. Trustees ordinarily have a lien for the costs of successfully defending a breach-of-trust claim. A hostile claim against them personally, or failure on particular arguments, does not alone remove that right. Recoupment was nevertheless made conditional because amendment might result in a successful claim against one or more trustees.

1. Court of Appeal: The beneficiary’s appeal and the defendants’ cross-appeal on the preliminary questions were dismissed. The order denying partial recoupment of the defendants’ costs from the trust fund was set aside and replaced by a conditional recoupment order.
2. High Court, Chancery Division: Jacob J held that the wide exemption clause protected the defendants against the pleaded claims, that the narrower farming-business clause did not have the wider effect claimed, and that the challenged pre-June 1987 claims were not statute-barred. He awarded the defendants 80% of their costs but restricted their right to recoup the balance from the trust fund.