Part 1: The duty of care
11.Sections 1 and 2 form Part I of the Act. Together they implement the recommendations in Part III of the Report. The sections create a new precisely defined statutory duty of care applicable to trustees when carrying out their functions under the Act or equivalent functions under the trust instrument. As in the law generally, the phrase “duty of care” signifies a duty to take care to avoid causing injury or loss. The new duty will bring certainty and consistency to the standard of competence and behaviour expected of trustees. It will be a safeguard for beneficiaries and thereby balance the wider powers given to trustees elsewhere in the Act. The duty will take effect in addition to the existing fundamental duties of trustees (for example, to act in the best interests of the beneficiaries and to comply with the terms of the trust) but will exclude any common law duty of care which might otherwise have applied.
The duty is a default provision. It may be excluded or modified by the terms of the trust. This new duty will apply to the manner of the exercise by trustees of a discretionary power. It will not apply to a decision by the trustees as to whether to exercise that discretionary power in the first place.
12.In relation to the investment of trust funds the new duty makes statutorily explicit the present common law duty which measures the behaviour of the trustees against that expected of the ordinary prudent man of business. This test includes a subjective element to allow for the particular skills and experience of the trustee in question. The new duty of care puts this beyond doubt. In relation to collective delegation by the body of trustees the new duty will however replace the unsatisfactory and insufficiently demanding provisions of sections 23 and 30 of the Trustee Act 1925.
Section 1: The duty of care
13.Section 1 defines the new uniform statutory duty of care for trustees. The circumstances where the duty will apply are defined in Schedule 1 to the Act, which is introduced by section 2. The duty will not apply outside those circumstances. To comply with the new duty a trustee must show such skill and care as is reasonable in the circumstances of the case making allowance for his or her special knowledge, experience or professional status (section 1(1)(a) and (b)). Thus, in relation to the purchase of stocks and shares, a higher standard may be expected of a trustee who is an investment banker, specialising in equities, than of a trustee who is a beekeeper, particularly if the investment banker is acting as a trustee in the course of his or her investment banking business. The new duty will therefore provide a standard against which the manner of the exercise of a power by trustees can be measured in the particular circumstances of the case. In determining what constitutes reasonable care consideration would also be given to the nature, composition and purposes of the trust being administered.
Section 2: Application of duty of care
14.Section 2 introduces Schedule 1 to the Act, which defines when the new duty will apply. In general terms the new duty will apply to any exercise by a trustee of a power to invest trust property or to acquire land; to appoint agents, nominees and custodians; or to insure trust property.