Trustees find no insulation from asbestos ruling

Trustees’ unlimited personal liability under English law: a recent Court of Appeal decision in First Tower Trustees v CDS (Superstores International) Ltd [2018] EWCA Civ 1396 reminds trustees of the implications.

Trustees operating in the offshore world have become accustomed to codified, statutory restrictions on trustee liability; trustees in England have much more limited protection. Being more exposed, trustees operating in England have been well advised to advertise their status and to take express steps to limit their liability when engaging with outside parties. A recent case, where the Court of Appeal has taken a hard line (perhaps owing to an unattractive fact pattern), has exposed flaws in this.

Background

A sophisticated commercial tenant contracted to lease commercial premises. The relevant documents were expressly stated to be governed by the laws of England and Wales. The landlord was comprised of two Guernsey trust companies of a Jersey trust.

In April 2015, before completion of the lease, the landlords were provided with a report notifying them of dangerous levels of asbestos, which made entering the premises unsafe. However, they had claimed during routine pre-contract enquiries (in February 2015, prior to receipt of the report), that they were not aware of any environmental problems relating to the premises and that the tenant should satisfy itself as to the condition of the property. Objectively, this may be the nub of the case - the tenants had performed such market-standard due diligence as could have been expected of them and suffered avoidable loss.

The tenants sued for misrepresentation following the loss they suffered owing to the need to lease alternative premises whilst remedial works were carried out. The landlords argued that they were not liable for misrepresentation by virtue of clause 5.8 of the lease, which amounted to an acknowledgment by the tenant that the lease was not entered into in reliance on any statement made by the landlords. In the alternative, the landlords further argued that their liability was limited to that of the trust fund, since they had entered into the lease in their capacity as trustees and not as individuals.

At the eleventh hour in the litigation, the trustees also attempted to rely on Article 32 of the Trust (Jersey) Law 1984, which they considered might limit the liability of the trustees under Jersey law.  The Court declined to permit this.

The deputy judge in the High Court found that there had been negligent misrepresentation by the trustees; the trustees were accordingly liable for statutory damages. The trustees did not appeal the finding of fact, but took the case to appeal on the ground that they were protected from the consequences of their negligence.

On appeal

The Court of Appeal agreed with the High Court’s finding that clause 5.8 was a non-reliance clause which attempted to exclude liability for misrepresentation (as opposed to a “basis clause” which aims to set out the parties’ primary, agreed factual matrix).

Under the Misrepresentation Act 1967, a non-reliance clause needs to satisfy the reasonableness test contained in the Unfair Contract Terms Act 1977 if it is to operate to limit liability. In this case, the clause failed the reasonableness test because it would otherwise render the tenant’s pre-contract enquiries worthless.  

The Court of Appeal agreed that the language asserting that the trustees were contracting in their capacity as trustees and not individuals was sufficient to exclude liability for contractual claims, but not for statutory or tortious claims (more on which below).

Unsurprisingly, the Court of Appeal upheld the decision by the first instance judge to disallow the introduction at the last minute of Jersey law (Article 32) as an issue for consideration. The Court found that its inclusion would be prejudicial to the claimant / appellant who would need time to research the relevant law. However, the following interesting points were raised in respect of the trustees’ attempt to rely on Article 32:

  • The recent decision in Investec Trust (Guernsey) Ltd v Glenalla Properties Ltd1 (which post-dates the first instance hearing of this case in the High Court) has shown that the effect of Article 32 is one of enforcement; it limits the class of assets available to a creditor in an enforcement scenario, rather than capping absolutely a trustee’s liability.
  • It was also unclear whether the counterparty would need to be made aware that it was contracting with a Jersey trustee in order for Article 32 to be invoked.  In this case, the tenant was merely aware that the landlords were trustees, and not specifically Jersey trustees.

What should trustees do to avoid liability creeping beyond the assets of the trust fund?

This case confirms the well-established principle in English law that trustees can easily limit their contractual liability to the assets of the trust fund. They do so, classically, by expressly contracting in their capacity “as trustees (and not otherwise)” which creates a contractual estoppel.

Although there is no reason in principle why parties cannot agree to give up tortious or statutory rights against trustees, this case confirms that the usual, standard, contractual language alone does not limit a trustee’s personal exposure to non-contractual claims.

Instead, careful drafting is needed to negate expressly the wider personal liability incurred by trustees as a result of their office. Precise wording of any clauses aiming to limit liability for negligent misrepresentation is needed to ensure that they apply to statements made before the contract was entered into and which are not specifically included in the contact terms.

The following practical points are useful for trustees to bear in mind when seeking to limit their various possible heads of liability when entering into a contract:

  • Liability for contractual claims can continue to be limited fairly easily by the inclusion of wording stating that the trustees contract in their capacity as trustees only and not as individuals.
  • Non-reliance clauses may be subject to scrutiny for reasonableness and the extent to which they conflict with relevant legislation. In any event, such clauses may be considered to conflict with the recognised importance of pre-contract enquiries. The law will tolerate parties to a contract agreeing a fictional basis for proceeding with a contract, but courts will not be happy with protecting one party against a clear lack of meeting of minds which causes loss.
  • For trustee landlords (or indeed sellers), this case emphasises the importance of keeping under review any responses made to pre-contract enquiries which might then be relied upon later by tenants or purchasers. Responses should be updated as necessary at any stage prior to completion. 
  • Outside the realm of real estate, trustees may wish to subject agreements to the governing law of a jurisdiction which includes statutory protections for trustees (for example Article 32 of the Trust (Jersey) Law 1984). 

To conclude, under English common law, a trustee entering into a contract is personally liable, save for circumstances in which a term of the contract operates to exclude such liability. English law has not adopted the analysis of the Privy Council in Investec v Glenalla. It is therefore important when drafting clauses designed to limit trustee liability that, where it is deemed necessary, they are sufficiently wide to include both contractual and non-contractual liability. No doubt however, such wording will be scrutinised by courts and construed against the trustee seeking reliance, so the counsel of perfection remains to avoid incurring tortious or statutory liability.

1 https://macfarlanes.com/insights/2018/privy-council- judgment-on-private-international-law-and-trustee-liability/

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