Sachdev at Rao Law Chambers]
in India has not kept up with the times. The last few years have seen an
increase in the incidence of sophisticated trust structures, particularly in
the private wealth and fund industries. However, changes to the law governing
trusts have substantially been introduced in ad hoc form by tax legislations,
securities and other regulators and on occasion the courts. This has led to
disharmonious, often confused positions on fundamental questions regarding the
nature of a trust, the transactions of settlement/ management/ distribution by
trustees and the status of beneficiaries in the trust structure.
examples of this vacuum & dissonance are as follows: The last amendment to
the Indian Trust Act, 1882 (“Trusts Act”), in 2016, related to the list
of “permissible investments” that may be made by a trust.
Although the amended provision was certainly wider than the previously applicable
Indian provision, it failed to ask why (if at all) the law should
restrict the list of permissible investments for trustees. The UK, Canada and Australia, for example, had rules similar to
ours, but amended their trust acts to allow trustees to invest as any other
another case, the Supreme Court held last year that disputes
arising out of trust deeds are not arbitrable, reversing a Bombay High Court ruling that they are. These
two rulings swung on the question of whether the beneficiaries were party to
the “arbitration agreement” contained in the trust deed to which the
beneficiaries were not a party. However, neither case asked deeper questions
regarding the status of beneficiaries in relation to a trust. More recently,
the Finance Bill 2017 includes provisions which have been interpreted to result in a tax on the act of
settlement in favour of a trustee, treating such settlements as any other
transfer. This position ignores the fact that a trustee does not receive an
asset, but the fiduciary obligation to manage/ apply the asset. These questions
are all fascinating from a practical, legal as well as philosophical
question, which we will examine today, relates to the enforceability of trustee
exculpation provisions. Simply put, the issue is as follows: does a trustee
(i.e., a fiduciary of a trust) have the ability to disown fiduciary
liabilities by entering into a contractual understanding with the settlor? This
question is particularly relevant today, because of the increase in
institutional trusteeship arrangements. Institutional trustees typically
include exculpatory clauses (referred to hereafter as trustee exemption
clauses) which protect them from liabilities arising from breach of trust,
except in situations where such liabilities arise from gross negligence or
fraud of the trustee. What should be the validity of such trustee exemption
some thoughts below.
of Liability Under Trust Law
Indian Trusts Act, 1882 (“Trusts Act”) imposes a number of duties upon
trustees, and also sets out the liability of a trustee for breaches of their
duties (a “breach of trust”). However, it contains no express provisions
regarding contractual limitation of liabilities. There is also no case law in
this regard. Therefore, we need to derive a position from other parts of the
Trust Act, which are discussed below.
trustee is not bound to accept a trust. It is only valid if the trustee consents,
which implies autonomy of a trustee and a contractual understanding. Further
under section 11, a trustee must fulfil the purpose of the trust in accordance
with the directions of the author of the trust. These directions are given at
the time of the creation of the trust, i.e., in the trust instrument / trust
deed. If the settlor agrees to certain limitations on liability in the trust
deed, the trustee would only be bound to that extent, and the exculpation terms
should govern the scope of the trustee’s liability in relation to the trust.
Trusts Act acknowledge that there may be modifications by contract or otherwise
to the trust deed, even to change the nature of the duties of the trustee. For
instance, section 15 of the Trusts Act, which imposes a duty on the trustee to
deal with the trust property with prudence. This section expressly mentions the
possibility of changing the duty of care applicable to a trustee, by way of
contract. This implies that the broader underlying arrangement can be modified
by means of contract.
suggests that a trust deed may contain a trustee exemption clause that only
allows for liability of the trustee when they have acted in bad faith. As a
result, the insertion of trustee exemption clauses should validly exempt the
trustees from a breach of trust when they have acted in good faith.
a trustee commits a breach of trust, he is liable to “make good the loss
which the trust-property or the beneficiary has sustained as a result”.
This section does not refer to limitation of such liability by agreement. There
is also some case law which suggests that a trustee’s liability cannot be
absolved merely because he took sufficient care or acted in good faith.
However, this leaves open the question regarding whether the extent of
the liability can be contractually agreed to.
of Liability under Contract Law
also apposite to examine whether contract law itself limits the ability of a
person to limit liability. This question is particularly important since
institutional trusteeship arrangements typically arise from an underlying
insertion of limitation of liability clauses in contracts under Indian law.
However, under section 23 of the Indian Contract Act 1872 (“ICA”), any
limitation of liability clauses must not defeat the provision of any law, be
fraudulent in themselves, or be opposed to public policy.
the enforceability of trustee exemption provisions. While such clauses, if not
fraudulent, should not defeat any provision of law (as discussed above), their
position vis-à-vis public policy is tougher to predict. Indian courts have long
refused to lay down any hard and fast guidelines on public policy, noting that
what may be viewed as opposed to public policy is not constant,
and it is unlikely which of the generally established precedents (opposed to
morality, or the interests of the state) would apply to trustee exemption
held to be enforceable in English case law. For instance, the judgment in the
leading case of Armitage v. Nurse upheld a
clause that excluded a trustee’s liability for damage caused to the beneficiary
except where caused by the trustee’s actual fraud. Usefully, in this case, it
was held that the enforcement of such a clause would not be
contrary to public policy. This case should hence have persuasive value in
arguing that the test of public policy under section 23 of the ICA is also
satisfied. Armitage continues to be good law despite the introduction of
the Trustee Act 2000 (which seeks to codify the duties of trustees) in England
and Wales, as confirmed in subsequent case law. Also see Bogg v Raper.
that acknowledges that trustee exemption clauses are valid in the UK, although
this advises that the settlor of the trust be made aware of the existence of
such a clause and its implications.
exactly similar to Indian trust law. However, the differences should not impact
our ability to derive persuasive value from UK material in this regard.
model trust law take a similar view. Trustee exemption clauses are widely considered
enforceable in the US, as long as they do not affect liability for fraud, bad
faith, and wilful recklessness, and the insertion of the clauses themselves are
not a result of fraud or bad faith.
Uniform Trust Code (the federal model law) is that trustee’s duties are default
rules generally, including the duties of prudence, loyalty and impartiality. At
the same time, it also recognises certain mandatory rules which are immutable,
including the duty to act in good faith and in accordance with the terms and
purposes of the trust.
certain states in the US have seen substantial litigation in the context of waiver of fiduciary duties of directors of corporations
versus limited liability companies, where the question has been
framed in terms of the difference between a common law fiduciary duty of good
faith versus a contractual duty of good faith. If these questions are carried
into trust law, it would suggest that fiduciary standards of good faith are
different from (possibly wider than?) contractual duties.
ignore the philosophical questions regarding the nature of fiduciary
responsibilities and their source.
understanding (as argued by Edelman, for example), it is
theoretically possible that the understanding can be modified by an agreement
to limit the liability of a fiduciary. If on the other hand a fiduciary
obligation derives from a broader duty of care (as argued by Miller, for example), liability
cannot be limited by agreement. We would then need to identify the nature of
that duty of care and delineate its boundaries.
is yet to reach a consensus on these issues due to the peculiar complexities of
the fiduciary relationship. These complexities may also manifest themselves
differently depending on the kind of trust – an express trust for instance, is
voluntarily accepted by the trustee and would therefore suggest proximity to a
contractual relationship. However, a constructive trust (created by
circumstance) suggests that the fiduciary is governed by a broader duty of
the analysis above, existing Indian law, read with the persuasive weight of
international precedents, suggests that trustee exemption provisions should be valid, to the extent that the
trustee continues to be held responsible for the more serious forms of breaches
(gross negligence, fraud etc.). However, it is likely that an analysis will be
necessarily dependent on the specific kind of trust and the nature of the exculpation
provision. Thus, the specific question, and Indian trust law in general,
continues to provide fertile ground for both legal and philosophical debates.
We hope to continue to draw more attention to this space through subsequent
Rao & Vakasha Sachdev
(8th edition) at 247.
Lakshminarsamma, (1989) 2 Mad LJ 385, cf Aiyar, Commentary on Indian Trusts Act
(8th edition) at 275.
Inland Water Transport Corporation Limited and Anr. v. Brojo Nath Ganguly and
Anr, (1986) IILLJ 171 SC.
includes an analysis of Scottish law that comes to the same conclusion.
 EWCA Civ 464.
Clash of the Titans or Cozy Bedfellows, 45 U. Mich. J. L. Reform 829
Exculpatory Clauses: Clash of the Titans or Cozy Bedfellows, 45 U. Mich. J. L.
Reform 829 (2012) at 837.