TRUSTS: If you're a trustee, negligence doesn't pay

In cases of administrators of property of others, it has generally been accepted that administrators are entitled to be reimbursed their costs of administration, including legal fees. However, in Bell v. Molson, 2015 QCCA 583 the Court of Appeal analyzed those rules in relation to a claim by the trustees for their legal fees. In reversing the Superior Court decision that the trustees in question were entitled to be reimbursed $3.2 million in legal fees despite having been found negligent, the Court of Appeal set out the parameters in which such fees can be reimbursed. This decision will have far-reaching implications because the test set out will apply not only to trustees but to liquidators, tutors, curators and mandataries. In addition, the Court of Appeal confirmed that since a trustee’s duties to act with prudence and diligence are of public order, clauses purporting to limit liability for violations of those duties will not be enforceable.

The Appellants were the capital beneficiaries of a trust. They sued the Respondent trustees for a rendering of account and damages for having been negligent in their management of the trust assets.

The Superior Court awarded the Appellants approximately $665,000 in damages. However, the Superior Court also condemned the Appellants to pay the Respondents’ defence costs (legal and experts fees), which totaled approximately $3.2 million.

The relevant provisions in the will stated:

I declare that … the decision of a majority of my Trustees … shall be final … and I relieve a dissenting Trustee and Executor from all responsibility for any action taken upon a decision in which he or she or it did not concur.

I further declare that at any time and from time to time a majority of my Trustees may act …

Article VIII

In addition to all other powers … my Trustees … shall have … the following powers :

[…] 

h)         To invest all sums of money requiring investment in such securities or other investments as they may think proper without being restricted […] to those mentioned in Article 981-o of the Civil Code of Lower Canada and from time to time to sell alter and vary investments and without responsibility for any loss which may be involved by reason of such investments.

The two questions in appeal were:

1.    Was the damage award of $665,000 well-founded?

2.    Did the Respondents have the right to be reimbursed their defence costs despite having been found to be negligent?

On the first question, the Court held that the Respondents had not been negligent in their administration of the assets prior to 1994 (the trust had been established in 1937). Prior to 1994, the trustees’ obligation was to preserve the capital. However, after 1994, the obligations set out in article 1340 CCQ became more onerous because full administration meant increasing the capital rather than simply preserving it. While the trustees had an obligation of means, the court held they had committed a fault for failing to have an adequate investment policy from 1994 to 2004, for ignoring the risk of being over-weighted in Nortel, GE and IBM shares, which made up half the portfolio, and for ignoring the warnings given by some employees of Royal Trust about the need to diversify.

In particular, the Court did not accept that a trustee could abdicate its responsibility to other trustees without incurring any liability. The Superior Court rejected Royal Trust’s reliance on a clause in the will that excused a dissenting trustee from any liability for a decision taken with which it did not agree.

Having upheld the finding of liability, the Court of Appeal had to decide whether, in such circumstances, the trustees could rely on the clause in the will that excluded their liability. The Court upheld the trial decision that such clauses must be interpreted restrictively so as not to exclude the public order obligations of trustees to act with prudence and diligence, which go to the very core of the administration of the property of others.

The Court quoted the author Troy McEachren:

[…] À la suite de la violation d’une obligation essentielle de l’administrateur découlant de l’obligation générale d’agir avec prudence, diligence, honnêteté et loyauté, les clauses exonératoires de responsabilité ne pourront cependant pas être invoquées. Ces obligations sont essentielles et inhérentes à tout régime d’administration. En d’autres termes, aucune administration n’a été créée s’il en résulte que l’administrateur peut faire ce qu’il veut du bien au mépris total des droits du bénéficiaire.

Given that the Court held that the exclusion clause did not apply, it then had to decide whether the trustees were entitled to their defence costs totalling $3.2 million. The Court referred to Article 1367 CCQ as the source of the right to reimbursement:

1367. Les dépenses de l'administration, y compris les frais de la reddition de compte et de remise, sont à la charge du bénéficiaire ou du patrimoine fiduciaire.

1367. The expenses of the administration, including the cost of rendering account and handing over the property, are borne by the beneficiary or the trust patrimony.

The Court acknowledged that expenses included not only those associated with rendering account but those incurred to be represented before the courts. However, the Court of Appeal disagreed with the trial judge’s conclusion that the Respondents should be reimbursed.

The Court held that whoever agrees to accept the position of administrator must execute her obligations with care and prudence and she will be liable for damages if she fails to do so (see Arts. 1318 and 1334 CCQ). While an administrator who acts prudently may still incur a loss and be entitled to have his costs reimbursed, it is unfair for the patrimony already reduced as a result of fault to be further reduced by the expenses related to the fault.

The test for whether an administrator’s legal fees will be considered administration expenses is whether they are objectively incurred in the interest of the beneficiary. If the administrator is sued for damages as a result of her personal fault, she is personally responsible for the fees because the claim is directed against her personally rather than in her capacity as trustee. An analysis of the entire situation is necessary to determine who is responsible for the fees.

In this case, the trustees were sued personally and were represented by different law firms. The trustees were defending their own interests (i.e. their interest not to have to pay damages) and therefore they were not pleading for the benefit of the beneficiaries. Accordingly, the legal fees incurred for that purpose were the trustees’ personal responsibility.