Most trustees who have faced an actual or potential conflict of interest will be able to recall the reaction of their critics. The oft-favoured refrain is, usually, some iteration of the following ultimatum: either the trustee must resign immediately, or 'face the consequences'. Such 'consequences' will be unpalatable and deftly contrasted with the quiet dignity of a discrete exit; they are likely to include a threat to remove the trustee by force or an allegation of breach of fiduciary duty.
However such threats are expressed, they are often buttressed by a confident assertion that the 'no conflict rule' is rigid, immutable, and unforgiving. This can, itself, be enough to frighten the trustee off their perch without further enquiry. But the legal reality is not quite so stark.
In a world where trustees (and other fiduciaries) can all too easily find themselves conflicted (even inadvertently), a greater appreciation of the nuances of the 'no conflict rule' is invaluable. This applies to persons in actual or potential conflict, to their opponents, and (perhaps) to their respective legal advisors as well. Accordingly, this article explores:
the parameters of the 'no conflict rule', focussing on conflicts between a trustee's personal interests and their duties. While similar considerations apply where a trustee owes conflicting duties to two sets of beneficiaries, those conflicts are not the focus of this article; and
some practical tips for managing conflicts. The solution, it will be seen, is not always to resign. This may be welcome news for trustees in difficult positions and for beneficiaries who would prefer to 'keep' their trustee but cannot see any basis to do so.
The 'no conflict rule' is an equitable principle, grounded in pessimism about the weaknesses of human nature. It arises from the suspicion that persons entrusted with protecting the interests of others may be tempted to abuse their office to advance their own interests (as described by Lord Heschell in Bray v Ford (1896) AC 44). Much like the vice of temptation, the origins of the rule are as ancient as they are arcane.
Traditionally, courts have expressed the 'no conflict rule' in severe terms: unless expressly authorised (for example, by the relevant trust instrument), trustees are not permitted to put themselves in a position where their personal interests conflict with their duties as trustee. This applies even if there is merely a 'real sensible possibility' of conflict in the eyes of a reasonable observer (Boardman v Phipps [1967] 2 AC 46). While this might be regarded as somewhat nebulous, these are questions which can usually be answered by a simple 'sniff test'.
In practice, the imperative for trustees should be quite clear: they must avoid acting in any way which may create an actual or potential conflict between their interests and their duties. If they fail to do so, they risk (i) personal liability and (ii) their actions being set aside at the instance of an interested party.
Facing the stringency of the 'no conflict rule', trustees in positions of actual or potential conflict often feel that they have no choice but to resign. But is that correct?
Certainly, the resignation of the conflicted trustee is often the cleanest means of resolving their conflict. And if no practical alternative exists, this is also the route which courts will generally favour. But it is an oversimplification to say that this is always the case.
In reality, the summary departure of the trustee may not always be practicable or in the interests of the beneficiaries. The impugned trustee may be a valuable source of information or advice to their co-trustees. They may have a significant relationship with the beneficiaries which cannot be replicated. There may be nobody willing or able to step into their shoes, or there might be disagreement amongst the beneficiaries as to the suitability of the prospective replacement(s). There may be a smorgasbord of commercial and legal obstacles which make transition problematic (for example, where proceedings affecting the trust are ongoing). In such circumstances, alternative means of managing the conflict will need to be carefully considered.
But what are the alternatives to resignation? According to Hart J in Public Trustee v Cooper (unreported, 1999), there are at least two:
where a conflict pervades the trustee body (rather than affecting just one of their number), trustees are likely to have no choice but to surrender their discretion to the court; or
if the trustees honestly and reasonably believe that they can take their decision free from the influence of conflict, they may arrive at a proposed decision and put it to the court for approval (whilst ensuring that all opposing arguments are ventilated along the way).
At first blush, neither of these alternatives may be especially attractive to a conflicted trustee, or even to their detractors (given the associated costs and uncertainty of pursuing them). Happily, however, we do not think that they are (or were intended to be) exhaustive. This is because courts have made clear that the 'no conflict rule' is precautionary in nature; it is not concerned with loss, compensation or punishment, but with the prevention of temptation on the part of the trustee to act inconsistently with their duties. Therefore, if there are other means of managing conflicts which are capable of securing such prevention and deterring trustees from misconduct, we consider that they must - in principle - be permissible. We explore some possible options below.
Where none of the courses canvassed above are felt to be workable and/or in the interests of the beneficiaries, a better mechanism of managing the trustee's actual or potential conflict will need to be identified. In our view, any of the below may be workable solutions (on the right facts):
disclosure of the conflict to the beneficiaries, and obtaining their informed consent to proceeding in spite of it;
exclusion of the conflicted trustee from the decision-making process on a particular issue, where there are unconflicted trustees available to act and the trust instrument, or applicable legislation, permits the trustees to act non-unanimously. If this route is to be used, care will need to be taken to ensure that there are sound reasons for the conflicted trustee to remain in place in circumstances where it will have no part to play in the relevant decision-making;
appointment of a co-trustee, for the same purpose (and subject to the same considerations); or
delegation by all of the trustees (including the conflicted trustee) of their decision-making powers to some other (non-trustee) decision-maker, subject to being satisfied that there is a power to delegate in this way, that it is appropriate to do so (taking into account the above considerations), and that the delegate owes the same duties to the beneficiaries of the trust as the delegating trustee.
As regards route (4), this may be particularly relevant to professional trust corporations. Where the trustee is a professional trust corporation which has been supplied by a corporate service provider (CSP), it may be possible to identify a separate trust corporation, run by different personnel, within the CSP's wider organisation, to which decision-making powers could (in theory) be delegated (on as wide or narrow a basis as required and, potentially, without the cost and complication of appointing an arms-length third-party as a replacement trustee). Naturally, care would need to be taken to ensure that the persons with carriage of this entity are taking the relevant decision independently of the individuals responsible for the day-to-day administration of the trust. This may be facilitated by erecting an information barrier which allows the 'independent' decision-makers to operate in isolation from the 'core' decision-makers, notwithstanding that they are supplied by the same CSP.
While we have some doubts about whether the court would regard route (4) to be an effective mechanism for ensuring independent decision-making (given that there may be reporting lines within the CSP which make this impracticable), there may be individual scenarios in which it could be workable.
In determining the appropriateness of any of the above routes, it will be important to weigh up the acuteness of the conflict and the significance of the issue to which it relates. Inevitably, this will be a case-by-case assessment and will be highly fact-sensitive.
The upshot is that conflicted trustees, and their critics, should not assume that resignation is the only mechanism by which actual or potential conflicts can be managed (even if it is, usually, the cleanest). In appropriate circumstances, other (more creative) solutions may be both permissible and preferrable.
Ultimately, what is required is a careful assessment of the relevant facts, in all cases with a view to what is most likely to serve the interests of the beneficiaries (as a whole) and negate any temptation on the part of the affected trustee to act in a conflicted manner.
For more information, please contact our private wealth disputes team.
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