It is trite to say that once a trustee is appointed and accepts the office, s/he becomes subject to the duties and powers of that office. A trustee’s liability, in the event that he is found to have breached his/her duties, or exceeded his/her powers, is personal. A trustee’s risk of personal liability is not limited to breaches of duties and powers owed to the beneficiaries, but rather includes breaches of obligations owed to third parties in both contract and tort. This follows because a trustee is a principal and not an agent of the beneficiaries.
Notwithstanding this potential exposure to liability, there are a number of means available to relieve a trustee from liability for breach of trust. One means is the inclusion of an express provision in the trust — often referred to as an exculpatory clause — to excuse a trustee from liability for certain events, such as failure to exercise reasonable prudence in the management of the trust, or to protect a trustee from liability for the conduct of his/her co-trustees and agents. Another means is the grant of a discretion to a trustee with respect to the exercise of a particular power. For instance, a trustee is under a duty to convert a deceased’s estate. Generally, however, the testator will give a trustee a discretion to decide when this will take place.
Although a trustee is a principal and not the agent of the beneficiaries, the purpose of a trust relationship is the administration of property on behalf of others: the beneficiaries. The fundamental principle of trusteeship is that an obligation is owed by a trustee to the beneficiaries of the trust. It is this fundamental principal that ensures there are limits on how a discretionary power may be exercised and on how far an exculpatory clause may go to protect a trustee from liability.
With respect to discretionary powers that are described even with the broadest of language, such as “absolute”, these are not a license to a trustee to act in any manner s/he wants. The court still has a supervisory role to play. While it is not the case that the courts consider whether a decision was right or wrong and set aside a decision because it would have reached a different one, it is the case that the courts will step in to ensure that the purpose of the trust is not defeated. Even a discretion that is described as “absolute” does not give a trustee carte blanche to do what s/he wants.