This week in the world of client requests in the context of family trusts, a client (the “Client”) considered appointing their child as one of the trustees of their family trust, however wanted to ensure that such child would not be liable for any error or mistake made by them as a trustee, including breaches of their duties as trustee brought about by their own gross negligence. Assume for this blog that the Client also was the settlor of the family trust. This blog reviews the law on indemnifying trustees for their own gross negligence, followed by client management and drafting tips.
Indemnifying Gross Negligence
There is an inconsistent climate regarding indemnity clauses, making it is unclear in Ontario whether an indemnity provision effectively can relieve a trustee from gross negligence. Such inconsistency is highlighted in the English case of Armitage v Nurse,  2 All E.R. 705 (C.A.) [“Armatage”] and the Alberta decision Re Poche (1984), 6 D.L.R. (4th) 40, 16 E.T.R. 68 (Alts. Q.B.) [“Re Poche”]. Armatage is an English decision which supports the principle that a settlor may relieve a trustee of gross negligence, as everything short of “actual fraud” may be excused in an indemnity provision. Distinctly, in Re Poche, the court states that “a trustee must be held responsible for any loss resulting from his gross negligence, regardless of any provision in the trust instrument…”. While Armatage is an English decision, both decisions are recognized as leading cases on this topic (Waters Law of Trusts in Canada (4th ed) “Waters”).
Managing The Client’s Expectations Through A Lens Of Achieving Their Goals
First, I would make sure that the Client understands the meaning of “gross negligence”, including possible acts and omissions that may constitute gross negligence and the consequence (i.e. the practical picture) of indemnifying the child trustee for their own gross negligence.
Second, if the Client still desires such indemnity, I would explain to the Client what it may look like practically, both the risk and possible advantage, of including such indemnity. To emphasize the risk, I would highlight that there is inconsistency in the law, as noted above. As such, drafting an indemnity for gross negligence may not guarantee the child’s protection in the manner desired by the Client. However, what may assist our Client is that interestingly, Waters’ explanation of the rationale for courts not enforcing exculpation clauses does not quite apply to the Client. The rationale, basically, is that courts consider settlors’ intentions and assume that that, “… it is improbable that any capacitated settlor or testator, having the draft clause before him, would desire any such thing.” While this statement was made in relation to acts of fraud, Waters notes that, “For a similar reason, the courts are inclined to take the same view of clauses which exclude the liability of the trustee for his negligence.” Thus, I would explain to the Client that based on such rationale and the fact that in distinction the Client desires that exact “such thing”, if the indemnity provision were litigated, it may provide the desired protection. This is because a court, in trying to protect settlors’ intentions, may choose not to knowingly act contrary to a clearly expressed and evidenced intention (such expressed intention discussed below). However, there remains the risk that a particular situation of gross negligence may arise for which a court may determine this situation likely was not contemplated by the settlor Client and therefore, it is improbable that they would desire “such thing” (i.e. the indemnity clause).
After explaining to the Client that while their intention is clear, there remains the above-noted risks, if the Client continues to desire such a clause, the following are a couple drafting tips that I would consider:
- Waters provides a takeaway drafting tip, stating, “The more general the exculpation provision, the more likely it is that the courts will reach the conclusion that the settlor or testator did not intend to relieve the trustee of liability”; and
- I would evidence the settlor Client’s specific desire, which desire contradicts the rationale for courts not enforcing exculpation clauses. I would consider specifying such desire in a settlor’s letter written by the Client, as settlor of the trust. I also may consider evidencing the desire within the trust. For example, in the indemnity provision, I may include language to the effect of, “It is the Settlor’s wish and desire that … including brought about by **’s (i.e. the child trustee’s name) own gross negligence.”