Law of Equity and Trusts - Exam Revision Notes (Part 4)

Trusts week 5 term 2

Investment – self contained topic
Investment is a temporal concept. It has been said that an express trust is a gift over time.
A trust is a gift extended over time and meanwhile in need of management
In the word temporal lies the essence of a trust
The t4rustee has a duty to manage the trust, this means care.. especially investment care
Unless you spread your gist over time you don’t need management or investment
If you have trustees for life and in remainder but the life beneficiaries have all died. Now have a trustee holding the fund for the last surviving beneficiary. Most peculiar where this is for an adult.
This is a bare trust
So at any moment, the last suruiving beneficiary can say it doesn’t want it anymore and can bring the trust to an aned. This is teh rule in saunders bautier
Bare trust : At any moment in time, can turn to trustee and say you want the money.
What this tells us about the trustees duty: there is no time, no ivestnemt
Think of investment as clothing something. Think of bare trust as unclothing smthing
If the trust will go on for a long time, u must take care, manage and clothe it with an investment
If it can be brought to an end in an instant, no investment,,
So 2 types of trust:
1 - Have to invest because there is time involved
2 - And the one where you don’t have to because it is a bare trust
It is about time – temporal
T stands for type
E stands for example
M stands for method or mode
P stands for portfolio
O stands for (standard) OF care
R stands for responsibility (this is social responsibility, nto responsibility generally speaking)
A stands for agency
L stands for land
This is everything that needs to be learnt about investment in trust law
1) TYPE – are there any restrictions as to type? The type of thing you can invest in?
There are some broad restrictions. History: there was a statute called the trustees investment act 1961, now have the trustee act 2000 (important statute, will see this on handout)

It was a radical statute (the 1961 one), said we are not Victorian anymore/. Don’t have to invest in gilt, government bonds. Victorians were restricted, could only invest in gold and government bonds. It worked for the Victorians. This worked because of inflation.

Purchasing power is stable.

In a world where prices are stable and currencies are stable, why go crazy with investment?

The message in Victorian period: don’t go crazy, trustees. If you wanted to invest outside goevenmrmt bonds.gold, needed express permission from courts/ in trust

So just keep it in well secured mortgages, don’t go crazy. If trustee says – i have to produce an income.. government bonds give you an income. Or shares, but youd need permission from trust

Gold mine?

Looking for things that produce income. Governemtn bonds are good.

Took until 1961 to change this
When statute came, it said youd don’t need permission to invest in certain kinds of shares. The kind: publicly quoted company with a long track record
This was 1961. Even then there were limits.
Today ----
Now you can invest in investments of any type.
This is the trustee act 2000.
Btu they do have to be investments. Cant for example do lottery.. this is not an investment by any definition. It is speculation
An investment is a purchase that has a reasonable expectation of yield in income/ capital.
g. tree – fruit is income, wood is the capital
Nowadays, relaxed..any type of thing so long as it gives a yield
Pure speculation, lotteries – not an investment
Must choose the right example of the thing to invest in
Can invest in company shares.
So it’s about examples as well as type
The right method/mode.
Have to go about it in the right way, certain advice. Being mindful of certain factors. Don’t approve an investment in land oversees unless familiar with local market. Getting the method right, take advice
So any type, but must use the right example. And right method.
Portfolio –
Portfolio theory. Kind of one the many factors that contributed to the global credit crisis.
Portfolio theory: the idea is today is not the day to invest in ice cream. Today =Invest in umbrellas. You hedge your bets. Invest in something. Offset the risk by investing in another. Sophisticated version: you can either invest by targeting paticualar companies, one by one, by researching and deciding who is to do well. Or you can invest in all of the companies.
If you target them, you’re taking a bigger risk
But efficient market theory: the bigger the risk you take the bigger the returns.
Example: Cadburys, prices of shares gone up. Have to take a risk to get a better return. Also though, increased likelihood of loss. Inversely proportionate. Risk gain, risk a similar loss.
If yourea trustee, want to make sure none will sue you.
T5rustees decide –rather than take big risks for big returns. They go with modern portfolio theory – if you invest in every single company, cant lose
This is how most investment takes place
What happens: in a portfolio investment, first of all, you give a bit in bank, keep cash, some gold. Spread some things outside share market. When you go into the market, you don’t invest in every single company. Most – buy shares in a company that buys shares in every single company.
Huge funds like pension funds can do it.
You try and produce a market tracking portfolio, looks just like the market
If the market goes up, go with it. If goes down, no worse than market
So, copy market
Better to do this than to expose yourself to complaint.
Dissipate risk by investing across whole market propeoritonaly.
This is what everyone was doing/ thinking outside of the box is risky and dangerous. General attitude of follow the crowd
This is why we have the trustee act 2000. Instead of restricting trustees to be careful, can spread the investment across all the shares.
Badly times idea. End of 1999 shares went down. The value from 1999 still not recovered
Law reformers said – let trustees invest any type of company, all the trust funds decided to throw money.. market bottomed out, hasn’t recovered
So badly timed innovation
If trustees had kept to traditional mixture of gold, gild.. etc.. may be better
Last week we looked at fudicairy duty – 2 – duty of care, duty of loyalty. Don’t do antyhign that outs your interest in conflict with that of your principal.
Todasy we are looking at care.
Last 3 –R A L.. discrete points you need to know. Come after main event.
Main event being ---- can invest in what you like, choose the right type. Simply creating a portfolio unthinking, not just to be followed. Do it with care
Then responsibility..agency ..
Responsibility –ethical responsibility
Trusts own a lot wealth, pensions for example. Unfortunate situation: Trustees under a legal duty to maximised wealth
Basic rule: cannot put any idea of social responsibility ahead of wealth maximisation
The law: more wealth is always good/ this actually means that this huge amount of wealth held in trust is invested with a disregard for social responsibility
Invest ethically without any one spotting it. Don’t want it to be proved you don’t want morals.
Agency – and land
Add on points
Noone expects anyone to be atrustee in evry kind of investment. Technical rules for appointing an agent
Crucial thing: all about care –getting the right agent for the job. Someone who knows the land
Land ---- can invest in freehold and leaseholds
Cant in restrictive covenant
Investments ----see handout
See weblinks
Now – doesn’t matter if your produce capital growth instead of income, as long as it is appropriate to the trust.
Trustees have freedom to invest
See worksheet ---
Introduction – duty of care
4 lines in –act fairly. As a trustee, not allowed to say that ‘ill be a trustee and can delegate to mate’..
Trustee has to do the job..can delegate administration but not discretion
Duty of care --- O of termporal. ‘of care’
Cases speight v gaunt –JESSEL MR: let the market to its thing. Classicl Victorian/ let everyone invest as they like. Laissez faire
A trustee ought to conduct the business of the trust in the same manner than an ordinary
A trustee is not bound because he is a trustee..
Problem alluded to at last session: not bound to do anything different.
So long as you do what everyone else does, follow crows, be ok!
Judge wants the trustee to just be safe
Not expecting them to be better than an ordinary man of business
Crucial: trustees are not paid unless special clasue in trust instrument saying they can be paid. Not true anymore.. generally true that fiduciirary not paid but
Now – professional trustess are entitled to reasonable renumernation under trustees act 2000
SEE ON WEBSITE. EXTRA BIT NOT ON HANDOUT. JESSER MR QUOTE
Cant be too hard on trustee, otherwise no one will be a trustee. They ARE hard on trustees
Learoyd and whitelely –said we need to think more deeply about what the business of a trust is
See what jessel said in last case – trustee like a another business person
No, see learodyd.
‘future time’ –temporal
The duty of a trustee is not to take prudent care..
Take care ...see website
It turns out that the duty of a trustee is not to act like dragons den kind of bsiness man but like a family man.. people fpr whom you have a duty to provide. Moral duty to provide for people so don’t take crazy risks
If you have to provide for others, have to care first. Cant think of Have to be MORE careful than a oerson in business
Select to protect, not speculate to accumulate. Cant lose what youve got. Spread the risk appropriately, choose wisely the examples of the investemtn types
It is LIKE moral duty
Irony of trusts law: if you are an amateur trustee, you will be subject to more onerous liability than a professional. Proferssional is covered by exclusion clauses.
So law says – u are judged by this strict standard (the standard of a prudent family provider).. if youre a professional.. e.g. solicitor – higher objective standard. If youre a bank that says the do trust work, you are subject to really hugh standard
This is all nonsense. If you make mistakes, even if higher standsrd, there are clauses for mistake
The amateur person who says they’ll do it, hammered by prudent family provider standards.. no exclusion clause
Before this, subjective standard: the lowest standard is objective lowers standard of prudent family provider.. so no subjective standard
Re vickery is one case where MAY be subjective standard BUT SO LONG AGO ..don’t expect it again. no subjective standard. 1931! One case.
So it is OBJECTIVE NOT SUBJECTIVE
Armitage v nurse: lord millet. Clause 15 ---see website.
‘No trstee should be liable for any loss or damahe...’
So only liable if only fraud.. court said this is fine. Ridiculous.
At the moment, no unfair trusts term act.
Have: Professional will do reasonable thing and insist upon reasonable clasuing.
Section 1 trustees act 2000 ---see handout. Acfording to the 2000 act, trustees must be careful.
So – a trust is like a private govemenr,t. General law in trustee act 2000. .. but if someone want sot create their own settelemnt, can exclude general law. Its a gift extended over time. Can make gift as you like to make the gift
There have been cases where trustees have said ‘dont care if youre not careful with this property, don’t want you to be liable’... radical
Exclusion clauses do NOT TAKE awy duty of care. Exludiosn clause excludes liability but NOT DUTY OF CARE
MUST be careful exclusion clause can exlude liability to mistake that has been made but must be careful --- there is a duty
Any trustee purporting to rely on exclusion clause in advance,, liable.. for recklessness as said in nurse case above
B TRUSTEE INVESTMENTS
If you bought a painitng (as a trustee you bought it).. no income not an investment. This is the OLD DEFINITION. Not the law any more
As a result of trustee act 200, can invest with a view to capital growth
If a painitng is likely to go up in value, may be sensible for a trust that wants a variety of investments
HARIES CASE
Capital case::: Capital return is ok
Nestle L ASND NAIONAL WEST MINISTER ..CASE VERRRY IMPORTNAT
Weblinks – treasursy research paper.. see graph of inflation
Inflation between 1750 and 1990
1970 – terrible inflation in 70’s.
See chart 2 – blips
Value of pound goes down during world war 1 and 2
Nestle case –somene left some money in 1920 – in shares gold/bonds/gilds...standard potfolio..balanced potfolio
When eveyrne had died, one person left. Miss nestle. In 1980’s
1922 -- £50000 to begin with.. would be 1.5 million if kept original
Bank made a mistake, when new statute came out.1961 – invest in whatever you like. trustee bank panicked..new statute says we can only invest in certain types of shares. Advice on what statute means?? No. the bank said ..when statute came out in 1961.. it didn’t affect the situation where the trust allowed you to invest in things
State said nothing about changing existing investments, miss nestles protifolio
So --- miss nestle –in 90’s ..expecting the money.. expecting 1.5 million
She thought that the bank, In 1961..when they got permission to invest more adventrualy. .. they sold more. Get shares which could be rising in value
They said ---- quatre of a million
She’d lost masses in real terms. She should have had her original portfolio.
Was the bank liable?
the CA said no right thinking investor would trust you with their money
Loss can include a bad gain..cant prove that she certainly made
Cant say for sure that a prudent bank would not have put money in a deposit account
The Victorian standrrd is to take care, take care..caution!
We cant prove that is caused a loss

Investment in land
Can invest in freehold or leasehold land..
****NOT ON HANDOUT ****The actual proviosns have been repealed, the principle is
Don’t lend more than 2 thirds of the value of the land
Soa ctually repealed but principle is above
See slide –
The Barclays bank –if your own 99.8% of shares, make sure u have a representative on the board. Duty to supervise and get someone on the board.
This brings us to investment policy –
Basic rule – Harries v church commissionser..s
Here, have invest for best cash. As in the case of Cadburys. Didn’t want to but had to by law.

You have to invest in something that provides money. Nestle: bank saying – you cant prove what would have happened if they did it differently. This is the nature of investments. Cannot prove it –‘hindsight is a wonderful thing’. You are not judged by outcomes, you are judged by the process od invesemnet (that is what m for method is about)

See page 3 of ntoes

Must be fair but this doesn’t mean equal

Imparituality means no bias bbut must be fair

Delegation – have to choose the right agent

Not on hanout- -- trustees act 2000 part 4.