Law Essay on Role of Fiduciary Duties of Trustees

Question

Task: While the responsibilities of a commercial trustee may be usually more narrowly defined in the contractual documentation than those of an ordinary trustee, on the other hand there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust; the financial crisis has brought under the spotlight this tension between the commercial trustee's duties, the trustee’s limitation of liability and the potential fiduciary conflicts. Against this background, write a law essay critically analyzing the role of fiduciary relationship in the context of financial transactions and in particular the duties, obligations and potential liability of a commercial trustee (i.e. security trustee) vis-a-vi the beneficiaries.

Answer

Introduction
The role of a trustee considered in this law essayis to administer the asset performance that is held by a trust for protecting the interest of beneficiaries based on fees. However, the trustee group can be classified into two categories including commercial trustee and ordinary trustee. In terms of performance, these trustee groups are having differences. At present, it is found that responsibilities regarding the performance of commercial trustees are not broadly mentioned in contractual documents or a trust deed, which is considered in case of ordinary trusts. This is because commercial trustee organizations are more profit motive and they deal with typical financial transactions or asset performance. In this context, the duties, obligations, and liabilities of commercial trustees compared to ordinary trustees requires to be mentioned. The current study has focused on the critical analysis of normal as well as fiduciary duties of trustees for identifying conflicts regarding the performance of the trustee. The details of the fiduciary relationship in the context of financial transactions have been explained in the study considering duties, limitation of liability, and obligations of commercial trusts. The analysis has been made based on different case laws for identifying different dimensions of activities of trustees. Furthermore, laws of different countries regarding trustees have been considered as examples in the explanation.

Discussion
Fundamental Concept of “trustee” (“Commercial trustee” and Ordinary Trustee), core responsibilities of trustees to the beneficiaries The trustee can be explained as a person or an organization that holds and controls assets on behalf of a third party. The importance of trustee can be identified in terms of benefits to the third party regarding property or assets. The term trustee can be used widely as a trustee has importance in various purposes including providing assistance in case of bankruptcy, for the purpose of charity, or in case of retirement plans. Duty of Loyalty and duty to manage the trustefficiently are two core responsibilities of trustees . The duty of loyalty has been considered as the fiduciary duty of a trustee towards the beneficiaries. It depicts that a trustee has to administer the trust organization solely in the interest of trust beneficiaries.

The term commercial trustee has been considered for the purpose of business solutions and the key motive of the commercial trustee is to enhance earnings capacity by protecting assets of beneficiaries from potential risks in the market. The commercial trustee organizations need to focus on the duty of loyalty as they are doing work on behalf of beneficiaries. However, the difference has been found in the liability of commercial trustee and ordinary trustee . This is because commercial trustee organizationshave only liability regarding financial assistance but ordinary trustee organizations focus on the broad concept. Hence, the contractual documents in the case of commercial trustee contain limited liability that has not been found in the case of an ordinary trustee. Although trustees are having differences in terms of activities, in terms of core obligations these organizations are the same. According to the case decision of Schmidt vs. Rosewood Trust Ltd. (2003), it has been found that it is the duty of a trustee to provide information for assisting beneficiaries regarding the performance of financial assets . The reason is the financial crisis has been identified due to different unforeseen events in the business. The beneficiary has the right to get information regarding his or her assets and in this case, the trustee has to provide information considering the duty of loyalty and management of the trust. The case of Armitage vs. Nurse (1998) has depicted that “there is an irreducible core of obligations owed by trustees to the beneficiaries and enforceable by them which is the basic to the concept of a trust” . Hence, considering the interest of beneficiaries is the primary motive of trust and hence trustees cannot reduce this obligation as it is the basic concept of ordinary and commercial trust.

Although providing information in terms of an asset or property performance to the beneficiary is the core obligation of the trustee but confidential information sometimes is not conveyed to the beneficiary and it is not the core obligation of a trustee. This decision has been derived from Re Londonderry (1965) case as the intimation of confidential information affects the asset performance and proper return cannot be earned by the trustee. Hence, it is clear that trustees have limitations in terms of obligations and these are applied based on the situation. The ultimate matter is protecting the interest of beneficiaries and trustees have to focus on this core duty in their activities. In the case of the USA, it has been identified that while a person filed a case regarding bankruptcy all rights of properties of the individual have been transferred to the bankruptcy trustee. In the case of the UK also the same rules are followed considering the Trustee Delegation Act 1999. In this context, it can be said that the Trustee Act 1925 in Australia has mandated the investment in trust assets for trustees and it has been considered as a general duty of trustees . The analysis of laws of trust in different countries, it is found that the importance of core obligations and fiduciary duties are clearly mentioned by acts. The duty of loyalty and management of trust assets are basic obligations of any trustee and this has been considered in the contract. The Armitage vs. Nurse Case (1998) has depicted that good faith and honesty both are important to ensure core obligations of the trustee and this importance has been found in the Trustee Act 1925 (NSW) and Trustee delegation Act 1999 also.

Fiduciary Relationship in the Context of Financial Transactions
The term fiduciary depicts a person who has a legal and ethical relationship of trust with one or more parties. Hence, it is clear that a fiduciary focuses on the protection of financial and other assets of a beneficiary. In terms of financial transactions,fiduciary dutycan be considered as the management of financial assets or liquid money by the trustee. Based on the case law of Bristol and West Building Society vs. Mothew (1998), loyalty is required to be maintained in the financial fiduciary process. The reason is the transparency in financial transactions can be easily maintained . The financial fiduciary can be easily maintained if rules and regulations of regulatory bodies of the financial market are properly followed. For instance, investment trust organizations focus on the rules framed by the regulatory body of the financial market and it ensures their fiduciary duty regarding financial transactions. In the case of the USA, rules of Securities Exchange Commission (SEC), has been followed, in the case of Australia, the prescribed regulations of the Australian Securities Exchange (ASX) is followed. Hence, in case of a fiduciary relationship with respect to financial transactions, the duty of good faith is essential which maintains transparency in the performance.

Based on Keech vs. Sanford case (1726), it has been identified that conflict of interest is not permissible in the case of fiduciary duty concerning financial transactions. The reason is it is clearly mentioned in the trustee rules of different countries that loyalty and good faith are key areas of fiduciary relationship and hence, it is the duty of the trustee to maintain transparency in their activities to protect the interest of beneficiaries and eliminating fiduciary conflict . On the other side, regulatory authorities in the financial market of different nations have framed rules to ensure transparency in transactions and it is required to be followed by commercial trustees.In this context, it can be clearly stated that proper knowledge of providing advisory service is essential regarding financial transactions as based on the advice of a trustee, beneficiaries adopt the right decision. If the right decision cannot be provided to beneficiaries, commercial or security trustees cannot fulfil their fiduciary duties appropriately and conflict of interest has been raised. Hence, the duty of care and loyalty are needed to be considered equally for providing accurate service to the beneficiaries. In addition to that, knowledge related to fund management is important, to provide the best suggestion regarding financial transactions to the client. The CBA vs., Smith case is an ideal example of a conflict of interest with respect to the fiduciary duties of an investment bank . In this case, the bank has assured regarding an investment to the customers that it is good but unfortunately the advice could not provide benefits to the customers, and conflict of interest has been created. Under these circumstances, the customers have filed a case regarding breach of fiduciary duties of the bank. The federal court of Australia has stated that in the case of the fiduciary relationship between two parties, the trustee or the service provider has to work at their own interest with good faith . Hence, the bank's advisory service was not enough to protect the interest of customers or beneficiaries. The case result of Australian Executor Trustee vs. Fuller (2019) is another good example regarding the importance of fiduciary duties of commercial trustees. Based on this case also, it is found that AET could not provide quality professional service and it has created a breach of fiduciary duties . The essentiality of three fiduciary duties in terms of financial transactions has been identified including the duty of loyalty, the duty of managing the trust, and duty to the terms. These duties are followed by all countries throughout the globe in order to investigate the performance of commercial or security trustees. Among these three duties, the duty of loyalty and managing trust are two primary obligations of trustees. The key term that is needed to be considered is the duty of care or good faith and this has been judged in case of interpreting professional services provided by trustees.

Three key principles that are needed to be considered by trustees in case performing fiduciary duties are avoiding own advantage, eliminating conflict of interests, and acting according to trustee deeds. These are important as trustees have to ensure that good faith has been maintained in the service. Hence, in the case of a fiduciary relationship in the context of financial transactions, the contract is essential which needs to specify different matters related to fiduciary duties. In case of providing advisory service or enhancing professionalism as a trustee, Corporations Act 2001 is needed to be followed properly. This is because based on the rules of these act regulatory bodies of the financial market in Australia focuses on specific rules regarding trust organizations. For instance, chapter 5C of the Corporations Act 2001 dealt with investment schemes and hence, it is essential to these specific areas for acting as investment trustee professionally . In the case of the UK also Trustee delegation Act 1999 is needed to be followed properly for enhancing the performance of commercial trustees and enhancing fiduciary relationships . The financial crisis matters are also needed to be considered in case of the asset management process of commercial trustees as it ensures the quality of performance under the adverse situation of trustees. The change market performance of a country can create a financial crisis and this is needed to be overcome to provide monetary benefits to the beneficiaries by trustee organizations.

Responsibilities of Commercial Trustee and compared to Ordinary Trustee
The key difference in the case of the performance of commercial trustees and ordinary trustees is commercial trustees are having more profit-making attitudes rather than ordinary trustees. As commercial trustee deals with monetary and different financial assets, the profit-enhancing based on quality service to the beneficiaries is the key motive of trustees.

Duties
Duty of care is the core activity of commercial or security trusts and in this case, there is no difference with ordinary trust. Hence, without a duty of care trustees cannot provide high-quality service regarding assets or properties to the beneficiaries. Furthermore, the power to invest is the most important duty of commercial trusts as they are more profit motive than ordinary trusts, they have investment obligations based on which monetary benefits would be provided to the beneficiaries. Thirdly, it can be sated that balancing income and capital is an essential duty in the case of a trustee as it would help to adopt the right investment decision, and beneficiaries would get benefits on a constant basis. These three duties are needed to be followed accurately by commercial trustees for developing their performance in the market.

Above mentioned duties are common duties of commercial trustees but some fiduciary duties are mandatory for managing commercial transactions perfectly . These include acting at good faith and liability to third parties which depict that the trustee has to deal with only trust assets. In this context, it is clear that the liability to the third party has stated the limitations of the liability of trustees. If the comparison has been made with ordinary trustees, it can be stated that good faith is the only fiduciary duty of this type of trustee but in case of commercial trustee addition, third party liability has been considered. Hence, in terms of duties, there is no huge difference between two anatomies of the trustee but the key difference has been found in case of monetary matters. The commercial trustees have established based on profit motive and hence, more proficient knowledge is essential and furthermore, more duties are needed to be performed compared to ordinary trustees . Hence, fiduciary and common duties both are having equal importance in the case of the commercial trustee as this enhances performance.

Obligations in details
The term good faith has been already discussed in the above which is an important matter in case of the performance of commercial trustees . Furthermore, at the time of performing duties of trustee organizations, the term good faith is considered as it is important for ensuring the interest of beneficiaries. The honesty and good faith are key obligations of trustee activities and it has been clearly mentioned in trustee obligation rules in Australia . In the case of the UK also the same rule has been followed and in case of a commercial arrangement, honesty, integrity, and good faith are considered as key elements of the performance. The case Leerack Pty Ltd vs., Garrick E Fay (2008) reveals the obligations of trustee and this is why the case decision has been provided priority in Australia. NSW court has provided a decision in this matter that honesty is the primary obligation of commercial trustees as well as ordinary trustees and it is not contrary to the public policy for excluding the liability of a trustee. Based on the case analysis of OztechPty Ltd vs. Public Trustee of Queensland (2018), it has been identified that equitable duties are owed by trustees and hence, honesty in the trustee activities is essential. The case has provided a solution in terms of equitable duties considering section 283DA of the Corporation Act 2001 . In this case, the federal court has found that the Queensland debenture trustee organization did not violate rules of the Corporations Act and the equitable duty has been properly followed. Hence, the case has been easily defended and the plaintiff could not get any support from the federal court.

Based on the comprehensive analysis of two cases, it is identified that honesty is the primary factor of trustees to perform professionally in the market. The ultimate objectives of trustee organizations are to manage risks in the asset performance on behalf of beneficiaries. Hence, if risk management is not properly made, it would damage the interest of beneficiaries and in this case, full liability is vested on the trustee . Hence, in terms of obligations of the trustee, it is clear that a trustee is liable if any interest of the beneficiary has been hampered. The term good faith is needed to be implemented effectively for ensuring honesty and furthermore, due diligence is also important for protecting the interest of beneficiaries easily . The case result of Oztech Pty Ltd. has developed the importance of good faith and honesty in the case of the commercial trustee. This is because it is identified that a trustee has to work accurately on behalf of a beneficiary to protect properties successfully. The case of Leerack Pty Limited has also increased the importance of honesty in case of the activities of trustee.

In the case of explaining the obligations of commercial trustees, due diligence is also an important term in addition to honesty and good faith. The reason is due diligence helps to protect a beneficiary from any tort or offense. The duty of care can be ensured based on three obligations including honesty, good faith, and due diligence and this has been evaluated from the case of Leerack Pty Ltd. In this context, it is essential to say that trustee has to handle trust assets only on behalf of beneficiaries only but it cannot be considered as personal assets. This is because if it is considered as a personal asset, the honesty and good faith in the performance cannot be maintained.

Trustee’s limitation of liability and potential fiduciary conflicts
Limitation of Liability
Based on the different Acts of different countries including the UK, the USA, and Australia, it has been identified that trustees have to enter into an agreement and that is called trust deeds. The primary duty of a trustee after the agreement is to follow conditions of trust deeds as it would ensure the duty of care, good faith, and honesty. The Armitage vs. Nurse Case 1998 has focused on the honesty and good faith of trustees for ensuring the performance of trustee organizations. The limitation of liability has been mentioned in this case also and it is related to trust assets only . The Trustee Act 1925 in Australia depicts that the limitation of liability clause is not needed to mention in the case of indemnity . The limitation of liability reveals that a trustee would perform for the assets of beneficiaries based on the amount received as fees. Hence, a trustee would look after a limited amount of assets of beneficiaries and in case of other assets of beneficiary, the trustee has no right. Furthermore, the activities have to be performed considering trust assets only and in this case, the trustee does not have any personal rights on these assets.

Actually, trustee focuses on the limit of their personal liability through expressing written limitation clause. This helps trustee organizations to protect from personal loss and risk of insolvency through indemnities from the fund of trust. If uniformity has not been maintained in the limitation of liability clause, the quality of the clause has been deteriorated. The limitation clause has benefits to the trustee regarding reimbursement rights and exoneration right. The reimbursement right depicts that a trustee has a full right to replenish its own assets while it has discharged liabilities of trust personally. On the other hand, the exoneration right focuses on the power of the trustee for applying trust assets directly for discharging liabilities of the trust. Hence, the exercise of both rights helps to identify the amount of personal benefits of a trustee from professional services. It implies that the performance of a trustee is limited to reimbursement and exoneration right and that cannot be exceeded. Rights and other obligations are needed to be clearly mentioned in the limited liability clause.

In the case of the operating activities of a trustee, it is important to mention in the agreement, the importance of allocation of risk. The limitation of liability clause wants to achieve an agreed risk allocation between the beneficiary and trustee . In this context, it is important to say that commercial trustees need to focus on limiting liabilities to trust assets for ensuring that their solvency is not at risk. For instance, sometimes an unsecured trust creditor seeks help from commercial trustees to recover the amount from the entity. In this case, the limitation of liability is needed to be mentioned properly at the beginning stage as it would not raise conflicting questions in the future. Commercial trustees deal with the different typical commercial transactions including transactions in the derivative market, hedging transactions, and so on. Hence, it is vital to consider the limitation of liability accurately for performing in the market successfully . The ultimate objective of ensuring limitation of liability is to eliminate the conflict in the trust deeds and it enhances transparency in the trust activities. The capacity of a trustee has been mentioned in a trust deeds pr agreement which provides an idea regarding the limitation of liability of a trustee.

Potential fiduciary conflict
The term good faith is an important part of the fiduciary duty of a trustee and this obligation cannot be denied in the performance according to the case decision of Armitage vs. Nurse (1998). The good faith term is limited to the duty of trustee and that is needed to be mentioned in the deeds. Hence, it is clear that limitation of liability is needed to be mentioned in the deeds accurately and it cannot create fiduciary conflicts in the future. In the case of commercial trustees, different types of complicated financial transactions dealt with by trustees and hence, it is an important focus on effective risk management, and in this case, also the limitation of liability is important. Actually, the limitation of the liability clause ensures that fiduciary conflicts can be easily eliminated and trustee performance can be enhanced. The case result of Public Trustee of Queensland vs. Oztech Pty Ltd., (2018) states that equitable duty is the liability of trustee organization and hence if that is not considered in the performance fiduciary conflict can be created. Hence, in case of evaluating the obligations of the trustee, it is important to focus on the fiduciary duties of commercial trustees that include good faith and third party liability. Furthermore, due diligence is also considered for ensuring that transparency in trust activities has been maintained. Hence, potential fiduciary conflict can be created if the trustee does not properly follow trust deeds, and interest of beneficiaries is hampered.

In the case of financial transaction and advisory services, commercial trust faces difficulties in terms of performance if beneficiaries are not satisfied accurately. Hence, fiduciary conflict can be developed based on key fiduciary duty good faith . If beneficiaries are not satisfied with the service of trustees, they can claim against trustees, and hence the conflict arises. Actually, the commercial trustees need to focus on the regulations of financial markets for providing service to the beneficiaries. Hence, full disclosure policy is needed to be followed by trustees along with trust deeds for ensuring that quality performance is made by the organization. The contract agreement is required to be considered properly and all clauses are needed to be mentioned so that beneficiaries cannot raise any question regarding the performance of trustee and breach of duty in the future. If the question of breach of duty has been identified, it would create controversy regarding the fiduciary duty of trustee and third party liabilities. This is because based on basic rules of trust deeds, it is important to focus on the performance of trustee considering good faith, honesty, and due diligence. Hence, trust assets are required to be protected based on loyalty, good faith, due diligence, and honesty and that would help to ensure that the trustee has performed well . The overall discussion regarding fiduciary conflict depicts that potential conflict can arise while the trustee does not follow trust deeds and honesty; good faith and liabilities are not considered properly in the engagement of activities. Hence, trust deeds are needed to be followed and good faith is an important fiduciary matter for maintaining trustee activities in the market. This is applicable not only to commercial trustees; ordinary trustees also need to focus on these areas.

Conclusion
The above-discussed study reveals that honesty, good faith, due diligence, and limitation of liabilities are key matters in the activities of trustees. Furthermore, it has been identified that the duty of loyalty is also important in the case of maintaining transparency in the performance of trustees. Commercial trustees deal with financial asset performance based on fees and they have fiduciary duties to protect the interest of beneficiaries from any issue. The case of Armitage vs. Nurse (1998), states that honesty and good faiths are important terms in order to ensure the quality of work of trustees. Commercial trustees face problems in case of dealing with typical transactions in the market and it deteriorates the performance of trustees, which creates fiduciary conflicts. Hence, it is important to focus on the trustee rules and regulations of the financial market properly for ensuring transparency in the performance. Actually, the main purpose of the trustee is needed to be evaluated in case of performing effectively and good faith can ensure the quality of performance of commercial trustees.

References
Allen B., "The Legal Obligations Of A Trustee: Proactive Not Reactive - Bradley Allen Love Lawyers" Bradley Allen Love Lawyers, [website] 2020, https://ballawyers.com.au/2018/06/07/legal-obligations-trustee-proactive-not-reactive/ (accessed 1 May 2020).

Armitage vs. Nurse 1998, ‘trustee beneficiaries’ Uk.Practicallaw.Thomsonreuters.Com, [website] 2020, https://uk.practicallaw.thomsonreuters.com/D-000-4061transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1 (accessed 1 May 2020). Connolly, M.J., ‘Discharging Duties’. American Bankruptcy Institute Journal, Vol. 37, no.8, 2018, pp.32-74

Davies, P.S., Conpensatory Remedies for Breach of Trust. Can. J. Comp. & Contemp. Vol. 2, 2016, p.65

Duties of trustees, "The Special Duties Of Trustees - Inbrief.Co.Uk" Inbrief.Co.Uk, [website] 2020, https://www.inbrief.co.uk/estate-law/special-duties-of-trustees/ (accessed 2 May 2020).

Gerard Basha, "Breach Of Trust By Professional Trustee – Even With Prior Legal Advice! | Bartier Perry Lawyers" Bartier.Com.Au, [website] 2019, https://www.bartier.com.au/insights/articles/breach-of-trust-by-professional-trustee-even-with-prior-legal-advice/utm_source=Mondaq&utm_medium=syndication&utm_campaign=LinkedIn-integration (accessed 2 May 2020).

Hafeez-Baig, M.J. and English, J. ‘Disclosure of trust information: discretionary or principle-based jurisdiction’. Trusts & Trustees, Vol. 23, no. 7, 2017, pp.829-834.

Haley, M., ‘Section 61 of the Trustee Act 1925: A Judicious Breach of Trust’. The Cambridge Law Journal, Vol. 76, no. 3,2017, pp. 537-565

Haslam A. and Wood M., "First Case On The Duty Of A Debenture Trustee Under Section 283DA(A) Of The Corporations Act 2001 (Cth): Oztech Pty Ltd V Public Trustee Of Queensland (No 15) [2018] FCA 819 - Gilchrist Connell" Gilchrist Connell, 2018, https://www.gclegal.com.au/limelight-newsletters/first-case-on-the-duty-of-a-debenture-trustee-under-section-283daa-of-the-corporations-act-2001-cth-oztech-pty-ltd-v-public-trustee-of-queensland-no-15-2018-fca-819/utm_source=Mondaq&utm_medium=syndication (accessed 2 May 2020).

Hudson, ‘Trustees duties’, Cw.Routledge.Com, 2020, http://cw.routledge.com/textbooks/9780415497718/podcasts/podcast25.pdf (accessed 1 May 2020).

Islam, C., ‘Breach of fiduciary duty claims and the quiet fiduciary thesis’. Trusts & Trustees, Vol. 25, no. 2, 2019, pp. 237-265

Kleiner, G. and Harris, J., The application of section 61 of the Trustee Act 1925: the court’s dubious prerogative of mercy. Trusts & Trustees, Vol. 23, no. 2, 2017, pp.215-226

May, G., ‘From the conduct commissioner: An executor's obligation to provide information to beneficiaries’. Law essayBulletin (Law Society of South Australia), Vol. 40, no. 6, 2018, p.20. Miller A., "Duties And Liabilities Of Trustees - August 2015 - Corporate/Commercial Law - Cayman Islands" Mondaq.Com, [website] 2016, https://www.mondaq.com/caymanislands/trusts/496738/duties-and-liabilities-of-trustees--august-2015 (accessed 1 May 2020).

Mitchell, C.H.A.R.L.E.S., ‘Good Faith, Self-Denial and Mandatory Trustee Duties’. Trust Law International, Vol. 32, no.2, 2018, p.2

Pottow, J.A., ‘Bankruptcy Fiduciary Duties in the World of Claims Trading’ Brook. J. Corp. Fin. & Com. Vol. 13, 2018, p.87 Reynolds, D., ‘What Are the Duties of Constructive Trustees’. UNSWLJ, Vol. 41, 2018, p.1297

Smith, L, ‘Access to Trust Information: Schmidt v. Rosewood Trust Ltd’. Est. Tr. & Pensions J, Vol. 23, 2003, p.1. Smith, L., ‘Prescriptive fiduciary duties’. U. Queensland LJ, Vol. 37, 2018, p.261

Smith, L., ‘The Duties of Trustees in Comparative Perspective’. Eur. Rev. Private L., Vol. 24, 2016, p.1031