Trustee investment duties: Daniel v Tee

18 / 10 / 2016

Background

The scope of trustees’ investment duties has recently been considered by the High Court in Daniel & Ors v Tee & Ors [2016] EWHC 1538 (ch), with results which will be comforting to professional trustees.

The case concerned solicitor trustees of a family trust established following the unexpected death of a wealthy farmer, in favour of his two then-teenaged children. Many years later the children as adults, Mr and Ms Daniel, brought a claim against the trustees for breach of trust. It was claimed that the trustees had acted imprudently by relying on the investment advice of independent financial advisers which transpired to be incorrect.

Court decision

The High Court found in favour of the trustees. Although, partly as a result of the poor financial advice, the trustees had “adopted an approach which was less balanced and diversified than I [the Judge, Richard Spearman QC] consider many trustees would have thought appropriate“, the trustees had not acted in a way that no reasonable trustee would act.

Referring to the trustees’ delegation of investment decision-making, the Judge stated that, given the complexity of investment choices in the 21st century, the law does not require trustees to personally make each individual investment decision.

The trustees were obliged to “exercise supervision and control over the strategy and pattern of investments“, however. In doing this, it was important that the trustees had considered the adviser’s recommendations critically rather than following them “unthinkingly“.

The Judge also considered that, had there been a breach of trust, it would be difficult for the claimants to demonstrate that the breach had caused loss in the value of the investments. To prove liability, the claimants would have the onerous task of showing first that the trustees’ investment choices were imprudent to the extent that they had breached their duties as trustees, and second that they would have been measurably better off if suitably prudent choices had been made. As to whether a decision was prudent, this should be considered in light of the economic context at the time rather than with the benefit of hindsight.

Claim for loss for imprudent investment

If a claim for loss due to a trustee’s imprudent investment were successful, the Judge in Daniel v Tee considered that the measure of compensation would be the difference between the claimant’s actual position and the “prudent investment” scenario. It would only be appropriate to measure fair compensation by reference to the performance of an index where the trustees had “misunderstood or misapplied their investment powers in some radical way“.

Investment duties of Pension Scheme Trustees

Trustees’ investment duties are a hotter topic than ever in the context of pension schemes. The Pensions Regulator (tPR) published a new Code of Practice for trustees of defined contribution schemes and a set of guidelines in July this year, including the Guide to Investment Governance. A DB scheme investment strategy publication is expected from tPR later in 2016.

Trustees of UK pension schemes will need to take care that, particularly if delegating their investment duties or relying on third party advice, they are complying with their statutory duties under the Pensions Act 1995, their scheme’s trust deed and rules, and the relevant tPR Code of Practice. It is important to remember that pension scheme trustees cannot exclude liability for negligence in relation to exercising their investment function (section 33, Pensions Act 1995). However, Daniel v Tee demonstrates that the Courts do not expect trustees to be omniscient in the investment sphere and in our view this applies just as much to trustees of pension schemes as to the family trust in Daniel v Tee.