The duties of a manager of a Unit Trust: Barclays v Equity [2014] JRC102D

The duties of a manager of a Unit Trust: Barclays v Equity [2014] JRC102D

This judgment relates to:

• the nature of unit trusts;
• the legal status of managers and trustees of unit trusts; and
• the basis of claims against them by a successor trustee and successor manager.

Facts

The new trustee and manager issued an Order of Justice against the former trustee and manager, claiming that the latter were liable to compensate the three relevant unit trusts in respect of breaches of trust, fiduciary duty and contract committed in the course of their trusteeship and management of the three unit trusts.

Duties

The Order of Justice claimed that, by virtue of its office as manager of the funds, the former manager was co-trustee of the funds with the former trustee and owed duties as trustee to all unitholders of each fund. It also claimed that (a) the former manager was subject to the express duties and responsibilities as manager set out in the trust instrument and that (b) under the Trusts (Jersey) Law 1984 it was subject to the statutory duties already set out in relation to the former trustee.

The Order of Justice further claimed that the former manager was a fiduciary office holder and owed fiduciary duties to the unitholders as well as equitable duties of care and skill.

It was also claimed that by each of the trust instruments a contract was formed between the manager and the unitholders such that, by virtue of its office as manager of the funds, the former manager owed duties in contract to all unitholders of each fund. As such, it was subject to the express duties and responsibilities in contract set out in the trust instrument and it was also subject to an implied duty of care and skill in the discharge of its functions as a manager.

Findings

The court focussed upon:

• the degree to which a unit trust is contractual or fiduciary in regard to the obligations imposed on the trustee and manager;
• whether a successor trustee or successor manager has locus standi to bring a claim against its predecessor; and
• whether the manager of a unit trust may be held liable as a trustee.

The court found that generally, a unit trust can be expected to establish a triangular relationship between the manager, the trustee and the unitholders. The court recognised the contractual origins of the relationship, and that the unit trust operates as a trust. The court also found that the trustee and the manager owe trustee-like or fiduciary duties and obligations to the unitholders as:

• they have control of properties belonging to the unitholders;
• they undertake activities in the interest of the unitholders;
• they hold power that can unilaterally affect the interest of the unitholders;
• their obligations are owed entirely for the benefit of the unitholders, to whom the unit trust also owes direct contractual obligations, and this combination of obligations renders the manager a fiduciary in relation to the unitholders; and
• the unitholders are in a vulnerable position for they have no right to interfere with the management of their own money.

The court went on to hold that trust instruments are capable of creating contractual obligations enforceable between the trustee and the manager of a unit trust, and that if the trust instrument expressly provides that such obligations are made for the benefit of the unitholders, this means successor trustees and successor managers would have locus standi to enforce those obligations against their predecessors.

The court held that it is at least arguable that the manager of a unit trust is liable as a trustee. In this particular case, it was noted that virtually all trustee-like functions were allocated to the manager, and the fact that the manager was not registered as a trustee, nor was it insured to act as a trustee, was irrelevant.

The court found in this case that the manager of the unit trust was a trustee and therefore had locus standi to bring the claim, particularly as the nominate trustee was required to act on the directions of the manager. The court held that it was unreasonable to insist upon the nominate trustee being the sole plaintiff where the nominate trustee was acting in accordance with decisions made by the manager in relation to the litigation.

Further to this, the court found that, going forward, the common law in this area should develop so that a court should be able to impose equitable remedies upon managers as if they were trustees.

The court held that if the successor trustee and the successor manager were able to show that there was a sufficient relationship of trust and confidence between the unitholders and the prior manager, that would give the unitholders the right to enforce the manager's obligations and to claim equitable remedies in respect of their breach.

The court held that the locus standi of a successor trustee to sue a former trustee does not depend on the breach having any particular character as a breach of a fiduciary duty. It applies generally to breaches of trust of all kinds. It went on to hold that despite the allegations made in this case being of two kinds: (1) unauthorized payments by companies comprised (indirectly) in the trust funds and (2) breaches of a duty of care owed to the beneficiaries of the trust; a successor trustee may legitimately make both.

The court found that it is arguable that any trustee of a unit trust, including a custodian, has a residual duty owed to the unitholders as beneficiaries to challenge unauthorised instructions of the manager. The court stipulated that this duty applies not only where the trustee had actual knowledge of relevant facts but also where it ought to have had that knowledge if it had complied with the statutory duty of diligence.

Comment

This is a noteworthy case for Jersey. There are a significant number of Jersey Property Unit Trusts being administered in the Island, invariably with both a trustee and a manager in place. This judgment provides helpful guidance on the duties, responsibilities and potential liabilities of both the trustee and, significantly, the manager. The comment at the end of this note in relation to a trustee's residual duty to challenge unauthorised transactions of which it ought to have notice may have relevance also, in the author's view, in the area of reserved powers, and the argument that in a reserved powers trust the trustee has a residual duty when provided with prescribed directions from a power holder to ensure no salvage or emergency situation has arisen by virtue of any direction.

About Ogier

Ogier is a professional services firm with the knowledge and expertise to handle the most demanding and complex transactions and provide expert, efficient and cost-effective services to all our clients. We regularly win awards for the quality of our client service, our work and our people.

Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

Regulatory information can be found under Legal Notice