The risks of relying on instructions from a Trustee

A solicitor with extensive knowledge and experience of Trust law has been held liable for breach of fiduciary duty, knowing assistance and dishonest assistance in acting on the instructions of a Trustee of a charitable trust:  Eden Refuge Trust v Hohepa, Ak CIV-2003-404-000539, 17.3.10, Duffy J.

The Trustee asked the solicitor to act on the sale of the Trust’s major asset – a building in Auckland that had been used for religious purposes.  After the building was sold the Trustee went to live overseas and asked for some of the proceeds of sale to be sent to him. 

The Judge said the Trustee was “dubious, dishonest and unreliable” and “the logical and probable inference to be drawn from the method of funds transfer was that it provided the means for [the Trustee] to pay personal debts that he otherwise would have difficulty paying”.

The solicitor sent the monies to the Trustee since he saw it as being no different from the previous circumstance where the Trustee was the registered owner of the New North Road property.  Instead of owning the real estate, the Trustee owned the proceeds of sale.  

The Judge held that: “Since the trust has no legal personality, it was required to operate through its Trustee … It follows that the duties [that the solicitor] owed in his role as a solicitor were owed to the … trust.”

“As the trust’s solicitor, it was incumbent on [him] to ensure that nothing he did harmed the Trust’s financial interests” and there was a “need for [him] to ensure that trust funds are not used for an unlawful purpose”.

The section of the Judgment that deals with the fiduciary duties of solicitors is of particular interest to Trust lawyers.  The solicitor had received a series of instructions from the Trustee.  “Here there are two possibilities:  the first is that at all relevant times [the solicitor] was acting for only the … trust; the second is that [the solicitor] provided services to both the trust and to [the Trustee] (in his personal capacity).  In either case, at all material times, [the solicitor] was a solicitor for the trust.  As such, he undoubtedly had fiduciary duties of loyalty, fidelity and to act in the utmost good faith towards the trust.” 

It was not sufficient that the solicitor regarded the Trustee as the legal owner of the funds and entitled to call for them.  The scope of the general fiduciary duties of solicitors required him “to refuse to act on instructions … which [he] could foresee would be likely to result in harm to the trust; to ensure that the trust’s property is dealt with in accordance with the law; and to require the Trustee to satisfy [him] that the instructions would not result in something that was contrary to the terms of the trust Deed.”

“A solicitor who continues to act on instructions that are inconsistent with the terms of the Trust Deed places himself or herself in a position where he or she cannot discharge the fiduciary duties of loyalty and good faith owed to the trust.”

Actual knowledge of a breach of trust is not necessary:  the solicitor was liable because he “wilfully shut his eyes to the obvious”.

The scope of his duty was held to be even more extensive than that:  the Judge said the Trustee had a positive obligation to report the Trustee’s conduct to the Attorney-General (who is responsible for the administration of charitable trusts).

Claims against the solicitor for breach of fiduciary duty, knowing assistance and dishonest assistance were all established.

Although the Judgment relates to a charitable trust, the general statements about the fiduciary duties of solicitors would appear to extend to all trusts.  It was noted, for example, that “solicitors are officers of the Court and as such they are bound to a higher degree than others to observe the utmost good faith towards a client.”  This is so, whether the solicitor is acting for a charitable trust or a non-charitable trust.

The point of greatest interest for lawyers is probably this:  if they act for a Trustee they owe fiduciary obligations to the trust itself and must be careful to ensure that in following instructions from the Trustee, they do not harm the interests of the trust.  The solicitor said that if the sole Trustee “instructed us to pay out all the Funds, then that would have been our obligation to do so.”  The Judge disagreed, saying that it was “incumbent on [him] to ensure that nothing he did harmed the Trust’s financial interests”.

That is a very high standard indeed.  Whether the obligation is as high as that is likely to be disputed.  But if the acts of a lawyer, when acting on the instruction of a trustee, result in loss to the trust itself, the lawyer should be aware that he/she may be personally liable to make good the loss.