Trustee – exercise of discretion

A helpful summary of the principles concerning the grounds on which the exercise of a trustee’s power can be challenged is found in a passage from the decision of Northrop J in Clerical Administrative and Related Employees Superannuation Pty Ltd v Bishop (1997) 76 IR 139, which was cited on appeal by Heerey J (Wilkinson v Clerical Administrative and Related Employees Superannuation Pty Ltd [1998] FCA 51; (1998) 79 FCR 469 at 480) and referred to by the High Court in Attorney-General for the Commonwealth v Breckler (1999) 197 CLR 87 at 99-100 ([7]) per Gleeson CJ, Gaudron, McHugh, Gummow, Hayne and Callinan JJ:

“Where a trustee exercises a discretion, it may be impugned on a number of different bases such as that it was exercised in bad faith, arbitrarily, capriciously, wantonly, irresponsibly, mischievously or irrelevantly to any sensible expectation of the settlor, or without giving a real or genuine consideration to the exercise of the discretion. The exercise of a discretion by trustees cannot of course be impugned upon the basis that their discretion was unfair or unreasonable or unwise. Where a discretion is expressed to be absolute it may be that bad faith needs to be shown. The soundness of the exercise of a discretion can be examined where reasons have been given, but the test is not fairness or reasonableness”.

See also the judgment of Kirby J, who regarded the summary as an accurate one, at 115 ([58]).

Example of such analysis

26 Accepting that where no reasons are given, the test is whether there has been a failure of the trustee to act “with an absence of indirect motive, with honesty of intention, and with a fair consideration of the issues”, a phrase used in Jacobs at [1610] and one based upon Truro LC’s words in In re Beloved Wilkes’s Charity [1851] EngR 375; (1851) 3 Mac & G 440 at 448[1851] EngR 375; , 42 ER 330 at 333, cited with approval by Sheller JA in Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 at 441-442, the question is whether, when reasons are given by the trustee, a different test is to be used. Jacobs states at [1610] that if reasons are given “the court may consider the validity of such reasons and, if it feels that the reasons do not justify the decisions, may correct the decisions accordingly”. Wilkes’s and Hartigan are cited in support of this proposition.
27 In Karger v Paul [1984] VicRp 13; [1984] VR 161, McGarvie J said at 165-166:

“It is an established general principle that unless trustees choose to give reasons for the exercise of a discretion, their exercise of the discretion can not be examined or reviewed by a court so long as they act in good faith and without an ulterior purpose: Re Beloved Wilkes’ Charity [1851] 3 Mac and G 440; [1851] EngR 375; 42 ER 330; Duke of Portland v Topham [1864] EngR 339; (1864) 11 HLC 31; 11 ER 1242. For reasons given above, I would add the further requirement, so obvious that it is often not mentioned, that they act upon real and genuine consideration. In the context, it was in that sense that Lord Truro LC used the expression “with a fair consideration” in Re Beloved Wilkes’ Charity, at (42 ER) p. 333. In the case of an absolute and unrestricted discretion such as the discretion in the present case, the general principle is given unqualified operation: Gisborne v Gisborne (1877) 2 App Cas 300, at p. 305, per Lord Cairns LC; Tabor v Brooks (1878) 10 Ch D 273; Craig v National Trustees Executors and Agency Company of Australia Ltd. [1920] VicLawRp 101; [1920] VLR 569. The operation of the principle is discussed in Jacobs’ Law of Trusts in Australia, 4th ed., pp. 300-2.”

(emphasis added)
28 In addition to the obiter dictum in Karger, I have had regard, in this connection, to The King v The Archbishop of Canterbury [1812] EngR 102; (1812) 15 East 117, 104 ER 789; Wilkes’s; Re Knollys’ Trusts [1912] 2 Ch 357; Dundee General Hospitals Board of Management v Walker [1952] 1 All ER 896; Rydge v Hartigan Nominees Pty Ltd (unreported, Supreme Court of New South Wales, Young J, 12 September 1990), and on appealsupra; Meat Industry Employees Superannuation Fund v Petrucelli (unreported, Supreme Court of Victoria, Nathan J, 29 February 1992, BC9200730); Asea Brown Boveri Superannuation Fund No 1 Pty Ltd v Asea Brown Boveri Pty Ltd [1999] 1 VR 144; the passage from Wilkinson cited in Breckler and set out at [21] above; and a note of Mr David Maclean, ‘Beneficiary’s Right to See Confidential Trust Documents’ (1993) 67 ALJ 703, to which reference is also made in Jacobs. In Wilkes’s, Truro LC said at 448:

“it is to the discretion of the trustees that the execution of the trust is confided, that discretion being exercised with an entire absence of indirect motive, with honesty of intention, and with a fair consideration of the subject. The duty of supervision on the part of this Court will thus be confined to the question of the honesty, integrity, and fairness with which the deliberation has been conducted, and will not be extended to the accuracy of the conclusion arrived at, except in particular cases. If, however, as stated by Lord Ellenborough in The King v The Archbishop of Canterbury [1812] EngR 102;(15 East, 117), trustees think fit to state a reason, and the reason is one which does not justify their conclusion, then the Court may say that they have acted by mistake and in error, and that it will correct their decision; but if, without entering into details, they simply state, as in many cases it would be most prudent and judicious for them to do, that they have met and considered and come to aconclusion, the Court has then no means of saying that they have failed in their duty, or to consider the accuracy of their conclusion.”

(emphasis added)

29 I note that the learned authors of Jacobs, after setting out the general test, said at [1610]:

“The duty of the court generally is to see that the discretion of the trustees has been exercised in this manner and not to deal with the accuracy of the conclusion at which the trustees may have arrived.”

with Wilkes’s and Hartigan in the Court of Appeal cited in support.

30 In Dundee, it was argued that when reasons are given, the Court can more readily examine and correct the trustee’s decision. Lord Normand said at 900:

“It was said for the appellants that the courts have greater liberty to examine and correct a decision committed by a testator to his trustees, if they choose to give reasons, than if they do not. In my opinion, that is erroneous. The principles on which the courts must proceed are the same whether the reasons for the trustees’ decision are disclosed or not, but, of course, it becomes easier to examine a decision if the reasons for it have been disclosed. Lord Truro’s judgment in Re Wilkes’s (Beloved) Charity ought not to be construed as going beyond that.”

Lord Cohen expressed some support for the view that if the reasons given by the trustee, even on a matter for the trustee’s absolute discretion, demonstrate an approach that no reasonable person could have taken to the matter at hand, this is sufficient to demonstrate that the discretion has miscarried, but Lord Tucker did not, saying that in his view, nothing short of dishonesty on the part of the trustees in arriving at their decision would suffice (at 907). Lord Morton, whilst willing to adopt the appellant’s test for the purposes of the case, did not accept that it was an appropriate test. Lord Reid, whilst prepared to proceed on that basis, indicated that he wished to reserve his opinion on the point.
31 Even in Wilkes’s, where trustees had to determine who should be selected to be trained for the Church ministry, Truro LC, after having set out the passage referred to by Lord Normand, did consider whether there was anything in the trustees’ affidavits which laid the foundation “for any judicial conclusion that the trustees intentionally and from bad motives failed in their duty” (at 449), and his Lordship later referred to the fact that it had not been established that the trustees had adopted an exclusionary rule for which there was no warrant, which rather suggests that the Lord Chancellor was not intending to lay down a principle that the Court could, absent some established breach of the requirements, consider whether the trustees’ decision itself was erroneous or wrong. Ellenborough CJ’s approach in The Archbishop of Canterbury does not provide support for any wide power of review of the decision of the person exercising the discretion. In that case, a bishop, pursuant to a statutory provision, had to decide whether a candidate was suitable for appointment as a lecturer at a parish church, and the bishop had been ordered to provide an affidavit giving his reasons. His Lordship commented at page 141 of East’s:

“It only requires him first to approve, that is, before he licences; and in so doing, it virtually requires him to exercise his conscience duly informed upon the subject; to do which he must duly, impartially, and effectually inquire, examine, deliberate and decide. If the Court have reason to think that any thing is defectively done in this respect, it will interpose its authoritative admonition. The mandamus to license, if the party shall be found to be a fit person, is a solemn and peremptory call upon the bishop to adopt the requisite means for duly informing his conscience, in order to the correct and effectual exercise of this most important duty.”

and at page 146:
“what scales have we to weigh the conscience of the bishop?”; see also page 153 of East’s, where his Lordship said:

“Now if we were trying the validity and correctness of the bishop’s conclusions, and going into all the facts of the case (which I disclaim our authority for doing) there was before the bishop the evidence of a person who gives his information at an unsuspicious period, when there was no question depending and no interest to be served or prejudiced by it.”

32 In Esso Australia Ltd v Australian Petroleum Agents’ & Distributors’ Association [1999] 3 VR 642 at 652-653, Hayne J said that the Court “will not sit on general appeal from the decisions of the trustee”.
33 In Petrucelli, Nathan J, in setting out his views of the limits of review by the Court when reasons are advanced and after noting that the exercise of discretion means no more than arriving fairly at a conclusion from a number of options or alternatives, said at page 8 of BC9200730 that the Court’s function was to consider:

“(1) Whether the reasons relate to or are relevant to the discretion to be exercised. (2) Whether the reasons were arrived at in good faith and without an ulterior purpose (see Karger and Beloved Wilkes Charity (1851) 3 Mac and Eg 440; [1851] EngR 375; 42 ER 330). (3) Whether the reasons reasonably support the conclusion. (4) It is open to the court to look at evidence of the enquiries made by the trustees, the information they had and the manner of the exercise of their discretion, but only [so] far as to assess the viability of the exercise, not to impugn or replace it. (5) It is not open to the Court to examine the reasons for the purposes of exercising its own discretion. It is not open to the Court to examine the factual situation for the purposes of substituting its own discretion for that of the trustee because the Court might consider the trustee unwise or imprudent (see also Dundee Hospital v Walker (1952) 1 All ER 896). (6) It follows as a compelling matter of logic that the reviewable discretion is that which was exercised by the trustees at the time.”

34 Having regard to the authorities, and particularly what was said in Dundee, Rydge at first instance and Petrucelli, I proceed on the basis that where reasons are given, the Court can have regard to those reasons in forming a view as to whether the trustee has:

(1) acted for an indirect motive;

(2) acted without honesty of intention;

(3) acted without a fair or real and genuine consideration of whether and how the discretion should be exercised; and

(4) acted for a purpose beyond that for which the power and discretion were bestowed on it.
35 I am, with respect, attracted to the view expressed by Lord Normand that the principles on which the Court must proceed are the same whether reasons are given or not. When reasons are provided, the determination of whether breach has occurred may well be made easier, but this does not alter the test. I think this conclusion is consistent with the last sentence of the passage from Wilkinson cited in Breckler and set out at [21] above. From a practical point of view, I think it would be undesirable that trustees be discouraged from giving reasons for a decision, when asked, for fear that the provision of reasons would lead to a more expansive power of review than if they gave no reasons.

38 In Telstra Super Pty Ltd v Flegeltaub [2000] VSCA 180; (2000) 2 VR 276 at 284, Callaway JA expressed the view that if the decision were one which no reasonable trustee could make on the material before it, this would establish a breach. This approach was adopted by Bryson J in Sayseng v Kellogg Superannuation Pty Ltd [2003] NSWSC 945 at [62]; and see Hay v Total Risk Management Pty Ltd [2004] NSWSC 94, where these cases were reviewed and Burchett AJ said at [56]:

“the trustee’s decision, applying the test that has so far been accepted by the courts, will only be overturned if it is such as no reasonable trustee could have arrived at upon the material considered. However, a reasonable trustee would hold to a high standard in the consideration of such a matter, which involves important rights of a contractual nature.”

From Manglicmot v Commonwealth Bank Officers Superannuation Corporation [2010] NSWSC 363