| Learoyd v Whiteley | |
|---|---|
| Court | Court of Appeal |
| Date decided | July 29, 1886 |
| Citation(s) | (1887) 12 AC 727 |
| Case history | |
| Prior action(s) | (1886) LR 33 Ch D 347 |
| Case opinions | |
| Cotton LJ, Lindley LJ, Lopes LJ | |
Learoyd v Whiteley (1887) 12 AC 727 is an English trusts law case, concerning the duty of care owed by a trustee when exercising the power of investment.
Contents |
Elizabeth Whiteley and her children sued the executors of Benjamin Whiteley's will (of 19 March 1874). The will contained a power to invest the fund on certain investments, including “real securities in England or Wales.” £5000 of the trust money had been lost. £3000 was invested in a mortgage at 5% return in the freehold of a ten acre brick field near Pontefract, “with the engine-house, sheds, brick and pipe kilns, and buildings thereon, and all fixtures and fittings thereon.” £2000 was invested on mortgages at 5% in four small freehold houses, including a shop, in Salford, Greater Manchester. The brickfield owners went bankrupt in October 1884 and the owner of the four houses filed for petition for liquidation. There was insufficient money to pay the trust fund.
Bacon VC held in the Chancery Court that the brickfield investment was unauthorised, and the trustees were responsible for its failure. The trustees failed to exercise sufficient caution, but they had done so in the case of the houses. The trustees appealed.
The Court of Appeal upheld Bacon VC's decision, that the trustees were liable for repayment of the £3000 invested in the brickfield. They held that a trustee must exercise the standard of care of an ordinary prudent businessman, applying any special knowledge he may have. Cotton LJ stated,
| “ | As I understand it the rule is this. They must take such care in conducting the business of the trust as a reasonably cautious man would use, having regard, not only to the interests of those who are entitled to the income, but to the interests of those who will take in future. That is to say, it is not like a man simply investing his own money where his object may be a larger present income than he can get from a safer security; but trustees are bound to preserve the money for those entitled to the corpus in remainder, and they are bound to invest it in such a way as will produce a reasonable income for those enjoying the income for the present. And in doing so they must use such caution as a reasonably prudent man would with reference to transactions in which he may be engaged of a similar nature.
In my opinion a trustee is not bound to have special knowledge. Where there is any special knowledge required, he may, and ought to consult those who could advise him from their special knowledge,—lawyers in the case of legal matters, and experts as to the value of property where there is any question as to the value of property. But I cannot accede to the view which Mr. Hemming pressed upon us so very much, that you must consider whether the trustee is or is not possessed of special skill and ability. If he likes to undertake the duty of a trustee (although I an not for my part at all inclined to bear hardly on a trustee who acts honestly) he must be dealt with as an ordinary man of ordinary intelligence. Having said that, let us look at what was done by the trustees as regards the investment on the brick-field. |
” |
Lindley LJ followed.
| “ | The principle applicable to cases of this description was stated by the late Master of the Rolls in Speight v Gaunt[1] to be that a trustee ought to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own, and that beyond that there is no liability or obligation on the trustee. I accept this principle; but in applying it care must be taken not to lose sight of the fact that the business of the trustee, and the business which the ordinary prudent man is supposed to be conducting for himself, is the business of investing money for the benefit of persons who are to enjoy it at some future time, and not for the sole benefit of the person entitled to the present income. The duty of a trustee is not to take such care only as a prudent man would take if he had only himself to consider; the duty rather is to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide. That is the kind of business the ordinary prudent man is supposed to be engaged in; and unless this is borne in mind the standard of a trustee's duty will be fixed too low; lower than it has ever yet been fixed, and lower certainly than the House of Lords or this Court endeavoured to fix it in Speight v Gaunt.[2] | ” |
Lopes LJ concurred.
Lord Watson held that in administering and managing trust property (distinguished from the investment sphere),
| “ | As a general rule, the law requires of a trustee no higher degree of diligence than a man of ordinary prudence would exercise in the management of his own private affairs. | ” |