New Zealand Law Society - Limitation of liability and indemnity of trustees under the Trusts Act 2019

Limitation of liability and indemnity of trustees under the Trusts Act 2019

By Rhonda Powell

As a general rule, trustees are personally liable for the consequences of their own breach of trust. One way of protecting trustees is by limiting their duties under the trust deed to reduce the likelihood of a breach of trust. Another is to include clauses limiting the liability of trustees and indemnifying them out of the trust fund for any losses that they suffer due to their trusteeship. These clauses are important because otherwise few people would be willing to take the risk of being a trustee.

In anticipation of the Trusts Act 2019 coming into force (in January 2021), clients should be advised to have trust deeds reviewed, and in many cases, amended to bring them into line with the new law. A key part of any Trusts Act review will be an analysis of the extent of any limitation of liability and indemnity clauses. At the same time, law firm precedents will need to be amended so that new trusts established are Trusts Act compliant. This will require specific advice to the settlors about the nature and extent of the trustee limitation and indemnity clauses to comply with a new statutory duty.

This article examines the new rules on limitation of liability and indemnity clauses in the Trusts Act.

The current position

Currently, there are no statutory restrictions on the breadth of trustee limitation of liability and indemnity clauses. However, under the common law, a trustee cannot be indemnified for failing to administer the trust honesty and in good faith for the benefit of the beneficiaries (Armitage v Nurse [1998] Ch 241 at 253). An indemnity clause that goes further than this would be ineffective to that extent, and could potentially undermine the validity of the trust. As things stand, a trustee can be indemnified for breach of trust caused by their own negligence or gross negligence.

The critical question that has been explored in case law is what it means for a trustee to act ‘dishonestly’, in which case any indemnity is not available. The Court of Appeal has held that dishonesty has both subjective and objective components. The first step is to establish what a trustee actually knows about the terms of the trust relevant to the alleged breach (subjective), and then it must be asked whether an honest person in the circumstances would have acted in the same way (objective) (Spencer v Spencer [2013] NZCA 449, [2014] 2 NZLR 190 at [131]).

In its Review of the Law of Trusts, the Law Commission, Te Aka Matua o te Ture considered that the current law offers insufficient protection to beneficiaries, who are the ones that lose when a trustee is able to limit their liability for what might otherwise have been a breach of trust. The Law Commission also commented on the fact that limiting trustee liability for breach of trust undermines the core concept of a trust, which is based on the trustee’s obligations (Law Commission, Te Aka Matua o te Ture, Review of the Law of Trusts: A Trusts Act for New Zealand (NZLC R130, 2013) at 5.26-5.27).

Limitation of liability under the Trusts Act

The Trusts Act makes it clear that trust deeds must not limit a trustee’s liability or provide an indemnity for dishonesty, wilful misconduct or gross negligence (ss 41-43). Any terms in a trust deed that purport to limit the liability of the trustee or to indemnify them in breach of these provisions are invalid to that extent.

This means that trustees can no longer rely on broad indemnity clauses that purport to protect them against gross negligence. They may still be protected in relation to ordinary negligence, if this is covered by appropriately drafted limitation of liability and indemnity clauses.

Gross negligence is defined in the Trusts Act (s 44). Reminiscent of administrative law, the court will have regard to a list of factors and determine whether the trustee’s conduct was “so unreasonable that no reasonable trustee in that trustee’s position and in the same circumstances would have considered the conduct to be in accordance with the role and duties of a trustee.”

The factors to be considered are (s 44):

  1. the circumstances, nature, and seriousness of the breach of trust;
  2. the trustee’s knowledge and intentions relating to the breach of trust;
  3. the trustee’s skills and knowledge that are relevant to the role of trustee;
  4. the purpose for which the trustee was appointed;
  5. any other circumstances, including whether the trustee has been remunerated for the role, or characteristics of the trustee that are relevant to the role of trustee;
  6. the type of trust, including, without limitation, the degree to which the trust is part of a commercial arrangement, the assets held by the trust, how the assets are used, and how the trust operates;
  7. the purpose of the trust, including, without limitation, what the trust is intended to achieve, and whom the trust is intended to benefit and in what ways; and
  8. any other factor the court considers relevant.

A limitation or indemnity clause in a trust deed that is too broad will only be invalid to the extent that it overreaches. It is nevertheless advisable to amend trust deeds that include overly broad limitation and indemnity provisions (if possible, under the terms of the trust) to bring the limitation and indemnity clauses into line with the Trusts Act, for the sake of transparency and simplicity. It is important to review the trust deed closely because limitation and indemnity provisions are sometimes found in more than one place. In particular, check the power to invest as limitation and indemnity provisions are often incorporated as part of contracting out of the duty of prudent investment.

In addition, under s 131 of the Trusts Act, the court has the ability to excuse a trustee for breach of trust in whole or in part if they acted honestly and reasonably and “ought fairly to be excused”. This does provide the potential for a trustee escaping liability for breaches of trust that fall outside the scope of any indemnity clause, if a court can be persuaded.

Advising on limitation and indemnity clauses

Those drafting new trust deeds (including but not limited to lawyers) will have a statutory duty to take reasonable steps to ensure that the settlor understands the meaning and effect of any limitation or indemnity clause contained in the trust deed (s 43). Explanation of limitations and indemnities should be part of standard advice when establishing a trust, and should be provided both verbally and in writing. If the lawyer does not properly advise, this does not invalidate the limitation and indemnity clauses. However, that lawyer would not be able to rely on them, if ever appointed as a trustee. A file note of any oral advice and a copy of any written advice should be retained in the long term.

The legislation does not require lawyers to provide this advice in relation to existing trust deeds. It only applies to lawyers who are paid to prepare the terms of the trust in the first case. However, it would be good practice to advise all trustee clients about limitation of liability and indemnity clauses, as part of any trust review that takes place to consider the new law. In my opinion, advice on limitation and indemnity clauses, as part of a discussion of the nature and extent of trustee obligations, should also take place as part of the appointment of new trustees.


The new rules on limitation of liability and indemnity of trustees are likely to alter trust law practice because of the statutory duty that advisers who draft trust deeds provide specific advice on the topic. This, together with other aspects of the Trusts Act, may lead to an increased public understanding of the nature of trusts, and the risks of trusteeships. In my opinion, this is a good thing. In the meantime, there is much work to be done reviewing trust deeds for compliance with the Trusts Act, and revising precedents in time for 2021.

Dr Rhonda Powell TEP is a Christchurch barrister with a specialism in trusts and estates.

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