INDEMNITIES AND RELEASES FOR TRUSTEES - Third Parties - Part II
In an effort to carry on with our theme of trying to protect trustees, we wanted to consider the liability of trustees as against third parties. In this context, there is really no limit to the extent of liability that a trustee can incur.
A trustee can, of course, incur liabilities to persons other than beneficiaries. For example, the trustee may contract an environmental clean up company to remove contaminated soil from land that is owned by the estate before it is put on the open market. The trustee will therefore be liable for those costs, payable out of the assets of the estate. As trustees are principals and not agents of the beneficiaries, they will, prima facie, be personally liable on obligations owed to third parties and trustees may incur personal liability as a result.
The trustee may limit the extent of the personal liability to the value of the trust assets or limit it to the extent that the right of indemnity exists only against such assets. Furthermore, where the trustee has the right of indemnity out of the trust assets, creditors will, as a general rule, be entitled to be subrogated to it. See Cullity, M.C.C. "Personal Liability of Trustees and Rights of Indemnification" (1997), 16 E.T.J. 115 at pp. 127-128. As to the question of limiting the liability of a trustee, Falconbridge on Mortgages (4th Ed.), p. 428-429 states:
If the trustee or personal representative covenants to pay, he will be personally liable on his covenant, even thought he covenants as trustee or as personal representative, even though he adds a proviso that he shall not be personally liable, such proviso being repugnant to the covenant to pay and therefore void. He may, however, validly limit his liability without destroying it, as, for example, if the covenant is to pay out of a certain fund, with a proviso that the covenantor shall not be liable after he ceases to be entitled to administer the fund. So, if a trustee covenants "as trustee and not otherwise", or "qua trustee only", or if an executor covenants "as executor, and as executor only", the covenantor is personally liable to pay, but only to pay out of the assets of the estate or to the extent that he has assets.
This strict rule attempting to limit a trustee's personal liability has been weakened and modified by the courts. For a review of the impact of the ability of a trustee to limit his or her liability, see Cullity, M.C.C. "Personal Liability of Trustees and Rights of Indemnification" (1997), 16 E.T.J. 115 at pp. 129-133 and see Gordon v. Roebuck (1992), 92 D.L.R. (4th) 670, 9 O.R. (3d) 1 at p. 7-10 (C.A.).
It seems that the bottom line is that a trustee must watch out for the personal risk that may be attached to him or her, merely as a result of his or her dealings with third parties.
On our next Blog, there'll be more to come on this "protection of trustees" theme...
All the best, Suzana and Ian.
