TRUSTEE DISCRETION AND CAPITAL ENCROACHMENTS - PART III
The Scope and Extent of the Power to Encroach (cont'd)
Today, I want to continue discussing the limits on a trustee's discretion to encroach on capital. Particularly, I want to deal with the concept of mala fides or bad faith.
The Exercise of Discretion: No Mala Fides
The concept of mala fides has been employed by the courts to limit trustees in the exercise of their discretion to encroach upon capital. The leading case in this area is a decision of England's House of Lords: Gisborne v. Gisborne (1877), 2 App. Cas. 300 (H.L.). Although Gisborne was not strictly speaking an "encroachment" case, it dealt with the underlying issue of the scope of an executor's discretion, particularly in circumstances where the income beneficiary had financial resources of her own. In Gisborne, the Will at issue established a trust fund for the care of the principle beneficiary, the testator's wife, with the trustees being granted "uncontrolled authority" over the application of the trust fund. The principle beneficiary had her own property. She was eventually declared incapable and required full-time care. She argued that the trust fund should be treated as the primary source of funds for her care. The trustees countered that they should only pay her such income from the fund as was required after her own resources had been exhausted. The House of Lords held that the trustees enjoyed an absolute discretion in how they applied the trust fund so long as they did not act with mala fides or bad faith:
[the trustees'] discretion and authority, always supposing that there is no mala fides with regard to its existence, is to be without any check or control from any superior tribunal. (at p. 305)The Gisborne decision was considered and confirmed by the Ontario Court of Appeal in Fox v. Fox Estate (1996), 28 O.R. (3d) 496 (C.A.). This case dealt specifically with the scope of an executrix's power of encroachment. The Court of Appeal affirmed that the main judicial limitation on the exercise of discretion is whether or not the trustee acted in bad faith or mala fides:
The entire question of the degree of control which the courts can and should exercise over a trustee who holds an absolute discretion is filed with difficulty. The leading case, or at least the case to which reference is almost always made, is Gisborne v. Gisborne. It stands for the proposition that so long as there is no mala fides on the part of a trustee the exercise of an ablsoute discretion is to be without any check or control by the courts. (at para. 11).I will continue my discussion of the Fox Estate decision tomorrow.
Have a wonderful day!
--Bianca
