The role of a trustee or co-trustee is not without risk. Some trustees may be statutorily protected from liability in some cases by section 35 of the Trustee Act, but that indemnity will not apply in all cases. Similarly, trust instruments often include exculpatory clauses intended to protect trustees from liability for certain errors or omissions, but such clauses do not apply to every kind of error or omission.

The Court of Appeal reminded trustees of their exposure to personal liability in the recent case of Penman v. Penman¹ wherein it dismissed the appeal of MM. MM was a co-trustee who was found liable for $453,048.20 plus interest for the wrongful removal of funds from a trust. The losses arose after MM signed a director’s resolution authorizing her co-trustee to invest the trust funds at his absolute discretion. Thereafter, MM did not make any inquiries as to the performance of the investment or her co-trustee’s duties.

At the hearing, MM asserted that she acted honestly, reasonably and in good faith and that she was duped by her co-trustee and another party. The application judge disagreed, and found that MM did not act reasonably as a trustee and did not meet the statutory duty of care set out in section 27(1) of the Trustee Act, RSO 1990, c T23 [the Act].²

At the hearing, MM had argued that the court could and should relieve her of liability in this regard pursuant to subsection 35(1) of the Act, which provides that the court may relieve a trustee from personal liability where a breach of trust occurred despite the fact that the trustee acted honestly and reasonably. The application judge concluded that section 35(1) was not available to MM for two reasons:

• subsection 35(2) provides that subsection (1) does not apply to liability for a loss to the trust arising from the investment of trust property, and;
• MM did not act reasonably as contemplated in subsection (1).³

The Court of appeal agreed. The application judge and the Court of Appeal also considered MM’s reliance on an exculpatory clause in the trust instrument. The clause reads in part as follows:

The Trustee [sic] shall not be responsible for the acts or defaults of each other or for any error in judgment or for any act of omission or commission not amounting to actual fraud in the management and administration of the Trust Property.  The Trustee shall not be personally liable for any monies to become due from or by any claims against the Trust Property or upon any investment executed by the Trustees under the provisions hereof.⁴

The application judge concluded that an exculpatory clause does not immunize a trustee from personal liability if the trustee improperly delegated the power or discretion in question. The Court of Appeal agreed, citing Waters’ Law of Trusts in Canada wherein the authors acknowledge the uncertainty in Canadian law regarding the validity of such clauses in relation to a trustee’s liability for gross negligence, and observe that such clauses will not protect a trustee who improperly delegated his or her power or discretion.⁵

In short, because MM had wholly and unreasonably abdicated her duties as a co-trustee, she could not avail herself of either statutory protection of the Trustee Act or the exculpatory clause in the trust instrument.

Trustees should speak to their lawyer about their exposure to personal liability in the course of their duties, especially when they are delegating responsibilities to a co-trustee or third party. Penman is clear: in certain circumstances, trustees will be personally liable for losses despite the indemnity of s. 35(1) of the Act and any exculpatory clause in the trust instrument. Had MM obtained advice from a lawyer and/or the Superior Court of Justice, she may have avoided this $453,048.20 bill … which does not include the cost of her litigation.

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1. Penman v. Penman, 2014 ONCA 83 (CanLII) [Penman].
2. Ibid at para 4.
3. Ibid at paras 9 – 13.
4. Ibid at para 11.
5. Ibid at para 13.