Scottish court guides trustees on use of indemnity clauses in trust deeds

The Inner House of Scotland’s Court of Session was ruling (20 page / 536KB PDF) in a case that considered whether the corporate trustee of a non-associated multi-employer pension scheme was entitled to the benefit of an indemnity under the rules from the scheme assets. Pinsent Masons represented the trustee in the action.

The trustee of the Plumbing and Mechanical Services (UK) Industry Pension Scheme had experienced difficulties in applying employer debt legislation laid out in section 75 of the Pensions Act 1995.

The scheme’s administration system had from the outset not been configured to allocate liabilities to employers. In addition, some employers claimed to have suffered losses as a result of mistakes made by the trustees in its application of the section 75 legislation.

As the trustee had no assets of its own, it asked the court for directions, because it needed certainty about its ability to use scheme assets to meet the costs of responding to claims from employers.

The court appointed a reporter to review and report on the facts and circumstances. On the basis of the report the court confirmed that in the circumstances the trustee was entitled to rely on the indemnity.

The facts of the case

The section 75 legislation has proved difficult for many multi-employer schemes to manage, and the Plumbing Pension Scheme is no exception. The trustee is a corporate body with no assets of its own, whose sole activity is acting as trustee of the scheme.

It has been the subject of criticism for the approach it has taken to dealing with section 75 debts. Concerns had been raised about whether the trustee could rely on the indemnity in the scheme rules to deal with any claims relating to section 75.

In its terms the scheme indemnity did not apply to wilful wrongdoing. Separately, in Scots law no indemnity is available in respect of ‘gross negligence’. The trustee needed to know that it could continue to rely on the indemnity to administer the scheme, collect section 75 debts, and respond to any claims.

One employer and an employers’ representative body lodged responses to the trustee’s petition, but withdrew these before the hearing. In order to gain a full picture of the situation the court appointed Lord Drummond Young as reporter to investigate the circumstances and express a view on whether or not the court should confirm the availability of the indemnity.

The reporter told the court that neither wilful wrongdoing or gross negligence were established, and on that basis the indemnity ought to be available to the trustee.

The report

Lord Young’s summary of the law covering these issues noted that no clause in a trust deed can permit a trustee to ignore his basic duties in that office. ‘Gross negligence’ involves a fundamental disregard for the duties of the office of trustee and the exception for gross negligence applies only where there has been a serious lack of attention to the affairs of the trust or serious mismanagement.

In its decision, the court agreed with the reporter that there was no arguable basis for stating that the trustee, or its officers, had ever acted in bad faith; there was no suggestion of fraud or dishonesty; and the conduct of the trustee did not amount to either wilful wrongdoing or gross negligence.

As a result, the court confirmed the trustee’s ability to use the indemnity clause to deal with any relevant proceedings. It also said that if the trustee stopped being the scheme trustee, it would still have recourse to the indemnity in the event of any claims.

Practical implications

Pension scheme rules generally set out the protections available to pension scheme trustees. Typically they will consist of an immunity from claims; an indemnity from either the scheme assets or the employers; or both.

Immunities and indemnities usually exclude protection against fraud, wilful default, and sometimes gross negligence. While the extent of the protection available to a trustee depends on the terms of its scheme rules, similar exclusions apply in Scotland, irrespective of what the rules say.

In Scots law indemnity and immunity clauses in a trust deed are valid and enforceable in respect of ordinary breaches of trust – including negligent breaches – but they do not apply where the breaches involve fraud, dishonesty, bad faith or gross negligence.

In the context of gross negligence this means that no immunity or indemnity is available where a trustee’s actions or omissions are so extreme as to amount to a fundamental disregard for the duties of a trustee.

The court defined this as: “A serious lack of attention to the affairs of the trust or serious mismanagement of its affairs; a mere failure to deal with one particular problem does not normally fall within this category”.

The court said its decision meant there was no need to give further consideration to questions of conflict of interest or replacing the trustee.