Majority-Rules Clauses1 are designed to avoid deadlock2 in executors’ decision making. Exculpation Clauses seek to protect executors from liability3. The purpose of this paper is to examine how these two clauses sometimes, independently or in combination, produce unexpected negative consequences leading to litigation. A review of the statutes, case law and secondary authorities dealing with these two clauses will hopefully assist testators and will-drafters in making their estate plans as well as executors and beneficiaries in litigation dealing with these clauses.
Majority Rule Clauses
Testators sometimes appoint more than one person to be an executor. As a matter of law, the executors’ decisions require unanimity unless the testamentary document says otherwise4. Unanimity in executors’ decision making process is a red flag to a seasoned will-drafter. Even intelligent people of good faith can disagree. Add a dose of family dynamics and you understand why there can be friction and conflict amongst co-executors leading to a paralysis in the decision making process.
In law, there is a general principle that, unless the Will provides otherwise when there is more than one executor their decisions must be unanimous.5 For that reason it is imperative that the testamentary document outlines how decisions are to be made. Is there a way to break a deadlock? Possibly. As Morden J.A. in Haasz, Re held:6
The testator intended the powers conferred by that paragraph to be exercised by his executors. In my view, they were and are under an imperative duty to exercise one power or the other. As long as they continue to fail to discharge this duty, the intention of the testator will be frustrated with the result that the beneficiaries may suffer. In these circumstances, where its assistance is invoked, the Court must intervene and assume or compel the due execution of the trust…
Lest one think that any one of the executors can easily just seek directions from the court one should look at Craig J.’s comments in Wright, Re:7
The executors are protected from all liability if they honestly and with due care exercised discretion vested in them. But the responsibility is theirs, and cannot be shifted upon the court. The executors cannot come to the court and ask whether the present is a good time or a bad time to sell stock or anything else, or ask whether a price offered is sufficient or insufficient. The advice which the Court is authorized to give is not of that type or kind; it is advice as to legal matters or legal difficulties arising in the discharge of the duties of executors, not advice with regard to matters concerning which the executors’ judgment and discretion must govern.
Given that, absent contrary intention documented in the will, there is a requirement that decisions must be unanimous and the difficulty in obtaining court assistance to break deadlocks one can understand a will-drafter’s preference for the majority rule clause. However, these clauses are not foolproof panaceas to decision making difficulties amongst executors.
There are problems that can still arise even with this majority rules clause in place including:
- Sometimes the majority of executors do not bother consulting other executors and act based on the fact that they had the majority vote. This type of behaviour is a breach of fiduciary duty because the majority denies the potential dissenting executor from presenting his/her perspective.11
- A ne’er do well trustee can still thwart the timely administration of the estate by refusing to sign documents and cooperate in the implementation of decisions arrived at by the majority vote of executors. This often results in litigation where the removal of an executor is sought12.
- There may be a decision made by the majority of trustees that is a breach of their fiduciary duty. The dissenting trustee now has a dilemma. Can they just go with the flow or does the dissenting trustee risk liability for not acting to prevent the breach of fiduciary duty?
General Rule – Liability for Co-Executor
As a general rule co-executors are liable for misdeeds of their co-executor13. An analysis of the case law shows that this rule is not absolute. There are clear exceptions including where the innocent executors kept him/herself informed and did not abdicate their responsibility to supervise a co-executor14.
The Difficulty of the Minority Executor
The difficulty stands for the minority executor who loses the vote and knows that the majority of executors are breaching their fiduciary duty. The law is clear that standing by and permitting a breach of trust incurs liability15. One can imagine the questions on examination to the executor who lost the vote and did nothing to prevent the majority of executors from taking action with estate assets that clearly constituted a breach of fiduciary duty.
Q1: I understand you are one of three executors and trustees
Q2: Do you recall that the will provides that a trust was to be set up for your brother Phillip?
A2: Yes. That’s what the will said.
Q3: And did your two brothers, the other executors oppose setting up the trust?
A3: Yes. We took a vote. They voted against setting up the trust and I voted we should. They won two to one so we did not set up the trust.
Q4: Why did you vote against it?
A4: The will was clear. Not to set up the trust would have been a breach of my duty as executor.
Q5: What did you do when you lost the vote?
A5: Majority rules. I did nothing.
Q6: You could have gone to court and asked for directions. Did you do that?
A6: No I did not.
Q7: Do you know that you, as a co-executor, had a duty to watch over, and if necessary, to correct your co-executors’ conduct?16
A7: But we took a vote and I lost…..
Q8: Do you know that an executor who stands by and sees a breach of trust committed by his co- executor becomes himself responsible for that breach17?
A8: But the will says the majority rules – what was I supposed to do at that point?
As set out in MacCulloch Estate (Trustee of) v. MacCulloch, the Nova Scotia Court of Appeal stated: “[i]t is the duty of executors to watch over and, if necessary, to correct each other’s conduct, and an executor who stands by and sees a breach of trust committed by his co-executor becomes himself responsible for that breach.”18
Arguably, by just voting against the actions of the majority of executors the dissenting executor does not fulfill his/her fiduciary duty to monitor his/her co-executors and ensure compliance with their fiduciary duties. That obligation does not end with the vote. The fulfillment of that duty may require taking steps to thwart the implementation of the majority decision by refusing to participate in its implementation and by seeking directions from the court. The question is what is the exposure of dissenting executors for failing to supervise the misdeeds of the majority. As set out below, it may be for that reason that one exculpatory clause specifically protects dissenting executors from the actions of the majority.
Section 35 of the Trustee Act19
In their paper, “Liability for the actions of a Co-executor?,”20 the authors state,
Section 35(1)2 of the Act is the first line of defence for a co-executor who proclaims innocence in the face of a co-executor’s wrongdoing. The argument is that s/he acted honestly and reasonably and that the court should use its discretion to relieve the trustee from personal liability for the improper actions of a co-executor. …In Cahill, the sister tried to make the same argument. She trusted her brother. She argued it was an honest mistake and was reasonable in the circumstances. The application judge rejected this argument. So did the Court of Appeal. The sister had duties as an executor and trustee. She had to take “real, active steps to ensure that the trust fund was set up in accordance with the Will. If the sister was not prepared to fulfill those duties she could have renounced at the beginning. The fact the sister received assurances from her brother that the trust fund was set up was not enough. She had a duty to make inquiries to satisfy herself that the trust fund was set up in accordance with the Will. An honest mistake is not necessarily reasonable in the context.” (emphasis added)
Arguably, real and active steps preclude the dissenting executor from saying I voted the right way and majority rules.
Section 35(1) of the Trustee Act: What Purpose Do Exculpatory Clauses Serve?
Under s. 35(1) of the Trustee Act, trustees are not held liable for technical breaches of trust. The legislation provides:
If in any proceeding affecting a trustee or trust property it appears to the court that a trustee, or that any person who may be held to be fiduciarily responsible as a trustee, is or may be personally liable for any breach of trust whenever the transaction alleged or found to be a breach of trust occurred, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust, and for omitting to obtain the directions of the court in the matter in which the trustee committed the breach, the court may relieve the trustee either wholly or partly from personal liability for the same. (emphasis added)
So if the legislation already excuses trustees from missteps when they acted honestly and reasonably what purpose does an exculpation clause serve? Clearly, those who benefit from exculpatory clauses seek protection from breaches of fiduciary duties that do not fall under the protection of the Act. The case law provides us with some examples:
- Investments. Some clauses excuse poor investment choices as long as they were made in good faith.21 As articulated by Professor Waters, “The trustee must show ordinary care, skill, and prudence, he must act as the prudent man of discretion and intelligence would act in his own affairs”22 An exculpatory clause would save the executor from liability if s/he fell below that threshold.
- Negligence. In his article23 David Steele references a typical exculpation clause, “The Trustees shall not be responsible 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.” Gross errors in judgement that fall below the expected standards of competence are thus protected. It is understandable why l trustees may like this clause and even insist that it be part of a testamentary document appointing them as executors. Query why a testator or his/her lawyer would think it’s in the testator’s interest to include such a clause.
- The Dissenting Executor. In her article24 Carla Figliomeni points out that one type of exculpatory clause is meant to protect the dissenting Executor. It may read like this, “Any trustee who acts in good faith and does not form part of any majority decision shall not be liable for any loss suffered by the trust by reason of the acts or omissions which result from such majority decision.” Hence, the duty to monitor or correct a co-executor’s conduct is nullified.
With exculpatory clauses the big losers may be the beneficiaries. The greater protection afforded to executors the more vulnerable the beneficiaries. But, as pointed out by a number of senior practitioners25 testamentary freedom is foundational. Accordingly, liabilities otherwise flowing from breach of fiduciary duties can be restricted by a testator under his/her will. There are certainly situations that call for the inclusion of an exculpatory clause. For example, it may be daunting to persuade the “Responsible Child” to gratuitously take on the role of executor and monitor a trust related to a troubled beneficiary. Testators may expect the Responsible Child to take on this role in a Henson Trust without compensation. How much more difficult to persuade a potential executor to take on that role without the protection of an exculpatory clause. The testator may feel that it would be unfair to ask that of anyone.
The role of the solicitor is to present options and in the end it’s the testator’s call. Arguably, lawyers ought to be asking their clients why they think an exculpatory clause serves the client’s interest. There is also the issue of enforceability.
As stated by Professor Waters, the more general the exculpatory provision, the more likely it is that the courts will reach the conclusion that the settlor or testator did not [intend] to relieve the trustee of liability – to throw upon the beneficiaries the risk of trustee idleness, imprudence, or carelessness – in particular circumstances which have occurred.26 In her paper, Elena Hoffstein makes the argument that public policy considerations would result in a court striking out an exculpatory clause if it relieved the executor of his/her fiduciary duties.27 Ultimately, when solicitors are advising their clients about including exculpatory clauses it behooves them to point out that the wider the exculpatory clause the less likely beneficiaries will be able to hold executors responsible for from imprudent investments, breaches of fiduciary duty or negligence.
In our view, the prudence of exculpatory clauses is best summarized by Professor Waters:28
the essence of a trust is a beneficiary’s right to recourse against the trustee for proper administration, and if the beneficiary is altogether denied that recourse it is highly questionable whether the settlor has created a trust at all.
Blindly following yesterday’s precedent is a mistake. Just like every client’s face is different, so too the role of an exculpatory clause in every client’s testamentary plan must be client specific. If it makes sense to utilize an exculpatory clause solicitors should take care to draft them narrowly enough so that they are enforceable. If the purpose of the exculpatory clause is to deny beneficiaries the right to look to the trustee for the proper administration of the estate what is the purpose of the exercise?
- One example of a majority rule clause can be found at c1.13 in Lindsay Ann Histrop, Estate Planning Precedents: A Solicitor’s Manual (Carswell): “IF AT ANY TIME my said Trustees are unable to agree regarding any matter in connection with my estate, I hereby declare that the decision of a majority of my Trustees shall govern and shall be final and binding upon all persons concerned. Any Trustee who does not for part of such majority shall execute all documents necessary to give effect to such decision but shall not be deemed to concur in such decision by virtue of so doing.” ↵
- See Wright (Re) (1976), 14 O.R. (2d) 698 (Ont. H.C.J.) and Blow (Re) (1977), 18 O.R. (2d) 516 (Ont. H.C.J.). In these cases trustees were deadlocked and looked to courts to be the casting vote. The courts declined absent bad faith or other impropriety. ↵
- An example of an exculpatory clause can be found in Steven Thompson Family Trust v. Thompson
2012 CarswellOnt 15843, 2012 ONSC 7138, 224 A.C.W.S. (3d) 233, 84 E.T.R. (3d) 24: “The Trustees shall be fully indemnified out of the assets in the trust fund from and against any liabilities, costs, charges and expenses arising because for their mistakes or errors in judgment made by them in good faith and in the exercise of due care and diligence in connection with any business carried on by them as Trustees of this Trust and shall not be liable to the Settlor or his Estate or any of the beneficiaries of this Trust by reason of any such mistake or error in judgment.” ↵
- Gibb v. McMahon (1905), 9 O.L.R. 522 (Ont. C.A.), affd 37 S.C.R. 362 (S.C.C.); Chisholm v. Chisholm (1915), 24 D.L.R. 679 (N.S.C.A.). Cf. Schiappa v. Baker (1980), 6 E.T.R. 289 (Ont. Co. Ct.). See Griffin (Ex parte); Dixon (Re) (1826), 2 Gl. & J. 114; Luke v. South Kensington Hotel Co. (1879), 11 Ch. D. 121 (C.A.); Flower (Re) (1884), 27 Ch. 592. See generally Ralph E. Scane, “The ‘Unanimity Rule’ and Court Interference with Trustees’ Discretion” (1986), 8 Est. & Tr. Q. 204; C.D. Freedman, “Disputes amongst Multiple Trustees: What Rights Does a Minority Estate Trustee Have against an Oppressive Majority” (2012-2013), 32 Est. Tr. & Pensions J. 41. ↵
- See Kaptyn Estate, Re 2009 CarswellOnt 2160 at para. 16 (Ont. S.C.J.); Has, Re (1959), 21 D.L.R. (2d) 12, 29 (Ont. C.A.); Willcocks v. MacLennan, (1946) O.J. No. 153 at para. 10 (Ont. C.A.), Where there is no provision for a majority vote, all executors must act in concert: Wasserman, Arsenault Ltd. v. Sone, 2000 CarswellOnt 1177 (Ont. S.C.J. (Commercial List). ↵
- (1959), 21 D.L.R. (2d) 12, 21 (Ont. C.A.). ↵
- (1976), 14 O.R. (2d) 698, 707 (Ont. H.C.). ↵
- 2009 CarswellOnt 2160, (2009) O.J. No. 1685, 176 A.C.W.S. (3d) 1202, 48 E.T.R. (3d) 278 (Ont. S.C.J.). ↵
- Price, Re (1979), 1979 CarswellOnt 601, 5 E.T.R. 194 (Ont. H.C.) ↵
- Wright, Re (1976), 14 O.R. (2d) 698, 74 D.L.R. (3d) 504, 1976 CarswellOnt 567 (Ont. H.C.) ↵
- See Gibb v. McMahon (1905), 9 O.L.R. 522 (Ont. C.A.), affd 37 S.C.R. 362 (S.C.C.). ↵
- Mailing v. Conrad (2003), 48 E.T.R. (2d) 238 (Ont. S.C.J.). ↵
- Carmen S. Thériault, Widdifield on Executors and Trustees, 6th Edition (10 — Breach Of Trust And Its Consequences, Contributing Editor: Margaret O’Sullivan). The author refers supports this proposition by reference to Mickleburgh v. Parker (1870), 17 Gr. 503 (Ont. Ch.). In MacCulloch Estate (Trustee of) v. MacCulloch, 1986 CarswellNS 91, (sub nom. Price Waterhouse Ltd. v. MacCulloch) 72 N.S.R. (2d) 1, (1986) N.S.J. No. 88 (N.S. C.A.), leave to appeal refused (1986), (sub nom. Price Waterhouse v. MacCulloch) 73 N.S.R. (2d) 270 (note) (S.C.C.), ↵
- Widdifield on Executors and Trustees, supra; See Cooper (No. 2) 1978 CarswellOnt 1283 (Ontario Surrogate Court). ↵
- Sovereign v. Sovereign (1869), 15 Gr. 559 (U.C.Ch.). ↵
- MacCulloch Estate (Trustee of) v. MacCulloch, 1986 CarswellNS 91, (sub nom. Price Waterhouse Ltd. v. MacCulloch) 72 N.S.R. (2d) 1, (1986) N.S.J. No. 88 (N.S. C.A.), leave to appeal refused (1986), (sub nom. Price Waterhouse v. MacCulloch) 73 N.S.R. (2d) 270 (note) (S.C.C.), Hart, Jones and Pace, JJ.A. confirmed: ↵
- See Carmen S. Thériault, Widdifield on Executors and Trustees, 6th Edition (10 — Breach Of Trust And Its Consequences, Contributing Editor: Margaret O’Sullivan) citing MacCulloch Estate (Trustee of) v. MacCulloch, 1986 CarswellNS 91, (sub nom. Price Waterhouse Ltd. v. MacCulloch) 72 N.S.R. (2d) 1, (1986) N.S.J. No. 88 (N.S. C.A.), leave to appeal refused (1986), (sub nom. Price Waterhouse v. MacCulloch) 73 N.S.R. (2d) 270 (note) (S.C.C.). In that case, Hart, Jones and Pace, JJ.A. confirmed: “22. … It is the duty of executors to watch over and, if necessary, to correct each other’s conduct, and an executor who stands by and sees a breach of trust committed by his co-executor becomes himself responsible for that breach.” ↵
- MacCulloch Estate (Trustee of) v. MacCulloch at para 22. ↵
- R.S.O. 1990, c. T.23 (the “Act”). ↵
- See Gregory Sidlofsky, David Wagner, and Charles Wagner at https://www.wagnersidlofsky.com/liability-for-the-actions-of-a-co-executor/ ↵
- See Donovan W.M. Waters, Contributing Editors: Mark R. Gillen and Lionel D. Smith, Waters’ Law of Trusts in Canada, 4th Ed. at chapter 18, FN 36: “my Trustee shall not be liable for any loss that may happen to my estate in connection with any such investment made by him in good faith.” A currently used term is “unless the trustee has engaged in willful wrongdoing;ibid” p.565. ↵
- Ibid., p. 656. ↵
- David A. Steele, “Exculpatory Clauses in Trust Instruments” (1995), 14 Est. & Tr. J. 216. ↵
- Carla Figliomeni, “The Effectiveness of Exculpatory Clauses” (2019), 38 E.T.J. 272. ↵
- See Carla Figliomeni, “The Effectiveness of Exculpatory Clauses”, (2019), 38 E.T.J. 272; M. Elena Hoffstein, “Protection of the Estate Trustee from Liability”, at p.1, in The Six-Minute Estates Lawyer (Toronto: Continuing Professional Development, Law Society of Upper Canada, 2012). ↵
- Waters’ Law of Trusts in Canada, supra, p. 56. ↵
- Elena Hoffstein, “Protection of the Estate Trustee from Liability”, at p.1, in The Six-Minute Estates Lawyer (Toronto: Continuing Professional Development, Law Society of Upper Canada, 2012). ↵
- Waters’ Law of Trusts in Canada, supra, p. 56. ↵