Fourth Round Problem (moot of 2004-2005)

Shanks V Porter
In the House of Lords

John Shanks is the sole beneficiary of a trust of which Victor Porter is the sole trustee. Ten years ago Mr Shanks suggested to Victor Porter that he might wish to invest some of the trust fund by purchasing shares in a company, Flush Ltd., owned by Mr Shanks. Mr Shanks assured Mr Porter that the company was run on a sound financial basis and was highly profitable and with good prospects. Mr Porter took Mr Shanks at his word and invested one half of the trust fund in shares in Flush Ltd. Mr Porter did not seek expert advice or make any independent inquiries into the suitability of the investment. Flush Ltd. subsequently became insolvent, rendering the shares virtually worthless. Mr Shanks brought the present action claiming compensation for loss arising from Mr Porter's breach of trust in failing to invest according to the general standard of care required of trustees.

Mr Porter relied in his defence upon a clause in the trust instrument purporting to relieve the trustee of all liability for any breach of trust apart from "dishonest" breaches. He also claimed, in the alternative, that if the exemption clause did not relieve him of all liability his liability should be reduced due to the fault of Mr Porter in recommending a risky investment in the first place.

At first instance Fidel J held that the breach of trust had been reckless, but that there had been no dishonesty on the part of Mr Porter, with the result that the exemption clause supplied a complete defence to the breach of trust (applying Armitage v Nurse [1998] Ch 241, Court of Appeal). His lordship held further, that if he was wrong with regard to the exemption clause, he would nevertheless have reduced the trustee's liability by half to reflect the claimant's contributory fault.

The Court of Appeal overturned the decision of Fidel J, holding that an exemption clause can never be relied upon to exempt a trustee from liability for a reckless breach of trust and that the contributory fault of a beneficiary can never be relied upon to reduce a trustee's liability for breach of trust.

Mr Porter now appeals to the House of Lords on the following grounds:

First, that a trustee exemption clause exempting a trustee from liability for all breaches of trust apart from "dishonest" breaches is competent to exempt a trustee from liability in respect of a reckless breach of trust.

Second, that it is permitted to reduce a trustee's liability for breach of trust to take into account the beneficiary's contributory fault.

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