BROTHERLY CONFLICT: MCLAUGHLIN V MCLAUGHLIN [2023] NZCA 473

Facts

John McLaughlin was a trustee of a family discretionary trust settled by his parents, Jim and Edna McLaughlin.  The trust undertook a residential subdivision which involved trust land as well as land belonging to John and his wife. John’s company was engaged by the trust as the project manager for the subdivision and was paid a fixed fee.

High Court

Two of John’s brothers, Mark and Andrew McLaughlin, issued proceedings in the High Court against John and another trustee, seeking an account of profits from John. The essence of Mark and Andrew’s claim was that the subdivision had been mismanaged and that John had obtained benefits whilst acting under a conflict of interest, through earning fees as the project manager and as the owner of the adjoining land.

In the High Court Gendall J found that Mark and Andrew’s allegations were unfounded. He held that at all times the trustees, including John, had acted competently and in the best interests of the beneficiaries.  He found that insofar as John had any conflicts of interest, those conflicts had been either impliedly authorised by Jim and Edna or expressly authorised by the trust deed.

Court of Appeal

Mark and Andrew appealed the High Court’s decision.  They argued the Judge erred in his findings because he had largely relied on events that took place after the trust was settled.  While the Court of Appeal (French, Courtney and Clifford JJ) dismissed Mark and Andrew’s appeal, it confirmed that, for a finding of implied authorisation, the “primary focus must be on the circumstances that existed at the time of settlement”.

The rule against self-dealing and the exceptions to it

The Court began its analysis by noting the two well established rules that apply to all trustees.  First, trustees must not profit from their trusteeship.  Second, trustees must not put themselves in a position where their interest and duty conflict (“no conflict rule”).  The Court noted that exceptions apply where the conduct at issue is either expressly authorised by the trust deed, impliedly authorised by the settlor or sanctioned by the court.

As mentioned, the Court clarified that the primary focus of the implied authorisation exception must be on the circumstances that existed at the time the trust was settled.  However, findings relating to those circumstances including settlor intentions, may be informed by evidence of subsequent conduct.

John’s conflict of interest as adjoining landowner

Regarding the conflict of interest that existed between John as a trustee and an adjoining landowner, the Court noted the following points made “very clear” the implied authorisation of the conflict by Jim and Edna at the time the trust was established:

·        Jim and Edna’s rationale for forming the trust was to provide a vehicle to take their subdivision plans well into the future after their deaths and there was strong evidence that Jim and Edna’s plan to subdivide had always included John’s land.  

·        John had been a neighbouring owner for two and a half decades before being appointed as a trustee of the trust when it was established. 

·        The evidence suggested a key reason Jim and Edna appointed John as trustee was precisely because he had “skin in the game”.

John’s conflict as paid project manager

The Court held that the conflict of interest that arose as a result of John’s appointment as a remunerated project manager was not entirely authorised by implication.

The Court of Appeal agreed with the High Court, that there was evidence to suggest that Jim and Edna had impliedly authorised John’s future appointment as project manager at the time the trust was settled.  However, the Court disagreed with the Judge’s finding that payment of John in that capacity was implicitly authorised.  Instead, the evidence suggested that this arose by way of an active decision by the trustees at a later point in time.  Accordingly, express authorisation for the payments made to John was required.

The trust deed included a charging clause and the Court found on a common-sense interpretation of that clause that the payments made to John were both within its scope and of a reasonable and just amount.  In making this finding, the Court noted that charging clauses are to be construed strictly and with regard to the wording of the particular clause at issue.

Implications

In stating that the primary focus of the implied authorisation exception is on the circumstances that existed at the time the trust was settled, and confirming that it is narrower than the High Court’s application, the Court of Appeal has provided much-needed clarification. The application of this rule has been unclear in the past. 

The Court of Appeal acknowledged that the no conflict rule is “prophylactic”. Had the High Court’s approach prevailed, it would have significantly undermined the rule and broadened the circumstances in which a conflicted trustee may be exempted from it. It is important that, in the family trust or any other trust context, the no conflict rule is applied in a manner that affords a high degree of predictability to trustees and beneficiaries, and any exceptions to the rule occur in well-defined circumstances.