Nestle v National Westminster Bank plc

1.The Law

There was no dispute over the general principles to be applied. First, there is the prudence principle. The classic statement is that of Lindley LJ (Re Whiteley (1886) 33 Ch D 347, 355):

"The duty of a trustee is not to take such care only as a prudent man would take if he had only himself to consider, the duty rather is to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide."

This is an extremely flexible standard capable of adaptation to current economic conditions and contemporary understanding of markets and investments. For example, investments which were imprudent in the days of the gold standard may be sound and sensible in times of high inflation. Modern trustees acting within their investment powers are entitled to be judged by the standards of current portfolio theory, which emphasises the risk level of the entire portfolio rather than the risk attaching to each investment taken in isolation. (This is not to say that losses on investments made in breach of trust can be set off against gains in the rest of the portfolio but only that an investment which in isolation is too risky and therefore in breach of trust may be justified when held in conjunction with other investments. See Jeffrey N Gordon, The Puzzling Persistence of the Constrained Prudent Man Rule (1987) 62 NY Univ LR 52) But in reviewing the conduct of trustees over a period of more than 60 years, one must be careful not to endow the prudent trustee with prophetic vision or expect him to have ignored the received wisdom of his time.

Mr Gerard Wright, who appeared for Miss Nestle, referred me to another passage in Re Whiteley at p 350 in which Cotton LJ said:

"Trustees are bound to preserve the money for those entitled to the corpus in remainder, and they are bound to invest it in such a way as will produce a reasonable income for those enjoying the income for the present."

In 1886 what Cotton LJ had in mind was the safety of the capital in purely monetary terms. But Mr Wright submitted that in the conditions which prevail a century later, the trustees were under an overriding duty to preserve the real value of the capital. In my judgment this cannot be right. The preservation of the monetary value of the capital requires no skill or luck. The trustees can discharge their duties, as they often did until 1961, by investing the whole fund in gilt-edged securities. Preservation of real values can be no more than an aspiration which some trustees may have the good fortune to achieve. Plainly they must have regard to the interests of those entitled in the future to capital and such regard will require them to take into consideration the potential effects of inflation, but a rule that real capital values must be maintained would be unfair to both income beneficiaries and trustees.

This brings me to the second principle on which there was general agreement, namely that the trustee must act fairly in making investment decisions which may have different consequences for different classes of beneficiaries. There are two reasons why I prefer this formulation to the traditional image of holding the scales equally between tenant for life and remainderman. The first is that the image of the scales suggests a weighing of known quantities whereas investment decisions are concerned with predictions of the future. Investments will carry current expectations of their future income yield and capital appreciation and these expectations will be reflected in their current market price, but there is always a greater or lesser risk that the outcome will deviate from those expectations. A judgment on the fairness of the choices made by the trustees must have regard to these imponderables. The second reason is that the image of the scales suggests a more mechanistic process than I believe the law requires. The trustees have in my judgment a wide discretion. They are for example entitled to take into account the income needs of the tenant for life or the fact that the tenant for life was a person known to the settlor and a primary object of the trust whereas the remainderman is a remoter relative or a stranger. Of course these cannot be allowed to become the overriding considerations but the concept of fairness between classes of beneficiaries does not require them to be excluded. It would be an inhuman law which required trustees to adhere to some mechanical rule for preserving the real value of the capital when the tenant for life was the testator's widow who had fallen upon hard times and the remainderman was young and well off.