Trustees often request that trust instruments, including Wills, contain clauses, called "exoneration" or "exculpation" clauses, exempting them from liability for actions causing loss to the trust or its beneficiaries. A common exculpation clause found in trust instruments is as follows:

To what degree are such clauses legally successful to protect a Trustee?

The effect of exculpation clauses is straightforward in the "black and white" cases. On the one hand, even the most broadly worded clause will not excuse a Trustee for purposely harming the beneficiaries' interests. A trust permitting fraud on its beneficiaries, after all, would not be much of a trust in any sense of the word. For this reason, most exculpation clauses expressly exclude fraudulent acts from their scope. On the other hand, a properly-worded exculpation clause will exempt a well-meaning trustee from liability for minor mistakes.

In between full-scale fraud and occasional slip-ups, however, lies a substantial "gray area" of actions to which an exculpation clause might – or might not – apply. The uncertainty arises in part from two conflicting court decisions – one from a lower court in Alberta in 1983, and one from the English Court of Appeal in 1998.

In Re Poche, the Alberta court considered the situation of an individual Trustee who, among other errors, failed to convert junior oil stocks held by the trust into safer investments. Although the trust's exculpation clause appeared to excuse the Trustee's omissions, the Court found the Trustee liable for damages. The Court ruled that the Trustee's failure to act was severe enough to be labeled "gross negligence", and that as a principle of law, a Trustee's gross negligence cannot be absolved by an exculpation clause.

In contrast, the English Court of Appeal in Armitage v. Nurse found a similar exculpation clause to be effective to protect a Trustee from liability for any degree of carelessness or neglect, as long as the Trustee had not been dishonest. In other words, the court held that the clause more or less meant what it said, thereby protecting the Trustee from any erroneous conduct not amounting to fraud.

Until a high-level Canadian Court has an opportunity to consider whether the Armitage decision does indeed extend the scope of exculpation clauses, Trustees are left with some ambiguity in the law. Are exculpation clauses effective against all misdeeds except those arising from fraudulent conduct? Or, will Trustees continue to be held liable for acts amounting to gross negligence?

Further, if the broader Armitage standard is adopted in Canada, will its broader protective scope extend only to individual, "non-professional" Trustees, or will it also offer protection to "professional" Trustees, such as financial institutions, who are appointed and paid as Trustees because of their espoused expertise in trust administration matters?

Until the law is clarified, it is still best to include an exculpation clause in any trust instrument. Unless the Settlor or testator wishes to impose a stricter duty of care on the Trustee, the exculpation clause should be broadly framed, like the clause subjected to judicial scrutiny, and approval, in Armitage.

Beyond the basic exculpation clause, many other Trustee protective clauses should be considered before a trust instrument is finalized. For example, if a Trustee enjoys discretionary powers under the trust, the governing trust deed should set out the scope of that discretion as clearly as possible. If the Settlor intends the discretion to be as broad as the law will allow, the deed should state as much. Likewise, any limits on a permitted discretion should be defined with precision. Discretion with defined boundaries can help to avoid claims that the Trustee exercised its discretion improperly.

Before litigating an issue related to an estate, whether from the perspective of an executor, beneficiary or other claimant, it is important to recognize in advance the court's options in awarding costs related to the proceedings. British Columbia Courts observe the following two general rules:

1. costs are awarded to the successful party; and

2. a Court recognizes a very wide inherent discretion in the types of cost awards it makes after the disposition of a proceeding.

To illustrate these general rules, while it is usual for a Court to require that the unsuccessful party in a proceeding pay at least a portion of the successful party's costs, if a "fund" exists as part of the proceeding, the Court may exercise its discretion and direct that such costs be reimbursed from the fund. The most common example involves estate litigation, where the estate conveniently can serve as such an available fund.

A few common circumstances in which British Columbia Courts will tend to award costs from an estate are:

(a)    Uncertain Testator Intent/Validity of Will

When the litigation is initiated because of uncertainty as to the Testator's intent or the fundamental validity of the Will is brought into doubt, costs are generally awarded from the estate. For example, an executor is required to seek Court directions because the Testator's Will is ambiguously worded, or a Will's validity is challenged on the basis of alleged Testator incapacity.

The rationale for cost recovery from the estate in such circumstances is premised on fairness to the beneficiaries or those who stand to benefit from an apparently defective Will. Specifically, it would be unfair to impose direct cost recovery on such parties where the required legal proceeding arises directly from some deficiency outside of their own control. In effect, the estate bears the cost of the litigation in these circumstances as a cost of administration because the action is necessary to enable the estate to be appropriately distributed.

(b)    Wills Variation Act

The Wills Variation Act allows a spouse, including a common-law spouse, or child of a Testator to seek variation of a Will on the grounds that inadequate provision was made for the claimant's proper maintenance and support. There is considerable case law in this area as the courts are given a wide discretion to make orders that are "adequate, just and equitable" in the circumstances.

This type of litigation presumes the validity of the Will and therefore different cost recovery principles arise. If, for example, a court finds that the Testator was under the mistaken belief that a child or spouse did some terrible deed justifying their exclusion from the Will, then the Court would be inclined to order that the costs of litigation be paid from the estate. Here the litigation arises to protect the claimant's proper entitlement and correct the Testator's unacceptable conduct in framing the Will.

By contrast, if the claimant's grounds for initiating an unsuccessful Wills Variation Act claim are viewed as unfounded or vexatious in nature, the Court may be disinclined to award costs from the estate, but instead direct the claimant to provide such cost recovery, in whole or in part, to the estate.

(c)    Executor Relief

The Court will generally direct that the estate bear the cost of the litigation fees incurred by the executor who is defending a Will, whether the proceeding involves proving the Will's validity or a Wills Variation Act claim. Similarly, cost recovery from the estate is also mandated where the executor is seeking Court clarification of the Will's provisions or Court assistance on matters of estate administration.

A basic trust law principle states that Executors are entitled to be indemnified against all reasonable costs and expenses which are incurred in the ordinary course of their duties to the estate, including the expenses incurred in most court proceedings relating to the due administration of the estate.