Speight v Gaunt (1883) 9 App Cas 1 (HL)

Facts

• The trustee, acting under the direction of beneficiaries, attempted to invest most trust assets into securities.
• The beneficiaries recommended a particular stockbroker to carry out the investments.
• The trustee, unaware of the broker’s precarious financial position, engaged the stockbroker.
• The stockbroker provided the trustee with a forged document showing supposed purchase of securities.
• After receiving trust funds, the stockbroker absconded.
• The beneficiaries sued, alleging the trustee acted imprudently by selecting and relying on a dishonest agent.

Issues

1. Whether a trustee is liable for loss caused by an agent who was engaged with reasonable care, particularly when following beneficiary recommendations.
2. Whether the standard for trustee conduct is to be judged against ordinary business practice or some higher standard of prudence.
3. Whether trustees should be treated as guarantors for all losses, including those resulting from agent dishonesty.

Decision

• The House of Lords held the trustee had not breached the duty of care.
• The trustee’s actions aligned with prevailing business practice, specifically transferring funds before security purchases.
• The Court determined the trustee had exercised the prudence and diligence that a reasonable person would use in their own affairs.
• Liability would not attach to trustees for losses caused by fraud or dishonesty of an agent reasonably selected in accordance with normal business procedures.

Legal Principles

• Trustees are required to act with the care, caution, and diligence that an ordinary prudent person would apply to their own business.
• The standard is based on contemporary business practice, not on hindsight or an expectation of infallibility.
• Trustees are not guarantors for agents’ fraud when selection and oversight meet reasonable business standards.
• The prudent person standard offers protection for trustees acting honestly and reasonably, and it remains central in assessing trustee liability.

Conclusion

Speight v Gaunt established that trustees are to be judged by the standard of the ordinary prudent business person, not as insurers against all potential losses. Provided trustees select and supervise agents with appropriate care and in line with accepted business custom, they will not be liable for unforeseen losses arising from the agent’s dishonesty. This continues to be a fundamental principle in the law of trusts.