A conflict of interest clause inside an SMSF trust deed will not help trustees found to be in breach of their best interests duty, a legal firm has said.
Highlighting a key misconception regarding best interest covenants following Marsella v Wareham (No 2) [2019] VSC 65, Townsends Business and Corporate Lawyers said including conflict of interest clauses in SMSF trust deeds would not absolve trustees of their statutory duty under section 52(2) of the Superannuation Industry (Supervision) (SIS) Act 1993 of exercising their best interests duty to the fund.
“Following the Marsella decision there has been an array of opinions. Several have advised that all SMSFs should amend their governing rules to include conflict of interest clauses,” Townsends noted in an update on its website.
“Such clauses would effectively state that a trustee’s decision is valid even if the trustee has benefited themselves. Such a recommendation is problematic.
“A clause within a private law instrument cannot absolve an individual of their statutory duties unless the statute itself allows for such absolution.”
The firm pointed out the Marsella judgment, which found SMSF trustee Carol Wareham had breached her best interests duty, focused on the method of decision-making Wareham followed, rather than the outcome of her decision.
As conflict of interest clauses were designed to permit certain outcomes, and the outcome of a trustee benefiting themselves was already permissible at law, Townsends said such a clause would not absolve a trustee of their best interests duty.
It also noted conflict of interest clauses could work against a trustee wishing to make a decision in their own favour, with the existence of such a clause potentially leading a court to decide the trustee believed they were unrestrained by their statutory duties under the SIS Act.
“Though it has generated much discussion, Marsella is not a landmark case. Best interests covenants have been brought before numerous state and federal courts before, and although the decisions can be rather nuanced, they are fundamentally consistent: SMSF trustees are required to demonstrate that their decision-making process was in the beneficiary’s best interests,” it added.
“To that end, conflict of interest clauses may be at best ineffective and at worst harmful to the trustee’s exercise of discretion.”
Last month, Hill Legal director Chris Hill said the Marsella case and its appeal (Wareham v Marsella [2020] VSCA 92) illustrated financial advisers who did not keep comprehensive document trails for their SMSF clients were creating a minefield of trouble for them in the future.
Commenting on the appeal case in April, Townsends stated beneficiaries of an SMSF considering legal action due to a dispute should be aware the courts would not consider whether a trustee’s decision was correct, but rather whether the process taken to reach that decision was consistent with the trustee’s legal obligations.
