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Eden Oration

5 December 2009

A tradition since 1645, the Eden Oration is given by one of the Fellows at a service in Chapel that precedes the Eden Supper. For the 2009 Oration, the honour was given to Professor Brian Cheffins.

Brian R Cheffins is a Professorial Fellow at Trinity Hall and S J Berwin Professor of Corporate Law

 

What is a Fellow?

At the Governing Body meeting held in November 2009 a paper by the Bursar and Dr Conaglen spelt out the implications that Trinity Hall’s registration as a charity under the Charities Act 1993 has for Trinity Hall Fellows, particularly with respect to the duties and obligations Fellows will owe under the new regime. In a paper that was admirable for its succinctness and clarity, nearly half a page of single space text was devoted to summarizing the duties Fellows will owe after registration. Those who did not follow closely the line of argument laid out in the paper might assume that registration imposes substantial new responsibilities on Fellows and exposes them to major new legal risks. This would seem to be a legitimate concern, because Trinity Hall Fellows will be signing up as charity trustees and the Charity Commission spells out in considerable detail in literature it circulates the duties charity trustees are supposed to fulfil. To the extent this logic is correct, the new status Fellows have as charity trustees might seem an alarming and unwelcome imposition, particularly because Fellows might fear being held accountable for decisions taken about which they knew little but which went seriously wrong.

The hitch with this plausible and potentially alarming logic is that the Bursar and Dr Conaglen stated explicitly in their paper that in fact registration under the Charities Act 1993 will not change materially the duties Fellows owe to a college. How can this be, given the seemingly radical transformation Trinity Hall Fellows will experience, in that they will henceforth be charity trustees when they previously were not? I will seek to clarify matters in my talk tonight by addressing in legal terms the question ‘What is a Fellow?’ in the sense of a Fellow of a Cambridge or an Oxford college.

To ascertain the legal position of Fellows, an important preliminary question must be addressed: What is a college? The full answer is a real legal mouthful – a college such as Trinity Hall is an eleemosynary chartered corporation aggregrate. The fact Trinity Hall is ‘chartered’ is a product of its history. When Trinity Hall was founded in 1350, and indeed for five centuries thereafter, corporations were regarded as unlawful unless some form of royal approbation was provided or Parliamentary approval was obtained. In Trinity Hall’s case, Edward III authorized Trinity Hall’s creation in 1350 and the College’s status was confirmed in greater detail by a 1559 statutory instrument endorsed by Elizabeth I.

Corporations authorized by royal declaration were either ecclesiastical or lay in nature, with Trinity Hall being in the latter category despite its strong religious element. Lay corporations in turn were divided into the eleemosynary and civil, with a corporation qualifying as an ‘e-corp’ if it was established by a founder who transferred property and other assets to such persons as he directed to fulfil perpetually his directions. Trinity Hall conformed to this pattern, with Bishop Bateman being the founder.

Now that we have established that Trinity Hall constitutes a corporation we can consider the position of its Fellows in relation to it. One position Trinity Hall Fellows hold is as members of the College. With respect to Trinity Hall, Statute XII of its statutes stipulates that the Governing Body of the College may admit persons as members of the College, and those designated as such include not only Fellows but also current students.

Does membership of the College matter to Fellows, at least in terms of legal liabilities? Not much, it appears. With a for-profit company, the shareholders, also known as the members of the company, are in effect entitled to the profits generated by the company after all contractual claims against the company have been accounted for. The received wisdom is that Fellows are not in an analogous position. Instead, the College, as a not-for-profit organisation, is subject to what can be termed a ‘non-distribution constraint’, meaning it is barred from distributing retained profits – the net accumulated earnings – to individuals who exercise control over it.

While membership in the case of a college such as Trinity Hall does not imply the same sort of financial upside enjoyed by shareholders in for-profit companies, there are also no significant legal downsides. As James Grant said in A Practical Treatise on the Law of Corporations, an 1854 volume in which he discussed the position of colleges at some length, members of a college are ‘in general are not liable, either civilly or criminally, for any share they may have taken in a regular corporate act within the competence of the corporation to perform’. Grant said the situation might be different if members tried to use the corporate personality of the college for ‘malicious purposes’, but absent extreme circumstances mere membership of a college does not generate legal risks for Fellows.

Of greater legal import for Trinity Hall Fellows is their status as members of Governing Body. Section 4 of Statute II of Trinity Hall’s statutes provides ‘The Governing Body shall consist of the Master and Fellows’ and ‘shall have control of the College as a place of education, religion, learning and research…’ So as to give Governing Body scope to exercise this control, section 4 stipulates additionally ‘Governing Body may exercise any of the powers vested in the College by law….’

Given the role assigned to Governing Body, and given that Trinity Hall will be registering as a charity for the purposes of UK charities legislation, going forward Fellows will clearly qualify as charity trustees, who are defined in section 97 of the Charities Act 1993 as those ‘persons having the general control and management of the administration of a charity’. Charities legislation imposes duties on charity trustees to register the charity they administer, should this be required, to keep accounts and to file annual returns. Beyond this, the Charities Commission has issued exhaustive guidance on the responsibilities of charity trustees. However, for the most part the detailed specification of obligations of charity trustees lacks a statutory foundation. Instead, neither the Charities Act 1993 nor the Charities Act 2006 specifies the general duties charity trustees owe to a charity akin to the way the Companies Act 2006 does for directors of companies.

If the basic duties Fellows owe to a college such as Trinity Hall do not arise from charities legislation, what is their source? The short answer is case law principles developed by courts of common law and equity. But what branch of case law does one look to?

One possibility is trust law. The logic here would be that while charities legislation imposes only a narrow range of specific legal obligations on Fellows as charity trustees, Fellows of a college owe extensive duties under more general principles of law as trustees. A trust relationship essentially involves property or a fund in which the trustee has legal title but holds and manages the property or fund on behalf of the beneficiary under the trust. Courts impose on trustees substantial legal duties – known as fiduciary duties – so as to ensure that a trustee conducts the affairs of the trust honestly and prudently in the beneficiary’s interests.

Some have argued that Fellows of a college are trustees of the college in the sense I’ve just described, most prominently David Palfreyman, currently the Bursar of New College, Oxford, in two 1990s law journal articles. If Fellows are in fact in this position, it follows that the substantial legal duties that trustees owe to beneficiaries will be owed by Fellows to the college. There is, however, a problem with this reasoning. In order for there to be a trust relationship, a trustee typically must hold legal title to property on behalf of the beneficiary. That means that for Fellows to be full-fledged trustees there seemingly must be property over which Fellows hold legal title that they can be said to be holding in trust for the college. The received wisdom used to be that charitable corporations such as Trinity Hall owned property in trust to further the objects of the founder but currently the prevailing view is that a college, as a corporation with full legal personality, owns its own property on its own behalf. Regardless of which view is correct, Fellows do not have legal title to a college’s assets and thus cannot be trustees for the college.

Palfreyman, to sustain the argument that Fellows are in fact trustees of college assets despite Fellows not owning college property, picked up on the notion that a college holds the property in trust to further the mission of the founder to argue that the Fellows are in essence the college and thus themselves constitute trustees. At first glance, Statute I of the Trinity Hall statutes lends credence to this argument by stipulating that ‘the Master, the Fellows and such Scholars as may be admitted’ constitute the Foundation of the College. This arrangement reflects the eleemosynary nature of Trinity Hall, in that there are individuals who in essence stand in on behalf of Bishop Bateman as founder, centuries after his death. However, the existence of the Foundation does not affect the fact that the College is a corporation that, as a distinct legal entity, owns its own property. Courts will sometimes disregard separate corporate personality – known as lifting the corporate veil – but will only do so in very limited circumstances, none of which is pertinent in this context. Hence, Trinity Hall Fellows cannot be deemed to be trustees of the College on the basis they are part of the College’s Foundation.

While Fellows of a college are not trustees under general principles of common law and equity, they nevertheless can owe similar duties by analogy. In various instances, courts have said that an individual holding a particular office or position that is functionally very similar to that of trustee should be subject to similar duties, generally encompassed under the fiduciary duties label. It is not clear precisely when courts will impose fiduciary duties, but Dr Conaglen provides a thorough analysis of the topic in a soon-to-be-published book, Fiduciary Loyalty: Protecting the Due Performance of Non-Fiduciary Duties. He argues that the acid test is whether it is legitimate to expect that the potential fiduciary will act for and on behalf of the other party to the relationship in the interests of that party, and will do so to the exclusion of his own interest.

Consider, for instance, the directors of a company. They control the management of a company’s property in a manner akin to the control a trustee has over a trust fund. It therefore seems legitimate to expect that they will manage the company’s assets in a way that advances the interests of the company rather than to advance their own personal interests, and courts have indeed long held that a company’s directors owe fiduciary duties to it.

What about Trinity Hall Fellows? Due to the responsibilities they undertake as members of Governing Body they occupy a position akin to – even pretty much identical to – the directors of a company. Invariably the articles of association of a company, which set down the rules by which companies are governed, stipulate that the directors are responsible for the management of the company’s business. With a college such as Trinity Hall, the College Statutes create much the same arrangement for Governing Body. Given that Trinity Hall is itself a corporation, there seems little doubt that a court would impose duties on Fellows in the same way they traditionally did for directors of companies.

To look at matters another way, Trinity Hall Fellows would pass Dr Conaglen’s fiduciary duty acid test. Given the way the College Statutes are structured, with responsibility for managing the College being devolved to the Governing Body, it would be legitimate to expect that Trinity Hall Fellows will act for and on behalf of the College in the interests’ of the College, and will do so to the exclusion of their own interest. The fact that Fellows, when they join the Fellowship, undertake an oath to uphold Trinity Hall as a place of education, learning, religion and research, affirms the point.

Now that we know the source of the duties that Fellows owe, what is their content? If Trinity Hall was incorporated under the Companies Act 2006, the departure point would be a codification of duties that legislation provides for. However, because Trinity Hall was incorporated by way of a royal endorsement one has to turn to general principles of common law and equity to determine what duties Fellows owe to the College as a result of being on Governing Body.

The relevant case law authorities indicate that directors – and hence Fellows of a college – should refrain from entering into engagements in which they have a personal interest conflicting, or which possibly may conflict, with the interests of the company. A Fellow also will be, as a matter of general principle, liable to account for any personal profit made by reason of and in the course of his or her position with the college. As Chief Justice Latham of the Australian High Court said of directors in the Court’s 1938 decision in Mills v Mills, Fellows will not be ‘required by law to live in an unreal world of detached altruism’. Nevertheless, with a Trinity Hall Fellow alarm bells should begin to go off whenever personal benefits come into play so as to ensure that everything is managed appropriately in accordance with the College’s Policy on Conflicts of Interest.

Trinity Hall Fellows, when exercising the powers of Governing Body, also must exercise those powers in the best interests of the College. This does not mean Trinity Hall Fellows will face adverse legal consequences simply because decisions they take turn out badly and thus, in hindsight, were not in the College’s interests. The key instead is whether the Fellows believed at the time they exercised their powers that they were doing so in the College’s best interests, and if they did so they will not be liable merely because decisions taken turn out badly.

A Trinity Hall Fellow, when acting as part of Governing Body, also must comply with duties of care, skill and diligence. As the Bursar and Dr Conaglen said in their paper, Fellows are not expected to have special expertise in every area of the College’s administration. However, a Fellow serving on Governing Body will be expected to exhibit the degree of skill that would reasonably be expected from a person undertaking those duties.

As for diligence, as the Bursar and Dr Conaglen also indicated, it is perfectly appropriate for the day-to-day running of the College to be delegated to people whom the Governing Body considers to be competent to perform the relevant task. Hence, when Governing Body properly leaves the performance of tasks to others within the College, the Fellows can, in the absence of grounds for suspicion, trust those delegated such authority to fulfil the relevant responsibilities honestly. On the other hand, Fellows, as members of Governing Body, are under an affirmative duty to be familiar with the basic operation of the College and are obliged to monitor in a general way its affairs and policies. A phrase the Bursar and Dr Conaglen used in their memo captures the point evocatively, as they say ‘the ostrich may find contentment in its personal life, but as a fiduciary it leaves itself dangerously exposed’.

While for Fellows of Trinity Hall the protection delegation provides from liability is qualified, a change of practice could result in greater insulation from legal risk, at least for some Fellows. Section 8 of Statute II of the Trinity Hall statutes authorizes the Governing Body to establish a College Council to exercise on Governing Body’s behalf such powers as Governing Body specifies, subject to designated exceptions, such as electing the Master or Vice-Master and the suspension or removal of a Fellow. While with ordinary delegation Fellows remain obliged to be generally familiar with the College’s affairs and policies, the establishment of a College Council arguably would create a different arrangement. For those powers the Governing Body bestowed on the College Council, the Governing Body seemingly would cease to function at all, as the College Council would be taking final and binding decisions. Correspondingly, members of Governing Body who did not serve on the Council likely could not be held accountable for decisions taken.

Before Trinity Hall Fellows rush off and draw up plans to establish a College Council, a cautionary note is in order. If Governing Body established a College Council with the intention of insulating Fellows from liability rather than promoting the good governance of the College, they might well breach the duty they owe to Trinity Hall to exercise the powers of Governing Body in the best interests of the College.

To sum up, while registration as a charity unquestionably has important implications for Trinity Hall, the College’s new status does not change in any fundamental way the duties and responsibilities of Trinity Hall Fellows. Regardless of whether Trinity Hall was registered as a charity or not Fellows would owe to the College duties to exercise Governing Body’s powers with care, skill and diligence, to avoid conflicts of interest and to avoid profiting at the College’s expense. Be that as it may, given that Fellows are not ‘required by law to live in an unreal world of detached altruism’, they can look forward to enjoying tonight’s dinner and drinks with a clear conscience.

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