Australia: How would a Court assess the operation of your family trust? Lessons from the Mercanti case

Last Updated: 31 January 2017
Article by Simon Creek

A recent decision of the WA Court of Appeal, related to a dispute within a successful family business, has passed a magnifying glass over the nature of a power within a discretionary trust deed to vary the trust deed, how such a power was to be exercised, and whether the power had in fact been exercised correctly and without the taint of undue influence or equitable fraud.

Background

The Court of Appeal delivered its decision on Mercanti v Mercanti [2016] WASCA 206 on 29 November 2016.

The Mercanti case was essentially a dispute within a family owned and operated business. The family business was a shoe repairs services and supplies business. Two family trusts were established by the senior Mr Mercanti to own and operate the two arms of the business.

In 2004, the trust deeds were amended by their respective corporate trustees, of which Mr Mercanti, his wife and his youngest son Tyrone were directors. The deeds of variation each amended the trust deeds by removing Mr Mercanti as Guardian and Appointer, and substituting Tyrone Mercanti as Guardian and Appointor.

The relationship between Mr Mercanti and Tyrone Mercanti deteriorated, and a dispute erupted in 2013 when the shareholders of the trustees of the family trusts, being Mr Mercanti and his wife Yvonne, removed Tyrone Mercanti as Director of both trustees. Tyrone quickly responded by appointing an alternative corporate trustee for each family trust, being a company which he controlled called Parradele Pty Ltd.

The resulting legal action focused on Tyrone's appointment as Appointor and Guardian of the family trusts back in 2004.

The Issues

The trial judge, Le Miere J, concluded that, in essence, one of the family trust deeds had been invalidly amended, but that in relation to the second family trust, the M Mercanti Family Trust (MMF Trust), the trust deed had been validly amended by a deed of variation in 2004 and that subsequently the notice of removal of the MMF Trust's corporate trustee and acceptance of appointment of Parradele was valid and of legal force and effect.

On appeal, Mr Mercanti and his older son Jason Mercanti relied upon seven grounds of appeal and effectively sought to argue that the trial judge erred in failing to conclude that:

  1. the MMF Trust deed had not been validly varied because either its trustee did not have power to amend the MMF Trust deed or its schedule to change the Appointor;
  2. any power that did exist was not exercised correctly, because the deed of variation was not executed correctly by the corporate trustee;
  3. the amendment of the MMF Trust deed constituted a fraud of the power to amend the deed and breached the trustee's fiduciary duty;
  4. Mr Mercanti only executed the deed of variation as a result of equitable fraud or the undue influence of Tyrone Mercanti over his father;
  5. Tyrone Mercanti's conduct in acting to appoint Parradele as trustee of the MMF Trust was a fraud on the power of the Appointor and thus a breach of duty; and
  6. in conclusion, the appointment of Tyrone Mercanti as the Appointor and Guardian of the MMF Trust was void or voidable or that Tyrone held such powers on constructive trust for his father, and the appointment of Parradele as trustee of the MMF Trust was void or voidable.

Amendment Powers

The Court of Appeal rejected each of the appeal grounds.

No implied power to vary

In relation to amending trust deeds, the Court of Appeal held that a trustee does not have an implied power to vary the trust deed. It therefore considered at length the law around construction of a written agreement including a trust deed in order to decide whether the trustee of the MMF Trust had a power to vary the MMF Trust deed. It considered the objective intention of the settlor of the MMF Trust deed as demonstrated in the ordinary and natural meaning of the words of the relevant clauses, within the context of the trust deed as a whole. It also considered whether variation of the appointor of the MMF Trust deed resulted in an alternation of the substratum of the trust and hence a fraud on a power.

The trust deed subjectively did confer a power to vary

The Court of Appeal found that the trial judge did not err in concluding that the MMF Trust deed contained a power for the trustee to vary the trust deed, and that this power extended to replacing the Appointor and Guardian through amending the schedule of the MMF Trust deed. The Court of Appeal's detailed analysis demonstrates the nuanced approach required when considering the powers of the trustee in respect of each individual trust deed. While this particular trust deed did confer a power to change appointor, such a power is not implied and must be very carefully assessed before its purported exercise.

No evidence of undue influence or fraud on the power

The Court of Appeal rejected any allegations of undue influence or other circumstances of equitable fraud on the basis of a lack of compelling evidence. It also rejected the appellants' assertions that Mr and Mrs Mercanti did not know what they were doing when the trustee amended the MMF Trust deed to appoint Tyrone Mercanti as Appointor and Guardian, and instead accepted the evidence led at the primary trial that the lawyers for the trustee had explained to Mr and Mrs Mercanti that, among other things, "the trustee was a mere puppet because the appointor was God and had the power to hire and fire trustees at will".

Beneficiaries' consent not required where only a right of due administration

The Court of Appeal also confirmed that a trustee of a discretionary family trust under which the beneficiaries have no more than a right of due administration is not ordinarily bound to consult with or obtain the consent of the beneficiaries of the trust before exercising their powers under the trust deed.

Lessons From This Case

The Mercanti case demonstrates the subjective nature of trusts. Each trustee is empowered and bound by specific trust deed.

If a discretionary trust structure is being considered for the purpose of succession planning, at least at some point in the future, it is vital that this is taken into account when the trust deed is drafted so that the trustee is given the necessary powers. This is only possible where a trust deed is prepared by an experienced lawyer after detailed consideration of the needs of the particular client and may also require significant input from the client's financial advisor and accountant.

Likewise, when it comes to amending a trust deed, such amendments must be considered very carefully to ensure that they are of legal force and effect. As shown in the Mercanti case, correctly identifying and exercising the powers of a trustee is essential, particularly where the trust deed may not have been drafted bespoke or where it was drafted many years earlier. Reliance upon assumptions, rather than specific advice, carries great risk.

Failure to take care in relation to drafting and amending trust deeds can have drastic consequences should the exercise of powers conferred by the trust deed become contentious in time. Amendments made during times of smooth sailing, as was the case in the Mercanti family, can suddenly become subject to scrutiny when fortunes or allegiances shift.

At HHG Legal Group, we would be pleased to assist you in planning for succession including by advising on and drafting amendments to your discretionary trust deeds. We know the value of peace of mind when it comes to securing the future of your family or your business.

This is general information only, and does not constitute specific legal advice. If you would like further information in relation to this matter or other legal matters please contact our office on Freecall 1800 609 945 or email us now.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Simon Creek
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions