Cayman Islands: Beneficiaries´ Rights To Trust Information And Trustees´ Duties Of Confidence

INTRODUCTION

The purpose of this briefing note is to consider Cayman Islands law in relation to beneficiaries' rights to trust documents and trustees' obligations of confidentiality, in particular the Cayman Islands case of Re Ojjeh's Trust, the Privy Council case of Schmidt v Rosewood Trust Company Ltd, the recent English case of Breakspear v Auckland and the Confidential Relationships (Preservation) Law (as amended) as it applies to trusts.

TRUSTEES' DUTY TO ACCOUNT

It has long been said that a beneficiary is generally entitled to inspect all documents relating to the affairs of the trust. In O'Rourke v Darbishire [1920] AC 581, the English House of Lords referred to a beneficiary's right to access to documents on the basis of a "proprietary right".

However, the decision of the English Court of Appeal in In re Londonderry's Settlement [1965] Ch 918 made clear that in some cases it is appropriate to withhold documents from beneficiaries on the grounds of confidentiality. The Court set out categories of documents that trustees are not normally bound to disclose, on the basis of protecting the well-established principle that in the exercise of discretionary powers trustees are not required to provide reasons.

In the English case of Armitage v Nurse [1998] Ch 241 it was held that a trustee owes an "irreducible core" of obligations to beneficiaries, which is fundamental to the concept of a trust. If those obligations are missing then there is no trust. A trustee's duty to account to beneficiaries for his administration of a trust is one of the core obligations. On that basis, every beneficiary is certainly entitled to see the trust accounts. It is also generally accepted that a beneficiary is entitled, on reasonable request, to information to enable the enforcement of the trustee's fiduciary obligations.

It is clear that, in principle, beneficiaries have a right to disclosure of certain trust documents, but there are limitations on this right and, as a result, it is often difficult for a trustee to decide how to react to requests for disclosure.

THE CAYMAN POSITION

Re Ojjeh's Trust [1992-93] CILR 348 is the most important case in the Cayman Islands on beneficiaries' rights to inspect trust documents. In that case it was held (applying the dicta of Lord Wrenbury in O'Rourke and the dicta of Romer LJ and Evershed M.R. in Butt v Kelson [1952] Ch 197) that the principles governing the disclosure of information to beneficiaries were as follows:

1. A beneficiary will normally be permitted to inspect and take copies of essential trust documents on the basis of the proprietary right he holds over them.
   
   
2. That normal right does not extend to detailed information about the affairs of companies owned by the trust. To obtain information of that kind, the beneficiary must make out a special case.
   
   
3. In order to make out a special case, the beneficiary must specify the documents that he or she wishes to see.
   
   
4. There must be no valid objection by the trustees or directors, or (in special circumstances), beneficiaries whom the trustees consider should properly be consulted upon the matter.
   
   
5. The beneficiary seeking disclosure must give proper assurances that he or she will not disclose the documents to anybody but his or her own legal or other advisers and will not make copies save as may be properly advised by his or her legal or other advisers.
   
   

In Lemos v Coutts & Company (Cayman) Limited [1992-93] CILR 460, the only reported decision of the Cayman Islands Court of Appeal on this issue, it was held that although a beneficiary has a proprietary right to trust documents, it is by no means an absolute right and there may be documents or categories of document which it would be just and proper to exclude from the ambit of the right where the documents are not relevant or evidentially essential to the beneficiaries' case, or where the probative value is minimal and considerably outweighed by prejudice to the other beneficiaries or to the proper administration of the trust. However, it was held that where the beneficiary is making serious allegations impugning the validity of the trustees' actions, it is only in an exceptional case that an absolute refusal of an application for accounts would be justified. Again, the Court emphasized that each case had to be considered on its merits.

RECENT DEVELOPMENTS

The decision of the Jersey Royal Court in In Re Rabaiotti 1989 Settlement [2002] 2 ITELR 763 concerned an application by the trustees of discretionary settlements. The Jersey Court held that there was a strong presumption in favour of beneficiaries seeing trust documents, unless it could be shown that there was a good reason why disclosure was not in the interests of the beneficiaries as a whole. As regards letters of wishes, the presumption was against disclosure on the basis that the settlor was likely to have intended the letter to be confidential although the Court could and would order disclosure where there were good grounds to do so.

Following the decision of the Judicial Committee of the Privy Council in Schmidt v Rosewood Trust Limited [2003] 2 WLR 1442, it is now established that rather than considering whether or not a beneficiary has a proprietary right to information, the more principled and correct approach is to regard the right to seek disclosure of trust documents as one aspect of the Court's inherent jurisdiction to supervise, and if necessary to intervene in, the administration of trusts. Lord Walker stated that the dictum of Lord Wrenbury in O'Rourke could not be regarded as a binding decision that a beneficiary's right or claim to disclosure of trust documents or information must always have the proprietary basis of a transmissible interest in trust property. The Privy Council therefore concluded that:

"No beneficiary (and least of all a discretionary object) has any entitlement as of right to disclosure of anything which can plausibly be described as a trust document. Especially when there are issues as to personal or commercial confidentiality, the Court may have to balance the competing interests of different beneficiaries, the trustees themselves and third parties. Disclosure may have to be limited and safeguards may have to be put in place. Evaluation of the claims of a beneficiary (and especially of a discretionary object) may be an important part of the balancing exercise which the Court has to perform on the materials placed before it. In many cases the Court may have no difficulty in concluding that an application with no more than a theoretical possibility of benefit ought not to be granted any relief".

The recent English decision of Briggs J in Breakspear v Auckland [2008] EWHC 220 (Ch) is significant both as the first English case to consider disclosure of letters of wishes to beneficiaries and as a fairly comprehensive summary of the law in this area. Briggs J said that there is an inevitable tension between confidentiality and disclosure in relation to wish letters, and that it is advisable to lay down guidelines to attempt to avoid unnecessary litigation. Applying Londonderry, he said:

"It is in the interests of beneficiaries of family discretionary trusts, and advantageous to the due administration of such trusts, that the exercise by trustees of their dispositive discretionary powers be regarded, from start to finish, as an essentially confidential process."

The current position is therefore that although trustees have a duty to provide information to beneficiaries arising from the trustees' fiduciary obligation to account for their dealings with the trust property, no beneficiary is entitled as of right to disclosure of trust documents or trust information. Indeed, there may be compelling reasons for refusing disclosure, but each case will depend on its own facts.

THE CONFIDENTIAL RELATIONSHIPS (PRESERVATION) LAW (AS AMENDED)

A trustee of a Cayman Islands trust may also have to consider the application of the Confidential Relationships (Preservation) Law (as amended) (the "Confidential Relationships Law"), which governs the disclosure of confidential information. The Law defines "confidential information" as including information concerning any property which the recipient thereof is not, otherwise than in the normal course of business, authorised by the principal to divulge. By section 5 of the Confidential Relationships Law, subject to section 3(2), if a person is in possession of confidential information (however obtained) and either divulges it or attempts, offers or threatens to divulge it, or wilfully obtains or attempts to obtain confidential information, he will be guilty of an offence and liable on summary conviction to a fine of CI$5,000.00 and to imprisonment for two years.

Subject to section 3(2), the Confidential Relationships Law applies to "all confidential information with respect to the business of a professional nature which arises in or is brought into the Islands and to all persons coming into possession of such information at any time thereafter whether they be within the jurisdiction or thereout".

Section 3(2) sets out the circumstances in which the Confidential Relationships Law will not apply, including the seeking, divulging or obtaining of confidential information by or to any professional person acting in the normal course of business or with the consent, express or implied, of the relevant principals.

It follows that a professional trustee acting in the normal course of its business may not need to be concerned about the Confidential Relationships Law. However, where a trustee is in possession of relevant confidential information from a third party (ie where the beneficiary is not able to assert that he has a proprietary right to the information) and does not have the consent of that third party to divulge the information, then section 5 of the Confidential Relationships Law may apply. In those circumstances, the trustee should not disclose information to a beneficiary without an appropriate Court Order.

The Confidential Relationships Law contemplates that an application may be made under section 4 of that Law for directions, but only where proceedings (whether before a Court, Tribunal or other authority) are on foot. However, in the ordinary case, there will be no extant proceedings and therefore the trustee will be unable to invoke section 4. Instead, the trustee should apply to the Court for directions.

APPLICATIONS FOR DIRECTIONS

In the Cayman Islands (in common with other jurisdictions) a trustee may apply to the Court for directions under section 48 of the Trusts Law (as amended)(the "Trusts Law"). Indeed, trustees and beneficiaries in the Cayman Islands are positively encouraged to refer disputes as to disclosure to the Grand Court. For example, in Ojjeh, the Judge said "...the trustees and the beneficiaries should be in no doubt that they should refer disputes as to disclosure to this court".

The Trusts Law enables a trustee to apply to the Court at any time for "an opinion, advice or direction on any question respecting the management or administration of the trust money or the assets of any testator or intestate...". The trustee should serve the application on all persons with an interest in the application. It is also possible to ask the Court for a direction about whom to serve the application on and/or who should attend the hearing.

Provided that the trustee acts on the opinion, advice or direction given by the Court, he or she will be deemed to have discharged his or her duty as trustee in respect of the subject matter of the application, unless the trustee has been guilty of "any fraud, wilful concealment or misrepresentation in obtaining such opinion, advice or direction ".

STAR TRUSTS

STAR trusts are set up under Part VIII of the Trusts Law, the objects of which may be persons or purposes or both. The settlor specifies in the trust instrument who has standing to enforce the STAR trust, and that person (or those persons) is/are known as the enforcer(s). Enforcers need not be beneficiaries, and section 100(1) of the Trust Law states "A beneficiary of a [STAR] trust does not, as such, have standing to enforce the trust, or an enforceable right against a trustee or an enforcer, or an enforceable right to the trust property". Accordingly it is the enforcers, rather than any beneficiaries, of a STAR trust who have the right to disclosure of appropriate trust information and the same principles applying to disclosure to beneficiaries of an ordinary trust will apply.

CONCLUSION

Whilst trustees are under a duty to provide information arising out of their fiduciary obligation to account to beneficiaries for their dealings with trust property, no beneficiary is entitled as of right to disclosure of trust documents or trust information. In deciding whether or not to provide disclosure, the competing interests of different beneficiaries, the trustees themselves and third parties must be considered. As a general principle the trustee should consider disclosure unless there are good reasons to demonstrate that the need for confidence or privacy outweighs other considerations. A trustee should in appropriate circumstances apply to the Court for directions as to whether or not to give disclosure and the extent of any such disclosure. The trustee should ensure that all relevant information is put before the Court on such an application (a) to enable the Court to carry out the necessary balancing exercise, and (b) to ensure that the trustee is adequately protected and can safely act in accordance with the Court's directions.

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.