Cayman Islands: To Sue Or Not To Sue: A Note On A Recent Decision Of The Grand Court Of The Cayman Islands Dealing With ´No-Contest´ Clauses

Last Updated: 25 January 2007
Article by Sara Collins

Most Read Contributor in Cayman Islands, September 2018

In a modern discretionary trust, in particular those which are set up in complex commercial structures, there is a concern to ensure that the trust can be efficiently and effectively administered without undue interference. Among the limitations sometimes introduced in drafting discretionary trusts are "no-contest" provisions which attempt to limit the scope for the beneficiaries to initiate litigation concerning the validity and/or administration of the trust.1

The Chief Justice of the Cayman Islands has recently ruled on the validity of such a clause in a Cayman Islands trust. The reported cases, which were reviewed by the Chief Justice, have largely arisen in the course of construction of wills as opposed to inter vivos settlements and so the judgment represents a comprehensive and unique analysis of the application of the principles in the context of a discretionary trust. 2

In the case before the Cayman Islands Court, there were two trusts under consideration, but the relevant clause (clause 23) in each was the same and stated as follows: "Whoever contests the validity of this deed and the Trust created under it, of the provisions of any conveyance of property by any person or persons to the Trustee to form and be held as part of the Trust Fund and of the decisions of the Trustee and/or of the Protection Committee shall cease to be a Beneficiary of any of these Trusts and shall be excluded from any benefits direct or indirect deriving from the Trust Fund"

The beneficiary sought to challenge certain decisions of the Trustee, which were pithily described as part of a "campaign to concentrate the family shareholding" in the structure of companies held through the trusts in a way which inhibited her ability to realise the best prices for her own holding and the Trustee's ability to publicly trade the shares held in trust for the benefit of the beneficiaries. She alleged that the Trustee was acting in concert with her brother and sister (the other primary beneficiaries) and contrary to her own interests and therefore sought the Trustee's removal on the basis that it was acting unreasonably, in bad faith and in a manner prejudicial to her interests and those of the remoter beneficiaries. She sought a declaration that the no-contest clauses were invalid in order to allow her to proceed to obtain the orders sought. This question was dealt with as a preliminary issue. The Chief Justice was ultimately satisfied that "construed as intended to conform with the decided cases, [the clause] can be validated so as to eliminate any concerns about uncertainty, repugnancy or ouster of the jurisdiction of the Courts", notwithstanding that, on a literal construction, various limbs of the clause would have failed on some or all of these grounds.

This purposive approach was underpinned by clause 19 of the settlements, which provided that none of the provisions of the deed should be construed as permitting the Trustees to act contrary to Cayman Islands law. Clause 19 was taken into account in construing the no-contest clause as "not intended to be construed as flying in the face of the established principles". In the light of this, the Chief Justice concluded that the clause "must be read by implication as allowing not only such contests which are successful; but also contests which are justifiable, in the sense of being taken bona fide, not frivolously or vexatiously, or with probabilis causa litigandi".

The clause was therefore saved by the implied insertion of the word "unjustifiably" before the word "contests", described by the Chief Justice as "the implied term of justification", so that the opening phrase was as follows: Whoever unjustifiably contests….". The effect of this construction was to leave unclear for the time being the operation of the clause in the circumstances of the particular case, as it would have to be subsequently determined whether the particular challenges were "justifiable" or not. As the Chief Justice remarked:

"Regrettably perhaps, from the Plaintiff's point of view, it all remains a matter that this Court, before which the contest has been raised, may yet have to decide; given the particular circumstances of this case."

Challenges to validity of the trusts and transfers to the trust

In considering the operation of the clause in respect of challenges to the essential validity of the trust (or transfers of property to it), the Chief Justice took the view that "the draconian consequences of mounting such a challenge are… more readily understood: a beneficiary could hardly expect to be allowed at once to challenge the essential validity of the Trust or its property and yet be allowed to claim benefits under it".

The inherent contradiction in seeking to invalidate a trust while at the same time attempting to preserve a right to benefit under it has informed similar judicial responses to, for example, a beneficiary's application for provision of trust documents (not to be disclosed to a beneficiary for the purpose of using them in support of a foreign challenge to the validity of a Cayman Islands trust: see Re Lemos).

Challenges to the Trustee's decisions or actions

In this case, the validity of the trust was not under attack but the question was whether the beneficiary had "contested" the Trustee's decisions in such a way as to trigger the forfeiture. The central issue was therefore to what extent the scope for such challenges could be proscribed in accordance with the settlor's intentions without cutting away the root of a trust, namely the irreducible core of obligations owed by the Trustee to the beneficiaries as a whole. In the recent decision of Levers J of the Grand Court of the Cayman Islands in Lemos and others v Coutts Cayman Limited [2004-2005] CILR 318, the learned judge confirmed that discretionary beneficiaries had a right to invoke the court's inherent jurisdiction to ensure the proper administration of the trust fund, for which they did not require a proprietary interest, applying Armitage v Nurse [1998] Ch 241 and Schmidt v Rosewood.3

A situation in which trustees could not be controlled by the court in any way in the exercise of fiduciary powers would clearly be unsatisfactory. This was the main foundation of the beneficiary's public policy challenge, as she argued that the clause, interpreted so as to prevent all such challenges, would be void as seeking to oust the jurisdiction of the court. In addition, an important part of the backdrop in this case was the wording of clause 11 of the settlements, which provided that the powers vested in the Trustee should at all times be exercised to ensure not only that there was always a Trustee to fulfil the trusts, but also that the trusts of the Settlements should be enforceable by the beneficiaries.

The following general principles emerged:

  1. There is no general rule of law which precludes testators (or, by extension, settlors) from including no-contest clauses, provided that such provisions are not introduced in terrorem rather than making a gift over of the forfeited interest to someone else
  2. It was appropriate to apply the principles of construction developed in the context of testamentary dispositions, notwithstanding that a beneficiary of a discretionary trust does not have an already vested entitlement to property. Compare the dicta of Levers J in Lemos (above) (dealing with a beneficiary's right to invoke the inherent supervisory jurisdiction of the courts) above, in which she quoted with approval the headnote from Schmidt v Rosewood: although a beneficiary's right to seek disclosure could be described as a proprietary right, it was best approached as one aspect of the court's inherent and fundamental jurisdiction to supervise and if appropriate intervene in the administration of a trust, including a discretionary trust…[and] a proprietary right was neither sufficient nor necessary for the exercise of the court's jurisdiction
  3. According to the common law principles, a forfeiture condition must be strictly construed and will be set aside on the grounds of either public policy, uncertainty or repugnancy. The strict approach has developed in respect of conditions subsequent (which would have the effect of divesting an already vested entitlement). However, there is no compelling reason why a less strict approach should be taken to a condition aimed at stripping away the interest of a beneficiary of a discretionary trust. Per the Chief Justice: "Though they are not vested proprietary interests and though also defeasible in certain other circumstances as we have seen; these are hugely valuable beneficial interests which also have ascribed to them a bundle of other rights intended to enable their enforcement. They may not be capriciously or unreasonably defeated by the exercise or operation of any power of exclusion under the Trusts. There is no compelling reason why any less strict an approach should be taken to the construction of the exclusionary provisions of clause 23 than would be taken to the scrutiny of any other power which may operate or be exercised so as to defeat an existing entitlement to be considered for benefit""
  4. Construed literally, clause 23 would have been void for repugnancy and contrary to public policy if it had the effect of preventing the trusts from being enforced by the beneficiaries and ousting the supervisory jurisdiction of the court.
  5. The Chief Justice was persuaded by the argument that: "On its true construction, Clause 23 does not deprive a beneficiary of the right to sue in court. On any view, clause 23 has no application to a claim by a beneficiary to sue the trustee in respect of the Trustee's fraud or bad faith. Further, if the beneficiary's claim on any other ground is successful (alternatively brought bona fide and probabilis causa litigandi) clause 23 will not apply".
  6. This was not just an exercise of construing the particular settlements, but rather of confirming a point of principle. As the learned Chief Justice, put it: "That proposition of principle, though differently stated, was, it seems to me, equally axiomatically identified in the other cases which exempt bona fide challenges brought on grounds which could be justified, even if such challenges fell short of success"

Conclusion

The impact of no-contest provisions in relation to any particular contest may remain unclear until the challenge is ultimately adjudicated upon. As the Chief Justice said: "In a context such as this, a challenge to the decisions or actions of the Trustee where the reasons may not yet be disclosed and in the face of a forfeiture clause, will be an inherently risky step". Legal advisers must be astute to identify a strong, bona fide reason for advising such challenges to be made and will have to place even greater reliance on obtaining disclosure of all relevant documents from Trustees before advising on how to proceed.

Footnotes

1. Such considerations are reflected in the statutory regime in many of the offshore jurisdictions. In the Cayman Islands, for example, under the Special Trusts Alternative Regime ("STAR") Law, a beneficiary of a STAR trust does not have standing to enforce the trust, or any enforceable rights against the Trustee, such rights being conferred on an "enforcer", a position that is a creature of the statute. The Law provides that standing to enforce a STAR trust may be granted or reserved as a right or as a duty, and that, subject to evidence of contrary intention, an enforcer is deemed to have a duty to act responsibly with a view to the proper execution of the trust.

2. The decision also analysed the circumstances in which relief will be granted from forfeiture, which will not be dealt with in this article.

3. [2003] 2 AC 709

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.

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