Cayman Islands: Risk Management For Trustees: Practical Lessons From Recent Cases About Providing Security For The Outgoing Trustee´s Indemnity And No-Contest Clauses

Last Updated: 3 October 2007
Article by Sara Collins

Most Read Contributor in Cayman Islands, September 2018

Most trustees understandably want nothing to do with litigation. The experience of making or defending a hostile claim is usually bad for business and certainly counterproductive to good relations between all of the parties involved in administering a trust, or who have an interest in the assets held on trust. One of the key selling points of the Cayman Islands as the jurisdiction of choice for the settlement of private and commercial trusts has been the consideration by the courts here in recent years of some of the risk management tools which are commonly employed in order to avoid precisely this type of situation.

Judicial guidance has also emerged recently in the form of 2 landmark decisions in complex areas of law which had previously been largely uncharted territory. For this reason, there has been a great deal of healthy interest in the jurisdiction as private client advisers throughout the world deliver the message to their clients that in Cayman they will be in safe hands. The widely held view that Cayman has a proven track record for developing case law with significant practical implications for the use and efficiency of the Cayman Islands trust, is one of reasons the popularity of the jurisdiction and its reputation for leading the field.

This article will focus on two recent decisions of the Chief Justice which provide examples of practical strategies for mitigating or avoiding the identified risks: ATC (Cayman) Limited v Rothschild Trust Cayman Limited [2006] dealing with an incoming trustee’s power to undertake to reserve a portion of the trust fund to indemnify outgoing trustees and AN v Barclays Private Bank and Trust Company Limited [2006] dealing with the validity of no-contest/forfeiture provisions in discretionary trusts.

Securing Indemnities

In ATC V Rothschild, ATC succeeded Rothschild as trustee of two Cayman Islands trusts and sought directions whether it had power to, and could, undertake to retain a certain amount of money in the trust fund for a specified period of time in order to meet any claims on Rothschild’s indemnity (calculated by reference to what ATC believed to be a reasonable pre-estimate of Rothschild’s potential liabilities). The question which arose was whether this would be an impermissible fetter on ATC’s discretionary powers of appointment as ATC essentially bound itself not to appoint or distribute that amount to beneficiaries for the specified period of time.

The principle that a trustee cannot fetter its discretion found earlier expression by way of elucidation in the decision of the Chief Justice in Re T Trust in 2000, which confirmed: "the fundamental principle that it is not given to trustees to seek to fetter in any way the manner in which they or their successors might exercise powers of appointment in the future. Trustees must be free to take all circumstances into account and to act accordingly at the date they actually do exercise that power".

In this case, a specific clause in the trust deed gave the trustee power to enter into an indemnity in favour of any former trustee and, in the exercise of its absolute discretion, to apply the whole or part of the trust fund or the income thereof "by way of mortgage, pledge or otherwise, as security for such indemnity". The Chief Justice held that the rule against a trustee fettering its discretion could be excluded or restricted by an express provision in the trust deed, so that this clause relaxed the principle by conferring on ATC express power to do what it had in mind. He described his view as "one which I think accords with the modern realities of trust administration addressing the kind of eventuality properly anticipated by the draftsman…as likely to arise and to be provided for in the often complex management and administration of valuable trusts".

No Contest Clauses

In practice, the inclusion of "no-contest" provisions in Cayman trusts has been rare, but this may change in the light of AN v Barclays Private Bank and Trust Company Limited , in which the Chief Justice ruled on the validity of such a clause. 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 and sought a declaration that the no-contest clauses were invalid in order to allow her to proceed to obtain the orders sought. 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".

The Chief Justice took a purposive approach to construction of the clause, concluding that it "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.

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. 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.

The Chief Justice was persuaded by the argument that: "… Clause 23 does not deprive a beneficiary of the right to sue in court….[It] 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 with probabilis causa litigandi) clause 23 will not apply". Thus, even if the challenge is ultimately unsuccessful, clauses of this nature would not cut out a beneficiary who had made a claim justifiably, in good faith and with "probable cause". Inclusion of such clauses, in the light of the judgment, should ensure that beneficiaries must be conscious of the threshold of "justification" before embarking on challenges to the trust or decisions of the trustees.

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
 
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
 
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