Cayman Islands: Island Remedy (Focus On Caribbean And Latin America Cayman Islands Trust Deeds)

IN DECEMBER 1982, the Y Trust No 1 was constituted by deed. Its settlor, Y Trust Inc, was named in the trust deed as the first protector. On the same date, however, Fern SA (Fern) was appointed protector by deed by the original trustee and, from that date, acted as protector of the settlement.

In 2012, it was discovered that the appointment of Fern as protector may have been invalid because, under the relevant clause of the trust deed, the original trustee only had power to appoint a new protector if there had not been a protector for a period of one month. As Y Trust Inc, the protector named in the trust deed, was not formally dissolved until October 1985, it was arguably protector from December 1982 to October 1985, while Fern potentially was not.

The position was complicated by the fact that the questionable validity of Fern's appointment as protector also put in issue the validity of a deed of retirement of two of the trustees in 1984. The consent of the protector was required for the trustees' retirement and proper discharge from the trusts of the settlement. Plainly, unless the issue of the appointment of Fern could be remedied, a multitude of decisions and steps taken in the administration of the settlement over a period of 31 years were arguably invalid, since the two 'retired' trustees had not joined in those decisions, including joining in the appointment of the new trustees.

Three arguments were put before the Chief Justice in Re the Y Trust No 1:1 rectification; the interpretation and construction of certain provisions of the trust deed; and the statutory powers of retirement.

RECTIFICATION

Rectification is a discretionary equitable remedy that allows the court, in certain circumstances, to modify trust instruments so that they properly reflect the intentions of the settlor. The attraction of rectification is that, if available, it operates retrospectively.

The Chief Justice considered rectification and the circumstances under which it would not be appropriate to grant rectification where there are other, more appropriate remedies available to the parties.2

In the Cayman Islands, the conditions required to establish an equitable claim for rectification are: 'a mistake, by reason of which the document in question fails to give effect to the intention of its maker... and that, if rectified as sought, the document would give effect to the intention of the maker.'3

The Chief Justice confirmed that the Grand Court is sensitive to the needs of those who establish trusts under Cayman Islands law, and will grant relief by way of rectification where it is appropriate for the purpose of 'safe vouching the parties' intentions'.4

However, rectification of the deed appointing Fern would not have solved the problem of invalidity of the deed of retirement of the two trustees. Even if Fern was properly appointed as protector of the settlement, it had not expressly consented in the deed to the trustee retirements. In fact, no evidence of its consent to the trustee retirements could be found in the trustees' records, so the plaintiffs were forced to rely on a presumption of due execution of consent. The evidence did not support such an inference being drawn, and so this argument failed to find favour with the Chief Justice, who concluded, therefore, that rectification would not serve any practical purpose.

The Chief Justice also reminded the parties that rectification is available where a document fails to express the intentions of the parties to it, but not to rectify a transaction that has gone wrong. Because Fern was not named in the trust deed as first protector, a different mistaken process to effect their appointment was adopted. The Chief Justice pointed out that the distinction between a mistake in drafting and a mistake of process would not have precluded relief by way of rectification in the absence of any other practical remedy. For the reasons set out above, this distinction proved to be moot.

PERSONAL v FIDUCIARY POWERS

The court next considered whether clause 16 (b) of the settlement contained a fiduciary or a personal right. Clause 16 (b) appeared to confer a unilateral right to retire as trustee. Conversely, clause 21 appeared to provide that powers and discretions vested in the trustees as specified in the sixth schedule of the settlement should only be exercised by them with the prior or simultaneous written consent of the protector.

Despite clause 16 (b) being listed within the sixth schedule, the Chief Justice held that, on its true construction, it did not fall within the category of a 'power or discretion vested in the trustees'. Consequently, the consent of the protector was not necessary. Clause 16 (b) conferred a unilateral right on a trustee to retire, and that such a unilateral right to retire (despite often being referred to as a 'power to retire') would be negated if it were made subject to protector consent. The crucial difference between a personal right and a power is that a mere right connotes no fiduciary duty owed to the beneficiaries when it is exercised, whereas a power, vested in the context of a trust, usually connotes a fiduciary duty owed to beneficiaries to be exercised with their best interests in mind.5

STATUTORY POWER OF RETIREMENT

Another interesting aspect was whether the statutory provisions in respect of trustee retirement were extinguished by the express right of retirement pursuant to the terms of the settlement. Section 110 (2) of the Cayman Trusts Law (2011 Revision) states that the powers conferred by the law on trustees are in addition to the powers conferred by the instrument that creates the trust, but those powers, unless otherwise stated, apply if and so far only as a contrary intention is not expressed in the instrument creating the trust, and have effect subject to the terms of that instrument.

Clause 16 (b) of the settlement provided as follows:

'If any Trustee hereof shall at any time desire to withdraw and be discharged from the trusts hereof he or it may... so do by notice in writing signed by himself or in the case of a corporate trustee by any of its officers given to the person having for the time being power to appoint new or additional trustees hereof and upon the posting or personal delivery of such notice the trustee so doing shall cease to be trustee hereof for all intents and purposes except as to acts and deeds necessary for the proper vesting of the Trust Fund in the continuing or new trustee or trustees or otherwise as the case may require.'

Section 8 (1) of the Trusts Law (2011 Revision) provides:

'Where a trustee is desirous of being discharged from the trust, and after his discharge there will be either a trust corporation or at least two individuals to act as trustees to perform the trust, then, if such trustee as aforesaid, by deed, declares that he is desirous of being discharged from the trust, and his co-trustees and such other persons, if any, as empowered to appoint trustees, by deed, consent to the discharge of the trustee, and to the vesting in the cotrustees alone of the trust property, the trustee desirous of being discharged shall be deemed to have retired from the trust, and shall, by the deed, be discharged therefrom under this Law without any new trustee being appointed in his place.'

The Chief Justice determined that the terms of the settlement did not expressly or implicitly exclude the statutory power of retirement. While he accepted the general proposition that a statutory power will be excluded under s110 (2) of the Trusts Law (2011 Revision), this would only be the case if the applicable statutory power was inconsistent with the clear purport of the instrument.

The Chief Justice did not find that there was any indication that the extensive description of the powers of the trustees set out in the settlement was intended to exclude powers conferred by statute.

This serves as a salutary reminder to those people drafting trust deeds to ensure that, if they intend the statutory powers of trustee retirement to be excluded, this should be clearly stated. Otherwise, the statutory provisions, and the provisions of the settlement in respect of retirement and appointment of trustees, will operate side by side.

CONSIDERING ALL OPTIONS TO REACH A SOLUTION

It was evident in this case that the beneficiaries of the settlement would have been severely prejudiced if a solution had not been found. It is clear that, in the right circumstances, the Cayman Islands court will be prepared to consider all options available to it in attempting to reach a viable solution to an otherwise seemingly intractable problem.

In the words of Lord Justice Mummery: 'Rectification is but one aspect of a wider equitable jurisdiction to relieve parties from the consequences of their mistakes.'6


Originally published by WWW.STEP.ORG/JOURNAL


Footnotes

1 FSD Cause No 49 of 2015 (ASCJ)

2 Scania (Great Britain) Ltd v Wager and others [2007] All ER 215

3 FSD Cause No 49 of 2015 (ASCJ) at 74

4 FSD Cause No 49 of 2015 (ASCJ) at 77

5 Re the Circle Trust [2006] CILR 323

6 Allnutt v Wilding [2007] EWCACiv 412

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Morven McMillan
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