The Court of Appeal of Guernsey has overturned the decision of the Royal Court of Guernsey holding the Guernsey based former trustees of a Jersey law trust personally liable to repay debts amounting to £183 million plus interest.
The court has held that the former trustees are entitled to rely on the provisions of Article 32 of the Trusts (Jersey) Law, 1984 (the "TJL") to limit their personal liability, notwithstanding that the governing law of the obligations was not the law of Jersey.
Court of Appeal's Determination
The Court of Appeal could not find any direct guidance in the authorities or in authoritative writings regarding the status of a trustee (as a legal concept) under the domestic law of the trust in relation to contractual obligations undertaken by the trustee. However, the Court of Appeal considered that assistance could be drawn from what it considered to be a generally accepted rule of private international law regarding companies and partnerships whereby the law of the place of incorporation determines, amongst other things, the extent of an individual member's liability for the debts and liabilities of a company and partnerships. On that basis, the Court of Appeal accepted that, where the law of one jurisdiction made provision regarding the potential liability of persons holding a particular status, those provisions, if of a substantive nature, would be recognised by the courts of the forum of the dispute.
The Court of Appeal held that the analogy with limited companies and limited liability partnerships was strong and if the courts would respect protection afforded to members of companies or partners and partnerships by the foreign laws under which they were incorporated, there was no compelling reason why a court should not similarly apply the foreign law of a trust which limits the liability of trustees.
It also noted that Article 32 of the TJL only arises where the other party to a transaction knows that the trustee is acting as trustee and not personally and considered that contracting parties are thereby put on notice that the person with whom they are contracting is not doing so as an individual but as a trustee.
The Court of Appeal held, relying upon this analysis, that there is no distinctive element in the character of trusteeship which should lead to the application of a different rule regarding the extent of a trustee's liability where that trusteeship is recognised by a jurisdiction and of which the other party to the transaction has been made aware, than is the case in relation to corporate entities or partnerships with separate legal personality.
It also held that Article 32 of the TJL is a substantive provision and that the Guernsey courts should accordingly recognise the applicability of Article 32 of TJL in the determination of the dispute between the parties before the Guernsey courts. The Court of Appeal noted that the provisions of Section 42 of the Trusts (Guernsey) Law, 2007 (the "TGL"), whilst expressed in slightly different terms, appeared to them to have the same effect as Article 32 TJL.
The Court of Appeal held that the Royal Court had given too narrow an interpretation to Section 65 (and Parts III and IV) of the TGL (which provide for the enforceability of foreign trusts in Guernsey such as under Article 32 of TJL). Further it held that a foreign trust should be governed and interpreted in accordance with its proper law, including the effect of the trust under its proper law, to include whether by virtue of that law there is a restriction on liability.
The Court of Appeal accordingly held that the provisions of Article 32 of TJL ought to be applied in considering the liability of the former trustees and that the former trustees should have no personal liability in respect of the loans extending beyond the assets of the trust.
The specific consequences of this finding of the Court of Appeal and the true meaning and effect of Article 32 of TJL will be considered by the Court of Appeal later this year.
Trustees in the Channel Islands (and no doubt also in the Cayman Islands, BVI and the other jurisdictions with similar limitation of liability provisions in their trust legislation) may be relieved following the Court of Appeal's decision.
However, whilst the judgment gives comfort to trustees (to the extent that contracts entered into with third parties subject to Guernsey law will enable the trustees to rely on liability limitation provisions of the applicable foreign law governing the trust) there is no certainty that the courts of other jurisdictions such as England, New York or on the continent will, when applying their law, in the absence of an express provision in the contract, be prepared to give trustees the protection of limited liability provisions afforded by their domestic law.
Trustees contracting under the laws of a jurisdiction other than the governing law of the trust or contracting with parties in other jurisdictions (even if the contract is governed by domestic law) would be well-advised to include express contracting provisions which limit their liability to the extent of the trust fund.
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