Bermuda: The Appleby 2012 Offshore Round-Up: Trust Disputes

Last Updated: 7 February 2013
Article by Andrew Bolton

Most Read Contributor in Bermuda, May 2019

Welcome to Appleby's review of the key decisions handed down in trust cases in the leading offshore jurisdictions during 2012, compiled by members of our Litigation & Insolvency Practice Group in Bermuda, the British Virgin Islands, the Cayman Islands, Jersey, Guernsey and the Isle of Man. Equivalent updates are available in the areas of insolvency & restructuring, company law, fund disputes, and civil procedure. Copies may be obtained from our website or from your usual Appleby contact.

Court decisions involving trusts have continued to come out of the offshore jurisdictions and in particular Bermuda, the Cayman Islands, Guernsey, Jersey and the Isle of Man. Highlights of the year include a lengthy trial in the Cayman Islands resulting in a landmark ruling concerning forfeiture clauses, breach of the fair dealing rule and the calculation of equitable compensation. There has also been extensive litigation in Jersey concerning the exercise by trustees of a power to exclude beneficiaries and constructive trust claims as a consequence of fraudulent activity in Brazil. The Court in the Isle of Man has been asked to consider indemnity provisions relating to a protector and the Guernsey Court has reminded parties of the limits of confidentiality. Bermuda, Guernsey and Jersey have been extensively involved in cases concerning the interpretation of trust deeds.

Breach of Trust

In Jersey, In the matter of the C Trust [2012] JRC 086B (25 April 2012), [2012] JRC 098 (14 May 2012) and [2012] (11 September 2012) was a case where a trustee had acted to remove certain beneficiaries, and gave rise to three separate rulings of considerable interest to trustees and their advisers.

Verite Trust Company Limited was trustee of a standard discretionary trust established in 1993. The settlor and his wife had a son, who was a beneficiary of the trust. He was married and had two children (who were also at one time beneficiaries, and were the representors or applicants in the proceedings). Unfortunately, the son's marriage failed and he was ordered in the divorce proceedings to make certain payments to his ex-wife for the children. He was of limited means, so the ex-wife, on behalf of the children, approached the trustee asking them to satisfy his maintenance obligations out of the trust. The settlor's widow however was resistant to any assistance being given either to her son or to the grandchildren and persuaded the trustee to exercise its power to remove them all as beneficiaries of the trust during her lifetime. It did so by means of an irrevocable instrument. The children applied to Court seeking that that instrument be set aside and that they (and their father) be reinstated as beneficiaries of the trust.

In its judgment dated 25 April 2012, the Royal Court set aside the instrument of exclusion, expressing the clear view that the trustee's actions in executing it were perverse and unreasonable and that "no reasonable trustee would have excluded the grandchildren as beneficiaries" in the circumstances of this case.

The trustee, after that judgment, applied to the Court contending that the anonymisation required in order to prevent the grandchildren from being identified was, for a variety of reasons, not enough and that the judgment should either not be published at all or should be heavily redacted. The Court declined to make such an order and gave a salutary warning that trustees who make decisions which are later found to be unreasonable should face the consequences of doing so: "Just as errors made by professional advisers in rectification cases were said in Re Sanne to be of public interest, so it seems to us that the conduct of trustees and protectors carrying on trust company business in the Island is just as much of public interest."

Payment of Costs out of a Trust

The final instalment of the C Trust saga related to the costs of the application to set aside the instrument. The children, widow and father sought all of their costs from the trustee personally and for the trustee to be deprived of its indemnity for costs out of the trust fund. The Court reiterated the test for depriving a trustee of its indemnity, as set out in the ELO & R Trust [2008] JLR 360: "A trustee may only be denied an indemnity for its costs if it has acted unreasonably, which is a high hurdle." The Court looked not only at the conduct of the trustee in the proceedings, but also the conduct which occasioned the proceedings. The applicants' position was that the trustee was the sole cause of the proceedings: by excluding the children (and the father) in the way the trustee did, it was inevitable that hostile proceedings would follow in order for their interests to be protected, there was no other option. The Court held that the costs of this hostile litigation should not come out of the trust fund but should be dealt with as between the parties according to the ordinary rules that apply to hostile litigation. It went on to say that, even if it were wrong to categorise the proceedings in this way, "it would, in any event, be unjust that the trustee should be able to use the trust fund to discharge the cost of its defending an action in which it has been found by the Court to have made a decision that no other reasonable trustee could have made." As a result, not only was the trustee deprived of its ability to charge its own costs to the trust fund, but it also had to pay the costs of the children and the father from its own resources on the indemnity basis.

Also in Jersey, In the matter of the X Trust [2012] JRC 171, the Royal Court decided that it has an inherent jurisdiction to order that the costs of beneficiaries in suing a trustee for breach of trust, should be paid from the trust fund. The applicants had been pursuing a claim against the sole trustee for breach of trust and had been funding the litigation by means of distribution from the trust. The trustee however, subsequently came to the view that there was a potential prejudice to the trust as a result of funding the proceedings and ceased to make distributions to the beneficiaries. So that the beneficiaries might continue their action against the trustee, they sought an order from the Court under Art. 51(3) of the Trusts (Jersey) Law 1984 that the costs of bringing the action should be borne from the trust fund. The beneficiaries argued that because they were bringing hostile proceedings against the trustee in a derivative action to recover monies for the benefit of the trust fund, the Court should order that the costs of bringing those proceedings should be paid from the trust fund and further that they should be protected against any future costs order which may be made in the trustee's favour. The beneficiaries saw their role as akin to that of a trustee and that, therefore, they should enjoy the same protection as a trustee would have. The trustee adopted a neutral stance in the proceedings which the Court agreed was proper in the circumstances although it provided two independent reports to the Court both of which noted the potential prejudice to the trust fund which could be caused by the Court making such an order. The Court indicated that the matters raised required careful attention because the line between authorising a beneficiary to sue the trustees at the expense of the trust and authorising the trustee to defend the action at the expense of the trust would not always be clear. This was the first time such a matter was considered in Jersey and on the facts the Court made the order sought by the beneficiaries.

Enlargement of Beneficial Class

In another Jersey case, In the matter of the A Trust [2012] JRC 066, the trustee sought the Court's approval of its decision to widen the class of beneficiaries to include the remoter issue of the settlors. The trustee did not surrender its discretion to the Court and the application was therefore brought under the second category of cases set out in Re S Settlement 2001/154 (Unreported, 24 July 2001). All four beneficiaries of the trust objected to the trustee's decision and asserted a complete lack of confidence in the trustee. The grounds included the fact that there were ongoing proceedings for the removal of the trustee and that it was alleged that the trustee was, in any event, unfit to act. The trustee therefore, the beneficiaries submitted, should not have made any decision at all in relation to the beneficial class pending the outcome of those removal proceedings. Whilst the Court indicated that it was initially attracted to that submission, it concluded that it was right for the current trustee to have addressed the issue of the beneficial class, particularly in circumstances where there was no letter of wishes and where any new protector and trustee would not have had any prior knowledge of the settlors and their intentions.

Forfeiture Clauses, Lack of Disclosure by Trustees, Equitable Compensation and the Fair Dealing Rule

In the Cayman Islands, a landmark judgment was delivered in the case of AB Jnr & Another v MB & Others (Unreported, 18 December) concerning the circumstances in which a forfeiture clause would be triggered against a beneficiary who was found to have acted against the interests of the trust and the other beneficiaries. The validity of such clauses, sometimes referred to as "no contest clauses", which have the potential effect of forcing beneficiaries to lose their interest in a trust (or part of it) if they act in a certain manner, had previously been upheld by the Grand Court in the case of A.N. v Barclays Private Bank & Trust (Cayman) Ltd [2006 CILR 365]. Settlors sometimes decide to insert such a clause into a trust as a way of discouraging future challenges to the actions of the trustees and their decisions.

The lengthy judgment given by Chief Justice Anthony Smellie, which was released after a nine week trial concerning alleged breach of fiduciary duties by the trustee defendants, including failures to disclose relevant information about a significant business transaction affecting the value of the trust fund in circumstances which were found to amount to a breach of the fair dealing rule, confirmed that the forfeiture clause in question would have operated to eliminate the plaintiff's interest in the trust but for a settlement that was reached with the trustees in 1999 giving rise to an estoppel. The judgment will serve as a useful authority for determining the circumstances in which a beneficiary's behaviour will result in the forfeiture of his interests but is arguably more significant for the Court's finding of a breach of the fair dealing rule by the trustees and the basis upon which the Court ordered and calculated equitable compensation to be granted to one of the plaintiffs as a result of the trustees' lack of disclosure. The Chief Justice also ordered that the case may only be formally reported in the Cayman Islands Law Reports. It is understood that this has not been ordered in Cayman previously.

Constructive Trusts

In the Guernsey case of IKEA Limited & IKEA Wholesale Limited v. Hauxwell-Smith and others 10/2012, IKEA had been the victim of serious procurement irregularities involving the respondents between 1998 and 2000. IKEA sought to recover £56,000 and £90,000 held by a bank and advocates respectively in Guernsey, as the traceable proceeds of those procedural irregularities and claimed that the funds were held on constructive trust for IKEA. The Royal Court granted IKEA's application. Having stated the usual principles on which the Court may apply the concept of constructive trust, including the concept of "unconscionable conduct", it then held that the bribery of senior staff at IKEA by the respondents, among other things, amounted to unconscionable conduct: Paragon Finance plc v DB Thakerer & Co [1999] 1 All ER 400 applied.

Jersey's Royal Court, in the case of Federal Republic of Brazil v Durant International Corp and Kildare Finance Limited [2012] JRC211 has been involved in the largest asset recovery action involving the Brazilian government outside of Brazil. This action relates to a claim by the Federal Republic of Brazil and The Municipality of São Paulo for US$10.5 million held by the defendants, which it was alleged were kick-backs received by the former Mayor and Governor of São Paulo and/or his son. Judgment was delivered in November 2012 and the Court concluded that the Municipality was the victim of a fraud as alleged and that each of the defendants were liable to the plaintiffs as constructive trustee of such payments to the extent of the US$10.5 million held by them.

Protectors

An interesting case was heard in the Isle of Man which addressed the role of the protector in a trust, his right to an indemnity where there were allegations of fraud on his part and the scope of the trustees to exercise their discretion. The case, IFG International Trust Company Limited and Others v. Michael C French CHP 2012/48, arose from the facts of the proceedings US Securities and Exchange Commission v Samuel E Wyly and Others ORD 2012/24 (as commented on in our round-up of insolvency and restructuring cases). Mr French was the protector of a number of trusts, the majority set up by Samuel Wyly or his brother. He was accused of assisting the Wyly brothers with a fraud and he sought to be indemnified from the trusts for his costs in defending these proceedings. Some trusts contained a discretionary indemnity, and others contained a mandatory indemnity, but with the usual exclusion for fraud or dishonesty. Such indemnities are of course common in other contexts such as, in jurisdictions where they have not been curtailed by statute, directors of companies.

As trustee of the trusts, IFG sought the guidance of the Court as to how it should respond to Mr French's request. The trustee resisted indemnifying Mr French because, although it was not at that stage known whether the fraud charges brought against him would be proven at trial, the allegations were not frivolous, but resulted from a lengthy investigation by a credible government enforcement authority. Further, some of the accusations made against Mr French concerned activities outside his capacity as a protector. The Court held that it could not substitute its own discretion for that of the trustees and could only interfere if the trustees appeared to be exercising their discretion improperly. The trustees in this case were bound to make proper enquiries of relevant matters and they were therefore entitled to wait until the conclusion of the SEC proceedings before deciding whether or not to grant Mr French the indemnity he sought.

Disclosure of Information

The case of Re B (25/2012) concerned an application made by the trustee of two Guernsey trusts. The trustee received notice of a summons issued by a French Judge requiring it to appear at a pre-indictment hearing in France. The French judge was contemplating placing the trustee under judicial investigation concerning potential criminal offences broadly equivalent to money laundering. The issue was that the trustee considered it had a defence to all of the potential charges mentioned in the summons, but in order to defend itself it would need to disclose confidential information relating to the trusts. Under normal circumstances, of course, the trustee would not be able to disclose such information without breaching its duty to keep the affairs of the trust confidential. However, the Court accepted that there are instances where there would be no breach of duty of confidentiality, such as those set out (in the context of the banker/customer relationship) in Tournier v National Provincial and Union Bank [1924] 1 KB 46. In particular, in the present circumstances, the trustee would have the right to disclose information when, and to the extent to which, it is absolutely necessary for the protection of the trustee's interests. This would involve an evaluation of the position the trustee was in and would be a balancing exercise having regard to the interests of the beneficiaries as well as the trustee, applying Re a New York Bank [1983] ECC 342. At first instance the Judge made an order permitting the trustee to disclose information that it "reasonably considers necessary or desirable to protect the interests of the beneficiaries to the Trust, to secure the preservation of the trust property or to protect the interests of the [Trustee] personally". The decision was appealed by a beneficiary of the trust on the grounds that the balancing exercise was not undertaken or, if it was, the Judge arrived at the wrong conclusion.

The Court of Appeal held that "The facts of this case serve to remind trustees and beneficiaries that there are limits to the obligation on trustees to keep the affairs of the trust confidential. One of those limits is the ability of the trustee to protect its own interests in circumstances where silence in response to a court order, or summons (whether issued in this jurisdiction or abroad), would be likely to expose the trustee to a real risk of serious harm. A trustee in such circumstances cannot be expected to refuse to answer questions in a court of law, and simply suffer the consequences." The Court of Appeal continued the order made at first instance with minor modifications.

In the Jersey case of In the matter of the HHH Trust [2012] JRC 127B (28th June 2012), the Royal Court had to consider for the first time whether the settlor of a trust, who had retained certain fiduciary powers, could be ordered to provide documents and information to a beneficiary. Although the case concerned an employment trust, the judgment is in general terms and would seem to be equally applicable to a conventional private trust. The facts of the case were that the settlor retained two fiduciary powers, namely the power to remove and appoint the trustee and the power to appoint a protector. The beneficiary has a right to seek disclosure of information and access to documents held by the settler in connection with the exercise by the settler or any retained fiduciary powers under the trust, but there is no wider duty of disclosure. The question for the Court was therefore whether a settlor is under an obligation to make disclosure to a beneficiary and, if so, what is the extent of that disclosure?

In relation to the disclosure of information, the Court held that a settlor was a person "having a connection with the trust" and therefore fell within the categories of person in relation to whom the Court could make orders on an application by a trustee or beneficiary under Article 51 of the Trusts (Jersey) Law 1984. It would not however be appropriate to make orders for disclosure against a settlor just because he was a settlor. By analogy with the position of a protector, the Court held that it should only order disclosure of information and documents held by the settlor in connection with his fiduciary duties. The reason for limiting disclosure in this was was that the settlor's liability to account related only to his exercise of those fiduciary powers. He had no stewardship of the property or any other responsibility for the trust fund other than the exercise of his fiduciary powers. But the settlor had a duty to account to the beneficiaries in relation to such powers and therefore the Court should police that by exercising its supervisory jurisdiction. On the facts, the Court held that the documents requested ought more properly to be provided by the trustee anyway and did not relate to the exercise of the settlor's two fiduciary powers. Accordingly, the Court refused to make any order for disclosure against the settlor.

Rectification and Interpretation of Trust Deed

ABC Trust [2012] SC (Bda) 65 Civ (13 November 2012) was the first reported decision in Bermuda on an application under section 47 of the Trustee Act 1975 that trustees be provided with the power to amend the provisions of the trust deed to extend the perpetuity period of a trust settled prior to the abolition of the rule against perpetuities. The application in this instance was uncontested.

This is not the first such application since the Perpetuities and Accumulations Act 2009 came into force abolishing the rule against perpetuities in Bermuda. However, since they are largely uncontested by the living beneficiaries, the Court has not until now been required to hand down a written decision. This reported decision confirms that the Court has power to grant such applications in appropriate cases where the proposed amendments are expedient for the trust as a whole and will be of interest to trust companies who may wish to consider taking advantage of this power to apply to be given the power to amend a trust deed to alter the perpetuity period.

In Guernsey, the issue of rectification was considered in In the matter of the Colour Trusts 24/2012. The decision concerned the rectification of six deeds of gift and indemnity which were intended to have applied funds to six settlements which were collectively known as the Colour Trusts. The Royal Court confirmed that the test for rectification was that as set out in In the matter of the Pelican Trust 2005-06 GLR 20 that the Court would need to be satisfied of the following: (a) there must be sufficient evidence of the error; (b) it must be established to the highest degree of civil probability that a genuine mistake has been made; (c) there must be full and frank disclosure; (d) there must be no other practical remedy; and (e) there should be no undue delay. In addition the Court reiterated that the relief being sought is discretionary and therefore even if those five requirements are met the Court may refuse to grant the relief if it does not think it is appropriate to do so. It is a remedy which "must be cautiously watched and jealously guarded."

The Royal Court also issued guidance for the first time on the manner in which a trust instrument ought to be interpreted in Albany Trustee Ltd v Jeandin and Cristofolini 32/2012. The Court confirmed that the approach taken under Guernsey law would be similar to that taken under English law where a trust instrument must be interpreted objectively as a whole in light of the surrounding circumstances. The Court seeks to establish the meaning that the words of the instrument convey and the subjective intention of the settlor is not to be taken into account, save in one exceptional case which is when there is a latent ambiguity (i.e. one that is not obvious, but only comes about when seeking to interpret the document in the circumstances of the case). Separate and apart from the issue of interpretation, if it is apparent that the instrument does not express what was intended at all (and is simply wrong) then it may be possible to make an application for rectification of the instrument which will not be granted easily. This decision is currently under appeal.

Governing Law and Jurisdiction

In MD Events and Dervan v. Concept Fiduciaries Ltd and others (unreported, 7 December 2012) as part of determining an application over whether there had been a mistake when making dispositions to a trust the Royal Court of Guernsey needed to determine, as a preliminary issue, the applicable law under which the substantive application was to be decided. The trust was an English law trust, but the trustee was a Guernsey company and the trust was administered in Guernsey.

Having undertaken an extensive review of relevant authorities the Court held that the law under which the mistake application would be determined would be established by considering the lex situs of those assets of which legal title had been transferred to the trustee. As the assets were shares in an English company and monies transferred from that company the Court determined that the lex situs of those assets was English and therefore the substantive mistake application would need to be determined under the law of England and Wales.

In Re A Trust [2012] SC (Bda) 72 Civ (12 December 2012) the Bermuda Court was charged with determining whether a clause in the trust deed that provided, "this Trust shall be governed by the laws of Bermuda and the forum for the administration of this Trust shall be the Courts of Bermuda" conferred exclusive jurisdiction on the Bermuda Court to adjudicate disputes in relation to trust administration. The Court held that the express choice of Bermuda governing law coupled with the provision that the forum for the administration of the trust shall be the Bermuda Court meant that the Bermuda Court had exclusive jurisdiction to determine matters concerning the administration of the trust. In Re A Trust, the Court applied these principles and granted an antisuit injunction against a beneficiary who threatened to bring proceedings in a court outside of Bermuda in respect of the administration of the trust.

Doctrine of Mistake

In the matter of Re B [2012] JRC 229, the Royal Court of Jersey was asked to adjudicate on the matter as to whether the doctrine of mistake could apply to voluntary dispositions made by the trustee and considered for the first time the rule in Hastings-Bass in light of the recent English decisions of Pitt v. Holt [2011] EWCA Civ 197 and Futter v Futter [2011] EWCA Civ 197.

The case concerned a trust in relation to which restructuring arrangements had been put in place by the trustee at a time when, unbeknown to it, the settlor had an undiagnosed terminal illness which claimed his life less than three and a half years later. The trustee applied to the Court for orders setting aside and/or confirming to be invalid as having been made by mistake the various deeds by which the restructuring had been effected. In the alternative, the trustee sought an order for rectification.

In Jersey, the law as to when dispositions into trust made by mistake can be set aside (as opposed to rectified) is well settled following the ruling in In the matter of the A Trust [2009] JLR 447. There the Court held that a voluntary disposition by a donor or a settlor could be set aside on the ground of mistake if the donor or settlor had been under a mistake, whether of fact or of law, that was so serious as to render it unjust on the part of the donee to retain the property given to him. The Court had to be satisfied that the donor or settlor would not have entered into the transaction "but for" the mistake. Here, the Court was concerned not with dispositions made by the settlor but various transactions entered into by the trustee.

The Royal Court confirmed that the proper approach to an application to set aside a Jersey trust made by mistake was as set out in In the matter of the S Trust [2011] JRC 117, where the Court considered at length the rationale for the rule laid out in Pitt v Holt and the criticisms made by the Court of Appeal of the decision of the Royal Court in the A Trust case. Notwithstanding those criticisms, the Court confirmed that it would follow the decision in the A Trust, the detail of which had been refined by the Bailiff (Jersey's senior judge) in Re the Lochmore Trust [2010] JRC 068. The current test is accordingly whether the donor or settlor was under some mistake of so serious a character as to render it unjust on the part of the donee to retain the property given to him. In applying that test, the Court must be satisfied that the donor or settlor would not have entered into the transaction "but for" the mistake.

The Bailiff directed the Attorney General to appoint an amicus curiae to argue one issue which arose on the application, namely the status of the Hastings Bass rule, in order that the Court would have the benefit of contested argument given that the rule in England was in a state of flux. The issue for the Court was whether it is necessary for the Royal Court to determine what course it should follow in relation to what the Court called "the historic Hastings Bass principle as extended by Mettoy Pension Trustees Ltd v. Evans" given that that principle has, as first understood, been applied consistently by the Royal Court since Re Green GLG Trust [2002] JLR 571, and given that that principle has now been thoroughly disapproved by the Court of Appeal in England in Pitt v. Holt. As the Bailiff put it: "If that decision stands ... either the Court has to follow the changed approach of the English Courts to the Hastings Bass doctrine, or it has to adopt some other reasoning for continuing to follow the historic approach."

The Jersey practitioners therefore eagerly await the decision of the Supreme Court which is understood to be heard on 12 March 2013. That decision will certainly be important in the development of the doctrine in Jersey, but whether it will be the last word remains to be seen.

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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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.

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