Bermuda: Important Bermuda Judgment Considers Questions Of Litigation Funding, Private International Law And Trusts

The recent Bermuda decision of Stiftung Salle Modulable & Rutli Stiftung v. Butterfield Trust (Bermuda) Limited, (Civil Jurisdiction 2012 No. 165) handed down on 21 February 2014 contains important points relevant to the question of litigation funding, as well as to practitioners of private international law and trusts. The 121-page ruling of the Chief Justice followed a six week trial and largely turned on a close analysis of the factual evidence.

The main issue in dispute was whether the Defendant, the Trustee of a Bermuda trust (known as the Art I Trust) (the "Trustee"), had a contractual (or other binding) obligation to provide funding of up to 120 million Swiss Francs for the planning and construction of an Opera House in Lucerne, Switzerland.

The Plaintiffs were a Swiss charitable foundation established for the express purpose of planning, constructing and maintaining the Opera House and a Swiss philanthropic foundation ("the Swiss Foundations").

The Trustee decided in 2010 to withdraw funding from the project having discharged certain costs that had been incurred. Perhaps the fundamental legal point in the decision was whether the Trustee's alleged contractual obligations were governed by Swiss or Bermuda law.

It was not disputed that this question fell to be determined by the Bermuda Court applying Bermuda's conflict of law rules. The Chief Justice held that the Court, in the absence of an express choice of law by the parties, would seek to identify either (a) an implied or inferred choice discerned from the surrounding circumstances; or (b) the system of law with which the alleged contract has its closest connection. On the facts, the Chief Justice held that Swiss law was the applicable law noting that the key contractual obligation was the place of payment and this was Lucerne.

Having analysed detailed evidence of Swiss law (which had to be proved as a matter of fact before the Bermuda court), the Chief Justice held that the parties had entered into what is known under that system of law as a "donation contract" by which the Trustee agreed to fund the preliminary costs and construction of the Opera House subject to a condition subsequent that if the project was not feasible the contract would be dissolved. This concept of a "donation contract", which is unknown to Bermuda law, involves the promise of a gift from the donor from his own assets on a gratuitous basis with an intention to donate which is accepted by the donee.

The Chief Justice found that essential objective terms of such a contract (which must be in writing signed by the donor) were simply (a) the identity of the donor, (b) the identity of the donated property and (c) the donor's intention to make a gift.

It was also held that proof of formation of a contract requires either proof that the parties subjectively intended to enter into a binding commitment or that such an intention can be objectively inferred based on what a reasonable person in the position of the parties acting in good faith would have intended. While the Chief Justice held that the Trustee had not subjectively intended to enter into a donation contract, he held that there was such a contract as a matter of objective analysis. While rejecting all arguments of bad faith on the part of the Trustee, the Chief Justice found that the Trustee was not entitled to terminate the contract as it had.

The Trustee's complaints about the implementation of the plan to build the Opera House were held not to amount to breaches of the contract and even had they amounted to breaches, it was held that the Trustee was under Swiss law obliged to allow a grace period to allow breaches to be cured.

The remedy awarded by the Chief Justice was not, however, the damages award claimed by the Swiss Foundations. Rather, the Chief Justice awarded what under Bermuda law would amount to a decree of specific performance. Under this ruling, the Swiss Foundations are to be given a reasonable time to demonstrate feasibility of the Opera House plan in terms of both construction and operating costs so as to satisfy the condition subsequent failing which the contract will be dissolved.

It is clear from the ruling that had legal relations between the Trustee and the Swiss Foundations been governed by Bermuda law, the outcome would have been different. This is a result of the Bermudian doctrine of consideration so that a binding contract would not flow from a gratuitous promise unless made by deed. It was conceded by the parties that there was a binding legal agreement to fund the feasibility phase of the project but had the issue been governed by Bermuda law the Chief Justice would have held that there was no such binding agreement to fund construction.

The Chief Justice also considered whether, as a matter of Bermuda law, the contractual obligation to fund the feasibility stage would have been validly terminated. He found that the Trustee would not have been entitled to terminate on the ground relied on, namely breach of essential terms. However, the Chief Justice also found that there would have been an implied term that if the Trustee for any bona fide reason decided that it was not willing to proceed with the funding of the construction of the Opera House, it would have been entitled to terminate the contract covering the feasibility stage upon giving reasonable notice and funding all reasonably incurred outstanding costs.

In reaching this alternative finding, the Chief Justice made an interesting point relevant to trust practitioners concerning the status of the Settlor of the trust.

It appears that the Settlor remained in favour of the Opera House project (although he died in the course of 2010) but the Chief Justice held that the Trustee had no legal obligation to have regard to the Settlor's wishes either generally or to the exclusion of the other beneficiaries. While the Letter of Wishes in this case expressly requested that the Trustee consider the wishes of the Settlor's children and remoter issue as they would the wishes of the Settlor (it is clear that other family members were supportive of the Trustee's decision to pull out of the Opera House project), it is interesting that the Chief Justice considered that the Trustee did not have an obligation to have regard to the Settlor's wishes.

There were a number of other trust claims advanced by the Swiss Foundations and these did not find favour with the Chief Justice.

The Trustee had added to the class of beneficiaries "any registered charity and non-profit making entity proposed by the Trustee and consented to by the Protectors". There was no evidence, however, that either of the Swiss Foundations had actually been added as beneficiaries and the claim that they were beneficiaries of the Trust was rejected.

The claim that they had a "legitimate expectation" to benefit from the trust was also rejected without an analysis of this concept or how it relates to the discretionary trust. It was also argued that the Swiss Foundations were discretionary objects of a fiduciary power and while the Chief Justice accepted this argument to some extent, he held that the Trustee did not breach any trust law duties to the Swiss Foundations by ceasing to fund the Opera House project.

The Chief Justice also rejected an argument that a common intention constructive trust had arisen.

One further remarkable aspect of the case is that the Swiss Foundations had entered into a litigation funding agreement. This was an English law governed agreement by which the Swiss Foundations would have had to pay approximately 40% of any damages recovered to the funder in return for litigation funding. While the treatment of this issue in the judgment is brief, it is clear that the argument on behalf of the Trustee that this litigation funding agreement was champertous was rejected as antiquarian. Indeed the Chief Justice stated that in light of modern principles promoting access to the courts, such agreements should be encouraged rather than condemned.

The Chief Justice then went on to consider whether litigation funding costs could be recovered as damages either under Swiss or Bermudian law.

It was clear that this was a question of Bermuda law since Swiss law would treat this question as one of procedure and governed by the law of the forum (i.e. Bermuda).

It was the Swiss Foundations' argument that litigation funding costs should be recovered under Bermudian law, not as legal costs, but as contractual damages by application of the test of causation. In other words, it was argued by the Swiss Foundations that the litigation funding agreement was caused by, and a reasonably foreseeable consequence of, the Trustee's breach of contract. The Chief Justice rejected this argument holding that it was not reasonable to infer that the contract-breaker assumed responsibility, not just for paying whatever legal costs might be awarded in litigation it defended unsuccessfully, but also for whatever litigation funding agreement the innocent party might choose to negotiate.

The Chief Justice expressly did not decide whether the litigation funding costs are potentially recoverable under the existing taxation of costs regime in Bermuda.

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.