Bermuda: Purpose Trusts: A Perplexing Ruling

Keith Robinson questions the reasoning behind a recent decision on disclosure in the case of Bermuda purpose trusts.

Purpose trusts have been valid in Bermuda since the coming into force of the Trusts (Special Provisions) Act 1989 (TA 1989), in what was a very significant and deliberate departure from the common-law principle that every trust other than a charitable trust must have a beneficiary who can compel its performance. This legislation was then the subject of substantial amendment in 1998, with the passing of the Trusts (Special Provisions) Amendment Act 1998. Given the seismic change from the common law that this legislation represents, its terms are surprisingly brief.

Following a general statement of legality (s12A(1) TA 1989), the statute provides that three conditions must be fulfilled with respect to the purpose or purposes (s12A(2)), namely that they are:

• sufficiently certain to allow the trust to be carried out;
• lawful; and
• not contrary to public policy.

The statute then provides (s12B(1)) that the Supreme Court may make an order enforcing a purpose trust on the application of:

• any persons appointed in the trust for this purpose;
• the settlor (unless there is a contrary intention);
• a trustee; or
• any other person with sufficient interest.

The Attorney General is given the position of default applicant if there is no person able and willing to make such an application.

Since the passing of the TA 1989, there has been very little Bermuda case law that has touched upon purpose trusts. The Bermuda courts have, for example, exercised the jurisdiction provided for in s12B(2) to approve a scheme of variation but there have been no reported decisions – until now, that is, with the recent interlocutory decision in the case of Trustees 1–4 v Attorney General and others.¹

FACTS OF THE CASE

This was an application in the course of Beddoe proceedings,² and was reported without the identity of the parties being revealed. The plaintiffs were trustees of four Bermuda purpose trusts and the second respondent had issued a writ against the trustees (in what was referred to as the 'main action'), claiming on behalf of the estate of his deceased father that his father had not properly consented to the assets being placed into trust.

The plaintiff trustees sought directions by originating summons as to: the stance they should adopt in the main action (they invited the court to direct that they should resist the second respondent's claim); directions as to the interim administration of the trust funds pending the conclusion of the main action; and an indemnity in respect of complying with the court's directions.

The second respondent sought disclosure of certain documents that had been referred to in affidavits filed on behalf of the trustees. The disclosure application was put forward on two grounds: first, that the plaintiff trustees had a duty of full and frank disclosure to the court; and, second, under Order 24, Rule 10 of the Bermuda Rules of the Supreme Court, which provides that one party can serve a notice requiring an opposing party to produce a document to which reference is made in an affidavit.

THE RULING

In a lengthy ruling, the judge found in favour of the trustees on the first ground but against them on the second ground, and ordered disclosure.

As to the arguments based on the duty to give full disclosure to the court, while clearly considering that the trustees had such a duty, the judge did not consider that there was any requirement that the trustees provide information in any particular form or copies of the documents from which that information was derived. It followed that the trustees had no obligation to produce copies of documents referred to in affidavits, and the judge held that the question of which documents the trustees should produce to the court was a matter for their own judgment. In doing so, the judge accepted the arguments of the trustees that the originating summons proceedings were not intended to be a 'mini-trial' of the main action or to provide disclosure for the purposes of the main action. He agreed with the Royal Court in Jersey that the court should avoid being sidetracked into 'unhelpful mini-investigations'.

With respect to the arguments based on the rules as to discovery, the judge considered in detail the rationale for the rule in Order 24, Rule 10. In doing so he held: (a) a 'Beddoe application' was a 'cause or matter' so as to come within the rule; (b) 'reference is made' to a document when there is a direct allusion to it; and (c) the rule extends only to documents referred to in the body of an affidavit and not to documents referred to in exhibits to the affidavit. The judge, having been satisfied that one particular document in dispute had been referred to in an affidavit, then went on to consider the trustees' argument that this document was covered by legal advice privilege.

This aspect of the judgment is perhaps the most interesting and controversial. The argument on the part of the second respondent was that the trustees could not assert privilege against him because he had been joined to the proceedings to represent the estate and heirs of his father. In the case of beneficiary trusts, the judge noted that the court might order trustees to disclose to beneficiaries legal advice obtained at the expense of the trust fund. The judge quoted with approval from Lewin on Trusts that '... the advice is held for the benefit of the beneficiaries, not for the personal benefit of the trustees, and so privilege is no answer to the beneficiary's demand for disclosure'.³

While there are no beneficiaries of a purpose trust, as noted above, the Bermuda legislation lists a number of individuals (including the settlor) who have standing to enforce the trust. The judge concluded that, since the second respondent was representing the estate and heirs of his father, he 'stood in the shoes of the settlor and is a person with sufficient interest in the enforcement of the trust'.⁴ The judge concluded that the trustees could not therefore assert legal advice privilege against the second respondent.

THE JUDGE'S REASONING

It is submitted that there are a number of significant difficulties with the judge's reasoning. As the judge himself noted, the second respondent was not seeking to enforce the trust but rather to attack it. It is unclear why this in and of itself was an insufficient response to the second respondent's arguments.

Second, s12B(1) TA 1989 does not give the estate representatives of a settlor of a purpose trust the power to enforce its terms. This section applies only to the settlor (subject to any contrary intention).

Third, and perhaps most importantly, the English and Welsh practice, referred to with approval in In Re Moritz,⁵ of not disclosing to a hostile party in the 'main proceedings' evidence in the Beddoe proceedings has been adopted in Bermuda in previous cases and it is not clear why this principle was not sufficient to disapply the Rules of the Supreme Court as to the discovery of documents. It is clear that the judge considered the In Re Moritz line of authority, since he referred with approval to In Re Eaton,⁶ in which Wilberforce J (as he then was) expressly approved of the procedure set out in In Re Moritz. The judge also referred with approval to the decision of Lindsey J in Re Professional Trustees of 2 Trusts,⁷ which again confirmed, rather than undermined, this long-established practice.

It will be interesting to see whether the decision in Trustees 1–4 v Attorney General and others is the subject of an appeal. The case is also noteworthy as an example of the Bermuda court grappling with the purpose trust. It is perhaps surprising that it has taken 25 years since the introduction of purpose trusts in Bermuda for such trusts to have become the subject of significant litigation.

Article first published in STEP Journal, July 2014

Footnotes

1. [2014] SC (Bda) 24 Comm (26 February 2014)

2. In Re Beddoe [1893] 1 Ch 547

3. Lewin on Trusts, 18th ed, (London, Sweet & Maxwell, 2008), paragraphs 23–45

4. At [73]

5. [1960] Ch 251

6. [1964] 1 WLR 1269

7. [2007] EWHC 1922

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