Following on from our earlier blog posting where we reported on the background of Zhang Hong Li v DBS Bank and others and the Hong Kong Court of Final Appeal's ("CFA") decision to overturn the Court of Appeal's ("CA") findings, we now set out below our more detailed analysis of the CFA's decision.

Summary of the decision

The CFA reversed the CA's findings and ruled that the anti-Bartlett clause contained in the trust deed effectively excluded any "high level supervisory duty" with any purported residual obligation on the part of the former trustee in relation losses to a trust resulting from risky investment decisions made by an investment advisor on behalf of the trust's underlying private investment company.

The CFA also found that the corporate director of the investment company similarly had no such high level supervisory duty and was not in breach of its fiduciary duties. The case was heard in the Hong Kong courts and the governing law of the trust was Jersey law. The parties relied on expert evidence on Jersey law and the courts dedicated much time to interpreting this evidence. The Jersey courts may reach their own conclusion on similar points in due course but as a result of this interplay between Jersey and Hong Kong law, the case could well be of broader application across the common law trust world.

It is notable that despite the parties settling shortly before the judgment was due, the CFA exercised its discretion to hand down its decision and it was held that if the parties had not settled, the CFA would have allowed the appeal. The discretion was exercised on the basis that the case involved important issues of law relevant in Hong Kong and internationally.

The trust structure and documentation

The trust was set up under Jersey law on 4 January 2005. DBS Trustee HK (Jersey) Limited ("DBS Trustee") was the former trustee. The sole trust asset was a share in a private investment company called Wise Lords Limited (the "PIC"). DHJ Management Limited ("DHJ") was the sole corporate director of the PIC.

The structure of the trust was one most commonly used by DBS Bank. The trust was a discretionary trust with powers of investment delegated to a BVI company which served as the trust's private investment company (i.e. the PIC).

The second plaintiff, Madam Ji Zhengrong ("Ji") and her husband and the first plaintiff, Zhang Hong Li ("Zhang") were the settlors to of the trust. They, together with their children, were beneficiaries of the trust. Ji was also the investment adviser of the PIC. Her position as investment adviser had been cemented through:

  1. Her appointment through an Investment Advisor Agreement between Ji and the PIC;
  2. A Letter of Wishes (although not legally binding) by Ji and Zhang stating that while Ji was alive, DBS Trustee "should always consult her in the first place with regards to all matters and her recommendation should be final"; and
  3. An Authorisation Letter where DHJ granted Ji authority to give investment instructions on behalf of the PIC.

The trust document contained an extensive anti-Bartlett clause as well as a number of other protections for the trustee including clauses stating that:

  1. Investments of a speculative nature are deemed an authorised investment;
  2. The Trustee is under no duty to diversify investments; and
  3. The Trustee shall not be under any duty to preserve or enhance the value of the trust and shall not be liable for any failure in those respects.

DHJ's Services Agreement also provided for exemptions from liability and indemnities except in cases of gross negligence.

In summary, the anti-Bartlett clause covered the following grounds:

  1. Trustees are not under any duty or bound to interfere in the business and in particular, the Trustees:
    1. are not under any duty to control or interfere with the administration, manager or conduct of the business or affairs of any company in which the trust is interested and the Trustee is under no duty to exercise any voting powers;
    2. shall leave the administration, management and conduct of the business to the directors (so long as the Trustees do not have actual knowledge of any dishonesty relating to the management); and
    3. shall assume at all times the administration, management and conduct of the business is being carried on completely honestly, diligently and in the best interests of the Trustees in their capacity.
  2. No beneficiary could control, compel or forbid the exercise of any power conferred on the Trustees.
  3. Trustees are not be liable in any way for any loss or the income of the trust arising from any act or omission of the directors or the management.
  4. Trustees are not responsible for any default, act or omission by the directors, officers or management.
  5. Trustees are under no obligation to obtain information on the administration, management, or conduct of the business and can assume information supplied to them relating to the company is truthful (unless the Trustees have actual knowledge indicating otherwise).
  6. Trustees are not liable for any loss sustained by the trust as a result of the Trustees not taking all possible steps to obtain information on the business or verifying its accuracy.

Issues in question

The issues in question concerned three of the PIC's transactions that were approved by DBS Trustee and DHJ during the financial crisis in 2008:

  • An increase in the PIC's credit facility;
  • The purchase of Australian dollars' worth USD83m; and
  • The purchase of decumulators.

As a result of these transactions and the downturn of the financial market, the trust experienced significant losses. It should be mentioned that prior to the financial crisis, the trust's investments had been very profitable.

The Court of First Instance ("CFI") and the CA found that DBS Trustee and DHJ owed a "high level supervisory duty" to the beneficiaries despite the delegation of the investment function and the anti-Bartlett clause stating that the DBS Trustee had no such duty.

On the back of DBS Trustee and DHJ approving the transactions, the lower courts found DBS Trustee to be liable for gross negligent breach of trust and DHJ liable for gross negligent breach of fiduciary duty.

The defendants challenged the findings in the CFA by arguing that they did not breach their duties because the anti-Bartlett clause in the trust document ensured such duties could not be established in the first place.

The key questions for the CFA included therefore whether despite the anti-Bartlett clause, a duty could be established and (if so) if that duty was breached.

The CFA's view on DBS Trustee and DHJ's supervisory duties

High level supervisory duty?

The CFA found that "to conclude, as a matter of law, that the "high level supervisory duty" existed is in our view plainly inconsistent with the anti-Bartlett provisions". Further, any supervisory duty was displaced by the terms of the trust which stated that trustees should assume that the business is being carried out honestly, diligently and in the best interest of the trustees in their capacity as shareholders until they have actual knowledge to the contrary. No such knowledge arose. The terms also relieved trustees of the duty to seek information on the management or conduct of the business. Therefore DBS trustee had no reason to query the transactions.

Regarding DHJ, the CFA held that based on the evidence of how the PIC's investments were made, DHJ did not exercise any powers of supervision over those investments and as such, a high level duty could not be justified on the part of DHJ.

Residual obligation?

The CFA did not accept the CA's interpretation that one of the Jersey law expert's reference to a "residual obligation" on the part of the trustee was meant to advocate the existence of a broad implied residual obligation which arises outside of and contradicts or overrides the express anti-Bartlett provisions in the trust deed.

In particular, the CFA did not agree with the CA's interpretation that the "residual obligation" identified by the Jersey law expert imposed a general requirement on trustees "to exercise available powers in circumstances where no reasonable trustee could refrain from acting" that existed external to the terms of the trust deed. Instead, the CFA preferred to read the reference to a "residual obligation" to mean that the anti-Bartlett provisions in the trust deed preserved an obligation to interfere only where there is actual knowledge of dishonesty.

The CFA went on to explain that anti-Bartlett provisions are typically used to enable settlors "freely to exercise control and management of the underlying company, especially regarding matters such as its investment decisions, and to relieve the trustees of any management or supervisory duties in that regard (save where extreme situations such as those involving actual knowledge of dishonesty might arise)".

Therefore, the CFA was of the view that to suggest the parties' chosen structure could be overridden by an "implied, non-derogable external duty arising in circumstances "where no reasonable trustee could refrain from exercising otherwise excluded powers" would be to introduce an amorphous and ill-defined basis for undermining a legitimate arrangement consciously adopted by the parties...". This would expose "the trustees to unanticipated risks of liability and sowing confusion as to the extent of their duties."

In other words, the CFA did not consider that in asserting the existence of a "residual obligation", the expert was seeking to go beyond the terms of the trust deed. Rather, the expert was merely referring to duties not excluded by the anti-Bartlett provisions. The CFA found that in any case, the DBS Trustee did not have any knowledge showing wrongdoing so this duty had not been triggered.

The CFA also explained that the "irreducible core of obligations" which are "fundamental to the concept of trust" referred to in Armitage v Nurse [1998] Ch 241 is distinct from the residual obligation mentioned in the Jersey law expert's report. The irreducible core obligations do not include "the duties of skill and care, prudence and diligence" and do not override express terms of the trust. These core obligations also do not support the existence of some broad duty to exercise powers available to the trustee "where no reasonable trustee could lawfully refrain from exercising those powers" which the CA exerted existed as a residual obligation outside the express terms of the trust deed.

Assumption of non-derogable obligations laid down by statute?

The CFI determined that a "high level supervisory duty" arose pursuant to a free-standing obligation to act prudently and without gross negligence. The CA's judgment was premised upon the existence of an external "residual obligation" identified by one of the Jersey law experts which required trustees to exercise available powers in circumstances where no reasonable trustee could refrain from acting.

In contrast, in the CFA the current trustee and the PIC argued that by choosing to exercise the supervisory power of approving the PIC's investments, DBS Trustee subjected themselves to the non-derogable obligations set out in Article 21(1) of the 1984 Trust (Jersey) Law to exercise this power in accordance with the standards laid down in the statute.

The CFA rejected this argument on basis that:

  • DBS Trustee did not in fact provide investment or portfolio management services. The so-called "approvals" took place after the transactions ad been effected by Ji as the investment advisor. These approvals were represented merely "a franking or acknowledgement of the information received" and DBS Trustee in reality had no meaningful supervisory role over the decisions taken by the investment advisor. Further, the Trustee had no power to reserve any transaction after the event – only the investment advisor had such power. Therefore the CFA did not accept the argument that the trustees had exercised a power to supervise and assumed the role of controllers and ultimate decision-makers regarding the PIC's investments.
  • The terms of the trust deed expressly restricts the power of the trustees to interfere in the conduct or management of the PIC's investment activities. The powers which DBS Trustee is alleged to have to supervise the investments simply do not exist under the terms of the trust deed.
  • In order for the standard laid out by Article 21(1) of the 1984 Trust (Jersey) Law, the threshold issue is to establish an applicable duty. The CFA could not find that DBS Trustee assumed any supervisory duty, or indeed that it is available under the terms of the trust deed to the trustee in the first place. As such, the standards laid out in statute does not come into operation and there is no need to assess whether DBS Trustee met those standard.

Whether the duties were breached

The CFA explained that in order for the plaintiffs' arguments of breach of duty to be successful, they would have to establish that DBS Trustee and DHJ had been grossly negligent in carrying out their duties. This is because the limitation of liability provisions in the Services Agreement and trust deed exempted liability apart from gross negligence. The expert evidence on Jersey law provided that under Jersey law, limitation of liability clauses cannot exempt liability for gross negligence breach of trust or anything more serious.

Based on the nature of the trust and that speculative transactions were envisaged and authorised, the CFA could not see how approving the transactions would be grossly negligent on the part of DBS Trustee and DHJ. The CFA explained that the transactions were risky in nature and showed a lack of diversification but that they did not amount to grossly negligent decisions. This is particularly so in circumstances where:

  • Approval of the increase in the PIC's credit facility is in itself not problematic and the CFA were clear that this does not constitute a loss to the trust fund. The trustee's approval in this respect therefore does not constitute a breach of trust.
  • Approval of the PIC's purchase of additional Australian dollars may have involved the risk of being highly concentrated in a single currency in light of a looming global financial crisis and may be considered speculative. However, the CFA found it difficult to conclude this amounted to flagrantly negligent conduct. In any event, the anti-Bartlett provisions authorise speculative and non-diversified investments. Moreover, Ji had previously ignored many warnings about lack of diversification because she had in the past made profit out of the same kind of transactions.
  • The decumulators were again risky investments but there was a possible benefit to be achieved by the decumulators depending on the direction the Australian dollar moved at the time. Therefore, the CFA similarly found it difficult to see how DBS Trustee's approval of these products was as grossly negligent breach of trust.
  • The CFA further found it noteworthy that the approvals for the transactions were only sought and given by DBS Trustee after the transactions had been given effect by Ji on the PIC's behalf. Therefore the CFA found that the lower courts' suggestion that such "approvals" were imprudent supporting a finding of breach untenable.

The CFA criticised the CFI and CA for not delving into its reasons for establishing gross negligence and concluded that it had not seen compelling evidence showing the defendants had acted grossly negligently.

Equitable compensation

Despite its findings, the CFA chose to outline its view on relief on the basis that it was an important issue to address.

The CFI held that the plaintiffs were entitled to "equitable restitution to the trust for breach of trust in order to reconstitute the assets of the trust so as to place the trust in the position it would have occupied but for the said breaches". This was concluded on the fact that the CFI held that the trustee's breach directly caused the losses. The judge noted that the equitable compensation would be calculated by determining what the value of the PIC's portfolio would have been had the transactions not been approved. The judge held it was appropriate to award equitable compensation against both DBS Trustee and DHJ as DHJ's breaches also caused direct losses. However, to avoid double recovery, the judge held that the plaintiffs could only seek compensation from either DBS Trustee or DHJ (unless compensation from one did not result in complete satisfaction). The CA upheld CFI's decision.

The CFA explained its view on determining equitable compensation. First, the nature of compensation will depend on the breach in question. This is because it will determine the rules of causation that will apply. Breaches can be broken down into three categories:

  1. Breaches leading directly to damage or loss of the trust property arising from misapplication or loss of trust assets which require substitution or restoration of trust property;
  2. Breaches involving an element of infidelity of disloyalty which engage the conscience of the fiduciary; and
  3. Breaches involving a lack of appropriate skill or care.

Category 1 applies the strictest causation rule – that of the "but for" test. That is the question of "but for the decision/action, would the loss/damage have occurred?". For category 2, the plaintiff can only recover what they can prove they have lost. For category 3, the common law rules on causation, remoteness and measure of damages will apply.

The CFI and the CA held that DBS Trustee and DHJ's breach fell into category 1 but the CFA questioned this. The CFA held that if there had been a duty and if that duty had been breached, the three relevant transactions approved by DBS Trustee and DHJ as mentioned above would have fallen into category 3. This is because negligence in the oversight of investments can be categorised as a failure to exercise appropriate skill or care.


This is a significant decision for private wealth and trust practitioners in that it confirms the comfort trustees can take in anti-Bartlett clauses. However, the case also serves as a reminder of the importance of ensuring trustees have well-drafted anti-Bartlett and limitation clauses. On a strict reading of the decision, the limits on the effect of the anti-Bartlett clause arise from the precise drafting of the clause as opposed to any overriding obligations at law. It therefore remains to be seen how a court would decide a case where:

  • the anti-Bartlett clause did not contain a carve out relating to situations where the trustees have (e.g.) actual knowledge of dishonesty; and
  • the trustees failed to take action despite such actual knowledge and losses resulted.

Notwithstanding this decision, it would be a brave trustee which sought to rely on broad anti-Bartlett provisions in such circumstances.
For private wealth clients, the decision is also significant because it shows the court will take into account the extent to which the investor/beneficiary is involved in investment decisions.

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.