29 January 2007
The Cayman Islands have long held a reputation as an offshore jurisdiction of choice for the resolution of trust disputes. Many factors have contributed to that success: the reputation of the judiciary and local practitioners; the flexible and facilitative approach to the admission of English leading counsel to appear before the court; and the statutory foundation, in Section 48 of the Cayman Islands Trusts Law, for the application to court by Cayman trustees for guidance on questions affecting the administration of their trusts.
Combined with the increasingly sophisticated structures being set up by Cayman's draftsmen, and the fact that many younger beneficiaries of the family or dynasty trusts set up several years ago are now older and often more actively involved in the administration of the trusts, explains why there has been something of a renaissance in the field of trust litigation in Cayman in the past few years.
There were two important decisions by the Grand Court that resonated beyond Cayman's shores in 2006, particularly for those involved in drafting or advising on disputes relating to Cayman discretionary trusts. The judgments concerned provisions for the exercise by 'protectors' of power to control trustees in the administration of the trust and provisions for the forfeiture or restriction of the interest of a beneficiary who challenges the validity of the trust or of decisions or actions of the trustee.
The decision of Mr Justice Henderson in HSBC International Trustee v Wong Kit Wan, delivered in July 2006, involved a power to appoint a protector, which was conferred on a majority of the adult beneficiaries of the trust, and which was exercised in an attempt to gain control of the administration of the trust in the context of a bitter family feud. The judge said: "It is open to a settlor to provide expressly that the powers of the protector are exclusively and merely personal."
However, in this case the protector, who was given power to remove and appoint trustees, to charge for his time and services, to receive accounts from the trustee and to receive a right of indemnification from the trust fund, was seen, as a matter of construction, as playing a clearly fiduciary role.
This was the grounding for the conclusion that the power to appoint or remove the protector in the context of that particular trust must therefore also be a fiduciary power, in the sense that it could be controlled by the court if exercised by the beneficiaries improperly or in bad faith. The decision in this case underscored the idea that those exercising important administrative powers must arguably be subject to supervision by the court so that it is possible to enforce the core obligations owed by the trustee to the beneficiaries as a whole.
The limits on the draftsman's freedom to exclude fiduciary accountability and liability have already been explored comprehensively by the Cayman court. The decision in Prospect Properties v McNeill (1990-91) has become a precedent for liability to be excluded or exempted for all, save liability arising from fraud, wilful default or bad faith. In the same way, the boundaries of the irreducible core of obligations owed by a trustee to their beneficiaries that lie at the heart of a trust are now well-charted territory.
The Cayman courts have adopted the circumscription set out in the dicta of Lord Justice Millett in Armitage v Nurse (1998). Millett LJ said: "I accept the submission that there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them, which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts.
"But I do not accept the further submission that these core obligations include the duties of skill and care, prudence and diligence. The duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts, but in my opinion it is sufficient."
The Cayman Islands Trusts Law specifically provides that a wide range of powers can be reserved by the settlor or granted to others without invalidating the trust. This is seen as a distinct jurisdictional advantage by many settlors and it is clearly important that this type of reservation can be workable in practice. What if the trustee considers that the direction is not in the best interests of the beneficiaries? Are they then duty-bound to seek the court's guidance, or to decline to follow the direction? Would the trustee be acting in bad faith, or be simply negligent, in turning a blind eye to any concerns they had?
The Trusts Law provides that the trustee is not guilty of breach of trust in acting in compliance with such directions. It is highly arguable that behaviour for which there is legislative sanction could not amount to bad faith and so the Cayman court is likely to interpret the trustee's duties in the context of the provisions of the Trusts Law. The result may be to reduce the necessity for the trustee to seek the court's intervention in such cases, but the person with power to direct the trustee may in any event be controlled by the court in the way suggested above.
The second case was also concerned with a popular mechanism employed by settlors and their draftsmen for preserving inviolate the ability of trustees or protectors to administer a trust without undue interference. The chief justice adopted a purposive approach to construction of a clause in a discretionary trust, which provided for the forfeiture of the interest of a beneficiary who challenged, among other things, the validity of the trust or decisions of the trustee or the protection committee, commonly known within the jurisdiction as 'no-contest' clauses.
The case is likely to be reported confidentially (so as to protect the identity of the parties involved) in 2007. As a question of construction of the particular clause in question in this case, the chief justice was persuaded by the argument that: "On its true construction, [the clause] does not deprive a beneficiary of the right to sue in court. On any view, [the clause] has no application to a claim by a beneficiary to sue the trustee in respect of the trustee's fraud or bad faith. Further, if the beneficiary's claim on any other ground is successful (alternatively brought bona fide and probabilis causa litigandi) [the clause] will not apply."
The clause was construed as operative in relation to "unjustifiable" challenges only.
It is interesting to note the balance achieved in these two decisions. On the one hand there is freedom of disposition and the ability for settlors to establish Cayman trusts on flexible and advantageous terms. This is balanced on the other hand by the court's inherent jurisdiction to enforce a trust at the instance of beneficiaries acting with good cause and in good faith, and to ensure that the powers of trustees and other fiduciaries in the trust structure are honestly and properly exercised.
-Sara Collins is head of trust disputes at Walkers