Why litigation is booming
25 March 1997
Despite the development of the doctrine of constructive trust, and the endless controversy over its scope and meaning, litigation on express trusts in England is relatively rare.
We still recite trust cases decided in the last century as key authorities, when the trust was a more common means of holding and administering family wealth. Any barrister or solicitor who claims to specialise in trust law is likely to spend most of his working life drafting trusts rather than litigating over them.
Contrast this with the position in the principal offshore jurisdictions, such as Jersey, Guernsey and the Isle of Man, where trust litigation is being fought more actively by the day. In contrast to the position in England, almost all firms with a litigation capacity in these jurisdictions will claim to have substantial expertise in trust litigation, and may be able to field several partners or assistants who can say that they specialise in litigation of that kind. Why is this happening?
The mushrooming of trust litigation in such offshore jurisdictions has come about for several reasons.
First, the fiscal advantage of offshore trusts has, over the years, been sufficient to tempt the wealthy to set them up without sufficient thought about whether the device will suit the needs of its beneficiaries. For example, it is not uncommon for a widow to discover that she has not "inherited" her husband's assets at all, but that they are held by trustees whom she has never met and therefore do not have her confidence.
A bad situation is often made worse by the discovery that, not only are the assets in the hands of trustees, but also that they must be shared with other beneficiaries with whom she does not get on.
Second, there have been an increasing number of professional indemnity claims against trustees for mismanagement of the trust assets. These may arise, for example, where a trustee has followed the investment advice of the settler "not wisely but too well". High standards are rightly expected of professional trustees, and lawyers are always ready to rise to the challenge of circumventing exemption clauses in the trust deed intended to protect the trustees from this kind of claim.
Third, there have been claims to title of the trust assets or even attacks on the validity of the trust itself. The most frequent example of the first is the equitable tracing claim which is often made against trustees who hold assets which are alleged to have been the proceeds of fraud. In these cases, the trustee's own assets are rarely subject to any personal risk. They may become so, however, if it is shown that the trustee knowingly handled money which he knew or suspected to be tainted by fraud - for example, Agip (Africa) v Jackson & ors 1991 3 WLR 116.
Other attacks may be based on the laws of another jurisdiction. Increasingly, powerful legislation is being introduced in the principal offshore jurisdictions to ensure that trusts which contravene local foreign laws relating to forced heirship are not invalidated for that reason alone. There remain, however, foreign laws relating to community property which automatically vest assets in husband and wife jointly.
Other foreign laws may affect the validity of transfer of assets from one person to the settlor. When these laws are contravened they can sometimes be used to argue that the settlor never had title to the assets which have been transferred to the trustees. Most offshore jurisdictions will regard claims made on this basis as arguable.
The most significant attacks have come from cases based on the assertion that the trust is a sham. There cannot be one trustee in the Channel Islands who is not familiar with the decision in Rahman v Chase Bank (CI) 1991 JLR 103 in which a trust was held to be a sham on the ground (inter alia) that the trustees had followed the settlor's instructions so slavishly as to be nominees rather than trustees. The case sent shock waves through the offshore trust industry because all trustees, from time to time, are under pressure to exercise their discretion as the settlor or beneficiary would wish. If the trustee submits to that pressure he runs the risk of an action for breach of trust by another beneficiary or a claim that it was never intended that he be a trustee of a genuine trust at all.
All of these types of claim are being litigated in the offshore jurisdictions in increasing numbers and we shall no doubt see a rash of interesting decisions. For many years, England has been a major exporter of trust law to the Channel Islands. Now we can look forward to getting some back.