Firewall And Forum Clauses – What Protection Is Available When Foreign Courts Seek To Intervene

This article first appeared in Trusts & Trustees.

Trustees can all too easily find themselves caught up in litigation in another jurisdiction given the increasingly international nature of offshore trusts. The firewall regime and forum for administration clauses within deeds, when robustly applied and upheld by the Courts, are the key to ensuring questions concerning a trust are dealt with by the courts of its home jurisdiction.

Being joined to foreign proceedings can result in trustees being caught up in a clash of laws and processes and potentially facing conflicting orders and obligations, but in a recent Cayman Islands decision, where a trustee had found itself in such an invidious position, the Grand Court of the Cayman Islands confirmed that all questions concerning a Cayman trust are to be determined in accordance with Cayman law and further held, importantly, that the forum for administration clause in question, together with the firewall, bestowed upon the Cayman court exclusive jurisdiction to determine questions concerning the administration of a Cayman trust. The Cayman court was also prepared, by way of a novel and practical approach in comity, to facilitate a mechanism whereby questions concerning a Cayman trust arising in the foreign proceedings be dealt with by the Cayman Court: by offering to act as auxiliary court.

In In the Matter of HSBC International Trustee Limited v Tan Poh Lee at al1, the trustee of a Cayman Islands settlement sought Beddoe relief and certain substantive declarations from the Cayman court in respect of foreign proceedings brought against it by one of the adult discretionary beneficiaries of the Trust. The relief claimed in the foreign proceedings included an order to compel the trustee to distribute the overwhelming majority of the trust fund, at the beneficiary's direction, to a nominated bank account held by a non-beneficiary of the trust, for the purpose of settling liabilities in relation to the construction of a building which was held by a company in which the beneficiary held shares (not a trust asset).

Notwithstanding that the trust was an irrevocable, discretionary trust, in which the trustee was given wide-ranging discretionary dispositive powers, the beneficiary alleged that the trustee had breached its duties as trustee by failing to act upon the beneficiary's instructions for a distribution.

The Trustee sought to challenge the jurisdiction of the foreign court to make the orders sought, given that the relief claimed related to questions of trust administration, which, by virtue of Cayman's firewall provisions, and the specific forum for administration clause in the Trust Deed, the trustee argued should be exclusively determined by the Cayman Court.

The Cayman Firewall Provisions

The Cayman Islands were one of the first jurisdictions to legislate to insulate trusts governed by Cayman Islands law from attack from foreign courts as regards forced heirship claims and those claiming against the trust assets by reason of a personal relationship to the settlor (and more recently a personal relationship to a beneficiary), such as in foreign matrimonial proceedings.2

Section 90 of the Cayman Islands Trusts Law (2018 Revision) (as amended) mandates that Cayman Islands law must be applied (save for certain exceptions)3 without reference to any other law, to all questions regarding a trust which is governed by the laws of the Islands including the administration of the trust. This provision expressly applies whether the administration is conducted in the Islands or elsewhere, and expressly includes questions as to the powers and obligations, liabilities and rights of trustees and their appointment and removal.

Section 91 of the Trust Law, which is expressly subject to the same provisos which apply to section 90, precludes the application of any foreign law that is in any way designed to give effect to heirship rights or to rights arsing by reason of a personal relationship with the settlor or a beneficiary of the trust.

Section 93 of the Trust Law provides that if a foreign judgment is "inconsistent" with section 91 (but makes no mention of s.90), the judgment will not be enforced or recognised by the Cayman Islands Courts.4

Applying Section 90, the Cayman Islands court in HSBC found no difficulty in declaring that, in respect to the Trust,

'All questions concerning the Settlor's capacity, the identity of the trustee, the administration of the trust, any past or future distributions from the Trust, any decision to decline a distribution, and termination of the Trust, or part thereof must be determined in accordance with the law of the Cayman Islands without reference to any other law.'

Exclusive Jurisdiction

Since the Trust was governed by Cayman Islands law, it follows that the construction of all clauses of the Trust instrument, including any jurisdiction clause, must be determined under Cayman Islands law. The Cayman Court in HSBC was invited to examine the forum for administration clause contained in the Trust Deed to determine whether such clause bestowed exclusive jurisdiction on the Cayman Courts.

Clause 27 stated as follows:

"The Courts of the Cayman Islands shall be the initial forum for the administration of the Trust. The Trustee shall have power…to carry on the general administration of the Trust from any country province state or territory whether or not the law of such country province state or territory is for the time being the proper law of the Trust or its courts are for time being the forum for...