The Appleby 2012 Offshore Round-Up: Trust Disputes

Welcome to Appleby's review of the key decisions handed down in trust cases in the leading offshore jurisdictions during 2012, compiled by members of our Litigation & Insolvency Practice Group in Bermuda, the British Virgin Islands, the Cayman Islands, Jersey, Guernsey and the Isle of Man. Equivalent updates are available in the areas of insolvency & restructuring, company law, fund disputes, and civil procedure. Copies may be obtained from our website or from your usual Appleby contact.

Court decisions involving trusts have continued to come out of the offshore jurisdictions and in particular Bermuda, the Cayman Islands, Guernsey, Jersey and the Isle of Man. Highlights of the year include a lengthy trial in the Cayman Islands resulting in a landmark ruling concerning forfeiture clauses, breach of the fair dealing rule and the calculation of equitable compensation. There has also been extensive litigation in Jersey concerning the exercise by trustees of a power to exclude beneficiaries and constructive trust claims as a consequence of fraudulent activity in Brazil. The Court in the Isle of Man has been asked to consider indemnity provisions relating to a protector and the Guernsey Court has reminded parties of the limits of confidentiality. Bermuda, Guernsey and Jersey have been extensively involved in cases concerning the interpretation of trust deeds.

Breach of Trust

In Jersey, In the matter of the C Trust [2012] JRC 086B (25 April 2012), [2012] JRC 098 (14 May 2012) and [2012] (11 September 2012) was a case where a trustee had acted to remove certain beneficiaries, and gave rise to three separate rulings of considerable interest to trustees and their advisers.

Verite Trust Company Limited was trustee of a standard discretionary trust established in 1993. The settlor and his wife had a son, who was a beneficiary of the trust. He was married and had two children (who were also at one time beneficiaries, and were the representors or applicants in the proceedings). Unfortunately, the son's marriage failed and he was ordered in the divorce proceedings to make certain payments to his ex-wife for the children. He was of limited means, so the ex-wife, on behalf of the children, approached the trustee asking them to satisfy his maintenance obligations out of the trust. The settlor's widow however was resistant to any assistance being given either to her son or to the grandchildren and persuaded the trustee to exercise its power to remove them all as beneficiaries of the trust during her lifetime. It did so by means of an irrevocable instrument. The children applied to Court seeking that that instrument be set aside and that they (and their father) be reinstated as beneficiaries of the trust.

In its judgment dated 25 April 2012, the Royal Court set aside the instrument of exclusion, expressing the clear view that the trustee's actions in executing it were perverse and unreasonable and that "no reasonable trustee would have excluded the grandchildren as beneficiaries" in the circumstances of this case.

The trustee, after that judgment, applied to the Court contending that the anonymisation required in order to prevent the grandchildren from being identified was, for a variety of reasons, not enough and that the judgment should either not be published at all or should be heavily redacted. The Court declined to make such an order and gave a salutary warning that trustees who make decisions which are later found to be unreasonable should face the consequences of doing so: "Just as errors made by professional advisers in rectification cases were said in Re Sanne to be of public interest, so it seems to us that the conduct of trustees and protectors carrying on trust company business in the Island is just as much of public interest."

Payment of Costs out of a Trust

The final instalment of the C Trust saga related to the costs of the application to set aside the instrument. The children, widow and father sought all of their costs from the trustee personally and for the trustee to be deprived of its indemnity for costs out of the trust fund. The Court reiterated the test for depriving a trustee of its indemnity, as set out in the ELO & R Trust [2008] JLR 360: "A trustee may only be denied an indemnity for its costs if it has acted unreasonably, which is a high hurdle." The Court looked not only at the conduct of the trustee in the proceedings, but also the conduct which occasioned the proceedings. The applicants' position was that the trustee was the sole cause of the proceedings: by excluding the children (and the father) in the way the trustee did, it was inevitable that hostile proceedings would follow in order for their interests to be protected, there was no other option. The Court held that the costs of this hostile litigation should not come out of the trust fund but should be dealt with as between the parties according to the ordinary rules that apply to hostile litigation. It went on to say that, even if it were wrong to categorise the proceedings in this way, "it would, in any event, be unjust that the trustee should be able to use the trust fund to discharge the cost of its defending an action in which it has been found by the Court to have made a decision that no other reasonable trustee could have made." As a result, not only was the trustee deprived of its ability to charge its own costs to the trust fund, but it also had to pay the costs of the children and the father from its own resources on the indemnity basis.

Also in Jersey, In the matter of the X Trust [2012] JRC 171, the Royal Court decided that it has an inherent jurisdiction to order that the costs of beneficiaries in suing a trustee for breach of trust, should be paid from the trust fund. The applicants had been pursuing a claim against the sole trustee for breach of trust and had been funding the litigation by means of distribution from the trust. The trustee however, subsequently came to the view that there was a potential prejudice to the trust as a result of funding the proceedings and ceased to make distributions to the beneficiaries. So that the...