Round-up of Recent Decisions Relevant to Trustee and Protector Liability and Indemnities

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There continue to be an increasing number of offshore Court judgments considering the nature and extent of an offshore trustee’s liability to third parties (including third parties in foreign jurisdictions), and the rights of a trustee and a trust protector to an indemnity from the trust assets in the event of a third party claim.

 

Trustee Liability: Recent Decisions

 

In Investec Trust (Guernsey) Limited and Bayeux Trustees Ltd v Glenalla Properties Limited, Judgment 38/2013, 6 December 2013, the Royal Court of Guernsey has recently considered (in a long-awaited decision of Sir John Chadwick) the extent to which trustees of an insolvent Jersey law trust can rely on Article 32(1)(a) of the Trusts (Jersey) Law 1984 to limit their liability in contract or restitution, particularly if such liability is governed by a foreign law.

 

The former trustees of the Tchenguiz Discretionary Trust applied for the Court’s determination of the question whether certain arrangements for moving money between the trustees and various BVI companies within the trust structure created enforceable loan liabilities. The former trustees also asserted that by virtue of Article 32(1)(a) of the Trusts (Jersey) Law 1984, they had no personal liability for such loans and any liability was only as trustees and extended only to the trust property.

 

The BVI companies, in liquidation, argued that the arrangements did give rise to valid and enforceable liabilities and made a counterclaim for payment of those liabilities.

 

The new trustee contended that the arrangements did not give rise to valid loan liabilities. It also contended that the former trustees were not entitled to an indemnity from the trust assets because of their unreasonable behaviour and their grossly negligent breach of trust in incurring the liabilities or failing to get rid of them.

 

Sir John Chadwick held that the arrangements with two of the BVI companies did create valid loan liabilities. As regards the third BVI company, he found that there was no loan but upheld a claim in restitution. 

Sir John Chadwick rejected the new trustee’s claims that the former trustees had acted unreasonably or that they were grossly negligent.

 

Importantly, the Guernsey Court held that Article 32(1)(a) did not apply because, although the trusts were governed by Jersey law, the proper law of the loans and the liability were either Guernsey law or English law, and nothing in Guernsey law or English law limited the liability of a Jersey trustee. The Judge held that section 65 of the Trusts (Guernsey) Law did not require him to apply Jersey law to anything other than enforcement of the trusts, and the BVI companies’ claims were not enforcement of the trusts.  Accordingly, he concluded that the former trustees were personally liable (with consequent implications for any liability insurers) for the full amount of the liabilities.

 

Sir John Chadwick’s decision as to the limited scope and effect of Article 32(1)(a) has significant consequences for Channel Islands trustees of trusts with contracts or liabilities governed by foreign law, exposing them to the risk of unlimited personal liability to foreign third parties, absent express contractual provisions limiting such liability.

 

This may not be particularly surprising to English trusts lawyers (since under English law, it is commonplace that trustees incur unlimited personal liability, unless expressly limited by contract). However, it is perhaps more surprising in the Channel Islands, since the received wisdom under local legislation was that the default position was that trustee liability to third parties was limited to the assets held in trust.

 

In Stiftung Salle Modulable v Butterfield Trust [2014] SC (Bda) 13 Com, 21 February 2014, the Supreme Court of Bermuda recently gave a 121-page judgment on a claim brought by a Swiss charitable foundation against a Bermuda trustee, relating to the trustee’s liability to follow through on its charitable promise to fund the construction costs of an opera house in Switzerland, to the value of about $140 million.

 

After a six-week trial, the Court concluded that the Bermuda trustee’s funding liability was governed by Swiss law, and that under Swiss law, a trustee’s promise to make a charitable donation was legally enforceable, provided that the recipient could establish the feasibility of the project.  The case is interesting for four reasons:

 

• Firstly, the Bermuda trustee appears to have assumed (wrongly, according to the Judge) that its potential funding liability was impliedly governed by Bermuda law, even though there had been no express agreement between the parties as to the proper governing law. In future, offshore trustees entering into agreements with foreign third parties would be well-advised to negotiate and specifically refer to the applicable governing law;

 

• Secondly, the Judge noted that the Trustee’s witnesses suffered from “apparent amnesia” about certain trust deeds, which was “somewhat eyebrow-raising” (although this is not uncommon in practice, given the manner in which the businesses of some offshore trustees and trust administrators are managed);

 

• Thirdly, the Judge expressed the view (although only obiter) that the Settlor’s Letter of Wishes was not legally binding on the trustee; and

 

• Fourthly, the Swiss charitable foundation’s claim was pursued with the assistance of third party litigation funding, which the Court accepted to be permissible under Bermuda law, although the financing costs (said to be over 40% of any damages awarded by the Court) were not accepted to be recoverable as damages (see further litigation funding article above).

 

In Lloyds Trust Company (Channel Islands) Limited v Fragoso [2013] JRC 211, the Royal Court of Jersey recently held that the proceeds of a bribe received by an agent acting in a fiduciary capacity, and held on trust by a professional offshore trustee, were held on constructive trust for the agent’s principal. The case concerned money held by a Jersey trustee purportedly on trust for a Mr Carlos Fragoso and his family. The trustee became concerned that the funds it held had been paid as a bribe by an English construction company to Mr Fragoso, when he was an official acting for the government of Mozambique. 

 

The trustee sought the Court’s directions under Article 51 of the Trusts (Jersey) Law 1984 as to whether, in the circumstances, it held the trust money for the government of Mozambique.  Mr Fragoso did not appear in the proceedings, and his family disclaimed all interest in the moneys.  The lawyer representing the minor and unborn beneficiaries of Mr Fragoso’s trust accepted that the beneficiaries could not, in the circumstances, have any interest in the moneys.

 

The Royal Court held the money (net of costs and legal expenses) were held on constructive trust for the government of Mozambique, and in doing so, it followed and applied a Privy Council decision, but declined to follow more recent English authority in this area. The Jersey court noted that Jersey public policy supported the “need to deter fraud and corruption and to have the ability to strip fiduciaries who have channeled their illicit funds through [Jersey] of all benefits."

 

From the perspective of the trustee, this decision demonstrates the importance of making an application to the Court for directions relating to the true beneficial ownership of trust property, with a view to minimising the trustee’s personal potential liability associated with the making of any payments to the disadvantage of the true owner.
 

Rights of Indemnity Against Trust Assets: Recent Decisions

 

In IFG International Trust Company Limited v French (2012) CHP 2012/0048, the Isle of Man High Court recently considered the circumstances in which a trustee might be obliged to indemnify a former protector out of trust assets against past and future costs relating to allegations of fraud made against the protector.

The protector, Mr French, was accused of being an accessory to the alleged dishonest arrangements carried out by the famous Wyly brothers, who were under investigation by the SEC. Mr French as protector sought an indemnity from the trustee for his costs to date and future investigation and defence costs. In light of the request for indemnity, the trustee sought the directions of the Isle of Man Court.

 

The Isle of Man High Court held that the trustee was entitled to take the view that, given the nature of the allegations made against the protector (which were not solely related to his role as protector, as opposed to his role as an attorney), the trustee was justified in awaiting the outcome of the US investigation and litigation before indemnifying the protector.

 

This is an important decision as to a trust protector’s rights of indemnity, and illustrates the importance of any party accepting the office of protector (and his liability insurers) fully understanding, and if appropriate, negotiating, the scope of his indemnity against the trustee and the trust assets.  The judgment is also interesting for its review of the role and functions of a protector. 

 

This Isle of Man decision can be compared with the more recent decision of the Royal Court of Jersey in B v Royal Bank of Canada and E, In the Matter of the HHH Employee Trust and in the Matter of the B Sub-Trust [2013] JRC 023, 30 January 2013, in which the Jersey court gave a generous interpretation to an indemnity clause to a settlor with fiduciary powers, with respect to a claim for indemnity against legal costs incurred. This decision was upheld by the Jersey Court of Appeal in Des Pallières v JP Morgan Chase & Co [2013] JCA146, 26 July 2013, which made the following findings as to Jersey law:

 

• a trustee has a right of indemnity which emanates from statute (Article 26 of the Trusts (Jersey) Law 1984), contract, and the inherent jurisdiction of the Court, and such an indemnity is prima facie complete, subject to arguments as to costs which have been unreasonably incurred or are of an unreasonable amount;

 

• a trustee's right to a complete indemnity may be lost if the trustee is guilty of misconduct. A trustee who has been found guilty of a breach of trust is likely to find that he or she has to bear personally the costs of unsuccessfully defending himself/herself;

 

• a trustee would still be entitled to an indemnity in cases of innocent breach of trust;

 

• a trustee's right to a complete indemnity is not lost through mere allegations of misconduct, even where the litigation is hostile and the trustee is defending his or her own conduct solely or primarily for his or her own benefit;

 

• the trustee’s right to an indemnity is unaffected by costs orders made inter partes, so that a trustee is  entitled to reimburse itself out of the trust fund for any costs incurred in litigation which it does not recover from the other side; and

 

• a person with fiduciary powers to exercise (but who is not a trustee) is also entitled to an implied equitable indemnity in respect of costs reasonably incurred by it in the discharge of such functions.

 

Topics:  Estate Planning, Trustees, Trusts

Published In: Bankruptcy Updates, Business Torts Updates, General Business Updates, International Trade Updates, Wills, Trusts, & Estate Planning Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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