Trusts & Trustees

doi: 10.1093/tandt/ttn101pmid: N/A

More details and weblinks for each item are set out in the in Prospect Calendar section of the Trusts & Trustees website http://tandt.oxfordjournals.org; the web version of the calendar also looks further ahead. November 2008 1 November – ‘All Saints’ Day’, Liechtenstein (public holiday) 4 November – ‘STEP Annual Tax Update’, STEP Event (Birmingham, UK) 12 November – ‘Recent Developments in Wills, Trusts and Taxation’ (Exeter, UK) 13 November – ‘STEP Switzerland and Liechtenstein Lunch Meeting’, STEP Event (Switzerland) 14 November – ‘16th Annual International Conference’, STEP Event (Jersey, Channel Islands) 14 November – ‘STEP Annual Tax Update’, STEP Event (Belfast) 17 November – ‘GENEVA – An Introduction to Trusts Course’, STEP Event (Switzerland) 19–21 November – ‘Global Residence & Citizenship-by- Investment Conference’, HSBC and Henley & Partners Conference (Hong Kong) 25 November – ‘Claims Under the Inheritance’ (Provision for Family and Dependants) Act 1975, STEP Event (Manchester, UK) 26 November – ‘Is Ignorance Bliss? Bankers Obligations to Trust Beneficiaries’, STEP Event (New Zealand) 26 November – ‘Litigation Risks for Trustees, Bankers, and Intermediaries and How to Manage Them’, STEP Event (Monaco) 28 November – ‘The Future of Probate Administration’, STEP Event (Bournemouth, UK) 30 November – ‘Independence Day’, Barbados (public holiday) December 2008 2, 3 December – ‘International Trusts Congress’, IIR Conference (London, UK) 9 December – ‘Asia and the Trust’, STEP Event (Zurich, Switzerland) 9 December – ‘Trusts in Matrimonial Proceedings’, STEP Event (Manchester, UK) 9 December – ‘Practical Matters in Filing Trusts and Estate Tax Returns’, STEP Event (Winnipeg, Canada) 10 December – ‘The Risk to Trustees When Appointing Investment Managers’, STEP Event (Ticino, Switzerland) 11 December – ‘The Risk to Trustees When Appointing Investment Managers’, STEP Event (Zurich, Switzerland) 22 December – ‘Trusts Structuring and the Shar’ia Law’, STEP Event (Monaco) 25 December – Christmas Day (public holiday in many countries) 26 December – Boxing Day, UK (public holiday) 26 December – St Stephen's Day (public holiday in many countries) January 2009 1 January – ‘New Year's Day’ (public holiday in many countries) 13 January – ‘Planning for Disabled Beneficiaries’, STEP Event (Winnipeg, Canada) 14 January – ‘An Update on “Negligent Mistakes and How to Fix Them” ’, STEP Event (Exeter, UK) 14 January – ‘Planning for Family Members with Disabilities’, STEP Event (Ottawa, Canada) 14 January – ‘Inheritance Tax: The Basic Principles and An Introduction to Business Property Relief’, STEP Event (Birmingham, UK) 15 January – ‘Trusts and Estates Update With Current Problems’, STEP Event (Leicester, UK) 19 January – ‘An Introduction to Trusts’, STEP Event (Zurich, Switzerland) 20 January – ‘Trusts and Divorce’, STEP Event (Leeds, UK) 27 January – ‘The Functions of the Probate Registry’, STEP Event (Manchester, UK) 27 January – ‘Lunch Meeting’, STEP Event (Basel, Switzerland) If you would like to suggest an event for possible inclusion in the catalogue, then please submit the event details on the online form at this weblink: http://tandt.oxfordjournals.org/cgi/cal-submit/. © The Author (2008). Published by Oxford University Press. All rights reserved.

Robilliard, St John

doi: 10.1093/tandt/ttn107pmid: N/A

The Trusts (Guernsey) Law, 2007 is important not only to those who work with Guernsey trusts but also to those from other jurisdictions seeking ideas in order to develop their own legislation. In this issue, Trust and Trustees have brought together contributions from a collection of experienced Guernsey trust practitioners to illustrate the new regime both from the perspective of potential clients (my article) and also those of trustees (Simon Howitt). Of particular relevance to litigators is Paul Buckle's treatment of binding arbitration or mediation of a means of solving trust disputes which describes a new provision that is currently unique to Guernsey. Raymond Ashton deals with the latest developments on trustees’ obligations to provide information about their trusts, a topic where Guernsey has been something of a market leader over the past decade. In the extensive reforms introduced by the 2007 Law perhaps three matters will tower above the rest when its history comes to be written. Firstly, the introduction of non-charitable purpose trusts coupled with the repeal of the statutory guarantee in respect of breaches of trust, provided by directors of corporate trustees has led to heightened interest in the use of Guernsey private trust companies. This development will see far more of a “hands on” approach for settlors, family members and onshore professional advisors in the running of larger trusts. Secondly, in the more contentious area Guernsey's statutory over-ride to combat “interference” from onshore matrimonial courts will attract the interest of planners seeking to safeguard family assets and should produce some interesting case law, (although Guernsey's 1990 exclusion of non-Guernsey forced heirship provisions has not yet fully responded to this invitation). Finally the creation of the non-possessory trustee's lien coupled with the abrogation of the strict rule of privity should streamline the process of the granting of indemnities on the change as trusteeships. An issue of great practical importance in routine trust administration. This issue's collection of articles should provide the starting point for anyone wanting to understand the background and purpose of Guernsey's new trust law for some years to come. © The Author (2008). Published by Oxford University Press. All rights reserved.

doi: 10.1093/tandt/ttn106pmid: N/A

Trends and Developments Voluntary Disclosure for Trusts Valid prior to January 1, 2006 Alon Kaplan, Adv. and Lyat Eyal, Adv., Alon Kaplan Law Firm Pursuant to the enactment of the Taxation of Trusts Law valid as of January 1, 2006, a new voluntary disclosure arrangement was recently published by the Israeli Tax Authority. This arrangement is a kind of "amnesty" for trusts valid prior to January 1, 2006 when the Taxation of Trusts Law came into force. This item outlines the new process. Proposed Tax Benefits for New Immigrants and Israeli Expatriates Returning to Reside in Israel Alon Kaplan, Adv. and Lyat Eyal, Adv., Alon Kaplan Law Firm Among other interesting changes to tax laws in Israel, there is a proposal announced by the Director General of the Israeli Tax Authority to provide further tax benefits to new immigrants and Israeli expatriates who return to reside in Israel. It is important for individuals who decide to change their jurisdiction of residency as well as for professionals advising such individuals to confer with local professionals prior to the date of arrival in Israel. Some planning should be considered in advance and may be irrelevant after the date of arrival. This item sets out the key issues set out in the proposal. Liechtenstein: Time for a Restructuring Marnin Michaels and Marie-Thérèse Yates, Baker & McKenzie Zurich Drafted in the 1920s, Liechtenstein trust law is largely based on Germanic law concepts and “modern” German law, in addition to common law trust concepts. It is not clear, however, which sections of modern Liechtenstein trust law derive from which source(s) and this lack of clarity has yielded inconsistent decisions regarding trust matters in Liechtenstein's three-tiered court system. It is becoming increasingly difficult to predict the outcome of a trust proceeding in Liechtenstein. This item sets out the case for a reform of the Liechtenstein legal system as it relates to the vehicles that have been created for working with the wealth management industry. Articles The New Guernsey Trust Law: What is of Interest to Prospective Settlors? St John Robilliard, Ozannes The recent changes in Guernsey trust law provide important statutory powers likely to appeal to those seeking robust answers to some of the key modern issues relating to the use of trusts. This article covers changes of interest to prospective settlors including reserve powers, the override of foreign law, duration of interest, powers of attorney and the accumulation of income. The New Guernsey Trusts Law—Changes to the Position of Trustees Simon Howit, Babbe The 2007 Law includes a number of new features which change, in some cases significantly, the position of trustees of Guernsey trusts. This article analyses and comments on these new features. Areas of particular interest to trustees of Guernsey trusts are (1) the abolition of the statutory rule that directors of a corporate trustee would be treated as guarantors of liabilities of the trustee for breach of trust (2) clarification of the extent to which an outgoing trustee of a trust is entitled to security (usually in the form of an indemnity) in respect of ongoing liabilities (3) creation of a statutory non-possessory lien for the benefit of outgoing trustees of a trust and (4) changes to the rules of limitation and prescription so that there is an absolute bar (other than in cases of fraud or misappropriation) on proceedings being brought in respect of a breach of trust more than 18 years after the act or omission complained of. Information Disclosure and Beneficiaries Raymond Ashton, Ashton Barnes Tee This short article analysis the disclosure requirements of trustees under Guernsey Law. In the first part of the article the jurisprudential issues are identified and this is followed in the second part by an analysis of the stature law prior to the coming into effect of the new provisions in March 2008. The third section examines the new provisions in some detail and in particular the extent to which they extend or otherwise the previous provisions and these of the common law. The fourth section examines the issue of the retention of trust records and the revised limitation periods. The article concludes by arguing that they only modestly extend the previous provisions and that there is still considerable uncertainty about the scope of the provisions given the judgement in Schmidt v Rosewood Trust [2003] 2 AC 709 and the increasing role played by the judges using the inherent jurisdiction of the Court. Trust Disputes and ADR Paul Buckle, Carey Olsen Here are considerable advantages to settling trust disputes by ADR, although in practice, the extreme position often taken by the parties, and the difficulties in binding all those interested give rise to problems. The new rules in the Trusts (Guernsey) Law, 2007 (as amended) dealing with compromise and ADR, are designed to enable binding settlements to be achieved by arbitration or mediation in breach of trust cases. This article looks at the question of trusts and ADR generally, and goes on to consider how successful those clauses are in resolving the difficulties which arise in practice. Case notes Welcome clarification from the Jersey Courts on Enforcement against Trusts: Mubarak v Mubarik (In the matter of the IMK Family Trust) [2008] JRC136—15 August 2008 Mark Renouf, Hanson Renouf The debate about the Jersey Courts’ perceived willingness to enforce foreign judgments against Jersey Trusts has been raging since 2002, when in Compass v McBarnett Commissioner Le Cras enforced a judgment of the High Court of England & Wales’ Family Division in favour of a non-beneficiary against the assets of a trust. In the meantime, a number of judgments issued out of matrimonial courts (including English and Dutch courts) have been enforced in Jersey against assets held in trust. However, the principles applied by the Jersey Courts have hitherto not been set out in detail, leading to some debate and controversy amongst practitioners as to the circumstances in which foreign judgments will be given effect to. In the Deputy Bailiff's judgment in the Jersey leg of Mubarak, the Royal Court of Jersey has now given welcome clarification of the principles it will apply. Duties of Outgoing Trustees: Re Caversham Trustees Limited [2008] JRC 65 Edward Mackreth, Ogier In this case, the Royal Court set out steps that should be taken by an outgoing trustee in order to comply with its duty to transfer trust assets to the new trustees, and provided further guidance as to what security the trustee could legitimately require. The Court also clarified that there was no difference in the duties applicable in a retirement and appointment of trustees to those owed where the trustee is appointing the trust assets to a new trust. In Focus Guernsey Jeremy Wessels, Ozannes This section compares law and practice of various jurisdictions in particular areas. We use the Q&A format familiar to readers of the World Trust Survey, but the In Focus section asks for more detailed answers than in the Survey. We start with a subject topical to readers in both England and Wales and offshore jurisdictions. The subject is anti-money laundering. In this issue we deal with the position in Guernsey. Useful Practice Points are included at the end. © The Author (2008). Published by Oxford University Press. All rights reserved.

TEP, Alon Kaplan,;TEP, Lyat Eyal,

doi: 10.1093/tandt/ttn094pmid: N/A

Pursuant to the enactment of the Taxation of Trusts Law valid as of 1 January 2006, a new voluntary disclosure arrangement was recently published by the Israeli Tax Authority. This arrangement is a kind of ‘amnesty’ for trusts valid prior to 1 January 2006 when the Taxation of Trusts Law came into force. There are a number of criteria, the main one being the question of the revocability of the trust under Israeli law, which a trust must satisfy in order to be eligible for the voluntary disclosure arrangement. In the event that the relevant criteria is not satisfied, the trust cannot commence the process of applying for the voluntary disclosure arrangement and must explore other options of resolving the past years vis-à-vis the Israeli Tax Authority. The main relevant data considered by the Tax Authority in the determination of the tax rate include the jurisdiction of residence of the settlor, the beneficiary and the trustee as well as the revocability of the trust. In addition, factors such as the date of the transfer of assets to the trust is considered, the location from which the assets originated and the income derived therefrom as well as foreign taxes paid, if any, and the applicability of tax treaties. The application procedure for the voluntary disclosure is to be commenced prior to 31 December 2008. The Tax Authority requires the submission of all relevant documentation relating to the trust, including, without limitation, the trust deed, a letter of wishes, if any, all correspondence between the settlor and the trustee, confirmation by the trustee as to the question of the revocability of the trust and other aspects relating to the trust, financial details of the assets held by the trustee and financial statements of the trust for the years 2003–2005 and any other documents which the Tax Authority may request. The publication by the Tax Authority includes the tax rates for this voluntary disclosure process based on the characterization of the trust under the Taxation of Trusts Law and based on the date of the transfer of the assets to the trust. The rates vary from 4% to 10% of the total trust fund as of 31 December 2005. The matter is undoubtedly complicated. Certain aspects of the disclosure process may be difficult for trustees to comply with and may require some negotiations. It certainly requires independent legal advice which this brief outline does not intend to provide. The arrangement is new and should not be overlooked by trustees in order to ensure the compliance of the trusts they manage with Israeli law. © The Author (2008). Published by Oxford University Press. All rights reserved.

TEP, Alon Kaplan,;TEP, Lyat Eyal,

doi: 10.1093/tandt/ttn093pmid: N/A

Among other interesting changes to tax laws in Israel, is legislation passed this week to provide further tax benefits to new immigrants (olim hadashim) and Israeli expatriates who return to reside in Israel. It is important for individuals who decide to change their jurisdiction of residency as well as for professionals advising such individuals to confer with local professionals prior to the date of arrival in Israel. Some planning should be considered in advance as it may be irrelevant after the date of arrival. The legislation provides as follows: Capital gains and income earned by new immigrants which are derived from sources outside Israel will be tax exempt in Israel for a period of 10 years from the date the new immigrants enter Israel. Israeli expatriates shall be deemed to be new immigrants for the purpose of determining their eligibility for tax benefits providing that they return to Israel during 2008 or 2009 pursuant to a minimum period of five years during which they resided abroad. Otherwise, if they return after 2009, the benefits shall be applicable only pursuant to 10 years of residency abroad. New immigrants and expatriates will be permitted a one year ‘adjustment period’ from the date of entry into Israel. During said period they will not be considered Israeli residents for the purpose of determining their tax liability. Companies controlled by new immigrants shall not be considered resident in Israel solely due to the fact that the controlling shareholder immigrated to Israel. New immigrants and expatriates as well as corporations controlled by said individuals shall not be obligated to file tax reports with the Israeli Tax Authority with respect to their tax exempt foreign source income. © The Author (2008). Published by Oxford University Press. All rights reserved.

Michaels, Marnin;Yates, Marie-Thérèse

doi: 10.1093/tandt/ttn087pmid: N/A

Over the last few months, Liechtenstein has been in the international spotlight, particularly in relation to the issue of secrecy and the maintenance of trust/foundation structures. In our opinion, however, the greatest threat to Liechtenstein is not the threat to banking secrecy, nor the recent breaches that have occurred during the past few years, rather, the real risks to Liechtenstein as a jurisdiction derive from the fact that it is long due for an overhaul of its existing structural legislation, particularly with respect to the way matters relating to trusts or similar vehicles are handled in the local courts. Fundamentally, Liechtenstein has a reputation as a sympathetic jurisdiction that has made an effort to create ‘common law-friendly’ vehicles based on common law trust concepts. Liechtenstein also created the Trust Reg., which is effectively an adaptation of the 1928 legislation in Massachusetts on the Massachusetts Business Trust translated into German. While it is not insignificant that Liechtenstein has welcomed such vehicles, dealing with them in the Liechtenstein court system has proved to be less than straightforward. Drafted in the 1920s, Liechtenstein trust law is largely based on Germanic law concepts and ‘modern’ German law, in addition to common law trust concepts. It is not clear, however, which sections of modern Liechtenstein trust law derive from which source(s) and this lack of clarity has yielded inconsistent decisions regarding trust matters in Liechtenstein's three-tiered court system. It is becoming increasingly difficult to predict the outcome of a trust proceeding in Liechtenstein. In spite of the limited role of case law in civil law jurisdictions, the field of trust law is an area where case law could play an increasingly important role. The jurisprudence, however, is inconsistent. The practical effect is that there is a limited guidance regarding how these vehicles should be administered: For example, there is no procedure under Liechtenstein law for appointing a guardian ad litem to represent the interests of minor or unborn children whose interests may be affected by trusts. In our experience, Liechtenstein courts have, in fact, ordered that separate guardians ad litem be appointed in five different jurisdictions to represent minors in one single matter. Besides the time-related and financial burdens of complying with such a procedural requirement, flagging the existence of such vehicles in certain countries can be quite problematic in many cases. In countries such as Brazil and Argentina, for instance, raising the existence of the vehicle can trigger significant safety and security issues for families—even in cases where the structure is fully compliant. Other problems deal with the fact that vehicles such as the Trust Reg. are not administered by courts, but instead are subject to the jurisdiction of the Land Registrar that—by its own admission—does not have experience in handling the procedures associated with such types of vehicles. Making any type of headway under the system is slow, cumbersome and may even be counterproductive. Adding to the difficulties is the fact that the local lawyers working on such matters, of their own admission, have limited experience with the vehicles themselves, not to speak of the litigation associated with such vehicles. As a result, in many cases trust law issues must be dealt with by analogy, which is oftentimes unworkable—and not made any easier by the reluctance of local judges to look to established common law jurisdictions for guidance. As Liechtenstein attempts to reinvent itself in view of recent events, we invite the Liechtenstein authorities to take an inward look at their country's internal legal and court system with a view to examining how it can best serve the vehicles it has for working with the wealth management industry. This would likely involve, for instance, restructuring local legislation such that the vehicles it already can work effectively within their court system, as well as providing the court system with the mechanisms necessary to address and deal with such vehicles. Finally, we encourage a greater education regarding trust and related vehicles at all level in Liechtenstein—from the local judges, to the Land Register, to the lawyers and the institutions setting up these structures—as to what these vehicles can and cannot do. In Liechtenstein today there are some significant misunderstanding regarding the needs and the uses of trust and similar vehicles and, consequently, such vehicles do not tend to hold up well when pushed. As a result, we strongly advocate a reform of the Liechtenstein legal system as it relates to the vehicles that have been created for working with the wealth management industry. © The Author (2008). Published by Oxford University Press. All rights reserved.

Robilliard, St John A.

doi: 10.1093/tandt/ttn090pmid: N/A

Abstract The changes to Guernsey's trust law in 2007 provide increased comfort to settlors both with regard to the reservation of powers and in safeguarding Guernsey trusts from the hostile intervention of non-Guernsey Courts. Settlors may now create trusts of unlimited duration, and issues concerning powers of attorney and the accumulation of income have been resolved. Introduction The recent changes in Guernsey trust law provide important statutory powers likely to appeal to those seeking robust answers to some of the key modern issues relating to the use of trusts. Reserve powers Following the Jersey Royal Court's 1991 decision in Rahman1 the idea appeared to take hold that offshore trusts had to be discretionary with no formal settlor involvement. This ran counter to the possibility of trusts being revocable2 or the direction of their investments being placed in the hands of say a principal beneficiary3 so as to permit family ownership of a company to be retained. The development of this idea was never a true reflection of trust law. However, there are a number of reasons why a settlor should not retain powers, particularly if the planning behind the trust could be defeated by other courts seized with tax, creditor or divorce problems. Further a ‘trust’ must still be a ‘trust’ under the Hague Convention on the Law of Applicable to Trusts and their Recognition (1985) so as to reasonably guarantee recognition outside its own jurisdiction. This is crucial in the world of offshore trusts as trust assets will frequently be held in a range of jurisdictions that may in turn look to the Hague Convention as either mandatory or persuasive guidance in determining questions involving such assets. Under Article 1(c) of the Hague Convention the characteristic of a trust includes: … the trustee has the power and the duty, in respect of which he is accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed upon him by law … the reservation by the settlor of certain rights and powers, and the fact that the trustee may himself have rights as a beneficiary, are not necessarily inconsistent with the existence of a trust (author's emphasis). In the example of a company being placed in a trust but with all the shareholder rights of the trustee drafted out of existence, Professor Hayton has commented: Are the trustees then, in substance, under any real duty to beneficiaries in respect of such property so as to give rise to a trust obligation, especially if the company is run by the settlor or his nominee and no dividends are declared, the company making loans and gifts to persons, some of whom happen to be beneficiaries under the trust?4 Against this background Section 15 of the Trusts Guernsey Law 2007 (the ‘2007 Trusts Law’) is designed to set out a wide list of reservations that can be made by the settlor or granted to persons other than the trustee. Under Section 15, the settlor may reserve any or all of the following powers or interests: a power to revoke, vary or amend the terms of the trust or any trusts or functions arising thereunder, in whole or in part, a power to advance, appoint, pay or apply the income or capital of the trust property or give directions for the making of any such advancement, appointment, payment or application, a power to act as, or give directions as to the appointment or removal of, a director or other officer of any corporation wholly or partly owned as trust property, a power to give directions as to the trustee in connection with the purchase, retention, sale, management, lending or charging of the trust property or the exercise of any function arising in respect of such property, a power to appoint or remove any trustee, enforcer, trust official5 or beneficiary, a power to appoint or remove any investment manager or investment advisor or any other professional person acting in relation to the affairs of the trust or holding any trust property, a power to change the proper law of the trust or the forum for the administration of the trust, a power to restrict the exercise of any function of a trustee by requiring that it may only be exercised with the consent of the settlor or any other person identified in the terms of the trust, a beneficial interest in the trust property Subsection (2) states:     The reservation, grant or exercise of a power or interest referred to in subsection (1) does not – constitute the holder of a power or interest a trustee, subject to the terms of the trust impose any fiduciary duty on the holder Section 15(2) dates back to a provision in the Trusts (Guernsey) Law 1989 (the ‘1989 Trusts Law’) that made it possible to have a provision in the terms of a trust that trustees must get the consent of another before exercising a power.6 Normally where there is a reserved power or a power vested in a non-trustee, the Court will need to decide whether or not it is fiduciary.7 It is generally in the interests of beneficiaries to construe such powers as fiduciary in that: Thus the Court will be able to approach their actions in a similar manner as it approaches those of trustees. their exercise will then be reviewable by the Court; the holder may not exercise them in favour of himself unless the trust expressly says so. Protectors occasionally cause difficulties, especially where there has been family discord. Further, where a non-settlor is to be granted any of the Section 15 powers, there is much to be said for making them expressly fiduciary rather than non-fiduciary. The trustee will also be affected by the classification of the power. Section 15 (2)(c) of the 2007 Trusts Law goes on to state: (2) The reservation, grant or exercise of a power or interest referred to in subsection (1) does not— … (c) of itself render any trustee liable in respect of any loss to the trust property Further Section 15(3) provides: (3) A trustee who acts in compliance with a valid exercise of any power referred to in subsection (1) does not, by reason only of such compliance, act in breach of trust. If the power is fiduciary there will be situations where the wrongful exercise could render the trustee liable.8 However, simply making the power non-fiduciary will not relieve the trustee of liability in all circumstances. Suppose there is a power to direct the making of trust investments and the holder of the power directs the trustee to purchase an item at a price that was clearly above market value.9 The vendor in such a situation is effectively receiving a distribution of trust property equal to the difference between the market value and the purchase price. On the face of it, therefore, the trustee is personally liable for distributing trust property to a non-beneficiary. Override of Foreign Law When the 1989 Trusts Law was amended in 1990, a principal concern was the possibility that the forced heirship rules of other jurisdictions might be invoked in Guernsey, so as to set aside dispositions to trusts. Accordingly, the override provisions of Section 11A were adopted.10 Despite these fears, the only time that forced heirship has been an issue before the Guernsey Courts in recent times11 was in a domestic non-trust context with the judge accepting that the statutory override should be available for trusts created by non-Guernsey domiciliaries. Twenty-six miles away in Jersey, a storm has recently developed with regard to matrimonial orders of onshore, principally English, Courts, varying Jersey Law Trusts being accepted by the Courts of Jersey.12 Guernsey has not seen such high profile cases being argued out in Court, although there have been a number of cases where an English divorce has provided the background to, perhaps, a consent order. Jersey enacted an override provision in 200613 which had the fortune of being considered by the Court on the day it came into force. In Re B14 where, with a minor change, an English matrimonial decision dividing trust assets was broadly accepted, the Bailiff of Jersey remarked: If the purpose of the amended Article 9 really is to protect trust assets to the extent that a manipulative spouse can evade the enforcement of a carefully considered judgment designed to do justice between husband and wife on divorce, it would seem to us to be a very unhappy state of affairs. This circumventing of the override provision led to some comment15 and the Guernsey equivalent drafting is in wider terms in order to head off similar concerns. Section 14 of the 2007 Trusts Law states: Application of Guernsey law to questions of validity 14.—(1) Subject to the terms of the trust, all questions arising in relation to a Guernsey trust or any disposition of property to or upon such a trust, including (without limitation) questions as to – the capacity of the settlor, the validity, interpretation or effect of the trust or disposition or any variation or termination thereof, the administration of the trust, whether it is conducted in Guernsey or elsewhere, including (without limitation) questions as to the functions, appointment and removal of trustees and enforcers, the existence and extent of any functions in respect of the trust, including (without limitation) powers of variation, revocation and appointment, and the validity of the exercise of any such function, the distribution of the trust property, are to be determined according to the law of Guernsey without reference to the law of any other jurisdiction. For these purposes “the law of Guernsey” does not include the Guernsey rules of private international law, except those set out in this section. (2) Subsection (1)– does not validate any disposition of property which is neither owned by the settlor nor the subject of a power of disposition vested in the settlor, does not affect the recognition of the law of any other jurisdiction in determining whether the settlor is the owner of any property or the holder of any such power, is subject to any express provision to the contrary in the terms of the trust or disposition, does not, in determining the capacity of a corporation, affect the recognition of the law of its place of incorporation, does not affect the recognition of the law of any other jurisdiction prescribing the formalities for the disposition of property, subject to subsection 3, does not validate any trust or disposition of real property situate in a jurisdiction other than Guernsey which is invalid under the law of that jurisdiction, and subject to subsection 3, does not validate any testamentary deposition which is invalid under the law of the testator's domicile at the time of his death, (3) No Guernsey trust, and no disposition of property to or upon such a trust, is void, voidable, liable to be set aside, invalid or subject to any implied condition, nor is the capacity of any settlor, trustee, enforcer, trust official or beneficiary to be questioned, nor is any settlor, trustee, enforcer, trust official, beneficiary or third party to be subjected to any obligation or liability or deprived of any right, claim or interest, by reason that – the laws of any other jurisdiction prohibit or do not recognise the concept of a trust, or the trust or disposition– avoids or defeats or potentially avoids or defeats rights, claims, interests, obligations or liabilities conferred or imposed by the law of any other jurisdiction on any person – by reason of a personal relationship to a settlor or any beneficiary, or      (B) by way of foreign heirship rights, or contravenes or potentially contravenes any rule of law, judgment, order or action of any other jurisdiction intended to recognise, protect, enforce or give effect to any such rights, claims, interests, obligations or liabilities.     (4) Notwithstanding any legislation or other rule of law for the time being in force in relation to the recognition or enforcement of judgments, no judgment or order of a court of a jurisdiction outside Guernsey shall be recognised or enforced or give rise to any right, obligation or liability or raise an estoppel if and to the extent that – it is inconsistent with this Law, or the Royal Court, for the purposes of protecting the interests of the beneficiaries or in the interest of the proper administration of the trust, so orders. (5) This section applies – whenever the trust or disposition arose or was made, notwithstanding any other provision of this Law. (6) In relation to a Guernsey trust of personal property or any disposition of such property to or upon such a trust, the law of Guernsey relating to legitime [rights of the children to inherit a share in the parents’ personal estate] and the rights of a surviving spouse apply only where the settlor is domiciled there at the time of his death. The key provisions to prevent decisions of other courts on Guernsey Law Trust being applicable in Guernsey are: the exclusion of the rules of private international law at the end of section 14(1); the allowance in Section 14(4)(b) that a Guernsey Court may ignore a non-Guernsey Court judgment. There is a belief that the Guernsey drafting may provide a surer defence than that of Jersey due to the fact that certain key provisions are different16 and the fact that Re B was a first instance decision of the Jersey Royal Court which has been subject to some criticism. The onshore matrimonial attack on offshore trusts has caused a great deal of concern to professional advisors who have been charged with finding appropriate trust jurisdictions for their clients. It is understood that the new Guernsey regime has found favour with such advisers. Other points of interest to prospective settlors Duration of Interest Prior to the enactment of the 1989 Trust Law Guernsey did not adopt the English Rule against Perpetuities.17 Notwithstanding this, draftsmen frequently included ‘Royal lives’ clauses or eighty-year periods to fix the maximum life of a Guernsey law trust. The 1989 Trusts Law simply created a period with a maximum life of one-hundred years unless the trust was for a charitable purpose,18 in which case it could be unlimited. The position under the 1989 Law continues for trusts created before 17 March 2008.19 However, the maximum period for any trust created after that date is potentially unlimited, unless the trust itself provides to the contrary.20 Prior to the enactment of the 2007 Trusts Law, there was concern that, where property from one trust was transferred to another with a longer potential life span than the first, the transferred property might only remain in the second trust until the expiration of the first trust period rather than the second. This is now determined beyond doubt by Section 16(3) of the 2007 Trusts Law which provides that: Except where the terms of a trust expressly provide to the contrary no advance, appointment, payment or application of income or capital from the trust to another is invalidated solely by reason of the other trust continuing to be valid and enforceable beyond the date on which the first trust must terminate. Powers of attorney Under the 1989 Trust Law,21 unless the trust otherwise provided, powers of attorney could only be granted for up to 12 months. This was particularly problematic where security was taken by a third party. The draftsman would often circumnavigate the problem by providing that the power of attorney only became operative on the occurrence of a breach of the security agreements as opposed to its execution. Section 34 of the 2007 Trusts Law resolves this problem by providing, that where a power of attorney is granted as part of a security arrangement there is no time limit on its validity and, where it is granted for any other purpose, it will valid for up to 3 years, although the trust instrument may provide for a longer or unlimited period. Accumulation of income Unlike most trust laws the 1989 Trust Law contained no implied power to accumulate income22 and so draftsmen had to take care to ensure that one was drafted in. Section 48 of the 2007 Trust Law resolves the problem. Conclusion The matters discussed in this article all provide important improvements to the 1989 Trusts Law. Obviously, the particular drafting of a Guernsey law trust will require care to ensure it is suitable for the circumstances of the client but there is certainly more room to accommodate the wishes of settlors than before. 1 Rahman (Abdel) v Chase Bank (CI) Trust Company Ltd [1991] JLR 103. 2 Thompson v Browne (1835) 3 My & K 32 pp. 35–36. 3 Re Hart's Will Trust [1943] 2 All ER 553. 4 David Hayton, ‘The Irreductible Content of Trusteeship’. Edited by Oakley Trends in Contemporary Trust Law. 1996, pp. 47–62 at p. 56. 5 ‘a person having a function or holding an office in respect of the trust other than a settlor, trustee, enforcer [the protector of a non-charitable purpose trust] or beneficiary’ the 2007 Trusts Law s80(1) [e.g. a protector]. 6 The 1989 Trusts Law, s28(2) and (3). 7 Vestey (Lord) Executors v IRC [1949] 1 All ER 1108 at p. 1115 (Lord Simonds), p. 1120 (Lord Normand), p. 1132 (Lord Morton). 8 Ibid. at p. 1132 (Lord Morton). 9 See Re Hart's Will Trust [1943] 2 All ER. 553 at p. 558. 10 The 1989 Trusts Law s11A was added by s1(c) of the Trusts (Guernsey) Law, 1990 (‘the 1990 Trusts Law’). 11 Kurzschenkel Funk v Krombach, Guernsey Royal Court 16 March 2000. 12 For example, Compass Trustees Limited (as trustee of the Eiger Trust) v McBarnett and 17 others [2002]. JLR 321, In the matter of the Bald Eagle Trust [2003] JLR N16; CI Law Trustees v Minwalla [2005] JRC 099 and Re the A Trust [2006] JRC0 20A. 13 Article 9 of the Trusts (Jersey) Law, 1984 in force from 27 October 2006. 14 In the matter of the B Trust [2006] JRC 185. 15 See e.g. Jonathan Harris (2007) 11 Jersey and Guernsey Law Review 184. 16 The Guernsey Section 14 (4) is wider than the Jersey Article 9(4) and the Guernsey section 14 (1) expressly deals with the problem of recognizing or enforcing non Guernsey judgments in Guernsey under the rules of Private International Law. 17 Re Tardif deceased Guernsey Royal Court 9 May 1953. 18 1989 Trusts Law s12. 19 2007 Trusts Law s16(2). 20 2007 Trusts Law s16(1). 21 Section 29(A) of the 1989 Trusts Law, inserted by section 1(d) of the 1990 Trusts Law. 22 Investec Trust (Guernsey) Limited: In re the P Trust Guernsey Royal Court 17 January 2005. © The Author (2008). Published by Oxford University Press. All rights reserved.

Howitt, Simon

doi: 10.1093/tandt/ttn086pmid: N/A

Abstract The Trusts (Guernsey) Law, 2007 (the ‘2007 Law’), which came into force in March, 2008, is Guernsey's principal legislation in relation to trusts, and has replaced and updated the previous legislation, the Trusts (Guernsey) Law, 1989. The 2007 Law includes a number of new features which change, in some cases significantly, the position of trustees of Guernsey trusts. This article analyses and comments on these new features. Areas of particular interest to trustees of Guernsey trusts are (i) the abolition of the statutory rule that directors of a corporate trustee would be treated as guarantors of liabilities of the trustee for breach of trust; (ii) clarification of the extent to which an outgoing trustee of a trust is entitled to security (usually in the form of an indemnity) in respect of ongoing liabilities; (iii) creation of a statutory non-possessory lien for the benefit of outgoing trustees of a trust and; (iv) changes to the rules of limitation and prescription so that there is an absolute bar (other than in cases of fraud or misappropriation) on proceedings being brought in respect of a breach of trust more than 18 years after the act or omission complained of. Introduction Whilst trusts have been established in Guernsey for many years, doubt as to whether principals of equity of the type so beloved of English jurists applied in Guernsey and, if they did, as to how they would be applied in practice lead to the introduction of the Trusts (Guernsey) Law, 1989 (the ‘1989 Law’). This legislation was amended once, in 1990, but, apart from that, was unchanged for almost 20 years. For much of that period, however, it was widely recognized that some of the provisions of the 1989 Law gave rise to potential difficulties in practice. It has therefore recently been repealed and replaced by the Trusts (Guernsey) Law, 2007 (the ‘2007 Law’) which came into force in March 2008. The purpose of this article is to outline those changes contained in the 2007 Law which affect the position of trustees of Guernsey trusts1 and trustees established in, or carrying on business from, Guernsey. However, this article does not comprise an exhaustive list of matters which might interest a trustee. The 2007 Law contains a number of new features2 which may well be of interest to a trust services provider from the point of view of expanding its product base. These features are outside the scope of this article, and are dealt with elsewhere in this edition of Trusts & Trustees. Directors’ guarantees of corporate trustees’ breaches of trust When the 1989 Law came into force, the provision of trustee services in Guernsey was unregulated. Whilst the general regulator of financial services business in Guernsey, the Guernsey Financial Services Commission, restricted the incorporation of Guernsey companies where an intention was expressed for such companies to be used to provide trustee services, there was nothing to prevent a company incorporated in another jurisdiction from opening an office in Guernsey and providing trustee services from the island. Because of the lack of regulation, there was no effective requirement for companies which undertook trust business in Guernsey to have any substantive assets or any insurance against liabilities for breaches of trust. In those circumstances, it was felt by those responsible for preparing the 1989 Law to be appropriate to include in it a provision3 whereby the directors of a corporate trustee would be deemed to be guarantors of the liability of the trustee in respect of ‘any damages and costs awarded by the court against the trustee in respect of [a breach of trust committed by the trustee]’. This provision applied not only to the directors4 of a corporate trustee5 which acted as trustee of a Guernsey trust but to the directors of any trustee6 ‘resident in Guernsey’ or ‘carrying on business in Guernsey or from an address in Guernsey’. Section 70(2) of the 1989 Law contained an exemption from liability as guarantor for any director whom the Court was satisfied ought fairly to be relieved because (a) he was not aware of the breach of trust in question or of the intention to commit it and, in being not so aware, was neither reckless nor negligent or (b) he expressly objected, and exercised such rights as he had by way of voting power or otherwise as a shareholder or director or other officer of the company, so as to try to prevent the breach of trust. Moreover, the guarantee provisions in section 70 were only relevant where, when a successful claimant sought to enforce a judgment against a trustee for breach of trust, the trustee was insolvent. In practice, most trustees maintained adequate insurance cover in respect of breaches of trust. The provisions of section 70 were successfully relied on only once in proceedings before the Guernsey Courts.7 They were, nonetheless, of concern to directors of corporate trustees and, in particular, discouraged potential non-executive directors of corporate trustees from accepting appointments as such. The situation has changed significantly since the 1989 Law came into force. The provision (by way of business) of trustee services is now a regulated activity by virtue of the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2000 which imposes a requirement to hold a license (issued by the Guernsey Financial Services Commission) both on Guernsey companies, which provide trustee services by way of business and on any other person which provides such services in or from within Guernsey.8 The regulatory regime imposes an obligation on licensed fiduciaries to have adequate insurance cover in respect of breaches of trust. In these circumstances, the provisions of the 1989 Law which made directors of corporate trustees’ guarantors of liabilities for breach of trust ceased to have the relevance which they had when the 1989 Law came into force. The 2007 Law, which repealed the 1989 Law generally, did not re-enact the provisions of section 70 of the 1989 Law. In addition, section 83(3) of the 2007 Law provides for the avoidance of doubt that ‘a director or former director of a corporate trustee shall not, after the date of commencement of this Law, be under any duty, obligation or liability as guarantor by virtue of section 70 of the Trusts (Guernsey) Law, 1989 except by virtue of any proceedings instituted prior to that date against the trustee in respect of a breach of trust committed by the trustee’. Position of outgoing trustees Entitlement to security for liabilities Few things give rise to more argument in the world of trusts and trustees than the extent to which trustees who resign or are removed from trusteeship are entitled to be protected against liabilities incurred whilst acting as trustees and which may be ongoing. Trustees, of course, incur liabilities, either contractually (such as where, for example, a trustee borrows for the purposes of a trust or guarantees the liabilities to a third party of a beneficiary of a trust) or on an involuntary basis, liability for tax in respect of the activities of a trust being the most obvious example in this category. Although they are frequently referred to as such, these liabilities are not liabilities of the trust, which cannot have any, because it has no legal personality. They are liabilities of the trustees of the trust albeit that, provided that trustees have not exceeded their powers or acted in breach of trust in incurring them, they are, whilst they remain as trustees, entitled to meet such liabilities out of trust assets or, to the extent to which they meets them out of their own assets, to be indemnified out of trust assets in respect of the amount paid by them. These types of liability are referred to in this article as ‘trustee liabilities’. Another category of liabilities is for breaches of trust. Such liabilities are, by their nature, those of the trustee in its own right, so they are referred to in this article as ‘personal liabilities’. A trustee which has committed a breach of trust (in respect of which it is not exempted from liability by the terms of the relevant trust instrument9) is obliged to meet that liability out of its own assets10 and not out of trust assets. By section 43(1)(b) of the 2007 Law, on ceasing to hold office a trustee is entitled to require, prior to transferring the trust assets, ‘reasonable security for liabilities (existing, future, contingent or otherwise)’. That provision is identical to section 39(1)(b) of the 1989 Law. However, what was not elucidated by the 1989 Law was the extent of the liabilities in respect of which an outgoing trustee was entitled to security. Whilst it was reasonably clear11 that an outgoing trustee was not entitled, having ceased to be a trustee, to be in a better position than it would have been in had it remained as a trustee, so that the security could only be in respect of trustee liabilities, and not in respect of personal liabilities, this was not expressly stated in the 1989 Law. In the vast majority of cases, the ‘reasonable security’ to which an outgoing trustee is entitled is provided in the form of an indemnity given by the new (or continuing) trustee in favour of the outgoing trustee. The only circumstance in which an outgoing trustee will typically seek security in any other form is where it is actually aware of specific liabilities in respect of which it will, or might, remain liable after it has ceased to be a trustee, in which case it will, again typically, retain trust assets to meet such liabilities, or take a charge over the trust assets. However, cases where an outgoing trustee knows of specific liabilities which will affect it after it has ceased to be a trustee are rare and, even where such cases occur, the liabilities in question can usually be dealt with simply by paying the amount due or, in cases where that is not practical, by novating the liabilities (by agreement with the relevant creditor), so that they become liabilities of the new trustee, rather than liabilities of the outgoing trustee.12 Where the outgoing trustee's security is to be in the form of an indemnity, section 43(2) of the 2007 Law clarifies the position as to the extent to which the trustee may be indemnified by providing that the indemnity must not, except with leave of the Royal Court or with the consent of all beneficiaries, be greater than that to which the trustee would have been entitled had it remained a trustee. In other words (unless the consent of the beneficiaries or leave of the Court is obtained) the indemnity must be restricted to trustee liabilities, and must not extent to personal liabilities. This provision envisages the possibility that an outgoing trustee may be able to obtain an indemnity which goes beyond that to which it would have been entitled had it remained a trustee by means of an application to the Court. Whilst it has to be conceded that the legislature must have envisaged that there could be circumstances where the Court might choose to permit an indemnity to be given which went beyond the outgoing trustee's entitlement had it remained a trustee, it is difficult to see when, in practice, such circumstances could arise. One rather puzzling aspect of section 43 of the 2007 Law is that the new restriction on the extent of the liabilities in respect of which an outgoing trustee is entitled to require security applies only where the security is in the form of an indemnity. This appears to leave open the question of whether, if the outgoing trustee requires security other than in the form of an indemnity, and acts reasonably in so doing, it can also properly ask for such security to extend to personal liabilities, in respect of which it would not have been protected had it remained a trustee of the trust in question. It is submitted that it cannot, as security for liability for breaches of trust will never constitute ‘reasonable security’, but it is unfortunate that the wording of this provision does not put the matter beyond doubt. Similar scope for confusion exists in the context of the entitlement to protection of a trustee when a trust is terminated. The 1989 Law provided, both in relation to an outgoing trustee of a continuing trust and in relation to the last trustee of a terminating trust, an entitlement to ‘reasonable security for liabilities (existing, future, contingent or otherwise)’13 without specifying the extent of the liabilities in question. As stated above (in relation to the position of an outgoing trustee of a continuing trust) it was reasonably clear that these provisions did not entitle the trustee in question to be put into a better position than it would have been in had it remained as a trustee and had the relevant trust remained extant. However, section 53(2) of the 2007 Law, which deals with the position of a trustee on termination of a trust, simply re-enacts section 48(2) of the 1989 Law, a bald statement that the trustee is entitled to reasonable security for liabilities, without including any provision equivalent to the restriction in section 43 of the 2007 Law whereby the security is (provided that the security is in the form of an indemnity and unless the Court or the beneficiaries otherwise permit) limited to matters in respect of which the trustee would have been protected from liability had it remained a trustee. Whilst it is submitted that the trustee of a terminating trust is entitled to no greater protection than an outgoing trustee of a continuing trust, the disparity between the provisions relating to outgoing trustees and trustees of terminating trusts which the 2007 Law introduces could make the point worthy of being the subject of argument in litigation, particularly if sufficiently large sums of money were at stake.14 Provisions for indemnity chains As we have seen, an outgoing trustee of a trust is entitled to reasonable security for liabilities, and that security usually takes the form of an indemnity given by the new trustee to the outgoing trustee. The new trustee will not, of course, want any claim under that indemnity to be met out of its own assets. It will want its liability to be limited so that it only has to meet the liability from such assets of the relevant trust as happen to be in its possession or control at the time when a claim is made under the indemnity. The disadvantage to the outgoing trustee of agreeing to this, without more, is that the liability of the new trustee can be reduced, potentially to zero, by the new trustee itself retiring, or being removed, as trustee or by the trust assets being distributed to its beneficiaries. Because of the rules of privity of contract, only the parties to a contract15 can enforce it.16 A trust itself cannot be a party to a contract, as it has no legal personality. In the context of an indemnity, the contract is between the outgoing trustee and the new trustee albeit that, provided that the new trustee has power as trustee of the relevant trust to give such an indemnity, the new trustee can meet its liabilities under the indemnity out of trust assets and its liabilities will typically be limited by the terms of the indemnity so that it is only liable to the extent of the trust assets in its possession or control at the time of a claim under the indemnity.17 In exchange for agreeing to the new trustee's liability being limited in this manner, the outgoing trustee will typically want to be in a position whereby it can enforce the indemnity against not only the original new trustee but against any subsequent trustee appointed and against any beneficiary to whom a distribution of trust assets is made. Unfortunately, the original new trustee cannot give an indemnity on its own behalf and on behalf of any subsequent trustee and any beneficiary who receives trust assets in the future. Such an indemnity would not be enforceable against subsequent trustees and beneficiaries, as they would not be parties to the original contract. A method of avoiding this difficulty has developed over some years whereby the original new trustee gives an indemnity to an outgoing trustee, claims under which are limited to trust assets in the original new trustee's possession or control at the time of a claim, but also agrees that this limit will only apply if, when the original new trustee is replaced as trustee or if a distribution of capital is made to a beneficiary, the original trustee procures that its successor as trustee or the recipient of the distribution (as applicable) gives an indemnity in favour of the original outgoing trustee, so that there is then an enforceable contract between the original outgoing trustee and the successor trustee or recipient of capital, and the original outgoing trustee can enforce any claim which is covered by the indemnity against the current trustee and/or anyone to whom a capital distribution has been made. Provisions of this nature have the potential to become extremely complex, and the description above merely scratches the surface of the subject. Suffice it to say that a trustee which has given an indemnity in favour of a former trustee which contains ‘chain’ provisions of the nature described above is, when it ceases to be a trustee or wishes to make a distribution of capital, faced with a situation where it must obtain, from (as the case requires) its successor as trustee or the recipient of the distribution, an indemnity in favour of the former trustee. If it does not then it will, typically, potentially be liable out of its own assets in respect of any claim under the original indemnity made against it by the former trustee. One practical problem which arose in the past in this context was that, because of the rules of privity of contract, in order for an indemnity given by the successor trustee or recipient beneficiary in favour of the former trustee to be valid and enforceable, the former trustee had to be a party to it. When former professional trustees were sent documents relating to trusts of which they had (in many cases long previously) ceased to be trustees, they frequently refused to execute them or, more often, simply failed to respond to correspondence in relation to them.18 The 2007 Law seeks to alleviate this difficulty. Section 43(4) disapplies, in effect, the usual rules of privity of contract in these circumstances. It provides that: An indemnity given in writing by a trustee or beneficiary and expressed to be in favour of a trustee who has previously resigned or been removed from office (a ‘previous trustee’) is, subject to its terms, enforceable by the previous trustee against the indemnifying party notwithstanding that the previous trustee is not a party to or signatory of the indemnity. In other words, where an outgoing trustee, or a trustee which wishes to make a capital distribution, has given an indemnity in favour of a former trustee which includes provisions requiring19 that indemnities be obtained from its successor as trustee or the recipient of the distribution in favour of the former trustee, the indemnity can be obtained by means of a document to which the former trustee is not a party. This disapplication of the normal rules of privity of contract should make life considerably simpler. However, care will need to be taken to ensure that the terms of the indemnity given in favour of the former trustee comply strictly with the requirements of the original indemnity. It should also be noted that the disapplication of the rules of privity of contract in section 43(4) goes no further than the precise terms of that provision. It is still not possible, for example, for a new trustee to give an indemnity which is, without more, binding on its successor trustees and on beneficiaries who receive distributions from the trust. Trustees’ lien The 2007 Law provides20 for a trustee to have a non-possessory lien over trust assets in respect of expenses and liabilities properly incurred. This is a right to follow the relevant assets into the hands of whoever holds them at the time when the lien is exercised and recover and appropriate those assets to satisfy the liability in respect of which the lien is exercisable or, if the trustee has already met that liability, to re-pay the trustee the amount which it has spent in satisfying that liability. In other words, in addition to being entitled to reasonable security for liabilities,21 an outgoing trustee will automatically have rights over the trust assets, even where the outgoing trustee no longer has those assets in its possession or under its control. The existence of the trustee's lien is obviously relevant in circumstances where a trustee is called on to meet a liability in relation to a trust after the trustee has ceased to be a trustee of the trust and has handed over possession or control of the trust assets to the new trustee or, if the trust assets have been distributed, and the trust has been terminated, after possession or control of the assets has been handed over to one or more beneficiaries of the trust. The Guernsey law on this subject, prior to coming into force of the 2007 Law, was unclear, as there had been no relevant local case law and the 1989 Law was silent on the matter. Under English law, a trustee has a non-possessory lien similar to that which the 2007 Law now gives to a trustee. It was believed by some Guernsey lawyers that Guernsey law would follow English law. However, the matter was debatable, and the 2007 Law has put the question beyond doubt. It is clear that the purpose of the lien is not to put an outgoing trustee into a better position than it would have been in, had it remained as a trustee of the trust in question. The lien only covers expenses and liabilities properly incurred. It will not protect a trustee against liabilities to beneficiaries of the trust for breach of trust nor against liabilities to third parties which arise because a trustee has wrongly exercised its powers or purported to exercise powers which, in fact, it did not have. An indemnity given by a new trustee to an outgoing trustee is a contract between those two parties. Conversely, the trustee's lien is a right against property, and can be lost in certain circumstances, usually beyond the control of the trustee which is entitled to the lien. Section 44(3) of the 2007 Law provides that the lien will be lost in the following circumstances: Where assets cease to be identifiable; for example, where money is paid to a beneficiary and used by the beneficiary to pay his debts. Even if the beneficiary has plenty of other assets, the fact that none of those assets can be identified as being the money which was distributed to him, or the proceeds of that money, will mean that the trustee will lose its lien (to the extent of the assets which had ceased to be identifiable). The lien is a right against the property itself, rather than against the beneficiary. Where the assets have been acquired by a bona fide purchaser for value. If, for example, the trustee of a trust distributes a specific asset to a beneficiary and the beneficiary sells it (other than in circumstances where the sale is not ‘bona fide’ or ‘for value’), the trustee cannot, for the purpose of satisfying its lien, trace that asset into the hands of the person who has bought it. However, the lien may, in some circumstances, attach to the proceeds of sale of the asset, or to another asset which was acquired using those proceeds of sale. Where the assets comprise real property.22 If, for example, a trustee distributes money to a beneficiary who uses the money to fund the purchase of real property, the trustee cannot, if a claim is later made against it in respect of a liability which the trustee properly incurred, exercise its non-possessory lien over that property. It should also be noted that the non-possessory lien may not be enforceable against assets in all other jurisdictions. If money is paid to a beneficiary and deposited by the beneficiary in a bank outside Guernsey (as will often be the case), any attempt by the trustee which has paid the money over to exercise its lien needs to be effective in the jurisdiction in which the relevant assets are situated at the time of enforcement. Limitation and prescription By section 71 of the 1989 Law the period within which an action founded on breach of trust could be brought against a trustee by a beneficiary was (other than in cases of fraud or misappropriation of trust assets, in respect of which there was no applicable limitation or prescription period) 3 years from whichever was the earlier of the date of delivery of the final accounts of the trust to the beneficiary and the date on which the beneficiary first has knowledge of the breach of trust. However, where the beneficiary was a minor or was under a legal disability, this 3-year period did not begin to run until the minority or disability ceased. This resulted in it being possible that an action for breach of trust could potentially be brought many years after the act or omission complained of. The situation was unclear in relation to beneficiaries who were unborn at the date of the alleged breach.23 It was certainly strongly arguable that, in order to be clear of a potential claim from such a beneficiary committed before he or she was born, he or she had to have been born and attained the age of majority, and that the relevant period did not thereafter expire until three years had elapsed from his or her becoming aware of the breach or from his or her having received final accounts in respect of the trust. The position of trustees has been alleviated by section 76 of the 2007 Law. There remains no applicable limitation or prescription period in respect of fraud or misappropriation of trust assets. Subject to that, there is now an absolute bar on any action for breach of trust being brought against a trustee after the expiration of 18 years immediately following the date of breach. That period is now the longest possible prescription or limitation period in respect of a breach which does not involve fraud or misappropriation of trust assets. The other rules have also been changed. References to the date of delivery of final accounts to the complainant beneficiary have been removed, so that the general period applicable is now 3 years from the date on which a beneficiary first has knowledge of the breach. In relation to a minor beneficiary, or a beneficiary under a disability, the 3-year period now runs from whichever is the earlier of the date on which his or her guardian first had knowledge of the breach and the date on which the beneficiary attains the age of majority or ceases to be under a disability.24 Judgments and settlements by ADR binding on beneficiaries Section 62(1) of the 2007 Law introduces an entirely new provision whereby ‘any order, judgment or finding of law or fact of the Royal Court in an action against a trustee founded on breach of trust is binding on all beneficiaries of the trust, whether or not yet ascertained or in existence, and whether or not minors or persons under legal disability’. This provision has been introduced to avoid a trustee being in a situation whereby there could be two separate findings, in relation to a single set of facts, at different times as a result of actions bought (again at different times) by different beneficiaries of the same trust. There are, however, conditions which need to be fulfilled before the protection afforded by section 62(1) has effect. Section 62(2) provides that section 62(1) will only apply in respect of a beneficiary if ‘(a) he was represented in the proceedings (whether personally, or by his guardian, or as the member of a class, or otherwise), or (b) if not so represented, he had notice of the proceedings and a reasonable opportunity of being heard’. In practice, if a trustee is sued by a beneficiary of a trust for breach of trust, it will want to be in a position to ensure that any litigation in relation to the alleged breach puts an end to the matter and that another beneficiary, who was not a party to the original proceedings, cannot re-open the matter at a later time. The procedure in section 62 now permits this finality to be achieved. Section 63 of the 2007 Law contains a similar provision in relation to claims against trustees for breaches of trust which are settled by means of alternative dispute resolution (‘ADR’25). Section 63(1) provides that: Where (a) the terms of a trust direct or authorise, or the Court so orders, that any claim against a trustee founded on breach of trust may be referred to ADR (b) such a claim arises and, in accordance with the terms of the trust or the Court's order, is referred to ADR, and (c) the ADR results in a settlement of the claim which is recorded in a document signed by or on behalf of all parties, the settlement is binding on all beneficiaries of the trust, whether or not yet ascertained or in existence, and whether or not minors or persons under legal disability Again, this provision is to enable a trustee to achieve finality in any proceedings against it. There are conditions, similar to those in section 62(2), whereby the protection afforded by section 63(1) is dependant on a beneficiary having been represented in the ADR proceedings or, if not, having been given notice of the proceedings and a reasonable opportunity to take part in them. Dealings by trustees with third parties Section 42 of the 2007 Law re-enacts section 37(1) of the 1989 Law. It provides that ‘where, in a transaction or matter affecting a trust, a trustee informs a third party that he is acting as trustee or the third party is otherwise aware of the fact, the trustee does not incur any personal liability and a claim by the third party in respect of the transaction or matter extends only to the trust property’. Doubt arose as to whether section 37(1) of the 1989 Law applied only where the law governing a transaction was Guernsey Law. Section 42(4) of the 2007 Law has put the matter beyond doubt by providing that section 42 applies to a transaction notwithstanding the lex causae26 of the transaction, unless the terms of the transaction expressly provide to the contrary. That is not to say that the trustee of a Guernsey trust which enters into a contract with a third party (and informs the third party that it is acting as a trustee) will invariably be protected against personal liability. It can only be guaranteed to be so protected if the matter comes before a Guernsey Court. Notwithstanding the addition of section 42(4), it may remain the case that Courts in some other jurisdictions will not recognize or enforce the limitation on liability afforded to trustees by section 42. It will therefore continue to be sensible for a trustee entering into a contract (in its capacity as trustee) to insist on the inclusion of a ‘limited-recourse provision’ whereby the remedy of the counter-party to the contract in respect of any breach or non-performance of the trustee's obligations is limited to enforcement against assets of the relevant trust held by the trustee, or under its control, at the time of enforcement. The wording of section 42 leaves unanswered a number of questions which arose in relation to its predecessor, section 37 of the 1989 Law. It is clear that, if a trustee tells a counter-party to a contract that it is acting as a trustee, it incurs no personal liability. If that trustee then ceases to be a trustee of the relevant trust and transfers the trust assets to the new trustee, how can the counter-party have any effective remedy? The original trustee has no personal liability, and no longer has any trust assets in respect of which the counter-party can enforce its claim. There is nothing in the 2007 Law [other than section 43(4)27] that expressly disapplies the usual rules of privity of contract in relation to transactions with trustees, so it appears that the counter-party cannot, in these circumstances, sue the current trustee in respect of breach or non-performance of the contract since, unless the contract has been novated,28 the current trustee is not a party to the contract. However, section 42(1) refers to any claim by the counter-party in these circumstances extending ‘only to trust property’. This may indicate that, even where the trust assets have passed to a trustee of the trust who was not a party to the contract in question, the counter-party has some form of right to follow those assets into the hands of the current trustee. The meaning of this provision is, however, obscure, and it would benefit from clarification. A further difficulty with section 42 arises because it is not clear when assets cease to be ‘trust property’, to which a counter-party to a contract has recourse in the event of breach or non-performance of the contract. If, for example, a trustee of a trust enters into a contract and then establishes a new trust and decants all of the assets of the original trust into it, do those assets remain available to the counter-party to the contract in the event that the trustee breaches the contract or fails to perform its obligations? The wording of section 42 does not assist in answering this question. Exculpation clauses Section 34(7) of the 1989 Law provided that: (7) Nothing in the terms of a trust shall relieve a trustee of liability for a breach of trust arising from his own fraud or wilful misconduct or gross negligence. There was a possible argument29 that, whilst section 34(7) limited the extent to which a trustee could be exempted from being liable to the beneficiaries of a trust, it did not limit the extent to which, if found liable, a trustee could apply trust assets in satisfaction of its liability to those beneficiaries. The position has been clarified by the 2007 Law. Section 39(7)(a) re-enacts the general restriction against the terms of a trust providing relief from liability for fraud, wilful misconduct or gross negligence. Section 39(7)(b) adds a new provision which forbids the terms of a trust providing for a trustee to be indemnified in respect of any such liability from the assets of the trust. In addition, section 39(8) of the 2007 Law provides, for the avoidance of doubt, that the restrictions in section 39(7) apply whenever the relevant trust was created and that a provision in a document creating a trust is invalid to the extent that it purports to (i) relieve a trustee of liability for a breach of trust arising from the trustee's own fraud, wilful misconduct or gross negligence, or (ii) grant to the trustee any indemnity against the trust property in respect of any such liability. It seems clear that the reference to a provision being invalid ‘to the extent that’ it goes beyond what section 39(7) permits means that, if a provision did go beyond what was permitted, its effect would simply be reduced, so as to make it comply with section 39(7). It would not be invalidated in its entirety. Conclusion The 2007 has generally improved the position for trustees, and has certainly clarified a number of areas where the law was previously in doubt. However, particularly in the context of the extent to which outgoing trustees and trustees of terminating trusts are entitled to be indemnified and of trustees’ dealings with third parties, there are areas where the law could be clarified further. 1 The expression ‘Guernsey trust’ is used throughout this article, as it is in the 2007 Law, to denote a trust the proper law of which is the law of Guernsey. 2 For example, the introduction of a facility to establish non-charitable purpose trusts and the provision of statutory backing to the practice of including ‘reserved power’ provisions in trust documents whereby powers in relation to certain matters (typically including the choice as to how trust assets should be invested) are reserved to the settlor of the trust or given to some third party. 3 Section 70 of the 1989 Law. 4 Section 70(3) contained an extended definition of ‘director’ so as to include ‘a person occupying the position of director by whatever name called, a person in accordance with whose directions or instructions the directors of the corporation or of a corporation of which it is a subsidiary (or any of them) are accustomed to act, and a person who alone or with or through an associate is entitled to exercise or control the exercise of one third or more of the voting power at a general meeting of the corporation or of a corporation of which it is a subsidiary’. 5 Wherever incorporated, and whether carrying on business in Guernsey or not. 6 Whether acting as the trustee of a Guernsey trust or of a trust with a proper law other than Guernsey law. 7 In the case of Cross & Cross v Benitrust International (C.I.) Limited, Ramsey, Rowe and Rich. This case, the substantive trial of which was dealt with by the Royal Court in November 1999 (and a further aspect of which was dealt with in October 2000) is generally unreported, but notes on aspects of it can be found in Ozannes, ‘A Guide to Guernsey Trust Law’ (1st edn, 2005). A preliminary point in the proceedings was dealt with by the Guernsey Court of Appeal [see Rowe & Rich v Cross & Cross (1998/1999) ITELR 341]. 8 The legislation refers to the ‘Bailiwick of Guernsey’, which includes not only Guernsey itself but the islands of Alderney and Sark. Both the 1989 Law and the 2007 Law apply only to Guernsey. 9 Guernsey law limits the extent to which the document which creates a trust can exempt its trustees from liability. This is dealt with in details below under the heading ‘EXCULPATION CLAUSES’. It should be noted that, where the terms of a trust limit the liability of its trustees for breaches of trust, that limitation will almost invariably continue to operate after the trustees have ceased to act as such so that, in seeking security upon ceasing to act, trustees need not be concerned that their potential exposure will be increased as a result of their ceasing to act. It will remain the same, even without any security. 10 Those assets will almost invariably include the benefit of a professional indemnity insurance policy the proceeds of which will meet any liability for breach of trust, at least up to a specified level and provided that it does not involve fraud on the part of the trustee. 11 See Virani v Guernsey International Trustees Limited et al Guernsey Court of Appeal (Civil Appeal 312) 4 November 2002. 12 An outgoing trustee which has incurred contractual liabilities will, in any event, usually be protected against personal liability by the operation of s 42 of the 2007 Law, which is dealt with below under the heading ‘DEALINGS BY TRUSTEES WITH THIRD PARTIES’. 13 See s 39(1)(b) and 48(2) of the 1989 Law. 14 In contrast with the provisions of ss 43(1)(b) and 53(2) of the 2007 Law, which refer simply to ‘liabilities’, s 44(1), which is dealt with below under the heading ‘Trustees’ lien’, refers, rather more helpfully, to liabilities ‘properly incurred’. 15 An indemnity given by a new trustee in favour of an outgoing trustee is a type of contract. 16 Guernsey has no legislation, equivalent to the (English) Contracts (Rights of Third Parties) Act, 1999, whereby, in certain circumstances, a third party can enforce a contract to which he is not a party. 17 Even without an express provision to that effect, s 42 of the 2007 Law, dealt with below under the heading ‘DEALINGS BY TRUSTEES WITH THIRD PARTIES’ would normally restrict the liabilities of the new trustee in this way. 18 Most professional trustees are companies which employ teams of people to administer trusts of which they are currently trustees. Typically, no one has responsibility for trusts of which they have previously acted as trustees, so, even though, when it ceased to act as trustee, it will have insisted on being indemnified not only by its immediate successor but by subsequent successors and beneficiaries who are in receipt of capital distributions, when a document comprising an indemnity from such a person in favour of the former trustee arrives in its office, often some years after it ceased to act as trustee of the relevant trust, with a request to execute and return it, it will frequently not be the responsibility of anyone in particular in the office to deal with it. 19 Strictly speaking there is not usually a requirement to obtain such indemnities; merely a stipulation that, if the trustee which gave the original indemnity does not obtain indemnities from its successor or from a recipient of a distribution of capital in favour of the former trustee, the trustee which gave the original will potentially be liable to meet a claim on the indemnity out of its own assets. 20 See s 44(1). 21 This is dealt with above under the heading ‘Entitlement to security for liabilities’. 22 It is clear that this is not intended to apply only to real property in Guernsey. Whilst it is relatively clear what comprises real property in Guernsey (put simply, land and anything, such as a house or other building, permanently erected on land) it is not entirely clear how the question of whether or not property in other jurisdictions is real property will be answered. Presumably, the usual private international law rules, whereby Guernsey law would determine the question by reference to the law of the place in which the property is situated, will apply. However, in the context of private international law, the distinction made is between movables and immovables. The distinction between real and personal property is a concept of domestic law. The matter may, therefore, not be unarguable. 23 For example, the class of beneficiaries of a discretionary trust might comprise the settlor and his children, and one of those children might not be born until after the date of the act or omission complained of. 24 Section 76(2) of the 2007 Law provides that ‘…the period within which an action founded on breach of trust may be brought against a trustee is (a) … or (b) where the claimant was at the time of the breach of trust a minor or a person under legal disability (i) three years from the date on which his guardian first has knowledge of the breach, or (ii) three years from the date on which the claimant ceased to be a minor or a person under legal disability, whichever first occurs.’ It appears from this that, assuming that the guardian of a minor beneficiary or a beneficiary who is under a disability does not become aware of a breach before the beneficiary attains the age of majority or ceases to be disabled, the relevant period of limitation or prescription starts to run on the date on which the beneficiary attains majority or ceases to be disabled, and may pass, so that the potential action for breach of trust becomes time barred, without the beneficiary bcoming aware of the breach. 25 This is defined in the 2007 Law as including conciliation, mediation, early neutral evaluation, adjudication, expert determination and arbitration. 26 The law which governs the question. 27 Dealt with above under the heading ‘Provisions for indemnity chains’. 28 Novation is a process whereby it is agreed between the original parties to a contract and a third party that the third party will assume the obligations of one of the original parties to the contract and that original party will be released from its obligations. 29 Albeit not one which, in the authors view, was likely to be successful before a Court. © The Author (2008). Published by Oxford University Press. All rights reserved.

Ashton, Raymond

doi: 10.1093/tandt/ttn091pmid: N/A

Abstract This short article analysis the disclosure requirements of trustees under Guernsey Law. In the first part of the article the jurisprudential issues are identified and this is followed in the second part by an analysis of the statute law prior to the coming into effect of the new provisions in March 2008. The third section examines the new provisions in some detail and in particular the extent to which they extend or otherwise the previous provisions and those of the common law. The fourth section examines the issue of the retention of trust records and the revised limitation periods. The article concludes by arguing that they only modestly extend the previous provisions and that there is still considerable uncertainty about the scope of the provisions given the judgement in Schmidt v Rosewood Trust [2003] 2 AC 709 and the increasing role played by the judges using the inherent jurisdiction of the Court. Introduction One of the most difficult areas in trust law is the provision of information to beneficiaries. Most jurisdictions, including Guernsey, have found it necessary to define in broad terms the disclosure obligations of trustees in statute law rather than leave the matter to the common law. The intent of these statutory provisions is to place restrictions on what would otherwise be the common law rights to information in order to reduce the ability of beneficiaries to ‘attack’ decisions taken by trustees. In the offshore world (although, strictly not confined to this domain) there is often a tension between what might be called the proprietorial information rights of the beneficiaries and the duty of confidentiality owed to the settlor and possibly others. This tension is often exacerbated by statutory provisions which are not altogether consistent as regards disclosure of information. In addition there is often a ‘gateway’ in the trust deed that excludes the statutory provisions in which case a beneficiary has to have resort to a mixture of common law provisions and statute. It is against this difficult background that this article is written. As a result the article is confined to the recent changes in the trust law but will not cover the difficult area of disclosure in divorce proceedings as this is a specialist matter covered in other papers. As accounts etc. are an important aspect of information disclosure reference will be made to them in the context of limitation periods which have been clarified in the new law. The information which a beneficiary may request of a trustee will often be contained in what might be called trust documents. Examples of documents a beneficiary might be interested (though this list should not be regarded as exhaustive) in are set out below: The importance of any one of these to a beneficiary will be a function of the wrong he seeks to address but obviously the trust accounts are always going to be important. the trust deed, deeds of appointment and removal of trustees, deeds exercising the dispositive powers of the trustees; trust accounts and reports (such as actuarial reports and valuation reports) relating to the trust property; contracts and leases relating to the use and enjoyment of trust property; the agenda and minutes of meetings of the trustees; correspondence between the trustees and beneficiaries of the trust or between trustees and other power holders (such as a protector); legal or other professional advice relating to the trust, including the instructions pursuant to which that advice was obtained. The position in Guernsey prior to 17 March 2008 This was mainly governed by the provisions of Sections 21, 22 and 33 of The Trust (Guernsey) Law 1989 (as amended). The provisions are set out below. Duty to keep accounts 21. A trustee shall keep accurate accounts and records of his trusteeship. Duty to give information 22. (1) Subject to the terms of the trust, a trustee shall, at all reasonable times, at the written request of any beneficiary (including any charity named in the trust) or of the settlor, provide full and accurate information as to the sate and amount of the trust property. (2) In its application to a trust arising from a document or disposition executed or taking effect before the commencement of this Law, subsection (1) shall only operate for the benefit of a beneficiary whose interest in the trust property becomes vested before the commencement of this Law, but this subsection shall not prejudice any rights that the beneficiary may have under the terms of the trust. Non-disclosure of deliberations 33. A trustee is not (subject to the terms of the trust and to any order of the court) obliged to disclose documents which reveal: his deliberations as to how he should exercise his functions as trustee; the reasons for any decision made in the exercise of those functions; any material upon which such a decision was or might have been based. Most trust deeds sought to take advantage of Section 22 by excluding the obligations set out in that section in the trust deed. A typical example is set out below: … … … and all or any of the liabilities or obligations imposed on the trustees by all or any of such provisions or order or by Section 22(1) …… are hereby negatived and excluded and shall have no application to the Trustees or hereto. ‘Information’ includes documents for this purpose, Stuart-Hutcheson v Spread Trustee Co Ltd (2002) 5 ITELR 140 at [35]. Whilst Section 22(1) states that these rights are subject to the terms of the trust, it has been held that a purported exclusion of such rights in the trust instrument does not remove the court's inherent jurisdiction to order disclosure in an appropriate case, see Bathurst v Kleinwort Benson (Channel Islands) Trustees Ltd, 9/8/2004 and 14/9/2004, Royal Court of Guernsey, at [115]. The term ‘beneficiaries’ is defined in Section 73(1) to include persons in whose favour a power to distribute trust property may be exercised, which appears to be sufficiently wide to include objects of fiduciary mere powers. Beneficiaries’ common law rights to trust information other than information as to the state and amount of the trust property (such as the trust deed itself) survive the enactment of the 1989 Law, as the law was not intended to codify the whole law on disclosure of information, Stuart-Hutcheson v Spread Trustee Co Ltd (2002) 5 ITELR 140 at [32]. Similarly, the court retains an inherent jurisdiction to order disclosure in favour of former beneficiaries, see the difficult case of Bathurst v Kleinwort Benson (Channel Islands) Trustees Ltd, 9/8/2004 and 14/9/2004, Royal Court of Guernsey, at [115]. In relation to pre-1989 trusts, Section 22(2) provided that: In its application to a trust arising from a document or disposition executed or taking effect before the commencement of this Law, subsection (1) shall only operate for the benefit of a beneficiary whose interest in the trust property becomes vested before the commencement of this Law, but this subsection shall not prejudice any rights that the beneficiary may have under the terms of the trust. It has been held in two cases relating to this section that the information rights are preserved for both discretionary beneficiaries, and former beneficiaries, see Bathurst v Kleinwort Benson (Channel Islands) Trustees Ltd, 9/8/2004 and 14/9/2004, Royal Court of Guernsey, at [115] and Stuart-Hutchenson v Spread Trustee Co Ltd (2002) 5 ITELR 140. It is suggested that the same is the case for objects of mere fiduciary powers. Finally, Section 33 provided that a trustee was not (subject to the terms of the trust and to any order of the court) obliged to disclose documents which revealed either his deliberations as to how he should exercise his functions as trustee, the reasons for an decision made in exercise of those functions, or any material upon which such a decision was or might have been based. However, it has been held that the section can catch letters of wishes, with the consequence that a more liberal approach appears to apply to the disclosure of such documents than under English and Jersey law, see Bathurst v Kleinwort Benson (Channel Islands) Trustees Ltd, 9/8/2004 and 14/9/2004, Royal Court of Guernsey, at [115]. The trusts (Guernsey) law 2007 In the new legislation, Section 21 is retained but is now Section 25. Section 22 is now recast (as Section 26) by enabling various interested parties to make an application to the Court for information to be supplied by trustees whilst Section 33, now Section 38 specifically redresses (at least on the surface) the finding in Bathurst v Kleinwort Benson (Channel Islands) Trustees Ltd, 9/8/2004 and 14/9/2004, Royal Court of Guernsey, at [115] to the effect that a letter of wishes could, under certain circumstances, be required to be disclosed. Duty to give information Section 26 The draftsman has recognized that there are sometimes good reasons for beneficiaries to be denied information, for example, children and grandchildren in a family discretionary trust for whom knowledge of the existence or quantum of the trust could be damaging in terms of ambition, work ethic, etc. or co-workers in an employee benefit trust who would expect privacy to be preserved in relation to their own benefits or interest under the trust. 26 1. A trustee shall, at all reasonable times, at the written request of– provide full and accurate information as to the state and amount of the trust property. any enforcer, or subject to the terms of the trust – any beneficiary (including any charity named in the trust), the settlor, or any trust official 2. Where the terms of the trust prohibit or restrict the provision of any information described in subsection (1), a trustee, beneficiary, trust official or settlor may apply to the Royal Court for an order authorising or requiring the provision of the information. 3. The person applying to the Royal Court for an order under subsection (2) must show that the provision of the information is necessary or expedient – for the proper disposal of any matter before the court, for the protection of the interests of any beneficiary, or for the proper administration or enforcement of the trust. 4. In its application to a trust arising from a document or disposition executed or taking effect before the 18th April 1989, subsection (1) only operates for the benefit of a beneficiary whose interest in the trust property becomes vested before that date, but this subsection does not prejudice any rights that the beneficiary may have under the terms of the trust. It will remain the case that one cannot have a trust where the trustees are not accountable to any of the beneficiaries for without accountability there can be no trust and this should be carefully borne in mind when drafting a trust deed. There is a presumption in the first clause that trustees will supply beneficiaries with the relevant information and it will only be exceptionally that this will not be supplied. Where information is denied the onus will, however, be on the person making the application to show that the disclosure is necessary. The extent to which disclosure will be ordered will in turn be a function of the facts. The real issue will be how difficult a beneficiary (or other interested party) will find it to satisfy a court regarding disclosure. In other words the height of ‘hurdle’ he or she will have to satisfy. Enforcers of Purpose Trusts are also included in this section as having rights to information. It will not be appropriate to seek to limit their rights in the trust instrument. The right of the settlor's to receive information, even when they are not beneficiaries, is retained. This is clearly not only intended to enable the settlor to monitor the trust but also to promote and facilitate the growth of the industry on the Island. It would be difficult to conceive of a jurisprudential situation where it would not be appropriate to supply information to the settlor. Non-disclosure of deliberations and letters of wishes Section 38 38.—(1) A trustee is not, subject to the terms of the trust and to any order of the Royal Court, obliged to disclose: documents which reveal— his deliberations as to how he should exercise his functions as trustee, the reasons for any decision made in the exercise of those functions, any material upon which such a decision was or might has been based, any letter of wishes. (2) A ‘letter or wishes’ is a letter or other document intimating how the settlor or beneficiary wishes the trustees to exercise any of their functions. (3) The person applying to the Royal Court for an order under this section for the disclosure of any document must show that the disclosure is necessary or expedient— for the proper disposal of any matter before the court, for the protection of he interests of any beneficiary, or for the proper administration or enforcement of the trust. It was thought that as a result letters of wishes would not ordinarily, be discloseable. However, in Countess Bathurst v Kleinwort Benson & Others Royal Court of Guernsey No 780 2004, the Court allowed the letter of wishes to be disclosed, a finding supported extra judicially by the Honourable Justice Lightman, see ‘The Trustee's Duty to Provide Information to Beneficiaries’ [2004] PCB at [33]. The justification being that in an appropriate case it would enable the beneficiaries to properly monitor the administration of the Trust. Whilst it may have been considered it does not on its face demonstrate that it was or may have been considered it may nevertheless be useful as a guide to what the trustees took into account in making their decision. The Trust Law Working Party clearly decided that this was not what the 1989 draftsman (or indeed most settlors) intended. The new law revises this section to make it plain that letters of wishes or documents which reveal the intentions of the settlor or of any beneficiary of the trust are preserved from disclosure subject to the terms of the trust or of any order of the Court with the burden of proof in any application to the Court being on the person seeking disclosure. It seems to this writer that in the appropriate circumstances, a beneficiary might be able to persuade a Court to order disclosure of a letter of wishes. In such a case we would be back to the Bathurst decision! Duty to keep accounts Section 25 The terms of this section remain unchanged. A trustee shall keep accurate accounts and records of his trusteeship. Under Section 71 of the 1989 Law, the period in which a beneficiary could bring an action for a breach of trust was: three years from delivery of the final accounts of the trust to the beneficiary; or three years from the date on which the beneficiary first has knowledge of the breach of trust, whichever period first begins to run. A trustee must keep ‘accounts’ and the 1989 Trusts Law assumed that the receipt of them by a beneficiary is something which was to be anticipated and not something to which a beneficiary has a right. Regrettably, the Law did not specify either the time nor the period for which they must be preserved. Representations were made to the Trust Law Reform Working Party that Section 71 of the 1989 law was unsatisfactory. The problem was that save in the exceptional cases of fraud no action could be brought against a trustee more than 3 years after the delivery of the ‘final accounts’ or 3 years from the date of knowledge of the breach whichever was the earlier save that time did not start to run until a beneficiary under a disability or being minor ceased to be disabled or minor. There was also a degree of uncertainty as to what was meant by ‘final accounts’. Did this mean the last accounts produced at the termination of the trust? There were also concerns that the 1989 law imposed an unfair burden on trustees where a trust may have had a wide class of beneficiaries, some of whom may not even have been born at the time of the breach of trust. For instance, it was conceivable (and possibly likely) that there were adult beneficiaries who were parents of minor beneficiaries who might have been fully aware of a breach of trust but who may have chosen to delay seeking redress until the minor came of age, long after the 3 year limitation period would have otherwise expired. In theory if a trust could have lasted for 100 years and a breach was committed on day 1, a minor beneficiary who was born the day before the trust period ended could have brought the trustee to account for the breach 121 years after its commission. The limitation periods have been revised to take this into account. Limitation and prescription The revised Section 71 now provides as follows: 76 (1) No period of limitation or prescription applies to an action brought against a trustee: in respect of any fraud to which the trustee was a party or was privy, or to recover from the trustee trust property or the proceeds thereof: held by or vested in him or otherwise in his possession or under his control, or previously received by him and converted to his use. 2. Subject to subsections (1) and (3), the period within which an action founded on breach of trust may be brought against a trustee is: 3 years from the date on which the claimant first has knowledge of the breach, or where the claimant was at the time of the breach of trust a minor or a person under legal disability 3 years from the date on which his guardian first has knowledge of the breach, or 3 years from the date on which the claimant ceased to be a minor or a person under legal disability, whichever first occurs. 3. Subject to subsection (1), no action founded on breach of trust may be brought against a trustee after the expiration of 18 years immediately following the date of the breach. The effect of these changes is that the date on which accounts are actually delivered is no longer relevant. The only question is when the beneficiary (or his guardians in law) has the requisite knowledge. Where the guardians of a minor beneficiary have knowledge but do not call the trustees to account then the action of the beneficiary may well have become time barred but the beneficiaries may have an action against the guardian themselves. The new position is that no action will now be founded on a breach of a trust that is more than 18 years old regardless of whether the beneficiaries had actual knowledge of the breach or not. However, this is not the end of the story as regulatory matters have to be taken into account. The relevant in paragraph 5 of the Code of Practice for Trust Service Providers states that ‘Trust Service Providers’ (‘TSPs’) must: keep and preserve (so far as appropriate for the TSP's functions and for at least the periods required by any applicable law) appropriate records of trust business including accounts, tax records and minutes of meetings. The relevant guidance note is cast in terms of this being dependent on: … … … the nature and scale of its business. The Commission will in each case consider the TSP's resources and systems as a whole but, for example, it may wish to see evidence of the following in addition to the specific points set out in this principle … … up to date records of all trusts which the TSP administers or of which it is a trustee, including details of trust property and of the TSP's arrangements for preserving it and keeping it separate from the property of other trusts and of the TSP itself … This suggests that, were there, is a likelihood that minor beneficiaries may be born sometime into the trust period it would be wise to retain and preserve all the records of the trust until such time as the limitation period has elapsed. In the context of a right to disclosure of information, the term ‘accounts of the trust’ in West v Lazard Brothers and Co (Jersey) Ltd [1987–1988] to include: … all accounts, vouchers, coupons, documents and correspondence relating to the administration of the trust property or otherwise to the execution of the trust, including a full inventory of the trust assets and all dealings relating to any real property … It follows that whilst the law has clarified the limitation period and made it more certain, there is still some uncertainty as to the period trust accounts etc. should be retained. This is something that needs to be addressed as soon as possible. Conclusion This brief article has analysed the changes to the Guernsey Trust Law as they relate to disclosure of information. The main effect of the changes is to apparently make it easier for trustees to refuse to make disclosure of information to beneficiaries. The law has put the onus on beneficiaries who seek information to justify their requests. The law has also clarified the position as regards limitation periods for beneficiaries to take actions against trustees. By doing so, it has raised awareness of issues such as the documentation retention policies of TSPs. The law, on the surface, has also reversed the decision in Bathurst v Kleinwort Benson (Channel Islands) Trustees Ltd, 9/8/2004 and 14/9/2004, Royal Court of Guernsey, at [115]. However, it remains to be seen the extent to which the statute will be modified in practice by the common law jurisprudence and in particular by cases such as Schmidt v Rosewood Trust Company Limited [2003] 2 AC 279. It is submitted that whilst the terms of the statute are clear the full implications of that case have yet to be fully worked out. As a consequence whilst the law might appear now more certain this may be far from the case as the courts will have to grapple with the competing obligations of money laundering, confidentiality and the beneficiaries concept of proprietorial rights to information. Given, the tension between these three concepts there is the prospect of considerable litigation in the future. Finally, the Court can always use its inherent jurisdiction to impose its own solution in any particular situation. Given, the propensity of modern courts to be pro-active this factor should not be under estimated, although this is not without its limits, given human rights legislation etc. Whilst this gives the law considerable flexibility it brings with it a degree of uncertainty which makes it very difficult for advisers to have any degree of certainty in the advice they give. © The Author (2008). Published by Oxford University Press. All rights reserved.

Buckle, Paul

doi: 10.1093/tandt/ttn105pmid: N/A

Abstract There are considerable advantages to settling trust disputes by alternative dispute resolution (ADR), although in practice, the extreme position often taken by the parties, and the difficulties in binding all those interested give rise to problems. The new rules in the Trusts (Guernsey) Law, 2007 (as amended) dealing with compromise and ADR, are designed to enable binding settlements to be achieved by arbitration or mediation in breach of trust cases. This article looks at the question of trusts and ADR generally, and goes on to consider how successful those clauses are in resolving the difficulties which arise in practice. Introduction It has always been recognized that there is much to be said for settling trust disputes by alternative dispute resolution (ADR), be that by reference to an arbitrator or ombudsman, or by mediation, or howsoever. There are clear advantages to ADR, such as time and cost savings, finality, confidentiality and general flexibility, which apply no less to trust matters than to any other type of dispute. Moreover, trust disputes are often intensely personal. Hence the kind of opportunity ADR often presents, for the parties to give vent to their true feelings in a more private forum, would seem to make it particularly suitable for resolution of trust cases out of court. But that personal element works both for and against such settlements, because, as one judge said in a case concerning a family dispute over exhumation rights, As for ADR, on the basis of what I had then read, and also on the basis of what I have now seen, I see little scope for it in a case like this where the members of the family hold such opposing views.1 The same is often the case where a family trust is involved. There is also another rather fundamental reason why trust disputes may not always settle by ADR, which has to do with their multipartite nature, and the fact that there may be many different beneficiaries (or other parties) with different interests, each of whom need separate representation. Some such persons may as yet be unborn, or unascertained, or even if in existence, may be minors or otherwise legally incapacitated. The essence of settlement is unanimity, and that may be unachievable, whether an adult will not consent, or else there is a minor or unascertained beneficiary which cannot consent, even through a guardian or parent. Hence, as was recently said, … there appear to be insuperable difficulties in the case of disputes between the beneficiaries or between the beneficiaries and the trustees (e.g. as to the proper construction of a clause or as to an alleged breach of trust, often requiring resolution of points of law as well as resolution of facts). Normally, there are beneficiaries who are minors or as yet unborn or unascertained. In such a case the court has to appoint a person to represent the interests of such beneficiaries, and, even then, any compromise of the litigation has to be approved by the court, so involving much time and cost in ensuring that the court can make a fully informed decision. Even where all the beneficiaries are ascertained and of full capacity there can often be a difficult beneficiary who refuses to permit the matter to be resolved (except in his favour) other than by a court.2 This article looks at the issue of trusts and ADR generally, and considers whether the sections dealing with ADR in the new legislation in Guernsey, the Trusts (Guernsey) Law, 20073 (‘TGL 2007’), go any way to resolving the issues identified above. I consider that point later on, but as ADR is all about settling disputes, the first stage is to look at how a trustee may be expected to settle (or participate in the settlement of) a trust dispute, and then to see what exactly constitutes a ‘trust dispute’ for these purposes. How might a trustee be expected to settle a dispute? As a matter of public policy, courts support the idea of compromise.4 That means that trustees, and indeed beneficiaries, are encouraged to settle their differences where they can. For trustees, settlement usually will involve exercising an express (or statutory) power to compromise5 either on its own,6 or in conjunction with some other power,7 to effect the settlement, and where there are minor or unascertained interests, by then applying to court to have the decision blessed, often under the familiar Public Trustee v Cooper8 jurisdiction. Such applications are most frequent where the trustee is party to the proceedings but, in some cases, even where not a party, the trustee still may be expected to help to resolve it, by the provision of information as a non-party, or by otherwise assisting the court. Although as a general rule, trustees should avoid becoming involved in third party litigation,9 the provision of information by a trustee to enable a court to determine a dispute, can be in the interests of any beneficiary who is party to that dispute.10 The reason is that it is thought desirable for any court to have the fullest accurate picture of the matter it has to determine, so absent a good reason for the trustee not to disclose, and provided the local court grants it leave to do so,11 disclosure often helps. The same should apply where settlement is contemplated. More exceptionally, joining as a party to the third party proceedings, or making a payment to a beneficiary or even non-beneficiary,12 can be a proper exercise of a trustee's powers to effect a compromise, where ultimately it is in the interests of the trust to do so. Types of trust dispute It is important to recognize that trust disputes can take a variety of different forms. We are all very familiar with Lightman J's tripartite classification in Alsop Wilkinson v Neary13 into ‘trust disputes’, ‘third party disputes’ and ‘beneficiary disputes’, and I propose to retain that for the purposes of this article. In the case Lightman J defined trust disputes as being disputes … as to the trusts on which [trustees] hold the subject matter of the settlement.14 These could further be sub-divided into ‘friendly trust disputes’ … involving e.g. the true construction of the trust instrument or some other question arising in the course of the administration of the trust,15 and ‘hostile trust disputes’ of which an example was a challenge in whole or in part to the validity of the settlement by the settlor on grounds of undue influence or by a trustee in bankruptcy or a defrauded creditor of the settlor.16 Typical examples of ‘friendly trust disputes’ are construction summonses or applications for directions, although even these might become ‘hostile’ if they are opposed by one of more of the beneficiaries. ‘Hostile trust disputes’ are largely allegations of invalidity, creditor challenges, sham cases and so on.17 ‘Third party disputes’ were categorized by Lightman J as disputes with persons other than beneficiaries, in respect of rights and liabilities, for instance claims in contract and/or tort,18 whilst ‘beneficiary disputes’ were simple breach of trust claims.19 As all these types of dispute are capable of arising, they are all capable of settlement and hence relevant to what follows. Section 31(2) of TGL 2007 Turning to TGL 2007, the first point to note is that there is now a statutory power to compromise or settle under section 31(2) which says A trustee may without the sanction of the Royal Court compromise or settle any action or claim brought by or against the trustee or in any way relating to the trust or the trust property. Previously, under TGL 1989, there was no such power and it was thought this gave rise to a lacuna, as all TGL 1989 said was that a trustee ‘… may sue and be sued as trustee’,20 a provision now found in section 31(1) of TGL 2007. Section 31(2) underwent some revision during the drafting stages, but in its final form bears some, if a little, resemblance to section 15(f) of the UK Trustee Act 1925, and might therefore be interpreted similarly. If that was the case, claims by third parties attacking the trust,21 or by third parties contracting with the trustees,22 should fall within it, as will directions applications23 and claims for breach of trust. What is much less clear is whether section 31(2) will receive an interpretation consistent with that placed on section 15(f) in In Re Earl of Stafford Dec’d24 where it was said at first instance that … section 15 is concerned with what may be called external disputes … not internal disputes, where one beneficiary under the trusts is at issue with another beneficiary under the trusts.25 On one view the section appears no more than a vires provision giving a trustee a statutory power of compromise, where perhaps the trust deed confers none, and which can be exercised without reference to the court, whilst still retaining the right of the trustee to approach the court in an appropriate case.26 But being much wider than section 15(f) in its scope,27 and speaking as it does of claims ‘… in any way relating to the trust or the trust property’,28 on another view it may be that even claims as to the precise trusts on which the trust property is held, or between competing beneficial interests, will fall within section 31(2). If that is the case, then it may be that the section will (like section 15(f)) allow the court to approve a compromise by deciding ‘what the trustees ought to do having regard to the interests of everybody concerned,’29 even if that involves going against the wishes of dissenting beneficiaries. But there ought to be some bright line drawn between section 31(2) and the power of the court to approve variations to the terms of a trust under section 57 of TGL 2007,30 or compromises of genuine disputes concerning beneficial interests under the Chapman v Chapman31 inherent jurisdiction. To put it another way, if as seems likely, section 31(2) is no more than a ‘vires provision,’ it would be surprising if it went so far as to confer on the court a jurisdiction, wider than under section 15(f), to approve compromises involving actual variations of beneficial interests. Sections 62 and 63 of TGL 2007—introduction I said above that one of the main difficulties in achieving any kind of resolution of trust cases by ADR lies in binding all the interested parties. In fact, that problem goes wider than ADR, but applies equally to any form of judicial process, including a court judgment. With this in mind, there are the two new sections 62 and 63 which have been introduced into TGL 2007, and which are intended to bind beneficiaries where a dispute resolution mechanism of one sort or another has resulted in a settlement. It is important to note that (like section 31(2)) sections 62 and 63 fall within the Part of TGL 2007 (Part II) which applies only to Guernsey law trusts,32 which means that whilst the court has jurisdiction to hear matters involving foreign law trusts,33 the ADR provisions do not apply to any compromise of those matters. The other major point is that both provisions are limited to claims for (or rather ‘founded on’) breach of trust, so most of the types of trust dispute described by Lightman in Alsop Wilkinson will not be caught. I return to this point later on in relation specifically to section 63. Judgments and findings to be binding on beneficiaries in breach of trust cases Section 62 deals with findings or judgments of the court in breach of trust cases. In an earlier draft of TGL 2007, the section appeared as follows: and in the final version, the only change to that was that ‘Notice’ in subsection 2(b) was said to mean 14 days notice or such other period as the court may direct. 62. (1) Any order, judgment or finding of law or fact of the Royal Court in an action against a trustee founded on breach of trust is binding on all beneficiaries of the trust, whether or not yet ascertained or in existence, and whether or not minors or persons under legal disability. (2) Subsection (1) applies in respect of a beneficiary only if –  he was represented in the proceedings (whether personally, or by his guardian, or as the member of a class, or otherwise), or  if not so represented, he had notice of the proceedings and a reasonable opportunity of being heard. (3) This section is without prejudice to the powers of the Royal Court in respect of representative proceedings and class actions, The intended effect of section 62 is that if proceedings are commenced for breach of trust by some of the beneficial class, any findings of fact or law, and any interim or final judgment or order will bind all of the beneficiaries including minors, unborns and so on, but only so long as they either were represented or had notice of the proceedings and could have been but were not represented. The intention is that this would prevent the beneficiaries as a class having more than one ‘bite of the cherry’. It is important to remember that ‘beneficiary’ is defined in TGL 2007 as being a person entitled to benefit under a trust or in whose favour a power to distribute trust property may be exercised,34 which is very wide, and includes not only fixed interest beneficiaries and the objects of discretionary trusts, but also the objects of mere powers of appointment. What it does not include, however, is the objects of a power to add beneficiaries,35 so any person who can successfully establish he was wrongfully excluded,36 could later bring an action for breach of trust even if the other beneficiaries had already done so and had the matter resolved. The powers of the Royal Court referred to in subsection (3) are those contained in Rules 33 and 34 of the Royal Court Civil Rules 2007 (‘the 2007 Rules’), which allow, respectively, for representative proceedings, and for the representation of unascertained interested parties. There are other points to do with section 62 which may require some clarification. First, to fall within it, an action against a trustee must be founded on breach of trust. ‘Breach of trust” means “a breach of any duty imposed on a trustee by [TGL 2007] or by the terms of the trust’,37 and may therefore exclude any claims for equitable compensation arising from breach of a duty of care owed by the trustee to the beneficiaries.38 That said, we know from Spread39 that the expression ‘terms of the trust’ includes any rights or duties arising under Guernsey customary law,40 so if a trustee does owe a distinct duty of care, outside of TGL 2007,41 a breach of that duty may still be a ‘breach of trust’ for the purposes of section 62. Also worth noting is the exclusion from section 62 of claims for breach of fiduciary duty against protectors, as one would have thought that those persons no less than trustees needed some protection against repeat claims. Finally, the extent of the application (if any) of section 62 to restitutionary claims founded on receipt rather than fault or breach,42 or on assistance in the commission of breaches of express or implied trusts, remains to be seen. Settlement of action against trustee by ADR to be binding on beneficiaries In marked contrast to section 62, the changes made to section 63 between the earlier and final versions of TGL 2007, are considerable. The initial draft read as follows: 63.(1) Where the terms of a trust direct or authorise, or the Court so orders, that any dispute between the trustees and a beneficiary or otherwise relating to the trust or the trust property may be referred to mediation or arbitration, such a dispute arises and, in accordance with the terms of the trust or the Court's order, is referred to mediation or arbitration, and the mediation or arbitration results in a settlement of the dispute which is recorded in a document signed by or on behalf of all parties, the settlement is binding on all beneficiaries of the trust, whether or not yet ascertained or in existence, and whether or not minors or persons under legal disability. (2) Subsection (1) applies in respect of a beneficiary only if - he was represented in the mediation or arbitration (whether personally, or by his guardian, or as the member of a class, or otherwise), or if not so represented, he had notice of the mediation or arbitration and a reasonable opportunity of being heard, and only if, in the case of a beneficiary who is not yet ascertained or in existence, or who is a minor or person under legal disability, the mediator or arbitrator certifies that he was independently represented. (3)For the avoidance of doubt, the mediation or arbitration need not be conducted in Guernsey or in accordance with the procedural law of Guernsey. The final version read thus: 63.(1)Where the terms of a trust direct or authorise, or the Court so orders, that any claim against a trustee founded on breach of trust may be referred to alternative dispute resolution (‘ADR’), such a claim arises and, in accordance with the terms of the trust or the Court's order, is referred to ADR, and the ADR results in a settlement of the claim which is recorded in a document signed by or on behalf of all parties, the settlement is binding on all beneficiaries of the trust, whether or not yet ascertained or in existence, and whether or not minors or persons under legal disability. (2) Subsection (1) applies in respect of a beneficiary only if - (a) he was represented in the ADR proceedings (whether personally, or by his guardian, or as the member of a class, or otherwise), or if not so represented, he had notice of the ADR proceedings and a reasonable opportunity of being heard, and only if, in the case of a beneficiary who is not yet ascertained or in existence, or who is a minor or person under legal disability, the person conducting the ADR proceedings certifies that he was independently represented by a person appointed for the purpose by a court of law. ‘Notice’ in paragraph (b) means 14 days' notice or such other period as the person conducting the ADR proceedings may direct. (3) A person who represents a beneficiary in the ADR proceedings for the purposes of subsection (2)(a) is under a duty of care to the beneficiary. (4) For the avoidance of doubt, the ADR proceedings need not be conducted in Guernsey or in accordance with the procedural law of Guernsey. (5) In this section—‘ADR’ includes conciliation, mediation, early neutral evaluation, adjudication, expert determination and arbitration, and ‘proceedings’ includes oral and written proceedings. Before looking at section 63 in more detail, it is worth considering the general position regarding trusts and ADR outside of the Channel Islands. The definition of ‘ADR’ in subsection (5) of section 63 is helpful, as it recognizes the current view that there are many types of ADR43 so-called, besides mediation and arbitration, and which act as alternatives to the court as a dispute resolution forum. When looking at how these various processes can be applied to trusts it is important to distinguish between arbitration which has a statutory basis, and other forms of ADR, which normally do not. Trusts and arbitration clauses There seems a degree of consensus now that arbitration clauses contained in agreements do not oust the court's jurisdiction, so that they become void as repugnant,44 but in fact preserve it, albeit in a supervisory form.45 The exception would be where a clause in an agreement sought to exclude a specific statutory jurisdiction,46 and in that case the court would in all likelihood strike it down. Some argue that all this applies to trusts as well as contracts.47 But what is more problematic is the question whether a trust instrument (and especially a declaration of trust) ever can constitute an ‘agreement’ for the purposes of arbitration legislation, which binds the beneficiaries as ‘parties’. It is thought that assistance may be found in the wording under the English Arbitration Act 1996 which says that any person claiming under or through48 a party to the agreement is in effect bound. That is taken to mean that any beneficiary (even an unborn or unascertained one) who derives his entire interest in the trust from the settlor,49 and whose rights and obligations under the trust are hence determined by the trust deed, is deemed to acquiesce to the arbitration provision. But my impression is that this is not a universally held view, and it is one which to my knowledge, has never been tested in the courts. There remains, however, the problem of representation for any minors or unborns etc. It is all very well them being bound, but under CPR 21.10 for instance, any settlement will need to be approved by the court to bind such persons, and that will involve appointing a person to represent their interests. There is doubt whether a so-called ‘virtual representation’ clause,50 by which minors and unborns are taken to agree to a term of the trust enabling a representative to be appointed on their behalf, will stand scrutiny, and it is this which has led to some to call for specific legislation to deal with the point.51 Presumably, section 63 of TGL 2007, so far as it applies to arbitration, is aimed at addressing these concerns. Guernsey law has no rule quite as strict as CPR 21.10, because both at customary law,52 and under the 2007 Rules,53 minors are represented by a tuteur, and incapacitated persons by a curateur, both of whom have a power to compromise. However, in practice, to achieve certainty, all settlements involving such persons are approved by the court. Where unborn or unascertained beneficiaries are parties to proceedings, the practice is for the court to order representation for those persons,54 and again, whilst there is nothing to prevent the representors from compromising the proceedings without reference back to the court, the parties will usually insist on this for certainty's sake. Trusts and ADR clauses The position with regard to ADR rather than arbitration, is likely to be similar, as whilst there is conflicting authority in Australia55 whether a contractual ADR provision is binding or not, the point was decided in England in Cable & Wireless plc v IBM United Kingdom Limited56 firmly in favour of upholding such a clause. The issue has not been decided in Guernsey, but even assuming the clause would be upheld, the same issues will arise with regard to the need for approval by the court of settlements in favour of minors etc, as was discussed in the paragraph above to do with arbitration. Section 63 Returning to section 63, it is clear from the words in subsections 1(a) … the terms of a trust direct or authorise, or the court so orders … and (b), that the section will only apply to a claim founded on breach of trust if the power or provision in the trust deed is used, or the court, as it will now often do,57 orders ADR. Presumably, if there is a power in a trust authorizing or directing ADR, which is not used, that is a case where one would ordinarily expect the court to make such an order. There must also be a settlement of the claim recorded in a document signed by all the parties. As will be seen from a comparison of the earlier and final versions of section 63 in paragraphs 12 and 13 above, aside of defining ‘ADR’, the other major changes were the introduction of a statutory duty of care owed by the independent representor, and the removal of the words … any dispute between the trustees and a beneficiary or otherwise relating to the trust or the trust property, in favour of the much narrower any claim against a trustee founded on breach of trust. he latter change may appear surprising, but was prompted, I gather, by a view that even under a statutory provision, third parties could not be bound. What is curious, however, is that there is a distinct provision under the 2007 Rules, rule 35, which says that an action may be brought by or against trustees without adding the beneficiaries as parties, and so that Any judgment or order given or made in the action is binding on the beneficiaries unless the Court orders otherwise in the same or other proceedings, Rule 35 clearly is intended to enable trustees to sue and be sued qua trustee without adding the beneficiaries as necessary parties (it is headed ‘Representation of beneficiaries by trustees, etc’). But its significance for present purposes must be that, not being limited to claims founded on breach of trust, as are sections 62 and 63, it will extend to third party and hostile trust disputes. That means unless added as a party, it is conceivable a beneficiary could become bound by an order, for instance setting aside a trust, in a claim brought by a third party against the trustee. Equally it could become bound by a compromise by a trustee of a third party dispute, such as a claim in contract or tort. In practice it seems inconceivable that a beneficiary would not become party, either individually, or through a representative or as a class member, but there is at least a theoretical risk of binding judgments or orders under rule 35 (where they would not be permitted under section 6258). Section 63 has taken steps to cover the problems caused by ‘virtual representation’, by ensuring that minors, those otherwise legally disabled, or unborn or unascertained must be independently represented (whether individually, or as a member of a class, or otherwise) in the ADR proceedings by someone appointed for the purpose by a court, who is under a duty of care to the representee. Others can appear personally. That any such person was so represented must be certified by the person conducting the ADR. So the role of the court can never be ousted altogether, save where the parties are all adults. Presumably, it was felt by those drafting TGL 2007 that it would be going too far to have a situation where a provision in the trust deed appointing representors for incapacitated or non-existent beneficiaries would be upheld without the court retaining some supervisory jurisdiction. What is more surprising is that contrary to the views of those in the UK wanting clarificatory legislation,59 there is no protection from liability afforded to those representing the minors etc (in fact quite the reverse—the law imposes a potential liability on them), and no provision for their costs. The imposition of the duty of care may make non-professional persona less inclined to act as representatives but professionals will want payment and the issue will be whether the ordinary rule of costs follow the event will apply, or whether it may be possible to structure a settlement in such a way that the fund pays any such costs. Conclusion There might be some nice legal points to be decided in relation to both sections 62 and 63—whether for instance, a foreign court hearing a claim for breach against a trustee of a Guernsey law trust, would be bound to apply them, given they are rules of Guernsey law, and what exactly falls within ‘ADR’, as the definition is said only to include the processes stated. That may be so, but in general, the provisions are a welcome addition, giving certainty to cases, where previously the practice was all too often to seek approval of settlements on the back of unwieldy indemnities or releases. The cynics might say the limitation of the sections to breach of trust claims demonstrates the limitations in the applicability of ADR to trust disputes generally. They might also argue that because the greater proportion of trust disputes are not straightforward claims for breach, the new provisions are unlikely to have much effect, as trust and third party dispute cases settled out of court, even by ADR, may still need court sanction. But some legislation is surely better than none, and the proof will be whether there is a discernible reduction in the number of cases where mediated or arbitrated settlements are referred back to court. 1 per George QC, in In Re West Norwood Cemetery [2005] 1 WLR 2176, para [7]. 2 Professor David Hayton, ‘Major trends in the trust world: Part 2’, PCB 2007, 2, 122–130 at p. 125; 3 Which came into effect on 14 March 2008 repeating the Trusts (Guernsey) Law, 1989 (as amended) (‘TGL 1989’) from that date. TGL 1989 had no provisions dealing with ADR; 4 See e.g. Woolwich B.S. v IRC (No 2) [1993] AC 70, 165 ff. 5 Such express powers are construed widely (In re Ezekiel's Settlement Trusts [1942] Ch 230, 234 and Re Earl of Stafford [1978] 3 All ER 18) and note new s 31(2) of TGL 2007 giving an express power to compromise (TGL 1989 gave only the power to sue and be sued as trustee, now s 31(1) of TGL 2007, which was seen to create a possible lacuna). 6 See e.g. Re the Thyssen-Bornemisza Continuity Trust (2003) 5 ITELR 340 where the claimants sought to set aside the trust. The trustees sought approval of a compromise as a ‘momentous decision’ under Public Trustee v Cooper, and the Court duly gave it, noting that the trustee had power to enter into the compromise, was doing so without any personal interest in the outcome of the compromise, and deciding (given for instance, the inevitable cost saving) that compromise was a decision a reasonable trustee could properly take. 7 See e.g. In Re Northern Trust Fiduciary Services (Guernsey) Ltd, as trustee of the X Trust (2006) unreported Guernsey Court 22 November 2006, where the Guernsey Court approved under Public Trustee v Cooper a variation application to enable a momentous decision to be made compromising litigation brought against a trustee by the settlor claiming $27.4m, that sum being the balance owing under a compensation payment to the settlor for excluding him as a beneficiary, which they settlor had renounced but later claimed when the trustee sought to charge him for use of the family yacht. 8 See e.g. Abacus (CI) Ltd v Hirschfield and others (2002) 4 ITELR 686 where the trustees applied to the Jersey Court for approval of a compromise of a family dispute within which the wife of a deceased had sued his estate for breach of promise (the alleged breach being a testamentary transfer on death into a discretionary trust with supporting letter of wishes, rather than to the wife directly), and other family members challenged the will and letter of wishes on grounds of lack of capacity on the part of the deceased and undue influence on the part of the wife. The compromise in effect made the wife the estate's life tenant, and the trustee sought directions under (then) Article 47 of the Trusts (Jersey) Law, 1984 (as amended), and by a surrender of discretion, as to whether it should give effect to the compromise by exercising certain powers it had under the trust deed. Reasons cited in favour of compromise were the ending of litigation already some five years old, the staunching of the use of trust funds to pay legal fees, the drawing to a close of a long-standing family dispute, the establishment of a state of certainty (and a firm investment policy) for the trust, and protection of beneficiaries’ private wealth. The Court agreed (following Public Trustee v Cooper) that a surrender of discretion to the Court should only take place rarely, and for a good reason, but that the reason cited (i.e. the trustee was in no position itself to judge the outcome of the substantive proceedings) was indeed a good and compelling one. The Court then considered whether it should sanction the compromise on the trustee's behalf by assessing whether it was in the beneficiaries best interests to do so. The protection of the estate from legal fees, closing of a long running family dispute and the establishment of a state of certainty preventing further disruption to the trust were all reasons why the Court eventually was able to give its consent. 9 See e.g. In Re H Trust [2006] JRC 057, paras [12]–[17]. 10 See e.g. In Re First Island Trustees Ltd and the Avalon Trust [2006] JRC 105A. 11 In Re Representation of Lincoln Trust [2007] JRC 173, paras [14]–[15]. 12 See e.g. In Re representation of Insinger de Beaufort Trust (Jersey) Ltd and the Moodie Blu Trust (unreported) 18 June 2003, JRC 097 where Insinger applied for approval of a decision to appoint 8.25m Rand out of the Moodie Blu trust to a Mr Mitchell. The money was sought by M to meet his share of a 16.5m Rand settlement payment agreed between M, and another individual, G, and the liquidators of a South African company called Leisure Net. They claimed M and G had committed breaches of fiduciary duty as directors of Leisure Net the proceeds of which had been paid to companies owned by Moodie Blu. On receipt of an order from the Attorney General seeking information to assist the South African authorities, the trustees made an STR. The Jersey police gave their consent to the distribution so that there was no difficulty under Articles 32 or 33 of the Proceeds of Crime (Jersey) Law 1999. The Court's approval of the distribution was sought as a ‘momentous decision’ within the Public Trustee v Cooper classification. The Court was presented with evidence that payment out of the 8.25m (which amounted to approximately one third of the trust fund) was clearly to M's benefit as it discharged a debt of M to the liquidator of Leisure Net. It was also to the benefit of the other beneficiaries, M's wife and four children (two of whom were minors) as settlement of the civil litigation with the liquidators would reduce the distress it was causing to M's family, and ‘[was] an important first step to allowing [M's] family to rebuild their lives in the light of the allegations made against [M]’ even though criminal investigations would continue. The Court regarded the trustee's decision as being ‘reasonable … reached in good faith [and] not vitiated by any conflict in interest …’ It therefore approved the payment, subject to it being made direct to the liquidators, and G also making a payment of the same amount at the same time, to avoid M being pursued for G's share as well, M and G's liability under the agreement with the liquidators being joint and several. 13 [1996] 1 WLR 1220. 14 [1996]1 WLR 1220, 1223. 15 [1996]1 WLR 1220, 1223–1224. 16 Ibid. 17 [1996] 1 WLR 1220, 1225. 18 [1996] 1 WLR 1220, 1224. 19 [1996] 1 WLR 1220. 20 See s 27 of TGL 1989. 21 Eaton v Buchanan [1911] AC 253. 22 Re Ridsdel [1947] Ch 597. 23 Re Shenton [1935] Ch 651. 24 [1980] Ch 28, affirming [1978] 3 AllER 18. 25 [1978] 3 AllER 18, 32–33 per Megarry V-C. 26 In which event the word ‘without’ might better have read ‘with or without’. 27 See s 15(f) says that a personal representative or trustee may ‘… compromise, compound, abandon, submit to arbitration, or otherwise settle any debt, account claim, or thing whatever relating to the testator's or intestate's estate or to the trust’. 28 Especially where the definition of ‘trust’ in s 80 of TGL 2007 is said to include ‘the functions, interests and relationships under a trust’ (emphasis added). 29 In Re Ezekiel's Settlement Trusts [1942] Ch 230, 234 in relation to the jurisdiction under s 15(f). 30 The Guernsey law equivalent of the UK Variation of Trusts Act 1958. 31 [1954] AC 429 the availability of which was left open in Jersey in Re Osias [1987–1988] 389, 400. 32 See s 5 of TGL 2007. 33 Under Part IV of TGL 2007. 34 See s 80(1) of TGL 2007. 35 See s 8(2) of TGL 2007. 36 Compare Bathurst v Kleinwort Benson (Channel Islands) Trustees Ltd & ors [2007] WTLR 959, where the objects of a power of addition succeeded in obtaining information from a trustee and a protector, and where the ultimate objective can only have been to call the trustee to account for its trust. 37 See s 80(l) of TGL 2007. 38 Under e.g. Bristol and West Building Society v Mothew [1998] Ch 1. 39 Stuart Hutcheson v Spread Trustee Ltd (2002) 5 ITELR 140. 40 (2002) 5 ITELR 140, 154 e–f. 41 The point is undecided in Guernsey and a matter of some discussion given the different limitation periods (generally, 3 years for breach of trust, 6 for negligence). 42 See e.g. Millett LJ in Twinsectra v Yardley [2002] 2 AC 164, 194, para [105]. 43 See e.g. Brown and Marriott, ADR Principles and Practice, 2nd edn, 1999, paras 2–20 ff. 44 See e.g. Re Raven [1915] 1 Ch 673: ‘repugnancy’ is in effect, a doctrine which says that a donor who gifts property cannot restrict the donee's access to the courts to resolve any rights arising from the gift. 45 See e.g. Jones and Others v Sherwood Computer Services plc [1992] 1WLR 277. 46 See Czarnikou v Roth, Schmidt [1922] 2KB 478, and in Guernsey, the court's powers under ss 68 and 69 to give directions, and make orders as to trusts and trustees would be a clear example. 47 See e.g. In Re Tuck's Settlement Trusts [1978] Ch 49. 48 See s 82(2); compare ss 4 and 5 of the Arbitration (Guernsey) Law, 1982 (as amended) which has similar wording. 49 See e.g. Re Wynn's Will Trust [1952] Ch 271. 50 Apparently popular in the US. 51 See for instance, Hayton, n 2 above, p. 126—‘… Clearly, legislation is needed to deal with the difficulties, with some procedure for independent non-conflicted representatives to be appointed at an early stage to look after the interests of minor, unborn and unascertained beneficiaries and to have full authority to agree a mediated solution of the dispute. Provision also has to be made for financing and protecting from liability whomever are appointed as such representatives, it being necessary for reasons of time and cost to oust the need for the approval of the court to any agreed solution.’ 52 See Count Lothair Blücher von Wahlstatt [1928] Plaids de Meubles vol XVIII, pp. 421–422, and see Dawes, Laws of Guernsey, 1st edn, 2003, pp. 124–125. 53 Rule 32 of the 2007 Rules, and see especially rule 32(2) which gives the tuteur or curateur power to do anything in the ordinary course of proceedings. 54 See again under rule 32 of the 2007 rules; compare also e.g. Leumi Overseas Trust Corporation Ltd v Howe and ors [2007] JRC 248, para [3]. 55 In Allco Steel (Queensland) Pty. Ltd v Torres Straight Gold Pty. Ltd (unreported) QSC March 1990 the clause was rejected but see contra; Reed Constructions Pty. Ltd v Federal Airports Corporate (unreported) NSWSC, Dec. 1988. 56 [2002] EWHC 2059, and followed in DGT Steel Cladding Ltd v Cubitt Building & Interiors Ltd [2007] EWHC 1584. 57 See e.g. Trident Trust Company (Guernsey) Ltd v Comprop Guernsey Limited (unreported) 2 June 2006, para [31], note also that the general overriding objective of the 2007 Rules is said to be (in rule 1) to deal with cases practically and without disproportionate expense. 58 See s 63 is less relevant as rule 35 is not concerned with ADR. 59 See Hayton, n 51 above. © The Author (2008). Published by Oxford University Press. All rights reserved.