Two key rulings in the common law trust arena by the English Privy Council and the Royal Court of Jersey respectively last June are expected to have a significant impact on the way in which trust law is applied and interpreted in future cases involving Guernsey and Jersey trusts.
In the first case, considered one of the most important trust law cases to date, the Judicial Committee of the Privy Council sat for two full days last December to hear the appeal by Spread Trust Company Ltd against Hutcheson and others before overturning decisions of the Royal Court of Guernsey and Guernsey Court of Appeal and ruling in favour of the trustees on June 15.
The case itself concerned the effect of a clause in long-established Guernsey trust deeds seeking to exonerate the trustees from certain liabilities, including gross negligence. The trust was established before statutory legislation was brought in which prevented trustees from building exoneration of this type into the trust deeds.
“At the heart of the matter is that the beneficiaries complained that the trustees failed to adequately diversify investment of trust funds and we argued that the trustees were in breach of trust by this action,” said Carey Olsen Advocate John Greenfield who acted for the beneficiaries.
The Guernsey Court had ruled that the duty imposed on Guernsey trustees to act “en bon père de famille” (as a good father) was incompatible with the trustee at the same time seeking to exonerate itself from its own acts of gross negligence by a provision in the settlement deed.
The Privy Council disagreed and has effectively ruled that trustees can be exonerated from their own gross negligence without infringing the duty to act as a good father. The Privy Council effectively followed English law in this area. Greenfield notes that the council’s decision narrows the meaning of this provision which has its roots in Norman customary law and is part of Guernsey’s statutory legislation. In doing so, it has reduced one long-established distinction between English and Guernsey trust law.
“The Privy Council decision covers some very important and complex issues of trust law that have significance not only for professional trustees and legal practitioners in the Channel Islands but also in the United Kingdom and elsewhere," Greenfield explained. He continued:
“The circumstances under Guernsey common law or customary law where a trustee could lawfully exclude its liability from a breach of trust had never previously been determined. The English Court of Appeal had ruled upon this, for English law purposes, in the 1998 case of Armitage v. Nurse."
“However there are a significant number of trust specialists who believe that the wrong decision was reached in the Armitage case and it has not been robustly endorsed. The very fact that these issues are finely balanced is reflected in the split decision (3:2) of the judges."
"It is highly unusual for the Privy Council to not give a unanimous judgement."
“The case will be a major aid to legal advisors in assessing the chances of a claim being successful against trustees. For trustees themselves that exoneration clause, depending on where the trustees’ conduct comes in on the sliding scale, looks as though it will indeed be worth the paper it is written on."
“It took the council six months to consider and deliver its ruling which indicates just how important they believed their judgment would be.”
Greenfield said the impact of the Hutcheson case to English trust law, and similar trust law in common law jurisdictions, cannot be overstated.
“I have had a number of City trust and chancery lawyers calling me waiting for the judgement, knowing that this case would significantly impact on trust law in the future,” he said.
“This is definitely Guernsey leading the world in testing case law and providing a channel for change and, on a personal level, it is exciting to be involved in something which has such a significant role in the future of trust law around the world,” he added.
A second significant judgment in a separate case was delivered by the Jersey Royal Court just days later, on June 21, where Jersey chose not to apply the same methods of an English court in its decision on an important part of trust law.
Experts suggest that the landmark ruling could, in circumstances where a case could be brought either in Jersey or England, attract a number of similar cases to the Jersey court.
The Jersey Royal Court ruling is of particular interest to trust practitioners as it sets a precedent for Jersey on the application of the Hastings-Bass principle following the English Court of Appeal's decisions in Futter v. Futter and Pitt v. Holt.
The Hastings-Bass principle sets out when a court may intervene in cases where a trustee acts under his or her own discretion, particularly in cases involving tax, where such a decision unintentionally brings about adverse financial (usually tax) consequences for the client.
In Futter v. Futter, the trustees failed to account for Section 2(4) of the Taxation of Capital Gains Act, 1992, which prevented the client, Futter, from being able to offset personal portfolio losses against the trust’s significant stockpiled gains. The trustee in this case successfully sought a declaration that the advancements were void and of no effect, based on the rule in Hastings-Bass. As part of the judgement, the Court agreed that the effect of the trustees’ actions, when exercising a discretion, were contrary to the trustees' intention. The trustees' actions were therefore allowed to be rolled back.
The second case, Pitt v. Holt, ended with a ruling that the receiver, appointed under the Mental Health Act, held the key roles of a trustee, and was exercising his role on a discretionary basis - on the basis that the receiver was not under the instructions of the beneficiary of the trust. The unintentionally incurred additional tax liability was therefore considered in this case also.
The Royal Court was considering whether a gift should be set aside on the grounds of a donor’s mistake and ruled that it would not follow the recent English Court of Appeal decision in Pitt v. Holt 2011.
In the Matter of the S Trust, Carey Olsen partner Robert MacRae, acting for the applicant, R, explained that R was seeking to have set aside, on the ground of mistake, a gift of shares to a Jersey resident trustee and the subsequent transfer of those shares to three US trusts.
The Royal Court decided it would follow the course charted in the previous Jersey case of the A Trust 2009.
In that case, the Royal Court concluded that the right test was whether the donor was under some mistake of so serious a character as to render it unjust on the part of the donee to retain the property given to him, and would not have entered into the transaction but for the mistake. Such a “mistake” could include mistakes with financial consequences.
In reaching this decision the Royal Court rejected the distinction drawn by certain English cases between the effects of a transaction and consequences of a transaction mistakenly entered into, which had held that only mistakes as to effects could be set aside.
The A Trust decision was then followed by other judges in the Royal Court in subsequent cases.
However, the distinction between effects and consequences was recently upheld by the English Court of Appeal in Pitt v. Holt where the Court of Appeal said that: 'the mistake must be of sufficient gravity as to satisfy the test, which provides protection to the recipient against too ready an ability of the donor to seek to recall his gift. The fact that the transaction gives rise to unforeseen fiscal liabilities is a consequence, not an effect, for this purpose, and is not sufficient to bring the jurisdiction into play.'
Cary Olsen points out that under English law, a donor would have to show that there was a mistake – that it was the right type of mistake (i.e. one as to effect, not consequence) and that it was sufficiently serious.
In its judgment in the Matter of the S Trust, the Royal Court stated that there were two competing principles. On the one hand it should not be too easy for a donor to retrieve a gift when things did not turn out precisely as he had anticipated, because legal certainty was important. On the other hand, parties should not be held to transactions into which they would not have entered had they known what the outcome would be.
The Royal Court said the English Court of Appeal’s approach leaned toward the first principle while the Royal Court's approach tended towards the second.
The English Court of Appeal in Pitt v. Holt had criticised the Jersey Court for “ignoring the distinction between effects and consequences” and applying a test which is “a great deal too relaxed for the donor who seeks to recover his gift” and gives “wholly inadequate effect to the gravity of the test posed” (in the English case of Ogilvie v. Littleboy 1897).
The Royal Court said that, in its view, these criticisms were misplaced. In the A Trust, the Royal Court “plainly had the distinction (between effects and consequences) very much in mind” but preferred to formulate its own test, which did indeed give effect to the need for the mistake to be a serious one.
Carey Olsen partner Robert MacRae, explained: “It is now clear that the test to be applied in Jersey, in considering whether a gift into trust should be set aside on the grounds of a donor’s mistake, is fundamentally different from the test applied in England."
It is suggested that there may now be an advantage, in certain cases where either court has jurisdiction, for a donor to choose to bring his or her application in Jersey rather than in England.
As MacRae observed: “The Royal Court has once again shown that it is prepared not to follow English jurisprudence where it is satisfied that it is either wrong or conflicts with existing Jersey authority.”