issue 3 2014 trust quarterly review1 1 volume 12 issue 3 2014 produced by in association with trust...

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VOLUME 12 ISSUE 3 2014

PRODUCED BY IN ASSOCIATION WITH

TRUSTQUARTERLY

Contents 02 FOREWORD

The Editors

03 A NEW TYPE OF CIVIL-LAW TRUST: THE CASE OF SAN MARINO Andrea Vicari

13 WHEN IS A TRUST ‘ILLUSORY’? Helen Dervan

19 IS A CONSTRUCTIVE TRUST ALWAYS A TRUST?

Anthony Dessain

31 EXCLUSIONS AND EXEMPTIONS IN ONSHORE AND OFFSHORE TRUSTS Daniel Clarry

44 THE IMPACT OF FATCA AND THE OECD COMMON REPORTING STANDARD John Riches

54 BOOK REVIEW Trust Taxation and Estate Planning, fourth edition, by Emma Chamberlain and Chris Whitehouse

REVIEW

NOVEMBER 2014 WWW.STEP.ORG/JOURNAL2

F O R E W O R D T H E E D I T O R S

Voyage of discoveryFROM SAN MARINO TO OUTER SPACE, AN IN-DEPTH LOOK AT TOPICAL TRUST ISSUES

We welcome you to the third issue this year, and hope we can once again thrill readers with Trust Quarterly Review’s global reach.

Our journey begins in the state of San Marino. When this country faced England in a recent World Cup play-off, we were told its entire population of 32,576 could have been easily accommodated in the empty seats at Wembley.

Nevertheless, in the history of fiduciary obligation, this landlocked realm has earned its place in the big leagues. Whether through inertia or common sense, this civil-law country draws on the unsullied and unmodernised well of the Roman civil code and appears to have left the time-hallowed principles intact until 2010. A thoughtful article, ‘A new type of civil-law trust’ (page 4) by Andrea Vicari, should intrigue all readers interested in how civil-law fiduciary principles can respectably dovetail with the common-law trust concept in a workable fashion.

We next travel to New Zealand, where Helen Dervan examines the rather thin reasoning of the High Court. Reading this excellent article, one is reminded of the advice of the canny elderly barrister to the young idealist, recently called to the Bar: ‘If the merits are on your side, leave the law to the Judge.’ The tribunal was faced with a considerable disparity of assets when considering a division of matrimonial property, and domestic legislation was inadequate to achieve a sensible split. One may charitably say some justice was achieved but jurisprudence was sold short.

From two modestly sized islands, we move, in the next two articles, to two even smaller ones: Jersey and Guernsey. Anthony Dessain offers an interesting analysis in ‘When is a constructive trust a trust, and when is it not?’. The significance of the enquiry, while appearing theoretical, in fact rotates around such key

outcomes as remedies, limitation and prescription. When the trust concept is employed as a sharp tool of restitution, it is unsurprising that some of the attributes of the express trust variety need to be modified to avoid an unjustifiable blunderbuss effect on innocent or relatively untainted third parties.

Our second piece from what the islanders still call the Duchy of Normandy is a thoughtful essay by Daniel Clarry that combines analysis of recent developments with a helpful tabulation of care standards and exonerations for trustees in Jersey, Guernsey, and England and Wales. The whole debate in this area seems, on an objective view, to be bedevilled by muddled thinking. An express trust can, perfectly easily, be framed to incorporate an articulation of very narrow and circumscribed duties. In such a case, the appointed trustees cannot legally be reproached for failing to fulfil a duty that was not imposed. Contrast that with a second trust instrument expressed in wider terms, but with broad duty and exposure exclusions and exonerations. The intent and the economic impact will be equal between the two – but the second instrument calls down disapprobation on the sheltered trustee that is not visited on the first. We do need to keep a clear head.

For our final article, the reader is, so to speak, transported into space, while, from his pan-galactic viewpoint, John Riches examines the worldwide implications of the US Foreign Account Tax Compliance Act and the OECD Common Reporting Standard, as countries move towards automatic exchange of information and the bringing of more details of private wealth into the public domain.

Happy reading.

THE EDITORS


S A N M A R I N O T R U S T S A N D R E A V I C A R I

A new type of civil-law trust

THE THEORY BEHIND SAN MARINO TRUST LAW

By Andrea Vicari

ABSTRACT• The introduction of the trust (or analogous

institutions) into civil-law systems requires not only the translation of common-law rules into civil-law concepts but also a precise choice about the functions to be performed by these instruments.

• Since the introduction of the legal category of ‘patrimony’ (patrimonie or Vermögen) in civil law and the seminal studies of Pierre Lepaulle on the trust, many cases of introduction of the trust into civil law were influenced by the idea that the trust is a patrimoine d’affectation and that its function is the segregation of assets.

• San Marino has rejected these theories. It has instead looked to the history of civil law and focused on the fact that civilians were well acquainted with the use of structures analogous to the trust before the civil codes. These structures were used to allow the settlor to exercise complete control over the assets they settled.

• This function is very different from both that of segregating assets, as under the common-law trust, and also that of gifting over time, which English and Welsh lawyers consider characteristic of the trust.

• This innovative blend of common-law and civil-law elements makes San Marino trust law unique and means it perfectly suits the needs of civil-law settlors.

THE TRUST IN CIVIL LAW: THE INFLUENCE OF THE PATRIMONYSince the beginning of the 20th century, trusts have attracted the interest of leading scholars in comparative law and they still continue to attract interest now.

Most of these studies focus on theoretical aspects of trusts, such as: • What is a trust?• Is the trust part of the law of property

or part of the law of obligations?• How can the common-law trust concept be

translated into civil-law terms?• Can a trust governed by a common-law system

operate in a civil-law system without a law of trusts, when assets or the settlor or beneficiaries are located there? The answers to these questions are often related. Each of these answers also depends on the

theoretical stance of the scholar; each scholar focuses on some given features of the common-law trust and emphasises them in their picture of the trust.

Scholars who consider the trust as part of the law of property – that is, a form of double or split ownership – and the beneficiary’s legal position as a property right, tend to consider the trust incompatible with civil law.



Scholars who consider the trust a segregation of assets deny the beneficiaries have any property right in the trust assets and, under civil-law concepts, they represent the trust as a patrimoine d’affectation (a patrimony by appropriation – that is, ownerless or owned by the trustee), and affirm the possibility that the trust can operate in civil-law systems as such, since civil law is well acquainted with the patrimoine d’affectation. Scholars who treat the trust as a contract arrive at the same conclusion, as the civil law of contracts and obligation is considered flexible enough to frame the trust.

Until the end of the 20th century, this debate remained mainly academic. However, after the ratification of the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition, the debate became more practical. Framing the common-law trust in civil-law terms became a necessity when the recognition of trusts in civil-law countries became mandatory due to the ratification of the Hague Convention.

Furthermore, the entry into force of the Hague Convention inspired several civil-law countries to integrate the trust into their legal system.1 This integration occurred in diverse ways. For example:• Jersey, in 1984, enacted a statute introducing the

common-law trust, with several innovations in several specific rules, but without any attempt to frame the trust in civil-law terms and without consideration of the relation of the trust to the remaining parts of the civil law then in force.

• Quebec, in 1994, introduced the fiducie in its Civil Code, under the form of patrimoine d’affectation – that is, an ownerless patrimony dedicated to a purpose, where the trustee is the administrator of property of another person, in a position not much different from that of the director of a company with legal personality.2

1. M Cantin Cumyn, ‘Reflection regarding the diversity of ways in which the trust has been received or adapted in civil law countries’, in Re-imagining the Trust: Trusts in Civil Law, page 6 2. M Cantin Cumyn, ‘Pourquoi définir la fiducie comme un patrimoine d’affectation? ’, in Cross-Examining Private Law (2008), page 131; Y Emerich, ‘The civil law trust: a modality of ownership or an interlude in ownership’, in The Worlds of the Trust (2013), page 23

• France, in 2007 enacted the fiducie as an equivalent to the trust. Even in this case, the category of patrimoine d’affectation influenced the legislator. However, the French fiducie was not enacted as an ownerless patrimony, as in Quebec, but as a segregated patrimony owned by the trustee.3 Except for Jersey, where no consideration

has been given to the relation of the trust law to civil-law categories and rules (later this generated several instances of conflict),4 the remaining cases of introduction of the trust into civil-law jurisdictions have been influenced by the idea that the trust’s function is the segregation of assets and its effect is the creation of a patrimoine d’affectation.

This idea is culturally dependent on the development by Pierre Lepaulle, at the beginning of the 20th century, of the theory that the trust should be represented as a patrimoine d’affectation according to civilian categories.5

In fact, as correctly expressed by Professor Cantin Cumyn, ‘the idea that each country has of the fiducie or of the trust is shaped by more or less internal [doctrinal] factors’6 and, therefore, these factors ended up ‘determin[ing] the function that the fiducie, whether or not derived from the trust, is called upon to fulfil’.7

Therefore, it is self-evident that the functions of the trust in most civil-law systems are often ultimately determined by random factors.8

Having recognised that, the San Marino legislator, drafting the Law of 1 March 2010, No.42 on trusts (the Trust Law),9 which totally revised the trust law previously in force,10 enacted after the ratification of the Hague Convention,11

3. F Barrière, ‘The French fiducie, or chaotic awaking of a sleeping beauty’, in Re-imagining the Trust: Trusts In Civil Law (2012), page 2224. For an example, see Rahman v Chase Bank [1991] JLR 1035. P Lapaulle, Traité Théorique et Pratique des Trusts (Paris, 1932)6. See Cantin Cumyn (footnote 2), page 97. See Cantin Cumyn (footnote 2), page 98. The legislative process giving shape to the French fiducie has been defined as ‘chaotic’ by F Barrière – see footnote 39. For a comment on the prior law, see P Panico, ‘San Marino’, Trusts & Trustees (2007), pages 500–50210. The Law of 17 March 2005, No.3711. The Hague Convention was brought into force in San Marino by the Decree of 20 September 2004, No.119



decided to avoid this trap and not to be influenced by the idea that the trust is mainly a segregation of assets.

THE CONCEPT OF THE TRUST: THE INFLUENCE OF COMMON-LAW TRADITIONWhile the ius commune had the trust-like institution of the fideicommissum fiduciarium or confidentiale, but not a concept called ‘trust’, the Trust Law introduced such a concept, clarifying that ‘a trust exists when a person owns assets for the benefit of one or more beneficiaries, or for a particular purpose within the meaning of this Law’. The Trust Law, in article 2, makes clear that ‘the fact that the settlor also holds the office of trustee, or reserves some rights or powers to himself, is not inconsistent with the existence of a trust’; that ‘the settlor and the trustee may be beneficiaries of the trust, but the trustee cannot be the sole beneficiary of the trust’; and, finally, that ‘the same trust instrument may create beneficiary trusts and purpose trusts’.

This basic description of a trust reflects the common-law tradition.

Even in relation to the permitted kinds of trust, the common-law experience, in its modern form expressed in most international laws of trust, was of inspiration: in fact, both purpose trusts and beneficiary trusts are allowed. Purpose trusts are allowed without any limitations.

CONTENTS OF THE TRUST DEED: THE INFLUENCE OF THE COMMON-LAW TRADITIONThe trust instrument will contain the standard requirements of a common-law trust instrument:• the intention of the settlor to create the trust;• the identification of the trustee;• the identification of the trust assets, or the criteria

that enable them to be identified.In the case of purpose trusts, the trust

instrument will contain:• the identification of a particular purpose, achievable

and not contrary to mandatory laws, public order or good morals;

• the identification of a protector with the duty to ensure that the provisions contained in the trust instrument are observed, or the criteria that enable the protector to be identified.In the case of beneficiary trusts, the trust

instrument will contain:• the identification of the beneficiaries, or the criteria

that enable them to be identified, or the identification of the person who has the power to appoint them;

• the rules that ensure that there is a protector empowered to make a claim against the trustee in case of breach of trust if for any reason there are no beneficiaries in existence, and in the other cases provided for by law.

A BENEFICIARY TRUST WITHOUT BENEFICIARIES: THE EMERGENCE OF A NEW TYPE OF TRUSTA peculiarity of San Marino trust law, as compared to the trust laws in force in most common-law jurisdictions, is the possibility of settling assets into a trust without appointing any beneficiary.

In fact, not only can beneficiaries be appointed in the trust instrument regardless of the fact that they don’t exist (e.g. ‘the children of Paul’, where Paul has no children at the time of the trust settlement), but it is also possible to settle assets into a trust with a trust deed that does not appoint any beneficiary but simply contains a power of appointment (i.e. ‘the beneficiaries are to be appointed by Paul before the end of the trust period’).

In this case, the Trust Law demands the appointment of a trust enforcer. There are two very important effects of this.

First of all, this rule ensures that trustee’s duties are enforced during the life of the trust, even if no beneficiaries have been born yet. Delayed enforcement often means no recovery. Under San Marino law, in this case, an enforcer will ensure timely enforcement.

Second, the new Trust Law creates a new type of trust for beneficiaries, unreplicated in any other common-law trust legislation in the world. A valid trust for beneficiaries, whether fixed or discretionary, can be created even if no certain or



ascertainable person is intended to be benefited by the trust at the time of its creation. In this manner, the individuation, appointment and identification of any type of beneficiaries can be postponed, even in a trust for beneficiaries, up to the end of the trust period. Trust assets are segregated and the trustee is under a duty to manage them in order to preserve and increase them, and to distribute them to beneficiaries when they are appointed. The enforcer, meanwhile, will ensure that the trustee’s duties are properly performed. This is a unique solution.

This is a peculiarity of San Marino law. Under English and Welsh law and the laws of jurisdictions influenced by it, any trust has to have appointed, identified or identifiable beneficiaries, unless the aim is to create a purpose trust;12 or, from another perspective, the persons or objects intended to be benefited must be certain or ascertainable.13 In fact, ‘there must be someone in whose favour [a] court can decree performance’.14

Under the new San Marino Trust Law, this requirement is waived. A trust is valid and the trust’s assets are segregated, without any resulting trust arising in favour of the settlor, even if no person is a certain or ascertainable beneficiary and even if the trust is not a purpose trust. Trustees’ duties, as long as beneficiaries are absent, are enforced by the enforcer.

This is the first of several indications that, under the San Marino Trust Law, the trust has its own ‘spirit’.

12. Re Wood [1949] Ch 49813. Morice v Bishop of Durham (1804) 9 Ves 399, at 40514. Knight v Knight (1840) 3 Beav 148

This peculiar spirit is determined by the frame of reference that inspired the San Marino legislator: the history of the civil law.

BACK TO THE FUTURE: THE HISTORICAL ROOTS OF THE SPIRIT OF THE NEW TYPE OF TRUSTSan Marino is a civil-law country, probably the purest remaining: no civil code has ever been enacted and the ius commune is still at the basis of its legal system. In fact, in San Marino’s law, save when a specific matter is governed by statute, ius commune applies. Ius commune is the common law that prevailed throughout Europe before the civil codes; it is rooted in Roman law but did not coincide with Roman law – on the one hand, because of the enactment of local legislation and, on the other, because of customary, as well as doctrinal developments, supported by the most important courts throughout the continent.

One institution under the ius commune, derived from the law of fideicommissa, was the fiduciary heir (heres fiduciarius).15 Under Roman law, the heir or the legatee charged with a fideicommissum was entitled to retain one-quarter of the assets before handing them over: this was the quarta, also called the ‘falcidia ’ or ‘trebellianica’.16 Even if some similarities with the common-law trust existed, the function and the structure of a fideicommissum were far from those of the trust, at least in its

15. R Zimmerman, ‘Heres fiduciarius, the rise and the fall of the testamentary executor’, in Trust and Treuhand in Historical Perspective (1998) page 267; M Lupoi, ‘The new law of San Marino on the “affidamento fiduciario”’, in Trust Law International (2011)16. The references are to the Lex Falcidia of 40BC and to a senatus consultum of 56AD

Under San Marino law, a valid trust for beneficiaries, whether fixed or discretionary, can be created even if no certain or ascertainable

person is intended to be benefited by the trust at the time of its creation... This is a unique solution



original family context, because the entitlement to the quarta could not be derogated by the will of the settlor and, therefore, the fiduciary was entitled to profit from the asset. This entitlement could not be removed. However, since medieval times, the Roman law rule was applied throughout continental Europe whenever an ordinary fideicommissum was concerned, but not when a fiduciary heir was appointed. Thus, the ius commune developed one institution where the fiduciary managed assets with the duty to allow beneficiaries to enjoy the property and to transfer the assets to them at the end of the period set by the settlor.

The fiduciary heir, like the trustee in a trust, was the owner of the assets and, like a trustee, could not retain any commodum – that is, any advantage from their office.

Thus, a European ius commune institution existed under which the party who received something, to be managed for a purpose or to benefit another party, had no beneficial claim to the assets they received and had to turn them over at the prescribed time or on the occurrence of a specified condition.

However, the fundamental function of this institution was different from that of the trust. The fiduciary heir, as well as the fideicommissum, did not serve to give a gift over time to beneficiaries, but rather as a tool to allow the settlor to exercise a ‘dead hand’ – a tool intended to provide the settlor with the ability to set an appropriation programme for the trust assets that could not be derogated by beneficiaries, who were bound by it – a programme aiming to restrain their entitlements, and not to enrich them.

This basic idea still underpins the expectation of most settlors domiciled in a civil-law country, and it provides the spirit of the new type of trust adopted in San Marino.

THE FUNCTION OF THE NEW TYPE OF TRUST: RESTRICTION OF THE BENEFICIARIES’ ENTITLEMENTSIf, under San Marino law, a trust can be created without the appointment of any beneficiary, then

there can be a settlement of assets into trust, segregation of them, and trustee’s duties, but no ‘gift’ to anyone: no beneficiary needs to be enriched; no one needs to receive any right, action or entitlement in order to create a valid trust. Under San Marino law, in other words, the trust appears to be a pure instrument to imprint trust assets with a destination, an instrument enabling the settlor to impose their own will, expressed in the trust instrument, over the trust assets.

This was the function of the institution of fideicommissa, in particular that of heres fiduciarius, which inspired the San Marino legislator. This function is very different from the function of the trust under English and Welsh law. Under English and Welsh law, a trust functions as a ‘gift over time’ to beneficiaries – that is, an instrument to enrich them rather than to exercise a dead hand over them.17

Beneficiaries, under a trust, are often considered, by English and Welsh lawyers, as having a proprietary interest in the trust. They are so considered because they are enriched by settlement of assets into trust, as if this were a gift over time. The fact that they may be entitled to receive possession of the trust assets at a later stage, vis-à-vis the time of the settlement, explains the ‘over time’ element of the gift embodied in the trust.

This function of the trust emerges even in the case of a discretionary trust, where the class of object of powers can be represented, as a whole, as the donee. In fact, even under a discretionary trust, one can notice the gift-over-time idea underlying common-law trusts, especially under English and Welsh law. In these cases, ‘you treat all the people put together as though they formed one person, for whose benefit the

17. As per Bernard Rudden: ‘It may be suggested that the learning on “the three certainties” and on resulting trusts in courses on equity is made difficult by failure to stress that the normal private trust is essentially a gift, projected on the plane of time and so subjected to a management regime’. Recently, John Langbein subscribed to this view: see J Langbein, ‘The Secret Life of the Trust: The Trust as an Instrument of Commerce’, 107 Yale Law Journal 165 (1997–1998). It is now an idea widely shared in the common-law world that the trust ‘is a donative transfer to the beneficiaries, structured to permit the management of wealth’: see Thomas P Gallanis, ‘New Direction of American Trust Law’, 97 Iowa Law Review 218, 218 (2011–2012)



trustees were directed to apply the whole of a particular fund’.18

Several rules in English and Welsh law embody the idea that the trust is constructed as an instrument to complete a gift over time to beneficiaries – an instrument to enrich them, rather than anything else.

For example:• The traditional rule, now abandoned, on the

proprietary basis for the right of information of beneficiaries. Under English and Welsh law, for a long time, the beneficiary’s right of information was attributed according to the gift-over-time idea of the trust. A beneficiary was entitled to inspect the trust documents and obtain information from them because, in some sense, they were the beneficiary’s own. The beneficiary was considered the beneficial owner of the trust documents, as well as of the trust assets. Nowadays, the right to inspect trust documents is not, in rhetorical terms, based on the beneficiaries’ ownership of trust assets,19 but the scope of application

18. Romer J in In Re Smith [1928] Ch 915. As Paul Matthews put it, under the English model of trust, ‘whatever the subject matter of the trust, it no longer belongs to the settlor or (obviously) the testator, and the decision whether to enjoy it or destroy it is no longer for him. Instead, it is ultimately a decision for those who benefit from the trust’. See P Matthews, ‘The comparative importance of the rule in Saunders v Vautier,’ Law Quarterly Review (2006), 266, 274. That is why beneficiaries are enriched by the creation of the trust.19. As is well known to all readers, this position was abandoned in Schmidt v Rosewood Trust Ltd [2003] 2 AC 709

of the rule is wider than before. All beneficiaries can get information about the management of the trust. This confirms the idea that the trust is considered a gift over time to all beneficiaries, regardless of whether they received a fixed interest in the trust property or not.

• The Saunders v Vautier rule, allowing all beneficiaries of any type of trust with beneficiaries, to terminate the trust and to obtain title to property when they are adult, of full capacity and they agree.20

• The rule against restrictions on alienation of beneficiaries’ vested entitlement:21 the beneficiary position, once vested and not contingent, is a beneficiary’s property because of the gift of the settlor and, as for any property in which the beneficiary has full title, alienation cannot be restrained by the settlor.

• The rules under which beneficiaries may obtain a variation of trust when they are all adult and capable, and they all agree, as well as those rules under which they may request, and the judge may consent, to a variation of trust when they can show that it is in their best interest, even if they are not all adult and of full capacity.22 All such rules are modified in San Marino

law, confirming further the idea that the trust, under San Marino law, does not have the function of a gift over time to beneficiaries, but is an instrument to impress the will of the settlor on the management and attribution of the trust assets – an instrument containing the programme for the management of the assets transferred to the trustee that can, but does not necessarily have to, immediately allocate entitlement to certain assets and the advantages deriving from them to one or more beneficiaries.

According to article 50.3 of the Trust Law, and only if the trust instrument does not provide otherwise, all the beneficiaries with fixed interests in the trust fund, or, if there are none, all the beneficiaries, may require the trustee to terminate

20. Saunders v Vautier [1841] EWHC Ch J8221. Brandon v Robinson 18 Vesey Jun 429, 433–34, 34 Eng Rep 379, 381 (LC). This is because the beneficiary is considered as having received a gift of property that enriched them and, in trusts as in gifts, once a property is gifted it becomes the donee’s property and their ownership cannot be restrained22. Variation of Trusts Act 1958; article 47(1) Trusts (Jersey) Law 1984

If, under San Marino law, a trust can be created without the appointment

of any beneficiary, then there can be a settlement of assets into trust,

segregation of them, and trustee’s duties, but no ‘gift’ to anyone: no beneficiary needs to be enriched; no one needs to

receive any right, action or entitlement in order to create a valid trust



the trust and transfer the trust assets to themselves or as they direct. Therefore, it is in the settlor’s hands to decide whether beneficiaries can terminate the trust in advance. Beneficiaries are not considered automatically enriched by the creation of the trust. Trust assets are managed by the trustee under the settlor’s programme. The beneficiaries’ collective will cannot interfere with it in any manner.

According to article 50.2 of the Trust Law, and only if the trust instrument does not provide otherwise, a beneficiary may require the trustee to postpone the transfer of trust assets to him or her or to perform the transfer to a third party nominated by him or her. Therefore, the Trust Law places in the settlor’s hands the decision as to whether beneficiaries can direct the distribution of the trust assets differently from the settlor’s directions contained in the trust instrument, with regard to time or persons. This confirms the view that beneficiaries are not considered enriched with the trust property until they actually receive it, on distribution. Until such a moment occurs, they cannot deal with the trust property at all, if the settlor so establishes.

Under article 51.2, and only if the trust instrument does not otherwise provide, a beneficiary may alienate, give as a guarantee or otherwise dispose, in whole or in part, of his beneficial interest by instrument or instruments taking effect as against the trustee when he becomes aware of it or them, or, in the case of a beneficiary with a fixed interest not limited to his life, by will. Beneficiaries are not, therefore, enriched by the trust, if the settlor does not wish so and if the settlor restrains their rights. Their entitlement under a trust cannot be disposed of as they wish, if the settlor otherwise provided in the trust instrument. They can enjoy the entitlement, but this is not necessarily property that they can dispose of.

The idea that, under San Marino trust law, the trust does not have the function of a gift over time to beneficiaries, that they are not the beneficial owners of the trust assets, and that they are not enriched by the trust, if the settlor does

not wish it to be so, also emerges from the rules about variation of trusts.

The trust instrument contains the will of the settlor in terms of the management and distribution of the trust assets. If beneficiaries can vary it, this means that assets are at the beneficiaries’ disposal, and that they are enriched by them. Under San Marino law, the settlor can grant the power to vary the trust instrument to beneficiaries, but otherwise they do not have such entitlement under the Trust Law. The settlor can decide to attribute it to them and can decide to enrich them. According to article 13.1, a trust instrument may provide that the provisions contained in it or the governing law may be amended in the interest of the beneficiaries or to promote the purpose of the trust, and this power of amendment can be granted to the person chosen by the settlor. The settlor can decide not to grant such a power to beneficiaries and therefore the settlor can decide not to enrich them. In this case, beneficiaries cannot vary the trust, not even with the help of the judge. In fact, according to article 53.4, only the trustee may apply to the judge in order to be duly authorised to make those changes to the trust instrument that have become necessary or desirable. Beneficiaries are not entitled to appear before a judge attempting to obtain a variation of the trust deed, and so implicitly overruling the settlor’s wish, the latter having explicitly chosen not to grant them such amending power.

Even the rules about the beneficiaries’ right of information provide clear evidence that the trust, under San Marino law, does not have the function of a gift over time to beneficiaries, but rather that of a tool to impress the will of the settlor on the management and distribution of trust assets. According to article 49.1 of the Trust Law, and only if the trust instrument does not provide otherwise, every beneficiary with a fixed interest will have the right to inspect and take copies of the instruments and documents concerning their own rights.



Similarly, under article 27.2, and only if the trust instrument does not otherwise provide, the trustee of a beneficiary trust is under a duty to give every beneficiary with a fixed interest: • notice of the existence of the trust, its name, the

address of the trustee, and the provisions of the trust instrument that confer such interest;

• notice of all instruments or matters that amend or extinguish such interest;

• at the request of such a beneficiary, within an adequate period of time, an inventory limited to those trust assets in respect of which the beneficiary claims their interest, and an estimate of their market value comparable to the value claimed by the beneficiary.The settlor’s will, in the trust instrument, can

remove such an entitlement.The rules about breach of trust further indicate

that San Marino trust law does not embrace the idea that the function of a trust is that of a gift over time to beneficiaries, but rather that of a tool to impose the will of the settlor on the management and distribution of trust assets.

Under the traditional English and Welsh or international trust laws, where trusts are viewed as a gift to beneficiaries, beneficiaries are always entitled to take legal action against the trustee in case of breach of trust. They are the beneficial owners of the trust property because the settlor, creating the trust, wished to enrich them. Therefore, they are entitled to enforce the trustee’s fiduciary duties in case of breach.

Under San Marino law, it is the settlor who, in the trust instrument, can attribute or remove the entitlement of a beneficiary to take legal action against the trustee. In fact, according to article 42, and only in the absence of a contrary provision in the trust instrument, a trustee committing a breach of duty will be bound at the request of a beneficiary or of the protector to restore the loss caused to the trust fund, or to the beneficiary who makes the claim. Of course, a trust instrument cannot deprive at the same time all the beneficiaries and the protector of the right to take legal actions against the trustee. This entitlement has to be vested in at least one

person. In fact, the settlor can exclude the entitlement of any beneficiary to take legal action against the trustee.

A final argument can be put forward to clarify the independence of the trust under the San Marino Trust Law from the idea of a trust as a gift.

Under English and Welsh law, which embodies the traditional idea that the function of the trust is that of a gift over time to beneficiaries, the judge is urged to find a donee (a trust beneficiary) in every case they can. Therefore, the tendency is to find a trust beneficiary even when the settlor did not want to have one. For example, under English and Welsh law, if the settlor attempted to create a purpose trust, where no beneficiary entitlement is expected to arise according to the settlor’s will, but the implementation of the purpose does benefit individuals, the judge will characterise the trust as a beneficiary trust and attribute to those individuals all the rights of a beneficiary.23

Article 48.5 of San Marino’s Trust Law makes it clear that persons who receive or may receive assets or benefits from a purpose trust will not be considered beneficiaries. Therefore, the settlor can characterise the trust as a purpose trust, depriving all individuals that can benefit from it of the beneficiaries’ rights. No risk of re-characterisation may arise.

In substance, since there is no idea of a gift over time embodied in the San Marino Trust Law, the settlor can fully shape any element of that bundle of rights constituting the beneficiaries’ legal position, because the trust is seen, under such a law, as an appropriation of segregated assets, to be managed under the settlor’s programme indicated in the trust deed. It is an instrument to exercise the dead hand of the settlor, rather than enrich the beneficiaries.

THE TRUST FUND: LESSONS FROM THE CIVILIAN THEORY OF PATRIMONYA further characteristic of the San Marino trust distances it from the existing common-law trust legislation. In a common-law trust, trust assets are

23. Re Bowes [1896] 1 Ch 507



considered as a fund.24 The fund is composed only of assets, not liabilities. As article 2 of the Hague Convention makes clear:• the assets constitute a separate fund and are not

a part of the trustee’s own estate;• title to the trust assets stands in the name of the

trustee or in the name of another person on behalf of the trustee.In this manner, trust assets are not part of the

trustee’s own estate, but trust liabilities can be.In the common-law world,25 the trustee can be

bound by all obligations entered into as a trustee, even if the extent of their liability can vary.

With the breadth of their liability varying from one legal system to another, the trustee can limit their liability if the counterparty accepts a clause with such effect or if the counterparty is aware that the trustee is acting as such. In any case, the trustee may be liable to third parties in tort for damages created by the trust assets, e.g. environmental damage caused by assets settled into trust.26

Therefore, under common-law systems, the trust can be considered as an asset-partitioning tool,27 not a liability-partitioning tool. Trust assets are out of reach of a trustee’s creditors, but a trustee’s assets are not always insulated against ‘trust liabilities’ toward third-party creditors.

24. B Rudden, ‘Things as Thing and Things as Wealth, Oxford Journal of Legal Studies (1994), 81–9725. Muir v City of Glasgow Bank (1879) 4 App Cas 337, 368; article 32 Trust (Jersey) Law 1984; for international developments, see P Panico, International Trust Laws (2010)26. In US, see Maine Shipyard v Lilley 2000 ME 927. Henry Hansmann and Ugo Mattei, ‘The Functions of Trust Law: A Comparative Legal and Economic Analysis’, 73 NYU Legal Review (1998), 434

The San Marino legislator, while not influenced by the theory of the patrimony in shaping the function of the trust, did not forget its utility.

Under San Marino law, the trust fund is composed of both trust assets and liabilities, following the civil-law idea of patrimony, which is not simply a fund composed of assets (article 1(J)).

This fund is composed of both assets and liabilities and they are transferred as such, all together, in all those cases where trustees are substituted (article 40(1)). In this manner, the trust assets and trustee’s obligations are transferred all together to the new trustee, who will be substituted, as debtor, in all the obligations entered into, but not fully executed, by the former trustee. As a consequence, the former trustee is automatically substituted by the new one in all legal proceedings (article 40(4)).

At the termination of the trust, liabilities are transferred to beneficiaries, according to the share of assets they are entitled to receive (article 16(4)).

In a manner similar to the transfer of a going concern in business law, trust assets and liabilities transfer, under San Marino Law, together as such, in all cases where, under common law, only trust assets are transferred.

Furthermore, trust assets are totally independent from the trustee’s own estate – not simply segregated from it. Under article 47(1) Trust Law, any person, not being a trustee, a beneficiary or a protector, having rights against a trustee as a result of obligations undertaken or acts carried out manifestly as trustee or due to acts or facts in that capacity, may satisfy their claim only out of the trust fund. In this manner, any liability incurred by the

Under San Marino law, the trust fund is composed of both trust assets and liabilities, following

the civil-law idea of patrimony



trustee (in their capacity as trustee) is to be satisfied by the trust assets, never by the trustee’s own assets, regardless of the fact that the third party knew that the trustee was acting as such or had a claim in tort arising from the trust assets. In this way, complete autonomy is created between the trust fund and the trustee’s own estate – not just a simple separation or segregation.

CONCLUSIONSThe enactment of a trust law in a civil-law country requires full knowledge of the common-law world and, more than this, a full knowledge of the civil law, in its historical, as well as contemporary, forms. Only with such knowledge can a trust statute perfectly work in a civil-law context and satisfy the needs of settlors located in civil-law countries.

The idea (introduced by Pierre Lepaulle) that the trust is merely a patrimonie d’affectation, a segregation of assets, shall not blind civilians and prevent them from capturing the other functions of a trust.

Civilians were quite familiar with institutions analogous to the trust, but which had functions different from the trust, and none of them were used to create merely a patrimonie d’affectation, but rather to impose the settlor’s will on the management and distribution of assets.

With this perspective clearly in mind, the San Marino legislator created a brand new model of trust. It is not simply a new trust law inspired by the several international trust laws enacted in recent years.

This new type of trust leaves to the settlor the power to completely decide the programme of appropriation of the trusts’ assets, without being bound by any rule against it deriving from the English and Welsh idea that the function of a trust is to complete a gift over time to beneficiaries.

This new type of trust is inspired, in spirit, by the civilian tradition that knew an institution which was analogous to a common-law trust, but which pursued a function different from it, allowing the settlor to restrain the enrichment of beneficiaries. This spirit fits well with the needs of civilian settlors even in these modern days.

Civilians, in fact, are not at odds with trusts, but they are often at odds with the gift-over-time idea embodied in trusts governed by a trust law inspired by English and Welsh law: they are able to appreciate the value of segregation of their assets the value of drafting an appropriation programme for these assets, but they do not want to immediately enrich the beneficiaries.28

ANDREA VICARI TEP IS ONE OF THE DRAFTERS OF THE TRUST LAW OF THE REPUBLIC OF SAN MARINO. HE IS FOUNDING PARTNER OF VICARI & ASSOCIATI (MILAN AND PESARO, ITALY) AND FOUNDER OF STUDIO LEGALE E NOTARILE VICARI (REPUBLIC OF SAN MARINO). ANDREA IS A DOCTOR OF JURIDICAL SCIENCE (CORNELL), ITP CERT (HARVARD) AND A DOCTOR OF COMPARATIVE LAW

28. For further details on trust law in San Marino, see A Vicari, ‘San Marino’, in Columbia Journal of European Law 81 (2012); A Vicari, ‘San Marino’, in International Trust Laws


I L L U S O R Y T R U S T S H E L E N D E R V A N

When is a trust ‘illusory’?

WHERE CLAYTON V CLAYTON LEAVES SETTLORS, AND THE RISKS OF A TRUST BEING FOUND TO BE ILLUSORY

By Helen Dervan

ABSTRACT• Courts often resort to heterodox approaches

when matrimonial property is held in trust; Clayton v Clayton is an example.

• In Clayton, the existence of broad powers held by the settlor/trustee was found by the New Zealand High Court to negate the creation of a trust.

• Clashes between fundamental equitable rules and the public interest in fair division of matrimonial property are best dealt with in legislation.

In the recent decision of Clayton v Clayton, the New Zealand High Court had the opportunity to consider the validity of a discretionary trust

where the settlor had declared himself to be the sole trustee and one of the beneficiaries and, as trustee, held wide discretions and powers to distribute income and capital, including to himself as beneficiary.

The extent to which settlors can preserve control of assets, including by appointing themselves as sole trustees and discretionary beneficiaries, before calling into question the validity of a trust relationship has been an issue, internationally, for

some time. It has arisen particularly in the context of the division of matrimonial property or, as it is termed in New Zealand, relationship property. There is a clear public interest in ensuring the proper distribution of matrimonial property on divorce. Family courts, in a number of jurisdictions, have had to deal with claims where assets, which arguably should form part of a property pool for division between divorcing spouses, have been secreted within trust or corporate structures. To ensure that legal (often statutory) rules governing the distribution of matrimonial property are given effect in a way that these courts consider to be fair, they have, at times, pursued heterodox approaches or have departed from fundamental legal principles, employing ‘incautious dicta and inadequate reasoning’.1 Clayton, arguably, falls into this category of case.2

The perceived threat of trusts being struck down generates uncertainty not only in matrimonial cases but also generally, given the diverse use of the trust device in modern life. This threat is a matter of particular concern in offshore jurisdictions

1. Prest v Petrodel Resources Ltd [2013] UKSC 34, at 19, 23–242. It has similarities to BJ v MJ (2011) 14 ITELR 572, at 5 and the ‘Dear Me trust’



offering international trusts. Bermuda, for example, has recently introduced legislation (the Trusts (Special Provisions) Amendment Act 2014) that lists various interests and powers that can be retained by settlors or given to third parties without prejudicing the validity of a trust. Other similar jurisdictions are likely to follow suit.

This article looks at the structure of the attempted trust in Clayton and the justification for, and some implications of, the decision that the relevant trust was illusory and invalid.

THE FACTS OF CLAYTON AND THE FAMILY COURT DECISIONMr and Mrs Clayton lived together from 1986 and married in 1989. The couple had a 20-year relationship, which was punctuated by a number of brief separations. They separated permanently in 2006 and divorced in 2009. There were two children of the marriage, born in 1990 and 1994 respectively.

Mr Clayton was a successful businessman. Over a period of some 25 years, commencing before his relationship with Mrs Clayton, he built up businesses in the forestry and timber sectors. At separation, the matrimonial home, family chattels and non-business assets had a value in excess of GBP1.5 million. Valuation of the business assets was disputed, but it appears that the property pool arguably available for division between the parties had a potential value in excess of GBP16 million. This pool comprised shares in companies run by Mr Clayton and property owned by certain trusts. Mrs Clayton appears to have had no significant assets in her own name.

Some six weeks prior to their marriage, Mr and Mrs Clayton entered into a prenuptial agreement. That agreement made very limited provision for Mrs Clayton if the couple divorced. Ultimately, the prenuptial agreement was set aside under the relevant New Zealand legislation as having become unfair or unreasonable.

During the course of the marriage, at least seven trusts were established by Mr Clayton for a variety of reasons, including: to facilitate

a restructuring of business assets, to reduce tax liabilities, to address the risk to Mr Clayton’s businesses that would be posed by a marriage breakdown, and to hold assets acquired by Mr Clayton after separation.

Of the seven trusts at issue in the litigation, only one trust, the Vaughan Road Property Trust (the VRP Trust), was considered to be ‘illusory’. This trust was established for the purpose of separating land and buildings used by certain of Mr Clayton’s companies from the operating assets of those companies. During the 1990s, Mr Clayton’s business had suffered some difficulties and the decision was made to hold the land and buildings on trust and to lease them back to the operating companies. The rental income derived from the arrangement was used to support bank loans secured over the land. Effectively, the VRP Trust acted as a banker to the companies. It borrowed funds from a bank and made advances of capital to the companies, when necessary.

The VRP Trust was a discretionary trust settled on 14 June 1999. Mr Clayton was the settlor. He was also the sole trustee. The discretionary beneficiaries included both Mr and Mrs Clayton. Their children were the final beneficiaries.

Under the trust, Mr Clayton held the power to appoint and remove both trustees and beneficiaries. The trust deed included the following provisions, which were held to be significant by either the Family Court or the High Court:• Clause 4: a standard income-distribution clause that

allowed interest to be distributed to discretionary beneficiaries;

• Clause 6: a standard distribution-of-capital clause that allowed capital to be distributed to discretionary beneficiaries before the vesting day;

• Clause 11: a standard ‘trustees’ unfettered discretion’ clause that gave the trustees unfettered discretion with regard to the exercise of their powers and discretions;

• Clause 12: a standard wide powers and discretions clause;• Clause 14: a self-benefit clause, allowing trustees who

are also beneficiaries to exercise any power or discretion vested in the trustees in their own favour;

• Clause 19: a trustee-conflict-of-interest clause; and



• Clause 23: a standard amendment-of-trust-deed clause, allowing the trustees to vary, revoke or enlarge management or administration provisions of the deed.In the Family Court, the judge, although invited

to find that the VRP Trust was a sham, found instead that the trust was illusory. Relying on the oft-quoted words of Millett LJ (as he was then) in Armitage v Nurse regarding the irreducible core of obligations,3 the judge, somewhat surprisingly, found that clauses 11 (the unfettered-discretion clause) and 19 (the conflict-of-interest clause) negated the ability of the beneficiaries to call the trustees to account. Further, relying on the TMSF decision,4 the judge found that clause 23 gave Mr Clayton the power to revoke the trust. As the VRP Trust was found to be illusory, the judge ordered that the assets of the trust were to vest in Mr Clayton personally and that Mrs Clayton was entitled to be compensated for one-half of the net value of those assets.

THE HIGH COURT DECISIONMr Clayton appealed this finding, among others, to the High Court. The court rightly held that clauses 11 and 19 did not erode the core obligations of the trustee and neither did they relieve Mr Clayton, as sole trustee, of his duty to act honestly and in good faith. It also found (at 85–86) that clause 23 did not militate against the creation of a trust, as it was fundamentally different from the revocation clause in TMSF. It did not allow Mr Clayton to revoke the trust and deal with the trust fund as he pleased, but was limited to management and administrative provisions. However, the court did concur that the trust was not a sham but was illusory.

TRUST WAS NOT A SHAM In finding that the trust was not a sham, the judge appears to have applied orthodox sham trust principles. In order to find that a trust is a sham, there must be a mutual or shared intention between the settlor and the trustee that the trust

3. [1998] Ch 2414. TMSF v Merrill Lynch Bank and Trust Company (Cayman) Ltd [2011] UKPC 17

is a facade. In particular, there must be an intention that there is, in reality, no trust or that the purported trust does not take effect according to its terms, and there must be an intention to mislead third parties as to the true state of affairs. Where there is a self-declaration of trust (as there was in Clayton), the mutual intention of the settlor and the trustee is found within one and the same person, the settlor-trustee.5

In order to ascertain intention, the court deviates from normal rules of construction and considers the subjective intention of the parties. In Clayton, the court appears to have evaluated Mr Clayton’s subjective intention and determined that he did not intend to mislead. While not referring in detail to the relevant legal principles, the court stated (at 79) that there was nothing to suggest that the VRP Trust was a sham, and that Mr Clayton ‘intended to create a trust and intended to do so for legitimate business purposes’. The court appears, therefore, to have found that Mr Clayton personally intended that he would no longer be absolute owner of the assets and was creating the beneficial interests in the declaration of trust.

In the same paragraph, the court stated that, on a proper construction of the trust deed, Mr Clayton ‘did not intend to give or part with control over the property sufficient to create a trust’. It is not entirely clear what the court meant when it used the word ‘control’. Mr Clayton purportedly made a self-declaration of trust and, to that extent, as trustee, he would hold the legal title and have control of the trust assets, subject to fiduciary and other duties. What the court appears to mean is that the transfer of the beneficial interest was somehow impugned and no trust was created.

At first sight, this finding might appear to be inconsistent with the finding above that Mr Clayton intended to create a trust. Although it is not wholly clear because of the brevity of the judgment, it seems that, in making this latter statement, the court had undertaken an objective

5. Pankhania v Chandegra [2012] EWCA Civ 1438; Official Assignee v Wilson [2007] NZCA 122; Painter v Hutchison [2007] EWHC 758



analysis of the words used in the documentation, rather than an analysis of Mr Clayton’s subjective intention. As stated in Byrnes v Kendle:6 ‘The fundamental rule of interpretation… is that the expressed intention of the parties is to be found in the answer to the question, “What is the meaning of what the parties have said?”, and not to the question, “What did the parties mean to say?”’ So, while Mr Clayton subjectively intended to create a trust by executing the trust deed, the deed objectively did not create the beneficial interests in the declaration and was ineffective. The deed was ineffective because Mr Clayton retained too much control over the assets and had ‘powers tantamount to ownership of trust property’ (at 85).

TRUST WAS ILLUSORYTo support its finding that the deed did not create a trust (that the trust was illusory), the court

referred to the wording of clauses 4 (income distribution), 6 (capital distribution), 12 (powers and discretions) and 14 (self-benefit), mentioned above. The court noted that Mr Clayton was a discretionary beneficiary, that he had power to appoint and remove trustees, that he was the sole trustee, that, as trustee, he had full discretionary power to pay income and capital to beneficiaries, and that, being both a trustee and a beneficiary, he was authorised under the deed to self-benefit. The court considered (at 86–91) that

6. [2011] HCA 26, at 53

it was significant that Mr Clayton could distribute the income and capital of the trust to himself if he wished, and bring the trust to an end at any time he pleased.

The court made its finding that the trust was invalid with very limited reference to legal authority and the decision is thinly reasoned. The court relied simply on dicta from another New Zealand High Court decision (Financial Markets Authority v Hotchin [2012] NZHC 323), which was an application to strike out a statement of claim and which itself did not undertake a detailed analysis of the relevant case law.

There are a number of problems with the court’s approach in relation to validity of the trust.

First, it is clear that it was the actual structure of the trust alone that the court considered rendered it invalid. While the court described the powers bestowed on Mr Clayton as trustee, it deliberately declined to consider as relevant how those powers

had actually been used by him. The court stated: ‘What [Mr Clayton] has in fact done is neither here nor there, although it appears that, through his delegates, Mr Clayton exercises, in a practical sense, the powers of ownership. It is what he has the legal power to do that is important and that is basically to do whatever he wants with the trust property… The reality is, however, that, if he chooses to, Mr Clayton is able to deal with trust property just as he would if the trust had never been created’ (at 90).

Traditionally, equity has permitted considerable flexibility in structuring trusts. It has declined to

While Mr Clayton subjectively intended to create a trust by executing the trust deed, the deed objectively did not create the beneficial interests in the declaration

and was ineffective. The deed was ineffective because Mr Clayton retained too much control over the assets and had ‘powers tantamount to ownership of trust property’



recognise as a trust an arrangement where one person is both the sole trustee and the sole beneficiary,7 as there is no separation of legal and equitable title. Other than that, the hallmark of a trust is the existence of fiduciary obligations that bind the conscience of the person vested with legal ownership.8 Beneficiaries must have rights enforceable against the trustee. The fact that provisions in a trust deed would enable a settlor, who is either a sole trustee or one of a number of trustees, properly to appoint trust assets to him or herself as discretionary beneficiary has not, to date, meant that a valid trust has not been created, nor that fiduciary duties have not been created, binding the conscience of the trustee. If the validity of a trust turns simply on whether those powers exist, then many arrangements currently recognised as trusts could be affected.

Second, it is not correct to say that Mr Clayton could do whatever he wanted with the trust property and that he could deal with the property as if the trust had never been created. As trustee, Mr Clayton would owe fiduciary and other duties to the beneficiaries. He would be under a duty to act in the best interests of the beneficiaries and to act in good faith and not fraudulently towards them. He would be under a duty to consider the exercise of his discretion and to exercise his discretion and powers in good faith and for a proper purpose, taking into account relevant considerations, including the needs and circumstances of the discretionary beneficiaries. He would be under a duty not to act irrationally, perversely, capriciously or arbitrarily in his decision-making.

The court held that the fiduciary duties Mr Clayton owed to the beneficiaries (including the duty to act honestly and in good faith) were not eroded by clause 11 (the unfettered-discretion clause). It is unclear why that same logic should not apply in relation to clauses 4, 6, 12 and 14, which were relied on by the court as supporting

7. Re Cook [1948] Ch 2128. Don King Productions v Warren [2000] Ch 291, at 317

its finding that no trust existed. Indeed, the court did not consider the fiduciary duties that Mr Clayton would owe as trustee in relation to those powers. It simply held that, because the powers existed, there was no trust – i.e. no fiduciary duties bound the trustee’s conscience.

Third, the court did not consider what would need to be done to make this arrangement a valid trust. Would the trust, for example, have been valid if there had been another trustee, or if Mr Clayton was not a trustee? Even if that were the case, the trustees could still properly have distributed all of the trust assets to Mr Clayton. Would it have been valid if there had been restrictions on Mr Clayton’s ability to self-benefit? If so, would the limit on self-benefiting have had to be absolute or would a limit of a fixed percentage of the trust assets have sufficed?

Further, the court did not deal with the fact that Mr Clayton appeared to be acting under dictation, which would be a breach of trust. Evidence was given before the Family Court (discussed at 77) that Mr Clayton did not make decisions himself regarding the administration of the trust, but that decisions were made by two advisors. There was no suggestion that distributions had been made to Mr Clayton and, presumably, the trust fund was intact. An option open to the court, which might have resolved its concern that Mr Clayton ‘could

In considering why the court found as it did, it is important to recognise

that New Zealand judges do not possess the same arsenal of statutory

powers as do English and Welsh judges when they are dealing with assets

that are held in trust and which arguably should form part of the

property pool for division



treat trust assets as his own’ (which would be a further breach of duty), would be to remove him as a trustee and replace him with independent trustees. If the trust deed gave Mr Clayton personally the power to remove and replace trustees, the court could also have ordered that the power was not to be exercised without the court’s consent.9

In considering why the court found as it did, it is important to recognise that New Zealand judges do not possess the same arsenal of statutory powers as do English and Welsh judges when they are dealing with assets that are held in trust and which arguably should form part of the property pool for division. In particular, there is no equivalent in the New Zealand legislation to s25(2) Matrimonial Causes Act 1973, under which an English or Welsh court may take into account the financial resources of each spouse. New Zealand judges must still look at what each spouse owns, rather than what financial resources are available and what each spouse might, in practice, be able to call upon.

New Zealand is thought to have one of the highest numbers of domestic trusts per capita in the world. Legal disputes between separating couples over property held in trust are increasingly common. The inability of the court to treat trust assets as a financial

9. Jones v Firkin-Flood [2008] EWHC 2417, at 296

resource of a spouse and to give ‘judicious encouragement’ to trustees to assist beneficiaries of discretionary trusts to fulfil court orders is a serious deficiency. Successive New Zealand governments appear to have had no appetite to make the necessary legislative changes. It must be acknowledged that this leaves New Zealand judges in an invidious position. Faced with leaving one spouse with an unfairly small share of assets, it is not surprising that New Zealand courts resort to the unorthodox.

Lewin on Trusts refers to the possibility of lifetime trusts being so squeletic (i.e. insubstantial), as to be illusory,10 but what the outer limits of a trust might be is a highly complex issue. Equity operates a unified law of trusts, and debate over these outer limits must include an analysis of the different uses of the trust concept and, particularly, an analysis of the commercial use of trusts. In the commercial sphere, flexibility in structuring trusts has proven highly advantageous and care should be taken before reducing it. A better approach is to make specific legislative changes where problems arise in relation to specific uses, as they do in regards to relationship property in New Zealand.

HELEN DERVAN TEP IS A SENIOR LECTURER IN LAW AT AUCKLAND UNIVERSITY OF TECHNOLOGY

10. Lewin on Trusts, 18th edn [1.14]; and Re AQ Revocable Trust [2010] SC (Bda) 40 Civ


C O N S T R U C T I V E T R U S T S A N T H O N Y D E S S A I N

When is a constructive trust a trust, and

when is it not?By Anthony Dessain

ABSTRACT• The principles governing the different types

of constructive trusts, and which of them are real trusts and which are not.

• The application of those principles to limitation and prescription periods.

• An examination of two lengthy recent judgments of the UK Supreme Court and the Royal Court of Jersey, namely:

• Williams v Central Bank of Nigeria [2014] UKSC 10; and

• Nolan v Minerva Trust and Others [2014] JRC 078A.

In both cases, the constructive trusts were not treated as trusts for the purpose of statutory limitation and prescription provisions.

• The reasons are compared and contrasted.• The implications are considered in light of

both judgments.

• The questions asked are: • will the law on ancillary constructive trusts

evolve towards a tortious liability? • is there a role for statute to simplify and

clarify the duties and obligations, and when they are breached?

• what are the correct remedies? • how can these principles establish

greater certainty and predictability but be sufficiently flexible?

How should constructive trust claims for knowing receipt and dishonest assistance be treated for limitation

and prescription purposes? Generally, trusts are express trusts created

intentionally by a settlor, or they may be imposed by statute or by the court, applying equitable

AND HOW DOES THE ANSWER AFFECT LIMITATION AND PRESCRIPTION IN ENGLAND AND JERSEY?



principles, creating a resulting trust or a constructive trust. An example of a resulting trust arises where there is a failure to transfer fully property to a trust or where there is some other failure to create a valid transfer.1 Generally, in such circumstances, the property reverts back to the settlor. Sometimes resulting and constructive trusts have, in England at least, been described as implied trusts.

Notwithstanding the above, two recent judgments have had to consider whether, for the purposes of limitation and prescription and the correct interpretation of relevant statutes affecting limitation and prescription, constructive trusts are or are not to be considered trusts. The cases of Williams v Central Bank of Nigeria in the UK Supreme Court,2 and Nolan v Minerva Trust and Others in the Royal Court of Jersey,3 had certain points in common and certain differences. Williams involved an alleged constructive trust created by knowing receipt, while Nolan involved a finding of dishonest assistance.

THE FACTS OF WILLIAMSThe facts of both cases are not overly relevant to the issues before the courts on the limitation issues. In Williams, the facts, which ‘can fairly be described as exotic’,4 were that Dr Williams alleged he was wrongly induced to act as a guarantor to a bogus transaction for the supply of goods. He had provided an English solicitor with GBP6.5 million, which was only to be released when other funds became available in Nigeria. It was alleged that the English solicitor paid GBP6 million to the Central Bank of Nigeria when the Central Bank of Nigeria knew the Nigerian funds were not available. It was alleged that the Central Bank of Nigeria had been party to the alleged fraud. The question of the jurisdiction of the English court arose, turning

1. Underhill and Hayton, Law of Trusts and Trustees, 18th edn (London, Butterworths Law), chapter 8; Jones v Plane [2006] JLR 438; Koonmen v Bender [2002] JLR 4072. [2014] UKSC 103. [2014] JRC 078A4. Williams at 1, per Lord Sumption

on whether the claims were statute-barred by s21(1) Limitation Act 1980.

The facts of the Nolan case, running to some 519 paragraphs, were more complex and similarly not hugely relevant to the questions of prescription before the court. In brief, the plaintiffs were members of a family (the Nolans) that had a successful transport business in Ireland and had built up a large pension fund held by an Isle of Man trust company with underlying companies. Mr Walsh, initially a successful Irish businessman, had a trust structure based in the Isle of Man that included underlying Jersey companies called the Buchanan Companies. A Jersey trust company, called Professional Trust Company Ltd (PTCL), administered and provided directors for the Buchanan Companies.

From March 2005 to September 2006, Mr Walsh persuaded the Nolans to pay over a total of GBP1,485,827 and EUR11,569,247 in order to make investments in the Buchanan Companies or in investments purportedly held or to be held by the Buchanan Companies. In June 2006, Minerva’s parent acquired PTCL, and PTCL subsequently legally merged under the Companies (Jersey) Law 1991 with Minerva Trust (Minerva) in February 2007.

The final defendants were Minerva (as merged successor of PTCL) and two of the directors of PTCL. The matters raised in the Jersey action essentially fell within the period from November 2003 to June 2006, and therefore before the merger.5

In the autumn of 2006, the Nolans’ relationship with Mr Walsh began to deteriorate. By 2008, the Nolans knew they had lost their money. Certain companies connected to the Nolans, over a period of time, obtained judgments and orders in England against Mr Walsh and some of the Buchanan Companies that became bankrupt.

After a full trial, the Royal Court described Mr Walsh as a ‘fraudster’ and held that the former PTCL directors and administrators were guilty of dishonest assistance. The court found they had

5. Nolan at 7



been the alter ego of Mr Walsh. During the trial, Minerva accepted, by reason of the merger, that it was liable for PTCL’s obligations and, if found to have acted wrongly, that it would be vicariously liable for the acts of those directors and administrators. The court held that a constructive trust arose over the monies received into the Buchanan Companies (and that those directors and administrators had dishonestly assisted in breaches of trust causing loss, and that Minerva must account for that loss).

Both cases are useful and illustrate the law of constructive trusts, although principally in the context of limitation and prescription respectively. In particular, it is acknowledged that Jersey law on constructive trusts is the same as English law.6

LIMITATION AND PRESCRIPTIONThe question of limitation and prescription arose in both the English and Jersey cases respectively, but in different ways. If s21(1) Limitation Act 1980 or article 57(1) Trusts (Jersey) Law 1984 applied, as argued by the Central Bank of Nigeria in Williams and Minerva in Nolan respectively, limitation or prescription could not apply at all.

Section 21 Limitation Act 1980 provides:‘(1) No period of limitation prescribed by this Act shall

apply to an action by a beneficiary under a trust, being an action –(a) in respect of any fraud or fraudulent breach of

trust to which the trustee was a party or privy; or(b) to recover from the trustee trust property or

the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use.

(2) Subject to the preceding provisions of this section, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed

6. Re Esteem Settlement [2002] JLR 53: Williams – although it is still open whether certain constructive trusts could apply to immovable property situated in Jersey. Generally, a trust that purports to do so will be invalid: article 11(2)(a)(iii) Trusts (Jersey) Law 1984

by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued.’

Article 57(1) and (2) Trusts (Jersey) Law 1984 provides as follows:

‘(1) No period of limitation or prescription shall apply to an action brought against a trustee –(a) in respect of any fraud to which the trustee was

a party or to which the trustee was privy; or(b) to recover from the trustee trust property –

(i) in the trustee’s possession,(ii) under the trustee’s control, or(iii) previously received by the trustee and

converted to the trustee’s use.(2) Where paragraph (1) does not apply, the period

within which an action founded on breach of trust may be brought against a trustee by a beneficiary is three years from –

(a) the date of delivery of the final accounts to the beneficiary; or

(b) the date on which the beneficiary first has knowledge of the breach of trust, whichever is earlier.’

The Nolans also relied on the definition of a trustee in article 2 Trusts (Jersey) Law 1984, as follows:

‘A trust exists where a person (known as a trustee) holds or has vested in the person or is deemed to hold or have vested in the person property (of which the person is not the owner in the person’s own right) –(a) for the benefit of any person (known as a

beneficiary) whether or not yet ascertained or in existence;

(b) for any purpose which is not for the benefit only of the trustee; or

(c) for such benefit as is mentioned in sub-paragraph (a) and also for any such purpose as is mentioned in sub-paragraph (b).’

Pausing there, there is no direct English equivalent to article 2 Trusts (Jersey) Law 1984 but s68(17) Trustee Act 1925 states: ‘the expressions “trust” and “trustee” extend to implied and constructive trusts... and to the duties incident to the office of a personal representative, and “trustee”, where the context admits, includes a personal representative’, and



s38(1) Limitation Act 1980 adopts the same meaning as in s68(17) Trustee Act 1925 for ‘trust’ and ‘trustee’.7

THE DISTINCTION BETWEEN LIMITATION AND PRESCRIPTIONBefore proceeding further, it is necessary to understand the distinction between limitation and prescription as used in both these cases.8

The distinction between limitation and prescription is usually a distinction without a difference. Limitation is generally used in common-law countries and prescription in civil-law countries, as it is derived from Roman law, by which Norman law was heavily influenced, and, hence, Jersey law. Limitation involves whether the claimant’s right to bring an action has been barred. It focuses on the action or claim. Prescription involves whether the right or the object has been altered by a duration in another’s possession. It refers to the effluxion of time on the underlying right of ownership. Both lead to similar results – i.e. the extinction of a claim or a right – but prescription is wider because it allows for the possibility of the acquisition of rights.

For the purposes of this article, the words are used interchangeably. Indeed, it is noted that, although the Jersey statutes and cases refer to prescription, article 57(1) Trusts (Jersey) Law 1984 anomalously states: ‘No period of limitation or prescription shall apply to an action brought against a trustee’.

7. Williams at 38. Prescription and Limitation, Jersey Law Commission, Consultation Paper No.1/2008 CP, March 2008

This perhaps merely reflects the engrafting of trust jurisprudence from England to Jersey since the 19th century and the consolidating (but not codifying) of the Trusts (Jersey) Law 1984.9

THE BACKGROUNDThe statutory provisions in s21(1)(a) and (b) Limitation Act 1980 and article 57(1) Trusts (Jersey) Law 1984, while not identical, are in similar terms and the Jersey provision has clearly derived from the English provision: ‘Those two aspects provide a strong basis for considering the reasoning of the English court may be equally applicable to article 57(1).’10

The trial of Nolan v Minerva occurred in 2012 and the judgments of Williams in the High Court and Court of Appeal were cited. In November 2013, a draft judgment in Nolan was handed down. The Supreme Court gave judgment in the Williams case on 19 February 2014. All parties in the Jersey case were given an opportunity to address the Jersey court on the implications of the Supreme Court decision on the draft Jersey judgment.

Neither party to the Jersey action considered it necessary for the draft Jersey judgment to be amended. The final judgment of the Royal Court of Jersey was handed down in June 2014 and concluded that ‘the law of Jersey in relation to article 57(1) and that of England in relation to

9. Esteem [2002] JLR 53 at 87: ‘...the 1984 [Trusts] Law was not a codification, nor was it enacted in a vacuum. There was already a customary law of trusts in existence. Many of the provisions of the 1984 Law were simply reflections of the pre-existing law or of English principles.’10. United Capital Corporation Ltd v Bender [2006] JLR 242, at 45

Limitation involves whether the claimant’s right to bring an action has been barred. It focuses on the action or claim. Prescription

involves whether the right or the object has been altered by a duration in another’s possession



s21(1) are now realigned.’11 Lord Sumption in the Supreme Court said that ‘there are few areas in which the law has been so completely obscured by confused categorisation and terminology as the law relating to constructive trustees’.12 Later, he said: ‘Regrettably, however, the expressions “constructive trust” and “constructive trustee” have been used by equity lawyers to describe two entirely different situations.’ The reason is that, after a time, ‘Courts of Equity... lost sight of the underlying principle and, for much of the 19th century, continued to deal with the issue on a confusing and inconsistent basis, generally without analysis or reference to earlier authority.’13

To show how the issue was so finely balanced, Lord Clarke indicated that, during the course of the argument in Williams, he had favoured Lord Mance’s arguments (which, as a dissenting judgment and for reasons of space, are not summarised) but was finally persuaded by the arguments of Lords Neuberger and Sumption.

THE IMPORTANCE OF THE JUDGMENTSThese recent judgments are important:• in both cases, to clarify the true position as to whether

constructive trust claims are subject to a limitation or prescription period;

• in the case of the Jersey judgment, to ascertain the number of years applicable;

• to confirm there can be a delay to the starting date for the time to run; and

• to provide an analysis of the nature of a constructive trust. Although the issues are in the context of limitation or prescription, the comments are of general relevance.Dealing with the last point first, the general

position, as a starting point, without reference to the question of limitation, was most carefully explained by Lord Sumption. This is instructive generally when, after saying how obscure by confused categorisation and terminology the law

11. Nolan at 49712. Williams at 1113. Williams at 16

of constructive trusts had become, Lord Sumption, having described express trusts and resulting trusts, referred to constructive trusts and, after reviewing key decisions,14 said there are two different types of constructive trust: ‘The first comprises persons who have lawfully assumed

fiduciary obligations in relation to trust property, but without a formal appointment. They may be trustees de son tort, who, without having been properly appointed, assume to act in the administration of the trusts as if they had been; or trustees under trusts implied from the common intention to be inferred from the conduct of the parties, but never formally created as such. These people can conveniently be called de facto trustees. They intended to act as trustees, if only as a matter of objective construction of their acts. They are true trustees, and, if the assets are not applied in accordance with the trust, equity will enforce the obligations that they have assumed by virtue of their status exactly as if they had been appointed by deed. Others, such as company directors, are by virtue of their status fiduciaries with very similar obligations. In its second meaning, the phrase ‘constructive trustee’ refers to something else. It comprises persons who never assumed and never intended to assume the status of a trustee, whether formally or informally, but have exposed themselves to equitable remedies by virtue of their participation in the unlawful misapplication of trust assets. Either they have dishonestly assisted in a misapplication of the funds by the trustee, or they have received trust assets knowing that the transfer to them was a breach of trust. In either case, they may be required by equity to account as if they were trustees or fiduciaries, although they are not. These can conveniently be called cases of ancillary liability. The intervention of equity in such cases does not reflect any pre-existing obligation but comes about solely because of the misapplication of the assets. It is purely remedial. The distinction between these two categories is not just a matter of the chronology of events leading to liability. It is fundamental.’15

14. Williams at 9; Barnes v Addy (1874) 9 Ch App 244 at 251; Paragon Finance plc v DB Thackerar & Co (a firm); Paragon Finance plc v Thimbleby & Co [1999] 1 All ER 400 at 413; Selangor United Rubber Estates Ltd v Cradock (a bankrupt) (No.3) [1968] 1 WLR 155515. Williams at 9, per Lord Sumption



This distinction is reflected in later speeches and is fundamental to the questions being decided.16 The first type of constructive trust has been described as a category 1 type and the other a category 2 type.17

Category 1 constructive trusts have been described by Underhill and Hayton as trusts of property imposed by law and category 2 constructive trusts as personal liabilities for third parties or beneficiaries: ‘The courts often use the language of constructive

trusteeship to describe liability for dishonest assistance. However, it follows from the fact that liability can arise whether or not the defendant has received property that the courts do not mean that the defendant is a trustee of property for which he must account to the claimant. Instead, they mean that he should be treated, by a legal fiction, as though he were the trustee or fiduciary in whose breach of duty he has participated: his liability derives from and duplicates theirs. Another way of putting this is to say that dishonest assistance can incur a civil secondary liability, analogous to the criminal secondary liability of those who procure, aid, or abet a criminal offence.’18

This essential distinction was outlined with great clarity by Lord Walker in an article where he set out the circumstances in which a professional person engaged in financial services may find themselves liable as a trustee, although they are not a trustee in the ordinary sense. He warned of the dangers of getting too close to a client.19

THE QUESTIONS AND DECISIONS IN WILLIAMSThe questions and the decisions were as follows:• Is a stranger to a trust who is liable to account (the

Central Bank of Nigeria) on the footing of dishonest

16. As to a discussion on equitable rights and constructive trusts generally under Jersey law, see Dessain and Wilkins, Jersey Insolvency and Asset Tracking, 4th edn, pages 46–5617. Nolan at 48818. Law of Trust and Trustees, 18th edn, at 98.46. In addition, dishonest assistance can also incur a direct primary liability in their own right, to disgorge profits that they have made for themselves through their equitable wrongdoing19. ‘Fraud, Fault and Fiduciary Liability’, in Jersey and Guernsey Law Review, June 2006

assistance in a breach of trust or knowing receipt of trust assets a trustee for the purposes of s21(1)(a) Limitation Act 1980?

• If ‘no’, does an action ‘in respect of’ any fraud or fraudulent breach of trust to which the trustee was a party or privy include an action against a party (such as the Central Bank of Nigeria) which itself is not a trustee?20 Their Lordships, comprising Lord Neuberger,

Lord Mance, Lord Clarke, Lord Sumption and Lord Hughes, decided:• (Lord Mance dissenting.) A party guilty of knowing

receipt was not a trustee for the purposes of the Limitation Act. Such a party incurred liability solely by reason of its participation in the misapplication of trust assets that the beneficiary sought to impeach and was not a true trustee who had taken possession of property on trust for others or who assumed such a position. The sole obligation of a party guilty of knowing receipt was to restore the assets immediately. Accountability for any profits or losses did not make the party a trustee or bring it within the provisions of the Limitation Act relating to trustees.21

• (Lord Mance and Lord Clarke dissenting.) A knowing recipient was not a party sued in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy. Section 21(1)(a) was concerned only with actions against trustees on account of their own fraud or fraudulent breach of trust. The words ‘to which the trustee was a party or privy’ would be unnecessary if the provision applied to strangers to the trust since a fraudulent breach of trust had necessarily to be one to which the trustee was privy. The words were intended to limit the circumstances in which the section applied to true trustees.22 Therefore, as a result of the first finding, it

is now settled that s21 only applies to express de facto trustees and not to persons liable only

20. Williams at 6 and at 40, per Lord Neuberger21. Selangor United Rubber Estates Ltd v Cradock (a bankrupt) (No.3) [1968] 2 All ER 1073, Paragon Finance plc v DB Thackerar & Co (a firm), Paragon Finance plc v Thimbleby & Co (a firm) [1999] 1 All ER 400, Soar v Ashwell [1893] 2 QB 390 and Taylor v Davies [1920] AC 636 discussed. Cattley v Pollard [2006] EWHC 3130 (Ch), [2007] 3 WLR 317 considered22. Peconic Industrial Development Ltd v Lau Kwok Fai (2009) 11 ITELR 844 and Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 considered



by virtue of their dishonest assistance in breach of trust.23 This does not put a dishonest assister in a better position than an innocent or negligent trustee: ‘The principle is not that the limitation defence is

denied to people who were dishonest. It plainly applies to claims based on ordinary common law fraud. The principle is that the limitation period is denied to fiduciaries. But dishonest assisters are not fiduciaries.’24 While most of the authorities on dishonest

assistance in breach of a trust related to where the defendant had participated in a fraud, others did not. It was found that knowing receipt also gives rise to the same treatment: ‘The essence of a liability to account on the footing

of knowing receipt is that the defendant has accepted trust assets knowing that they were transferred to him in breach of trust and that he had no right to receive them. His position is therefore at all times wrongful and adverse to the rights of both the true trustees and the beneficiaries. No trust has been reposed in him. He does not have the powers or duties of trustees... His sole obligation of any practical significance is to restore the assets immediately.’25 Although such a defendant may also be

accountable for profits that could have been made,

23. Paragraph 28: JJ Harrison Properties Ltd v Harrison [2001] EWCA Civ 1467, [2002] 1 BCLC 16224. Peconic Industrial Development Ltd v Lau Kwok Fai (2009) 11 ITELR 844, per Lord Hoffman25. Williams at 31, per Lord Sumption

or any loss that would have been avoided, and there may be a proprietary claim – those are the measure of the remedy. As such: ‘It does not make him a trustee or bring him within the provisions of the Limitation Act relating to trustees.’26

In relation to the second finding, Lord Sumption concluded that s21(1)(a) ‘is concerned only with actions against trustees on account of their own fraud or fraudulent breach of trust’.27 In giving his reasons, he confirmed that the purpose of ‘s21(3) was intended to relieve trustees... from the harsh consequences of the equitable rule which held them to account without limitation of time.’28

Section 21(1)(a) is limited to cases of ‘fraud or fraudulent breach of trust to which the trustee was a party or privy’. These words are there to relieve trustees who acted in good faith, including co-trustees of a dishonest trustee.’29

Lord Neuberger, with whom Lord Hughes agreed, gave different reasons for deciding the position as stated by Lord Sumption. He said the resolution of the two issues was not easy. In reaching the same conclusions as Lord Sumption, he clarified certain aspects of general interest. He said, in relation to the first questions, that the definition of s68(17) Trustee Act 1925 (stated above) obviously extended to a person who accepts property, expressly or impliedly, on the basis that they are to hold it for the benefit of another, a classic definition of a trustee.

As Lord Neuberger noted in Williams:30

‘The Courts of Equity treated as a trustee not only an express or implied trustee and a trustee de son tort, but also a person who “though not expressly appointed as trustee, has assumed the duties of a trustee by a lawful transaction which was independent of and preceded the breach of trust and is not impeached by the [claimant]”... such a person is known as a constructive trustee, and “really is a trustee”, as

26. Williams at 31, per Lord Sumption27. Williams at 3228. Williams at 3329. Williams at 3430. Williams at 55, with reference to the words of Millett LJ in Paragon Finance plc v DB Thackerar & Co , Paragon Finance plc v Thimbleby & Co [1999] 1 All ER 400 at 408–409

Following Williams, it is now settled that s21 Limitation Act 1980 only

applies to express de facto trustees and not to persons liable only

by virtue of their dishonest assistance in breach of trust



“his possession of the property is coloured from the first by the trust and confidence by means of which he obtained it, and his subsequent appropriation of the property to his own use is a breach of that trust”.’ Lord Neuberger, after reviewing the key cases,

concluded that dishonest assistance should also be treated in the same way as knowing receipt. Therefore, neither of these types of constructive trustee was a ‘trustee’ for the purposes of the definition of s68(17).31

Such a party, while liable to account in the same way as a trustee, is not, according to the law laid down by the courts, a trustee, not even a ‘constructive trustee’, and ‘trust’ and ‘trustee’ in the Trustee Act 1925 were meant to have orthodox meanings.32

After reviewing Millett LJ’s conclusion in the Paragon Finance case and Lord Hoffman’s conclusion,33 Lord Neuberger said: ‘It is unreal to refer to a person who receives property

dishonestly as a ‘trustee’, i.e. a person in whom trust is reposed, given that the trust is said to arise simply as a result of dishonest receipt. Nobody involved, whether the dishonest receiver, the person who passed the property to him, or the claimant, has ever placed any relevant trust and confidence in the recipient... and, while he is “not a trustee at all”, “he may be liable to account as if he were”.’34 In relation to the second question (disagreeing

with the Court of Appeal),35 he found that s21(1)(a) only applied to claims brought against the trustee who was ‘a party or privy’ to the ‘fraud’ or ‘fraudulent breach of trust’ (the narrower meaning), rather than to anyone, including such a trustee, who was involved in the ‘fraud’ or ‘fraudulent breach of trust’ (the wider meaning).

Accordingly, s21(1)(a) can only be invoked by a beneficiary against a true trustee, and not against a knowing recipient or a dishonest assister.36 Normal periods of limitation, therefore, do apply to knowing recipients and dishonest assisters.

31. Williams at 6632. Williams at 9033. Peconic at 19–2434. Williams at 6435. Williams at 11336. Williams at 92 and 102

THE QUESTIONS AND DECISIONS IN NOLAN ON THE MAIN PRESCRIPTION ISSUEIn Nolan, in relation to prescription under article 57, the first question and the decision on it was as follows: ‘... whether a person guilty of dishonest assistance is a

‘trustee’ for the purposes of article 57(1). If that person is, then he or she will not have the protection of any limitation period.’37 Accordingly, this was similar to the first point

at issue in Williams. The second question in Williams was not argued in the Jersey court, but the court in Nolan adopted that second finding in the final judgment.38

The Royal Court decided that ‘article 57(1) did not prevent Minerva from relying on whatever period of prescription would otherwise apply to the Nolans’ claims’.39

This was based principally on Bagus Investments Ltd v Kastening,40 which related to whether there was an arguable defence to such a claim based on prescription. If there was, leave to re-amend should not be granted. The Royal Court in Bagus found that there was no arguable defence and refused leave to amend. In Bagus, the Bailiff, referring to Paragon and to Millett LJ’s explanation, said: ‘Underlying this assertion is the fact that, in English

law, the expression “constructive trustee” covers two completely different types of situation. The first is where the defendant acquired the property as a trustee or other fiduciary in an unimpeached arrangement before the conduct complained of when he abused the trust and confidence reposed in him; the second is where the wrongful conduct of the defendant in asserting his interests leads to an equitable obligation being placed upon him. This distinction has been touched upon in a number of cases but has perhaps been most clearly articulated by Millett LJ in the case of Paragon... at 408–414.’41

37. Nolan at 48638. Nolan at 49839. Nolan at 49640. [2010] JLR 35541. Bagus Investments Ltd v Kastening [2010] JLR 355



The second type of constructive trust is usually described as a category 2 trust.42

The Royal Court in Bagus referred to Peconic Industrial Development Ltd v Lau Kwok Fai;43 Dubai Aluminium Co Ltd v Salaan;44 Statek Corporation v Alford,45 and to the Jersey case previously mentioned of United Capital Corporation Ltd v Bender.46

Unusually, therefore, the main question in Williams had been decided twice before in Jersey, in 2006 and 2010, ahead of England. The Williams case was first reported in 2012. Both the Jersey and English decisions were based on whether there was or was not an arguable case, whereas the Supreme Court has determined the main issue as to what, in fact, is right in law.47

WHAT IS THE CORRECT PERIOD FOR A CATEGORY 2 CONSTRUCTIVE TRUST CLAIM?In Nolan only, having found that article 57 did not apply to a dishonest assistance claim, the Royal Court then had to consider what was the correct prescription period to apply. Had article 57(1) applied, the period would have been unlimited. Had article 57(1) not applied, it would have been three years under article 57(2) but, of course, none of article 57 applied at all. As indicated, article 57(2) provides that: ‘where paragraph (1) does not apply, the period within which an action founded on breach of trust may be brought against a trustee by a beneficiary is three years from...’ This is in certain respects similar to s21(3), except that the section applies a six-year period.

IN NOLAN, THE COURT CONSIDERED THE PRESCRIPTION PERIOD FOR A CATEGORY 2 CONSTRUCTIVE TRUSTAs it was found in both cases that s21(1)(a) and article 57(1) did not apply, one would have

42. Nolan at 48843. (2009) 11 ITELR 84444. [2002] UKHL 48, [2003] 2 AC 36645. [2008] EWHC 32 (Ch), [2008] BCC 26646. [2006] JLR 24247. Williams at 6

expected s21(3) to apply and article 57(2) to apply. However, on the basis of the reasoning in Williams that s23(1) did not apply where there was ‘knowing receipt’ or ‘dishonest assistance’ and in Nolan that article 57(1) did not apply where there was dishonest assistance, it follows that neither could s23(3) nor article 57(2) apply. Such actions did not involve real or orthodox trustees or trustees at all.

The normal prescription period in Jersey for tort is three years and, for breaches of contract, it is ten years, whereas in England the limitation periods for breaches of trust, contract and tort are the same, at six years.

As the Nolan claims were not subject to article 57, the appropriate periods of prescription needed to be found. The court accepted Minerva’s submission that ‘as a matter of Jersey law, the prescriptive period applicable to actions for dishonest assistance in a breach of trust is, by analogy with economic torts, three years...’48

In Re Esteem Settlement, there were suggestions the ten-year period (referred to by Le Geyt, a 17th-century writer on Jersey customary law) is a general period applying to personal actions and to actions applying to movables unless subject to a different period ‘or that some other period is by analogy clearly more applicable.’49

In Re Northwind Yachts Ltd,50 the Royal Court expressed the view, without full argument, that a ten-year period would apply against a director of a company for breach of fiduciary duty. Minerva argued that a claim of dishonest assistance was analogous to an economic tort, which would, by virtue of article 2(1) Law Reform (Miscellaneous Provisions) (Jersey) Law 1960, apply a three-year period.

The Royal Court in Nolan followed Esteem by stating that what has to be analogous was the period and not the cause of action. It also found that, as the category 2 dishonest-assistance-type constructive trust had been imported from

48. Nolan at 50149. Re Esteem Settlement [2002] JLR 53, at 25750. [2005] JLR 137



English law, as confirmed in Esteem, it was appropriate to look to English principles, rather than the old Jersey customary law rules. Accordingly, it was appropriate to look to such cases as Cattley v Pollard;51 Royal Brunei Airlines Sdn Bhd v Tan;52 and Peconic. They referred to dishonest assistance claims as akin to claims for deceit or procuring a breach of contract.

Whether, under the historical divide in England, the claims arose in England at common law or under the equitable jurisdiction of the court was of no relevance in Jersey.

IN NOLAN THE COURT CONSIDERED EMPÊCHEMENT DE FAITHaving determined the prescription period was three years, the Court had a third question in relation to whether the action was now prescribed in that the action had not been brought within three years. Under Jersey law there is empêchement d’agir, which is divided into empêchement de droit and empêchement de fait.53

Article 57(3) Trusts (Jersey) Law 1984, applying only in relation to actual trusts, including category 1 constructive trusts, states that time only starts to run when a minor ceases to be a minor, an interdict ceases to be an interdict, or any other legal disability ceases. This reflects the common-law position, to which would also be added hostilities that prevented access to the court.

Lord Neuberger in Williams referred to s32 Limitation Act 1980, which, in some cases of dishonest assistance and knowing receipt, allows a postponement of the commencement of the six years in cases ‘based upon the fraud of the defendant’ or where the defendant has ‘deliberately concealed’ relevant facts from the claimant.54

The issue in Nolan was whether there was an empêchement de fait. The test is laid down in

51. [2006] EWHC 3130 (Ch) at 352. [1995] 2 AC 37853. See generally, Prescription and Limitation, Jersey Law Commission, Consultation Paper No.1/2008 CP, March 200854. Williams at 119

Public Services Committee v Maynard,55 and Boyd v Pickersgill,56 and must involve some practical impossibility, and, while ignorance alone is insufficient, it could be part of the necessary impediment. The ignorance needs to be reasonable in all the circumstances. What is reasonable is a matter of policy in each case, such as where there were no means by which a plaintiff could reasonably have been expected to discover the facts on which the cause of action was based.

Minerva stated, and the court accepted, that the issue was whether the Nolans knew the existence of all the facts necessary to found the pleaded causes of action in dishonest assistance. If the Nolans did know of these facts prior to 28 January 2008 – i.e. three years prior to commencing proceedings – then they could not rely on the principle of empêchement de fait.

The court found as a fact that, although the Nolans knew they had lost their money by January 2008, it was not until 2010, after documents were received in response to a Jersey injunction, that they knew the part that PTCL had played in the dissipation of their investments, so it was only then they had acquired sufficient knowledge of all the facts necessary to found an action in dishonest assistance. A breach of trust could not have been properly pleaded until after receipt of the disclosed documents. The Nolans’ claims were, therefore, not prescribed and the Court awarded damages equal to the amounts the Nolans had invested. This was based on article 30(2) Trusts (Jersey) Law 1984, which states:

‘A trustee who is liable for a breach of trust shall be liable for –

(a) the loss or depreciation in value of the trust property resulting from such breach; and(b) the profit, if any, which would have accrued to the trust property if there had been no such breach.’

The Nolans had relied on United Capital Corporation v Bender,57 to the effect that a person guilty of dishonest assistance is liable to account to the victim as if they were a trustee.

55. [1996] JLR 34356. [1999] JLR 284 (CA) at 291 and 29557. [2006] JLR 242



In Minories Finance Ltd v Arya Holdings Ltd, the Jersey Court of Appeal rejected an argument that, in practice, a claimant could not effectively commence proceedings until it had been put in possession of the necessary documents and information in the possession of a third party. That argument was ‘... misconceived. Periods of prescription do not cease to run, in the absence of specific provision to that effect, merely because a potential plaintiff may not have all the information or documents needed to press home his cause of action... [The] lack of documents or information did not stop the prescription period running.’58

This case was not cited in Nolan. Perhaps there is a distinction now between sufficient documents and information to commence an action, as opposed to press it home. It is a fine line. A further distinction may be where the documents and information are held by the defendant, or at least a defendant who has acted wrongly, as opposed to a third party. Still, it was no doubt arguable in Nolan that, had the injunctive proceedings producing the sufficient information and documents been brought at least a year earlier, which they could have been after the loss was discovered, over three years would have passed and the Nolan claim would have been prescribed.

THE IMPLICATIONS OF THE DECISIONSThese judgments are important for the analysis of the nature of constructive trusts. In effect, they answer the question: when is a constructive trust a trust and when is it not a constructive trust?

Category 2 constructive trusts have some affinity with remedial constructive trusts, but rest on a declaration of the position. The remedial constructive trust depends for its force on an order of the court where, for example, there has been unjust enrichment. While accepted in some jurisdictions, such as Canada,59 Australia,60 and New Zealand,61 it was rejected as applying under

58. [1994] JLR 149 at 16659. Hartman Estate v Hartfam Holdings Ltd (2006) 205 OAC 36960. Robins v Incentive Dynamics Pty Ltd (in liquidation) (2003) 45 ACSR 24461. Fortex Group Ltd v MacIntosh [1998] 3 NZLR 171 (NZCA) and Commonwealth Reserves v Chodar [2001] 2 NZLR 374

English law by the Court of Appeal in Re Polly Peck International plc (in administration) (No.2),62 and in subsequent cases,63 principally on the basis that it would require legislation to introduce it, as the rights in the property itself would be changed.

In Re Esteem Settlement,64 the Royal Court also could not permit such a change without statutory authority, on the basis that title and proprietary rights had been too strongly part of the customary law and the benefits were not sufficient.

NEW AND UNANSWERED POINTSThere are a number of new and unanswered points that arise from these judgments. One is that, if a category 2 constructive trust is more analogous to a tort, should it be treated as a tort in other respects rather than just for prescription? The necessary elements to categorise an action either as an existing tort or sui generis were addressed by the Jersey Court of Appeal in Minories Ltd v Arya Holdings Ltd.65 Should article 30(2) have been engaged at all in a category 2-type constructive trust? If the category 2 constructive trust does not engage article 57, why should it engage any other article of the statute? If a category 2 constructive trust is more akin to a tort, should, for example, an element comprise causation, particularly for dishonest assistance where no funds have been received? Should the measure of damages reflect the usual measure for a tort? In that respect, there may need to be a distinction between knowing receipt and dishonest assistance where funds had or had not actually been received. If so, in the Nolan case, should the liabilities of Minerva have been confined to the part played or the loss caused by PTCL and its employees, rather than the whole loss? Should there be some apportionment between Mr Walsh, who was found to have been a ‘fraudster’ and the role he played? Would the position be different if no recovery could be made

62. [1998] 3 All ER 81263. Underhill and Hayton, Law of Trusts and Trustees, 8th edn, at paragraph 22.1564. [2003] JLR 188, at 146–15165. [1997] JLR 176. How close is the connection with the tort of fraud?



against the primary wrongdoer? It seems impossible to remove the category 2-type of constructive trust from the realms of trust completely, as the requirements involve the need for findings that there was a trust or fiduciary duty, as well as whether there was a breach of one or the other. The answer probably lies in the historical English origins, deriving from the Courts of Equity rather than the common-law courts. Should that be relevant today? The remedies available for a category 2 constructive trust are equitable remedies and this has consequences for the causation rules and the amount of damages that can be ordered when called to account and compensate.66 There are a number of other important issues arising from Nolan which were the subject of a notice of appeal but which are beyond the scope of this article. However, the action has now been settled without admission of liability and the appeal has been discontinued, so we will only know in a future case.

In the meantime, comfort can be taken that the laws in England and Jersey have been ‘realigned’ in this area, even though the actual limitation or prescription time in terms of the number of years differs. Will English law follow Jersey law and apply the same limitation period to a category 2 action as it does to an English tort?

Greater clarity is welcome in what had become a complex and confused area of the law, which is more relevant in the light of increased complex fraud generally and the amounts involved.

66. Underhill and Hayton, Law of Trusts and Trustees, 18th edn, paragraph 98.46

Globalisation and the ease with which sums can flow (as is necessary to finance an efficient global economy) can result in greater abuse. The weaponry available to counter abuse needs to be as clear and simple as possible. One of the difficulties of category 2 constructive trusts is that, other than in clear cases, often it is only with the benefit of hindsight and when all information is made available that it can become clear whether the ingredients to launch a claim or to properly defend a claim can be assessed.

The tests that need to be passed are likely to be subject to argument, and expensive and slow to pursue to finality, and, if successful, result in problems of recoverability and jurisdiction. Perhaps this is an area ripe for statutory intervention so that the equitable remedy based on principles of conscience for a category 2 constructive trust aspect is removed from the concept of trusts altogether. Perhaps a statutory test for fraud, knowledge and dishonesty in both civil and criminal matters should be tackled. Would this test create greater certainty and predictability and a sufficient amount of flexibility?

ANTHONY DESSAIN TEP IS THE SENIOR PARTNER AND AN ADVOCATE OF BEDELL CRISTIN JERSEY PARTNERSHIP

HE IS GRATEFUL FOR THE ASSISTANCE OF HENRY WICKHAM TEP, AN ENGLISH SOLICITOR OF BEDELL CRISTIN AND A MEMBER OF THE STEP JERSEY BRANCH COMMITTEE

Greater clarity is welcome in what had become a complex and confused area of the law, which is more relevant in the light of increased complex

fraud generally and the amounts involved


E X C L U S I O N S A N D E X E M P T I O N S D A N I E L C L A R R Y

Exclusions and exemptions in onshore and offshore trusts

FOLLOWING SPREAD V HUTCHESON, GUERNSEY AND JERSEY TRUSTS LAW HAS BEEN ALIGNED MORE CLOSELY WITH ENGLISH AND WELSH LAW WITH REGARDS TO

DUTIES AND STANDARDS OF CARE. HOWEVER, A CLEAR LEGISLATIVE PROVISION IS REQUIRED IN ENGLAND AND WALES IN ORDER TO LIMIT EXCLUSIONS AND EXEMPTIONS

By Daniel Clarry

ABSTRACT• The en bon père de famille obligation in Guernsey

trusts law has effectively been translated in the Spread v Hutcheson litigation, in which it was uniformly accepted to be equivalent to the standard of care applicable to trustees in England and Wales and in Jersey, i.e. the ‘prudent man of business’. This removes a latent uncertainty in Guernsey law.

• Despite difficulties in the reasoning of the Privy Council in Spread, the alignment of standards of care of trustees develops greater cohesion across these prominent trust jurisdictions and facilitates the coherent development of trusts jurisprudence.

• Unlike in England and Wales, the standards of care in Guernsey and Jersey are mandatory, rather than applicable by default, which ensures greater accountability in offshore trust administration.

• Guernsey and Jersey have also taken a more robust position on trustee exemption clauses, where liability

for a trustee’s own fraud, wilful default or gross negligence cannot be exempted; in England and Wales, all liability save actual fraud can be exempted.

• Despite leading trust precedents recommending against broadly drafted trustee-exemption clauses, and attempting to strike an appropriate balance between accountability and protection of trustees, trustees may nevertheless insist on lower standards of care being imposed, consonant with the general and statutory law.

• As a matter of public policy, the minimum standards of care that apply to trustees and any consequent liability ought to be clearly stated as a matter of law, irrespective of trust drafting. Trustees would not be unduly exposed as there remain internal mechanisms in trusts law that protect diligent trustees from liability, including obtaining legal advice, concurrence from beneficiaries and protection from the court, where necessary.



This article builds and reflects on an article published in the Jersey & Guernsey Law Review, 1 which was primarily concerned

with Spread Trustee Co Ltd v Hutcheson.2 In Spread, a preliminary question of law made its way to the Privy Council: could a trustee be exempted from liability for gross negligence in a trust instrument before 19 February 1991?3 If a trustee could not be so exempted, the provisions in the relevant trust instruments were invalid and the beneficiaries could pursue their claim against the trustee.

Departing from the Royal Court of Guernsey and the Guernsey Court of Appeal judgments, and only by a slim majority (3:2), the Privy Council held that a trustee could be exempted from liability for gross negligence in a trust instrument under Guernsey customary law. Essentially, the Privy Council aligned the Trusts (Guernsey) Law 1989 with Guernsey customary law such that, until 19 February 1991 when statutory amendment came into force, Guernsey customary and statutory law both allowed trustee exemption clauses that excluded liability for gross negligence.

There were three problems with that approach. First, the Trusts (Guernsey) Law 1989 was not a codification of Guernsey trusts law and it should not have been treated as such by approaching the determination of Guernsey customary law as simply a matter of statutory construction. Second, the explanatory material that accompanied the relevant amendment to the Trusts (Guernsey) Law 1989 to explicitly prohibit the exemption of liability for gross negligence in a trust instrument did not treat that amendment as a particularly momentous occasion, even though it was the first time that gross negligence could not be excluded by the terms of a trust instrument under Guernsey law, according to the majority of

1. Daniel Clarry, ‘The Offshore Trustee en bon père de famille’, Jersey & Guernsey Law Review, 5 (2014) 18(1)2. [2012] 2 AC 194 (Spread (PC))3. On 19 February 1991, an amendment to the Trusts (Guernsey) Law 1989 came into effect that explicitly prohibited the exemption of liability for a trustee’s grossly negligent conduct

the Privy Council.4 Third, although the Privy Council accepted that the statutory draftsmen in Guernsey followed a similar amendment in Jersey,5 the prohibition on ‘gross negligence’ was also introduced in Jersey without any indication that it was a significant change to the pre-existing law.6

One interesting feature of the Spread litigation warrants further attention because it resolves a peculiar aspect of Guernsey trusts law. In determining the position of trustee exemption clauses under Guernsey customary law as a matter of statutory interpretation, the Privy Council did not consider that the unique obligation to act en bon père de famille in the Trusts (Guernsey) Law 1989, which was accepted to be declaratory of Guernsey customary law, had any particular role to play in the determination of the question of whether a trustee of a Guernsey trust could be exempted from liability for grossly negligent conduct. Instead, the Privy Council equated the obligation to act en bon père de famille with the standard of care expected of a trustee in English and Welsh law.

The consequence of doing so is that the standards of care in onshore and offshore trust administration are aligned, even though the law on trustee exemption clauses remains quite different. The duties of care applicable to trustees in England and Wales, Guernsey and Jersey are the subject of this article, as well as the law on exclusion and exemption clauses and the drafting practice that has arisen responsively. It will be shown that, while the duties of care are similarly framed in onshore and offshore trust administration, the mandatory nature of Guernsey and Jersey trusts laws ensures that duties of care cannot be excluded by the terms of a trust in the Channel Islands and trustees cannot be exempted from liability for gross negligence. This enhances the

4. States’ Advisory and Finance Committee, ‘Report on Amendments to the Guernsey (Trusts) Law 1989’, 16 March 1990, Billet d’État VIII of 1990, article VI. See also Spread Trustee Co Ltd v Hutcheson (2009) 10 GLR 403 (Spread (GCA)), 35–38, per Martin JA5. Spread (PC) at 216, per Lord Clarke6. Finance and Economics Committee, Explanatory Note (lodged with the draft Jersey Amendment Law au Greffe), 31 January 1989


accountability of offshore trustees, relative to their onshore counterparts.

STANDARDS OF CARE IMPOSED ON TRUSTEESA duty of care is a fundamental aspect of trust administration that regulates the manner in which a trustee executes the trust and performs their duties as trustee. The difficulty in defining the duty of care is in shaping an objective standard of care to be applied to the different persons that

may occupy the office of trustee. Nevertheless, it is fundamental to ensuring that a trust will actually be performed.

Aside from active or positive breaches of trust (i.e. misapplication or misappropriation of trust property), trustees commonly commit passive breaches of trust by failing to act diligently – in particular, by failing to monitor trust investments that have not been diversified but simply comprise a concentrated shareholding in a particular company that declines in value. Three examples may be given of such cases. In Re Lucking’s Will Trusts,7 a trustee was held liable for failing to supervise the management of a company in which the trust had a controlling interest. In Bartlett v Barclays Bank Trust Co Ltd (No.2),8 a bank was held liable for failing to supervise two land development projects undertaken by a company of which the bank held 99.8 per cent of

7. [1967] 3 All ER 7268. [1980] Ch 515

the shares as trustee. In Spread, the relevant conduct concerned the alleged failure by the trustee to monitor shares, the value of which plummeted over several years by some GBP50 million.9

Such cases give rise to the common complaint that trustees did not take appropriate steps to preserve the value of the trust fund and did not act diligently. Similarly, trustees who do not actively administer the trust may also be held liable for failing to monitor the performance

of the trust by their co-trustees. In such cases, the difficulty is in setting the appropriate threshold for liability where the trustee has not actively breached the trust. For this reason, the framing of duties of care to regulate such conduct is especially important, albeit difficult to define in abstraction, and has given rise to shifting standards of care to take account of the circumstances.

England and WalesIn England and Wales, a trustee’s duty of care is expressed as, or likened to, that of the ‘ordinary prudent man of business’ or, in other words, it is the duty to act as a reasonable and prudent man would act in the conduct of his own affairs – that is,

9. In Spread, the claim was met by an exemption clause that successfully relieved the trustee from liability except for ‘wilful and individual fraud or wrongdoing…’ See also Hildyard J, ‘Prudence and Vituperative Epithets’ (lecture given to the Chancery Bar Association’s Annual Conference (London, 21 January 2012)), available at www.step.org/prudence-and-vituperative-epithets (estimating the loss to the trust fund to be some GBP50 million)


Aside from active or positive breaches of trust, trustees commonly commit passive breaches of trust by failing to act diligently – in particular, by failing

to monitor trust investments that have not been diversified but simply comprise a concentrated shareholding in a particular company



with reasonable care and skill.10 In the general law, that formulation allows for a shifting standard depending on the care and skill that one would expect would be exercised by the trustee in question, since the test of what is ‘reasonable’ in the circumstances must reflect the qualities of the trustee in question.11

Similarly, in the statutory law, a trustee’s duty of care is to ‘exercise such care and skill as is reasonable in the circumstances, having regard in particular to the following: any special knowledge or experience that he has or holds himself out as having; and, if he acts as trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession.’12 Furthermore, the conduct of a trustee will be considered by having regard to the facts and circumstances known to, or that ought to have been known by, the trustee at the time, and not with the benefit of hindsight.13

By virtue of the Trustee Act 2000 (TA 2000), the statutory duty of care is attached to a broad range of powers of a trustee, however conferred.14 The statutory duty of care attaches to powers to:15 invest and review such investments; acquire land;16 employ agents, nominees and custodians and review the conduct of such persons;17 compound liabilities, etc;18 insure trust property;19 and get in reversionary interests falling into possession, as

10. Re Speight; Speight v Gaunt [1883] 22 Ch D 727 per Sir George Jessel MR (CA), affd sum nom Speight v Gaunt [1883] 9 App Cas 1; Learoyd v Whiteley [1887] 12 App Cas 727 (HL); Re Godfrey [1883] 23 Ch D 483; Re Chapman [1896] 2 Ch 763 (CA); Re Lucking’s Will Trusts [1967] 3 All ER 726, [1968] 1 WLR 866; Bartlett v Barclays Bank Trust Co Ltd (Nos.1 and 2) [1980] 1 Ch 515, 531 and 534 per Brightman J; Henderson v Merrett Syndicates Ltd [1995] 2 AC 145; Bristol & West Building Society v Mothew [1998] Ch 1. See also Getzler, ‘Duty of Care’, in Birks & Pretto (eds), Breach of Trust (2002) 4111. Bartlett v Barclays Bank Trust Co Ltd (Nos.1 and 2) [1980] Ch 515, 531–534 per Brightman J. See also Re Waterman’s Will Trusts [1952] 2 All ER 105412. TA 2000, s113. Re Hurst [1892] 67 LT 96 (CA), 99 per Lindley LJ; Re Chapman [1896] 2 Ch 763, 777–78 (CA); Nestle v National Westminster Bank [1994] 1 All ER 118 (CA), 134 per Staughton LJ14. TA 2000, s2 and Schedule 115. TA 2000, sections 4 and 5, and Schedule 1, s116. TA 2000, s8, and Schedule 1, s217. TA 2000, sections 11, 16, 17, 18 and 22, and Schedule 1, s318. TA 2000, Schedule 1, s4; Trustee Act 1925 (UK), s1519. TA 2000, Schedule 1, s5; Trustee Act 1925 (UK), s19

well as ascertaining and fixing the value of trust property.20 However, the statutory duty of care only applies in the circumstances specified by the TA 2000.21 As such, it is important to consider not only when the duty of care does apply, but when it does not: ‘The duty of care does not apply if or in so far as it appears from the trust instrument that the duty is not meant to apply.’22 In so providing, the TA 2000 makes the statutory duty of care a default, rather than mandatory, rule of English and Welsh trusts law. It is, therefore, left to settlors, and especially those advising them, to choose to exclude the statutory duty of care by the terms of the trust.

Despite extensive consultation and statutory reform, the TA 2000 failed to grapple with the difficult public policy question of setting the limits on lawful exclusion of a trustee’s duty of care and what base standard must apply. Thus, trust instruments will either exclude the statutory duty of care altogether, thereby rendering the core aspect of the TA 2000 inoperative, or reduce the higher standard of care applicable to professional trustees down to that of lay trustees.23 This manipulation of a trustee’s duty of care means that professional trustees often only owe a duty to act honestly and in good faith or, put another way, not to act dishonestly or fraudulently.

Despite the vulnerability of beneficiaries to the mismanagement of trustees, the rules of English and Welsh trusts governance are weak relative to those applicable to other fiduciary office-holders, such as directors and certain trustees, where duties of due or reasonable care and skill cannot be excluded by the terms of a constitutive document.24 The approach taken in the statutory law of setting the duty of care merely as a default rule permits the perverse result that those who are

20. TA 2000, Schedule 1, s6; Trustee Act 1925 (UK), s22(1) and (3)21. TA 2000, s1(1) and (2)22. TA 2000, Schedule 1, s723. Reed and Wilson, The Trustee Act 2000 – A Practical Guide (Jordan Publishing, 2001), page 15424. See, for example, Companies Act 2006, s174 (as to directors), s750 (as to debenture trustees); Pensions Act 1995, s33 (as to pension trustees); Financial Services and Markets Act 2000, s253 (as to unit trustees)



entitled to charge professional fees for trust administration and hold themselves out as having certain skills often owe no duty to take any reasonable care, or the same standard applicable to trustees receiving no remuneration at all.

Guernsey

In Guernsey, a trustee’s duty of care is reduced to the expression that ‘a trustee shall, in the exercise of his functions, observe the utmost good faith and act en bon père de famille’.25 In terms of what that, at least superficially distinctive, language means in practical terms, we have authoritative guidance from the Privy Council in Spread.26 Indeed, this was one of the points that was upheld per curiam on appeal at an intermediate and final appellate level and is, therefore, an important aspect of Spread.

Martin JA (with whom Vos and Montgomery JJA agreed) considered there to be ‘no doubt the obligation to act en bon père de famille implies a standard of care similar to that required of trustees in England, namely that of a prudent man of business…’27 On appeal, Lord Clarke (with whom Lord Mance and Sir Robin Auld agreed) also considered that it is ‘no doubt the duty of a trustee under [the relevant provision of the Guernsey (Trusts) Law 1989 codifying the en

25. Trusts (Guernsey) Law 2007, s22(1)26. Spread (PC) at 213 per Lord Clarke (with whom Lord Mance and Sir Robin Auld agreed)27. Spread (GCA) at 421, citing Bartlett v Barclays Bank Trust Co Ltd (No.2) [1980] 1 Ch 515

bon père de famille obligation] to act prudently and thus to exercise all reasonable care and skill to be expected of a trustee.’28 The majority of the Board of the Privy Council went on to endorse that approach by interpreting the en bon père obligation as ‘the duty... to act as a reasonable and prudent trustee would act – that is, with reasonable care and skill.’29 In his leading opinion, Lord Clarke considered that the trustee’s duty of care is ‘the same’ in Guernsey as it is in England and Wales and also in Scotland.30

However, the content of the duty of care in Guernsey law to act en bon père de famille was not the issue that split the Board of the Privy Council. Indeed, Lady Hale similarly held that ‘the duty to act en bon père de famille [was] clearly equivalent to the duty adopted by English law to act as a prudent man of business…’31 Rather, the key issue was whether the en bon père de famille obligation carried with it some particular quality, such that a prospective exemption of liability for gross negligence in a trust instrument would be inimical to a Guernsey trust.

On that question, no peculiar meaning was given to the en bon père obligation, even though the dissenting opinions, especially that of Lord Kerr, highlighted the obvious difference between the two duties, in that the English and Welsh duty of care did not embody the concept of fiduciary loyalty, whereas the duty to act as a bon père plainly was fiduciary in nature.32 Leaving that dissent aside, the unique obligation to act en bon père de famille was authoritatively translated in Spread and equated with English and Welsh trusts law.

Eliding those jurisdictions together on a central feature of trust law serves to develop greater cohesion and coherency across those different jurisdictions, whereas a different approach that

28. Spread (PC) at 20929. Spread (PC) at 209, 21330. Spread (PC) at 209, 218 per Lord Clarke (with whom Lord Mance and Sir Robin Auld agreed), citing Bartlett v Barclays Bank Trust Co Ltd (No. 2) [1980] 1 Ch 515 and Lutea Trustees Ltd v Orbis Trustees Guernsey Ltd (1998) SLT 471, 473 per Lord Justice Clerk (Cullen)31. Spread (PC) at 24532. Spread (PC) at 255 per Lord Kerr

The majority of the Board of the Privy Council interpreted the

en bon père obligation as ‘the duty... to act as a reasonable and prudent

trustee would act – that is, with reasonable care and skill’



lent weight to the distinctiveness of the obligation to act en bon père de famille in Guernsey trust law may have isolated Guernsey from the prominent trusts jurisdictions upon which it typically draws in developing its trusts jurisprudence. Guernsey would have been alone in fashioning its trust law around the en bon père de famille obligation.

Although the mixed legal system of Quebec has known the trust for a long time, the en bon père de famille obligation was not adopted in the recodification of the Quebec Civil Code in 1994.33 France has also recently purged the en bon père de famille expression from its general law.34 As such, a distinctive interpretation of a Guernsey trustee’s obligation to act en bon père de famille would have created uncertainty in advising on Guernsey trusts and increased the likelihood of litigation to resolve those uncertainties. For that reason, even though the obligation for a Guernsey trustee to act en bon père de famille does look superficially distinct, there are good policy reasons behind equating that obligation with the prudent man of business in English and Welsh trust law. In any event, no indication was given in the explanatory report that accompanied the passage of the Trusts Guernsey Law 1989 as to what was meant by the obligation to act en bon père de famille, and little appears to have been known in the profession, more generally.35

Jersey

In contrast with Guernsey, Jersey mirrors the English and Welsh trustee’s duty of care much more closely in providing that a ‘trustee shall in the

33. A Popovici, ‘Le bon père de famille’, in Mélanges Adrian Popovici: Les couleurs du droit, Générosa Bras Miranda et Benoît Moore, (Montréal : Éditions Thémis, 2010), page 12534. J Parienté, ‘Le “bon père de famille” va disparaître du droit français’, Le Monde, 20 January 2014, available at www.lemonde.fr/politique/article/2014/01/20/le-bon-pere-de-famille-menace-de-disparition-du-droit-francais_4350949_823448.html35. States’ Advisory and Finance Committee, ‘Report on the Guernsey (Trusts) Law’, 12 February 1988, Billet d’État IX of 1988. No further indication was given as to the meaning of the en bon père de famille expression with the amendments to the Guernsey (Trusts) Law 1989 in 1990 nor in the re-enactment of that Act in 2007 – see States’ Advisory and Finance Committee, ‘Report on Amendments to the Guernsey (Trusts) Law 1989’, 16 March 1990, Billet d’État VIII of 1990; Commerce and Employment Department, ‘Review of Trust Law in Guernsey’, Billet d’État XXI (reported 13 December 2006, reviewed 27 October 2006), 2398–413

execution of his or her duties and in the exercise of his or her powers and discretions… act… with due diligence… as would a prudent person… to the best of the trustee’s ability and skill; and observe the utmost good faith.’36

As in England and Wales, shifting standards apply in each case, depending on the particular circumstances, especially the individual trustee’s ability and skill. However, like in Guernsey, and unlike in England and Wales, the duty of care is not excludable by the terms of a trust instrument in Jersey, thereby making it a mandatory rule of Jersey trust law and part of the irreducible core of a Jersey trust, which cannot be excluded when creating such a trust. Jersey has, therefore, taken a more robust approach than England and Wales in fixing the duty of care in Jersey trust administration.

TRUSTEE EXCLUSION AND EXEMPTION CLAUSES Trustee exemption clauses are closely connected with the trustee’s duty of care because such clauses curtail the consequences that would ordinarily arise from the breach of the trustee’s duty of care. It also follows, therefore, that a distinction must be drawn between trustee exemption clauses, which purport to exempt a trustee from liability arising from a breach of trust, and trustee exclusion clauses, which attempt to exclude the underlying duty itself.

That conceptual difference translates, in practical terms, into the kinds of remedies that might be available to correct a breach of trust.37 Equitable compensation, for example, is one remedy that may be available, but other remedies may be more appropriate depending on the circumstances of the case. While a trustee exemption clause might restrict the personal liability of a trustee in terms of paying equitable compensation, and thereby provide adequate protection for a trustee, other remedies ought to

36. Trusts (Jersey) Law 1984, s21(1)37. Compare Futter v HMRC; Pitt v HMRC [2013] 2 AC 108, [2013] UKSC 26, 89 per Lord Walker



be available to beneficiaries, such as injunctive relief and the ancillary liability of third parties. Trustee exclusion clauses risk destabilising other remedial relief and ought to be avoided, despite the possibility of excluding a trustee’s duty of care in English and Welsh law.

Here, we are concerned with the different approaches to trustee exemption clauses in onshore and offshore trust administration – again, a more robust position has been taken in the Channel Islands than England and Wales on the ability of trustee exemption clauses to exempt trustees of liability.

England and WalesIn England and Wales, Armitage v Nurse remains the leading authority on the lawful scope of trustee exemption clauses. In the case, the Court of Appeal upheld a clause exempting any trustee ‘for any loss or damage… to [the Trust]… unless such loss or damage shall be caused by his own actual fraud’.38 There, Millett LJ held that ‘actual fraud’ meant dishonesty and that, as the clause was not void on the grounds of public policy, the trustee would only be liable for dishonesty. If the trustee breached the trust, but did so with the honest intention of furthering the interests of the trust, then the trustee would be exempted from personal liability, according to Millett LJ.

That subjective approach to dishonesty has subsequently been pared back by the Court of Appeal in Walker v Stones, in which Sir Christopher Slade rejected the subjective approach for dishonesty and preferred a more objective test for determining whether an ‘honest belief’ of the trustee was ‘reasonable’.39 As such, a trustee exemption clause ‘would not exempt the trustees from liability for breaches of trust, even if committed in the genuine belief that the course taken was in the best interests of the beneficiaries, if such belief was so unreasonable that no

38. Armitage v Nurse [1998] Ch 42139. Walker v Stones [2001] QB 902, 939 per Sir Christopher Slade

reasonable solicitor-trustee could have held that belief.’40 That adds a preferable gloss to Millett LJ’s approach.

As to the possibility of excluding a trustee’s duty of care, Millett LJ clearly stated:41 ‘I accept the submission made on behalf of [the

beneficiary] that there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees, there are no trusts. But I do not accept the further submission that these core obligations include the duties of skill and care, prudence and diligence. The duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts, but in my opinion it is sufficient.’

To be absolutely clear, Millett LJ went further in stating:42 ‘In my judgment [the relevant clause in the trust

instrument] exempts the trustee from liability for loss or damage to the trust property no matter how indolent, imprudent, lacking in diligence, negligent or wilful he may have been, so long as he has not acted dishonestly.’

From a public policy perspective, that view is unsatisfactory.43 Indeed, the prevalence of broadly drafted trustee exemption clauses in the trust industry has caused the perverse situation that the very trustees that ought to have higher standards apply to their conduct in administering trusts are the very persons who insist on the lowest standards of care and fullest exemptions.44

40. Walker v Stones [2001] QB 902, 941 per Sir Christopher Slade. For a subsequent interpretation of the objective assessment of reasonableness, see Fattal v Walbrook Trustees (Jersey) Ltd [2010] EWHC 2767 (Ch), paras 78–82 per Lewison J; Madoff Securities International Ltd v Raven [2013] EWHC 3147, paras 323–26 per Popplewell J. On the test for dishonesty, compare Barlow Clowes International Ltd (in liquidation) v Eurotrust International Ltd [2006] 1 All ER 333 and Twinsectra Ltd v Yardley [2002] 2 AC 164 41. Armitage v Nurse [1998] Ch 421, 253–54 per Millett LJ (with whom Hirst and Hutchison JJA agreed) 42. Armitage v Nurse [1998] Ch 421, 251 per Millett LJ (with whom Hirst and Hutchison JJA agreed)43. Dal Pont, ‘The Exclusion of Liability for Trustee Fraud’, 6 APLJ 41 (1998)44. Compare Law Commission, Trustee Exemption Clauses (No.171, 2002), para 3.31; Law Commission, Trustee Exemption Clauses (No.301, 2006), para 4.10



Following extensive consultation and reporting by the Law Commission, which only produced soft recommendations and a ‘rule of practice’,45 that position is unlikely to change in England and Wales unless a suitable case is taken to the UK Supreme Court to test the correctness of Armitage v Nurse, key aspects of which have been subsequently questioned.46 It may be that the UK Supreme Court may consider that a clause which purports to prospectively exempt a trustee from all forms of liability for loss or damage caused to a trust ‘no matter how indolent, imprudent, lacking in diligence, negligent or wilful [the trustee] may have been, so long as [the trustee] has not acted dishonestly’ is unacceptable and is not to be borne by the beneficiaries. In the interim, English and Welsh trustees are likely to insist on broad trustee exemption clauses to avoid liability for gross negligence.47

Guernsey

Since 19 February 1991, Guernsey has provided greater protection to beneficiaries in the offshore administration of Guernsey trusts than that provided in England and Wales. Specifically, this

45. Law Commission, Trustee Exemption Clauses (No.301, 2006), paragraphs 7.1–7.2. See also STEP, ‘Guidance Notes: STEP Practice Rule to Trustee Exemption Clauses’, available at www.step.org/guidance-notes. See Kenny, ‘Conveyancer’s Notebook: The Good, the Bad and the Law Commission’ [2007] Conv 103, 103–0846. E.g. Spread (PC) 46–52 per Lord Clarke (with whom Lord Mance and Sir Robin Auld agreed), 129 per Lady Hale; Law Commission, Trustee Exemption Clauses (No.171, 2002), paragraph 2.54; Hildyard J, ‘Prudence and Vituperative Epithets’, available at www.step.org/prudence-and-vituperative-epithets47. E.g. Re Clapham’s Estate; Barraclough v Mell [2006] WTLR 203; [2005] EWHC B17

was achieved by prohibiting the exemption or indemnification of liability for a breach of trust arising from the trustee’s ‘own fraud, wilful misconduct or gross negligence.’48 For the avoidance of doubt, Guernsey trusts law also invalidates pro tanto any term of a trust that purports to relieve or indemnify a trustee of liability for a breach of trustee arising from his own fraud, wilful misconduct or gross negligence.49 A trustee will be personally liable, irrespective of the existence of a trustee exemption clause for ‘any loss or depreciation in value of the trust property resulting from the breach’, as well as for ‘any profit which would have accrued to the trust had there been no breach’.50

Liability is, however, appropriately limited where there are multiple trustees and only some of the trustees have participated in the breach of trust. In such cases, the innocent trustee will not be liable unless ‘he becomes or ought to have become aware of the breach or of the intention of his co-trustee to commit the breach’, and ‘he actively conceals the breach or intention, or fails within a reasonable time to take proper steps to protect or restore the trust property or to prevent the breach.’51 A similar situation arises where a newly appointed trustee discovers past breaches of trust, in which case the new trustee ‘shall take all reasonable steps to have the breach remedied.’52

48. Trusts (Guernsey) Law 2007, s39(7)49. Ibid, s39(8)50. Ibid, s39(1)51. Ibid, s39(4)52. Ibid, s39(3) and (6)

The prevalence of broadly drafted trustee exemption clauses in the trust industry has caused the perverse situation that the very trustees that ought to have

higher standards apply to their conduct in administering trusts are the very persons who insist on the lowest standards of care and fullest exemptions



Jersey

In functionally equivalent terms to Guernsey, Jersey has taken a similarly robust position with respect to trustee exemption clauses, in providing that ‘nothing in the terms of a trust shall relieve, release or exonerate a trustee from liability for breach of trust arising from the trustee’s own fraud, wilful misconduct or gross negligence.’53 The potential liability of a trustee is similarly broad, including ‘the loss or depreciation in value of the trust property resulting from such breach’ and ‘the profit, if any, which would have accrued to the trust property if there had been no such breach.’54

The strictness of the rules on trustee liability are moderated by a trustee only being ‘liable for a breach of trust committed by the trustee or in which the trustee has concurred’ and not being liable for a breach of trust by a co-trustee, ‘unless the trustee becomes aware or ought to have become aware of the commission of such breach or of the intention of his or her co-trustee to commit a breach of trust… and the trustee actively conceals such breach or such intention or fails within a reasonable time to take proper steps to protect or restore the trust property or prevent such breach.’55 As is the case in Guernsey, ‘a trustee shall not be liable for a breach of trust committed prior to the trustee’s appointment, if such breach of trust was committed by some other person’, although a new trustee must ‘take all reasonable steps to have such breach remedied’.56

BALANCING ACCOUNTABILITY AND PROTECTION OF TRUSTEESIt is a widely held view that professional trustees and possibly, although it is less likely, well-advised lay trustees will draft trustee exemption clauses to the fullest possible extent as a matter of course. In Australia, one leading trust commentary notes it to be ‘a melancholy fact that [trustee exemption] clauses are usually insisted on by highly paid

53. Trusts (Jersey) Law 1984, 30(10)54. Ibid at 30(2)(a) and (b)55. Ibid at 30(5)(a) and (b)56. Ibid at 30(4) and (9)

professional trustees (like trustee companies), who hope to gain immunity from the consequences of departing from their own advertised standards of expertise’.57 In England and Wales, a similar, seemingly inescapable, melancholy pervades trusts discourse. Indeed, one need look no further than the leading case of Armitage v Nurse, in which Millett LJ said ‘… it must be acknowledged that the view is widely held that these [trustee exemption] clauses have gone too far, and that the trustees who charge for their services and who, as professional men, would not dream of excluding liability for ordinary professional negligence should not be able to rely on a trustee exemption clause excluding liability for gross negligence’.58

Kessler QC said in an earlier edition of his popular trust drafting book: ‘The problem with exemption clauses, it is considered, is not one of trust law but of trust draftsmanship. The solution is not law reform, but a drafting solution; to require appropriate use of such clauses in trust drafting. A strengthening of the rules of professional conduct – or to a greater recognition of the implications of existing rules – would be the best solution to the problem.’59 In the latest edition of that text, Kessler QC and Sartin go on to rightly acknowledge that they really have no idea whether such an approach has been a success or not and that an empirical study would be required to provide some indication of the measure of success.

However, the melancholy fact that trustee exemption clauses have gone too far in practice is not an inescapable reality. It is a matter for each jurisdiction to ensure minimal standards of care in the administration of trusts by setting mandatory rules that reflect the underlying public policy imperatives behind competent trust administration. To that end, it is far better to set the limits up to which a settlor can prospectively exempt a trustee from the

57. Jacobs’ Law of Trusts in Australia, 7th edn (LexisNexis, 2006), paragraphs 1619–2058. Armitage v Nurse [1998] Ch 241, 256 per Millett LJ (with whom Hirst and Hutchison JJA agreed)59. Kessler QC, Drafting Trusts and Will Trusts, 7th edn (Sweet & Maxwell, 2004). See also Kessler QC and Pursall, Drafting Cayman Islands Trusts (Sweet & Maxwell, 2006), page 94



financial consequences of their misconduct, as is the case in the Channel Islands.

Furthermore, if it is so widely regarded that trustee exemption clauses have gone too far then the answer to the ‘problem’ of trustee exemption clauses is not optimistic recommendations and soft law but statutory reform to define exactly what is the minimum standard of care that a trustee is required to take in the administration of a trust. Such an approach has the benefit of certainty and would not require any empirical study to determine the measure of its success.60

Interestingly, the melancholy fact with respect to the onshore trust industry is not the result of trust draftsmen following precedent texts from leading practitioner guides, but from the insistence by trustees either acting on advice or from an awareness of the lower standard of care imposed on them in the general and statutory law.

In the modern trust precedents, we find an encouraging shift away from the inclusion of broad trustee exemption clauses. Thus, in relation to the ‘liability of trustees’, the second edition of the STEP Standard Provisions recommends the inclusion of the following provision into trust instruments: ‘a Trustee shall not be liable for a loss

60. Kessler QC and Leon Sartin, Drafting Trusts and Will Trusts: A Modern Approach (Sweet & Maxwell, 2012), page 108

to the trust fund unless that loss was caused by his own actual fraud or negligence’.61 The detailed guidance to that provision confirms the linking of that exemption with the default standard of care in trust administration, in providing that ‘trustees are not liable for breach of trust when they have acted honestly and with reasonable care.’62

Another welcome sign that STEP has attempted to grapple with the difficult public policy issue over higher standards applying to professional trustees is found in the delineation between the exemptions applicable to different kinds of trustees. Thus, in the STEP Standard Provisions, STEP recommends the inclusion of a further provision as follows: ‘12.2 A Trustee shall not be liable for a loss to the Trust

Fund unless that loss or damage was caused by his own actual fraud, provided that:

12.2.1 the Trustee acts as a lay trustee…; and 12.2.2 there is another Trustee who does not act as

a lay Trustee.’Again, the ‘detailed guidance’ to that draft clause

relevantly provides that ‘this clause… relieves a lay Trustee, even if negligent, unless guilty of fraud and as long as there is a professional Trustee… Thus a lay Trustee may, if they choose, broadly leave the Trust administration to a professional co-Trustee.’63

The failure to include such a clause may lead to serious financial exposure for a lay trustee who entrusts the administration to another trustee. But it is not all lay-trustee-sided, as there is a safeguard in the requirement for there to be at least one other trustee, who is not a lay trustee (i.e. a professional trustee). The potential uncertainty in delineating between lay and professional trustees is resolved by reference to the relevant trust legislation.64 Thus, ‘a person acts as a lay trustee if he – (a) is not a trust corporation, and (b) does not act in a professional capacity’.65

61. STEP Standard Provisions, 2nd edn, clause 4, available at www.step.org/ step-standard-provisions62. Ibid at 1163. Ibid at 1164. Ibid at 4 (clause 12.2.1 further provides that a ‘lay trustee’ falls ‘within the meaning of s28 Trustee Act 2000’)65. TA 2000, s28(6)

The answer to the ‘problem’ of trustee exemption clauses is not optimistic recommendations and soft law but statutory reform to define exactly

what is the minimum standard of care that a trustee is required to take in the

administration of a trust



For the purposes of the TA 2000, ‘trust corporation’ has the same meaning as that provided for in the Trustee Act 1925.66 As such, ‘“Trust corporation” means the Public Trustee or a corporation either appointed by the court in any particular case to be a trustee, or entitled by rules made under subsection (3) of section four of the Public Trustee Act 1906, to act as custodian trustee…’ and, therefore has a much narrower meaning than what might be thought is meant by a ‘trust corporation’. Thus, the second limb (i.e. a trustee acting in a professional capacity) is more likely to apply in most cases. To alleviate the shortcomings of allowing professional trustees to be exempted for liability for a breach of trust, the Law Commission’s rule of best practice requires ‘professional trustees’ (i.e. trustees who receive remuneration for administering a trust) to bring any clause purporting to limit liability to the attention of the settlor.67

Elsewhere, Kessler QC has, with Sartin, recommended against the drafting of broad exemption clauses and advised that a clause be included in trust instruments in the same terms as he proposes in the STEP Standard Provisions.68 In doing so, they hope that ‘there is still a marketplace in which some firms will undertake the duties of trustee on terms that they undertake to use reasonable care and accept responsibility if they fail to do so.’69

Further, they suggest that the adoption of narrow trustee exemption clauses may confer a competitive advantage over other professional trustees that routinely insist on exempting themselves for negligent trust administration.70 Their plea is overly optimistic, as it is unlikely

66. TA 2000, s39(1)67. Law Commission, Trustee Exemption Clauses (No.301, 30 July 2006), paragraph 7.1; STEP, Guidance Notes: STEP Practice Rule to Trustee Exemption Clauses, available at www.step.org/sites/default/files/Comms/STEPGuidanceNotes.pdf. See also Kessler QC and Sartin, Drafting Trusts and Will Trusts: A Modern Approach (Sweet & Maxwell, 2012), pages 102–368. Kessler QC and Sartin, Drafting Trusts and Will Trusts: A Modern Approach (Sweet & Maxwell, 2012), 109 (‘a Trustee shall not be liable for a loss to the Trust Fund unless that loss was caused by his own actual fraud or negligence’)69. Ibid at 10670. Ibid

that such trustees would advertise their services in this way. A better approach would be to state the minimum standards of care that apply to trustees as a matter of law irrespective of trust drafting. This would not expose trustees unduly as there remain internal mechanisms in trusts law that protect diligent trustees from liability, the main three of which are considered below.

Advice

First, trustees can and ought to seek advice in relation to a broad range of administrative and dispositive matters in order to discharge their duty of care. To make that clear, a provision may be drafted into a trust in the terms provided for in the STEP Standard Provisions, that:71 ‘A Trustee shall not be liable for acting in accordance

with the advice of counsel, of at least five years’ standing, with respect to the Trust. The Trustees may in particular conduct legal proceedings in accordance with such advice without obtaining a court order. A Trustee may recover from the Trust Fund any expenses where he has acted in accordance with such advice.’However, according to the STEP Standard

Provisions, the exoneration of trustees by means of obtaining advice does not apply in certain, entirely sensible circumstances, including where the trustee knows or suspects that counsel’s advice was incomplete, court proceedings are pending on the matter or where the trustee either has a personal interest in, or has committed a breach of trust relating to, the subject matter of the advice.72

A somewhat odd aspect of the UK Supreme Court’s decision in Futter v HMRC; Pitt v HMRC was that the court upheld the view that ‘if the trustee has in accordance with his duty identified the relevant considerations and used all proper care and diligence in obtaining the relevant information and advice relating to those considerations, the trustee can be in no breach of duty and its decision cannot be impugned merely because in fact that information turns out to be partial or incorrect’ as

71. STEP Standard Provisions, 2nd edn, clause 12.372. STEP Standard Provisions, 2nd edn, clause 12.4 and 11



a correct statement of the law and that ‘apart from exceptional circumstances… only breach of fiduciary duty justifies judicial intervention.’73 Given that represents a modern view, it is worthwhile addressing the point in trust drafting, as it remains possible for a trustee to be liable for a breach of trust despite obtaining professional advice.74

Beneficiaries

Second, trustees may seek the concurrence of beneficiaries in order to relieve or indemnify themselves from liability for a breach of trust.75 In some cases, such as in trusts of land to which the Trusts of Land and Appointment of Trustees Act 1996 (TLATA) applies, a statutory duty may be imposed on trustees to consult the beneficiaries with respect to ‘the exercise of any function relating to the land subject to the trust’ and to ‘give effect to the wishes of those beneficiaries’ accordingly.76 Like the duty of care in the TA 2000, the duty to consult and obey the wishes of the beneficiaries in the TLATA is not mandatory, but excludable by the terms of the trust.77

The trustee’s duty to consult beneficiaries is somewhat vague and empty in any event – it is also potentially problematic in that it may place the trustee in a difficult position where the particular duty to consult and obey the beneficiaries conflicts with the general duty to perform the trust.78 In such cases, the general duty to perform the trust ought to prevail.79 For these reasons, any duty to consult beneficiaries is expressly excluded by the trust instrument in favour of an ‘absolute discretion clause’.80 Here, the concern is not with a general

73. Pitt v HMRC; Futter v Futter [2013] 2 AC 108, 131, 139–141 per Lord Walker, approving Abacus Trust Co (Isle of Man) v Barr [2003] Ch 409, 23 per Lightman J and 178 and Pitt v Holt; Futter v Futter (2012) Ch 132, 178 per Lloyd LJ74. Pitt v HMRC; Futter v Futter [2013] 2 AC 108, 140 per Lord Walker. See also Stott v Milne (1884) 25 Ch D 710, 714 per Lord Selborne LC, approved in Re Beddoe [1893] 1 Ch 547, 558 per Lindley LJ; Re Dive [1909] 1 Ch 328, 342 per Warrington J 75. Trusts (Guernsey) Law 2007, s40; Trusts (Jersey) Law 1984, s30(6) and (7)76. Trusts of Land and Appointment of Trustees Act 1996 (UK), s11(1)77. Trusts of Land and Appointment of Trustees Act 1996 (UK), s11(2), (3) and (4)78. E.g. a trustee of land may owe a duty to consult with, and obey the wishes of, the life tenants, but the wishes of the life tenants may commonly conflict with those of the remainderman, who may not yet be born or cannot be consulted for some other reason79. E.g. Trusts of Land and Appointment of Trustees Act 1996 (UK), s11(1)(b)80. STEP Standard Provisions, 2nd edn, clause 19. See also Kessler QC and Sartin, Drafting Trusts and Will Trusts, 11th edn (2012), 142

duty to consult beneficiaries, which does not arise except from the terms of the trust or some statutory provision in any event,81 but with the ability of the trustee to minimise the risks associated with trust administration by avoiding liability and securing indemnification by means of such consultation.

As such, trustees may be able to avoid liability for a breach of trust where the trustee has sought and obtained the concurrence of the beneficiary as to the proposed course of action, irrespective of whether the beneficiary is actually aware that the relevant conduct would constitute a breach of trust.82 Of course, proper disclosure must be made by a trustee and fully informed consent must be obtained from the beneficiaries. Once the trustee has done so, it will be difficult for a beneficiary to make a successful claim for personal liability for breach of trust arising out of a course of action in which the beneficiary consented, with virtually identical provisions in England and Wales, Guernsey and Jersey codifying this position.83

CourtThird, trustees are in the enviable position of being able to approach the court for advice and directions as to how to perform their duties and will obtain a prospective indemnity if they have made full disclosure of all material matters pertaining to that advice and act accordingly.84 That is a better working model for trust administration, as well as the coherent operation of trust law, than the inclusion of broadly drafted trustee exemption clauses in trust instruments.

In addition to the ability of trustees to be able to approach the court for advice and directions concerning any matter of doubt arising in the administration of the trust, there is also a statutory power for the court to relieve a trustee from

81. X v A [2000] 1 All ER 490, 496 per Arden J82. Re Pauling’s Settlement Trusts, Younghusband v Coutts & Co [1961] 3 All ER 713, 729–30 per Wilberforce J83. Trusts (Guernsey) Law 2007, s56; Trusts (Jersey) Law 1984, s46; Trustee Act 1925 (UK), s 62(1)84. In England and Wales, see Administration of Justice Act 1985, s48; Civil Procedure Rules 1998, Part 64, Practice Direction 64A and 64B. In Guernsey, see Trusts (Guernsey) Law 2007, sections 68 and 69. In Jersey, see Trusts (Jersey) Law 1984, s51



personal liability for a breach of trust where the trustee has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court.85

Plainly, it is more desirable for trustees to seek advice and directions from the court before undertaking any legally uncertain course of conduct in the administration of a trust – indeed, the statutory provision conferring power to relieve trustees from personal liability refers not only to a trustee being excused from the breach of trust, but also to failing to obtain directions from the court. Given the bias toward proactivity by trustees, and prospective directions being given by the court for trustees to obtain indemnification, the statutory power is often seen by trust practitioners as a ‘false friend’ of trustees that cannot be relied upon to justify past conduct ex post facto, but only as a defence of last resort against allegations of maladministration.86

CONCLUSIONS The conclusions drawn in this article are threefold.

First, the peculiar obligation to act en bon père de famille in Guernsey trust law has effectively been translated in the Spread litigation and equated with the English and Welsh, and Jersey duties of care. Although that approach fails to give any weight to Guernsey legal heritage, it does have the benefit of certainty and cohesion. One key difference, however, is that the Guernsey and Jersey trusts laws adopt the duty of care as mandatory rules and prohibit the exemption of a trustee’s liability for fraud, wilful default or gross negligence, rather than leaving those matters (save fraud) as matters of trust drafting, which remains the case in English and Welsh law. The clear statutory position taken in the

85. Trusts (Guernsey) Law 2007, s55; Trusts (Jersey) Law 1984, s45; Trustee Act 1925 (UK), s6186. See Waterworth, A Practitioner’s Guide to Drafting Trusts, 2nd edn (2007), 115. See also, Thurston, A Practitioner’s Guide to Trusts, 9th edn (2011), 151 (questioning ‘what is reasonable conduct in this context?’); Kessler QC and Sartin, Drafting Trusts and Will Trusts, 11th edn (2012), 108–09 (recommending additional drafting in the trust instrument to properly protect trustees from personal liability)

Channel Islands is to be preferred, as it promotes prudent trust administration.

Second, leading precedent texts and drafting manuals attempt to fill gaps left in onshore trust administration by recommending against the inclusion of broad trustee exemption clauses, and attempt to approximate onshore trust administration with the minimum standard expected of offshore trustees as a matter of law. Again, the better approach would be for a clear legislative provision to provide for the minimum standards that apply to trust administration irrespective of trust drafting.

Third, there is no need for broad exemptions of liability for trustees who conduct themselves with reasonable diligence, as existing mechanisms within trusts law serve to protect prudent trustees, especially by indemnifying trustees by the taking of advice, concurrence with beneficiaries and directions from the court. Aside from the duty of care, which itself can be excluded by the terms of a trust, the mandatory rules of English and Welsh trust law are too trustee-biased when compared to Guernsey and Jersey, both of which have struck a more appropriate balance between beneficiaries and trustees and furthered the public policy incentive of promoting prudent trust administration.

DANIEL CLARRY IS A BARRISTER AND AFFILIATED LECTURER AT THE UNIVERSITY OF CAMBRIDGE

AN EARLIER DRAFT OF THIS ARTICLE WAS DELIVERED AT STEP GUERNSEY’S ANNUAL CONFERENCE ON 26 JUNE 2014. DANIEL WOULD LIKE TO THANK SIR PHILIP BAILHACHE, RICHARD McMAHON AND MICHAEL DE LA HAYE, FOR THEIR INSIGHTFUL COMMENTS. HE WOULD ALSO LIKE TO THANK THE FACULTY OF LAW OF McGILL UNIVERSITY, FOR ACCOMMODATING HIM AS A VISITING RESEARCHER WHILE HE WROTE THIS PAPER


A U T O M A T I C E X C H A N G E O F I N F O R M A T I O N J O H N R I C H E S

Supranational initiatives and their

impact on wealth planning

A PRACTITIONER’S PERSPECTIVE ON THE EFFECTS OF THE US FOREIGN ACCOUNT TAX COMPLIANCE ACT AND THE OECD COMMON REPORTING STANDARD

By John Riches

ABSTRACT

COMMON REPORTING STANDARD• Why will its impact on global transparency of

wealth-holding structures be greater than FATCA’s?• What issues should be raised with beneficiaries

and what steps should be considered before its introduction on 1 January 2016?

• Will it render the notion of an EU trust register academic?

DISCLOSURE AND TRUSTS• How will trusts fall into two very different groups

with a high/low disclosure profile?

KNOW YOUR BENEFICIARY• Why will trustees have to monitor beneficiary

migration on an annual basis?

TRANSPARENCY DIVIDEND• What benefits will arise from an era of transparency?• Which holding structures may be simplified?

In hindsight, 2014 may be seen as a pivotal year so far as supranational initiatives effecting wealth planning are concerned. It has seen the much-delayed introduction of the US Foreign Account Tax Compliance Act (FATCA), as well as the publication of the OECD Common Reporting Standard (CRS).1

It is, therefore, an appropriate juncture to reflect on the new order that will emerge as we move towards an environment where

1. www.oecd.org/tax/exchange-of-tax-information/Automatic-Exchange-Financial-Account-Information-Common-Reporting-Standard.pdf and www.oecd.org/ctp/exchange-of-tax-information/standard-for-automatic-exchange-of-financial-information-in-tax-matters.htm



automatic exchange of information becomes the norm.

I propose to give a practitioner’s perspective on the implications of this new order, combined with some commentary on related topics, such as the overall environment for tax planning and the apparent belief that placing more information about private wealth in the public domain is a desirable goal in its own terms.

SETTING THE TONEA succinct summary of the perspective of the international community with respect to the overall policy framework and goals can be found in the joint statement of the CRS Early Adopter’s Group, issued on 19 March 2014:2

‘Tax evasion is a global problem and requires a global solution. We, therefore, welcome the new standard in automatic exchange of information between tax authorities developed by the OECD (the Common Reporting Standard). This will provide a step change in our ability to clamp down on tax evasion, which reduces public revenues and increases the burden on those who pay their taxes. The initiative was first launched by France, Germany, Italy, Spain and the UK in April 2013. In doing so we recognised that only those financial centres which adopt the highest standards in tax transparency and work in close cooperation to tackle cross-border tax evasion will prosper in the future. Now that the Common Reporting Standard is agreed, we intend to implement it among the early adopters group to an ambitious but realistic timetable:… The first exchange of information in relation to new accounts and pre-existing individual high-value accounts will take place by the end of September 2017.’

It is significant that this statement expressly links the future prosperity of international finance centres (IFCs) with their willingness to fully implement the information exchange standards that will be promulgated through CRS. It is also noteworthy that included in the signatories to the statement are a number of IFCs, comprising

2. www.oecd.org/tax/transparency/AEOIjointstatement.pdf

Liechtenstein and all of the UK’s Crown Dependencies and Overseas Territories.

TAX PLANNINGWhile it is safe to assume that there will be no defenders of tax evasion among practitioners, a key issue for the future will be how the transparent new environment that we all expect FATCA and CRS to usher in will impact tax planning that is legal.

An undoubted challenge here is the tendency of commentators to blur the important distinction between evasion and what is characterised as ‘aggressive tax avoidance’. The problem with the latter concept is that it has a very subjective element that can result in some surprising outcomes. An egregious example of this in my home jurisdiction of England and Wales in recent years was an ill-considered attempt by the government to limit charitable tax relief for individuals, partly on the basis that the relief was being used for tax avoidance.3 Chancellor George Osborne was reported by the BBC as saying: ‘He had been “shocked” by the scale of legal tax

avoidance by the very rich, after seeing the result of a confidential study by HM Revenue & Customs and this was a “specific” loophole he wanted to close.’4 It took a concerted attempt from the charitable

sector to persuade the government as to the serious damage to charity funding that would have resulted from this policy being implemented.

It is undoubtedly the case that national governments have the ability to change the domestic tax rules in their jurisdiction to counter perceived tax avoidance, both with specific legislation and through the introduction of general anti-avoidance rules. What is not always acknowledged is that families with an international profile often take tax advice on structuring their affairs not just to mitigate tax legally but also to eliminate double or triple taxation on the same

3. http://webarchive.nationalarchives.gov.uk/20130129110402/http://www.hm-treasury.gov.uk/budget2012_documents.htm4. www.bbc.co.uk/news/uk-politics-18278253



assets or sources of income or capital gain. The capacity for the inconsistency between different tax systems to generate unfairness is especially apparent in estate planning.

CRS AND FATCA CONTRASTED While CRS, like the UK intergovernmental agreements (IGAs), is clearly modelled on FATCA, it is worth noting that there are also material differences in concept and scope.

The principal similarities between FATCA and CRS are most apparent in respect of:• The core concepts of financial institutions (FIs) and

non-financial entities (NFEs, sub-categorised into ‘active’ and ‘passive’ NFEs) as a tool for analysing entities and their status.

• The use of calendar year reporting with a nine-month filing deadline.

• The use of common guidance to be applied in interpreting the rules (the public CRS guidance was released in July 2014 – from an initial review, it has marked similarities with US FATCA and UK IGA guidance).5 The notable points of contrast between the two

codes are:• Scope: there are differences in scope to reflect the fact

that the US rules are geared to US citizenship as an independent factor in rendering non-US-resident persons taxable, whereas, under CRS, the emphasis is on the residence of individuals.

• Withholding tax: a key ‘sanction’ applicable under FATCA is for withholding tax at 30 per cent to be applied on US-source payments in certain cases. CRS will not involve any equivalent form of sanction on payments.

• Use of GIINs: FATCA requires FIs to register and depends heavily upon FIs providing their global intermediary identification number (GIIN) to third parties to evidence their compliance with FATCA. Under CRS, there will be no GIIN equivalent; instead, it is likely to be necessary for the tax authority in the relevant jurisdiction to collect data on ‘reportable accounts’. They will be

5. See for example the Cayman Islands joint guidance issued in May 2014 (www.step.org/cayman-islands-releases-fatca-guidance-notes) and www.oecd.org/ctp/exchange-of-tax-information/standard-for-automatic-exchange-of-financial-information-in-tax-matters.htm

obliged to pass that information to another jurisdiction whose residents are either individuals holding reportable accounts or individuals with a defined beneficial interest in reportable accounts held by certain entities, including trusts, foundations and companies.

• Domestic legislation: FATCA is grounded in US domestic legislation. CRS will be grounded in a series of bilateral or multilateral treaties; it will be based on a model ‘competent authority agreement’ and Common Reporting Standard, which were published in draft form by the OECD in February 2014.6

TIMESCALES It is worth pausing to reflect on the timescales that will apply to the various transparency initiatives. The broad principle is for reporting to take place within nine months of the end of the prior calendar year.

FATCA is already with us and the first reporting on 2014-calendar-year information will need to take place by 30 September 2015.7 Registration of foreign FIs has already commenced, although in the majority of jurisdictions that are subject to Model 1 IGAs, the deadline for obtaining GIINs is 1 January 2015.

For the IGAs that have been entered into by the UK with its Crown Dependencies and Overseas Territories, which follow a common pattern, the first reporting period is from 1 July to 31 December 2014. The information that is reportable will be subject to deferred reporting so that it will only need to be reported by 30 September 2016 (along with relevant data for the whole of the 2015 calendar year). The UK IGAs incorporate a special alternative reporting regime (ARR), which is subject to different time limits, linked to the UK fiscal year, expiring on 6 April in each calendar year. ARR is intended to apply to UK-resident non-domiciled taxpayers. In practice, ARR looks to have a very short existence because the

6. www.oecd.org/tax/exchange-of-tax-information/Automatic-Exchange-Financial-Account-Information-Common-Reporting-Standard.pdf7. www.irs.gov/Businesses/Corporations/Summary-of-FATCA-Timelines



UK IGAs will be modified to comply with CRS (see immediately below) when it takes effect.8

CRS will first apply among the Early Adopter’s Group from 1 January 2016, with reporting due for new accounts and pre-existing individual high-value accounts for the 2016 calendar year to take place by the end of September 2017.9

We will, therefore, witness a gradual process over the next three years during which automatic exchange of information between relevant jurisdictions will take effect.

CONNECTION BETWEEN TRANSPARENCY INITIATIVES AND FATF AML POLICY CHANGE It is very clear from reading the US Model 1 IGAs and the draft CRS that performing customer due diligence that is based on the Financial Action Task Force’s (FATF’s) anti-money laundering (AML) guidance is of central importance in the implementation of the new regimes.

Section VIII, paragraph D6 of the CRS on defining ‘Controlling Persons’ states: ‘The term “Controlling Persons” means the natural

persons who exercise control over an Entity. In the case of a trust, such term means the settlor, the trustees, the protector (if any), the beneficiaries or class of beneficiaries, and any other natural person exercising ultimate effective control over the trust, and in the case of a legal arrangement other than a trust, such term means persons in equivalent or similar positions. The term “Controlling Persons” must be interpreted in a manner consistent with the Financial Action Task Force Recommendations.’The explicit reference in the CRS

to FATF’s Recommendations underlines the importance of using the FATF methodology in determining who will be treated as having an ‘equity interest’ in a ‘reportable account’. It is also apparent that the wording is taken directly from paragraph 1 of FATF’s guidance on Recommendation 25, which states:

8. The UK IGAs contain ‘sunset’ provisions that require them to be updated when CRS is introduced9. www.oecd.org/tax/transparency/AEOIjointstatement.pdf

‘Countries should require trustees of any express trust governed under their law to obtain and hold adequate, accurate, and current beneficial ownership information regarding the trust. This should include information on the identity of the settlor, the trustee(s), the protector (if any), the beneficiaries or class of beneficiaries, and any other natural person exercising ultimate effective control over the trust.’10 One point to note in the context of corporate

settlors is the need to verify information about the identity of individuals who are treated as controlling such an entity. Paragraph 134 of the CRS guidance notes in this context:11

‘With a view to establishing the source of funds in the account(s) held by the trust, where the settlor(s) of a trust is an Entity, Reporting Financial Institutions must also identify the Controlling Person(s) of the settlor(s) and report them as Controlling Person(s) of the trust.’

PUBLIC REGISTERSIn an EU context, there is significant political support for certain information on trusts to be made public as part of the imminent introduction of the Fourth Anti-Money Laundering Directive, implementing the FATF proposals referred to in paragraph D6.12 This has been linked to initiatives in the UK to making public the beneficial owners of companies,13 as well as domestic legislation in France on trusts.14 There are strong arguments that can be made to oppose trust registers, not least in the context of exposing vulnerable individuals to risk if the existence of trusts where they are named beneficiaries falls into the public domain. What is clear, though, is that the imminent arrival of automatic exchange of information on a global basis under CRS and FATCA will mean that the information relevant to trusts and similar entities will be available to tax and regulatory authorities,

10. www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF_Recommendations.pdf (see page 91)11. www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF_Recommendations.pdf (see page 199)12. www.europarl.europa.eu/news/en/news-room/content/20140307IPR38110/html/Parliament-toughens-up-anti-money-laundering-rules13. www.gov.uk/government/uploads/system/uploads/attachment_data/file/304297/bis-14-672-transparency-and-trust-consultation-response.pdf14. www.step.org/france-more-double-penalties-non-reporting-trusts



which will have the capacity to create registers of their own. Thus, the only open issue that remains is whether such information is confidential and only available to competent authorities or whether some will be placed in the public domain.

There are cogent arguments advanced by the industry suggesting that, if the key objective is to ensure that FATF AML standards are to be implemented properly, a system that is based on the ongoing regulation of service providers is likely to be more rigorous and effective than a public register, where the information may rapidly become outdated. Such alternatives also help protect the legitimate privacy of individuals without compromising the imperatives of transparency.

A CHANGED PARADIGMIt is important that, as practitioners, we take time to reflect on the likely longer-term implications for cross-border holding structures of the new paradigm that will take effect over the next three years.

My sense at this point is that there are many implications, and I propose to consider those likely to be the most important. I would suggest they are:• scrupulous compliance and record keeping,• substance,• simplification,• risk of confusion,• trustee residence,• reporting profile of different fiduciary structures,• change of circumstances and corporate settlors,• profile of fiduciaries, and• tax-transparent entities.

These are outlined in more detail below.

Scrupulous compliance and record keepingIt is apparent that, for families with cross-border interests that are tax-compliant and their advisors, greater transparency will create a different context within which planning is undertaken. We have become accustomed in more recent years to a ‘self-assessment’ paradigm, where the burden of disclosure falls on individual taxpayers who disclose matters that they consider to be germane to the assessment of their tax affairs. In the post-FATCA and CRS world, this paradigm will change. Revenue authorities will be receiving significant amounts of spontaneous information about taxpayers’ foreign financial interests through FATCA and CRS. Much of this information may duplicate data that has already been filed directly with the relevant individual’s domestic tax authority but, nonetheless, it is likely to create an environment where more cross-checking of such data is undertaken, especially where it relates to entities such as trusts and foundations, where the individual is a beneficiary. This places a greater onus on advisors to ensure that clients’ tax filings are scrupulously accurate, as the overall trend seems set to be one in which revenue authorities are likely to adopt a less forgiving attitude to innocent mistakes.

It is also apparent that the maintenance of appropriate records will become more important. Tax authorities may not audit an individual’s tax affairs for a number of years after these new initiatives take effect. When an audit occurs, it is likely to be important to be able to demonstrate that the structure did report the taxpayer’s interest

Transparency initiatives will place a greater onus on advisors to ensure that our clients’ tax filings are scrupulously accurate, as the overall trend

seems set to be one in which revenue authorities are likely to adopt a less forgiving attitude to innocent mistakes



in relevant cases and to link this with the individual’s personal tax filings where relevant.

Substance A second, if less direct, consequence of transparency is the importance of ensuring that trusts, foundations and companies that are organised and resident in a particular jurisdiction have the appropriate substance there, and that this can be demonstrated should the need arise. In a more transparent environment, the connections that exist between individuals as ‘ultimate beneficial owners’ and entities located in different jurisdictions will be more apparent. The policy thrust of seeking to identify not only settlors but those exercising oversight in a fiduciary capacity (such as protectors and enforcers), and those seen as ‘exercising effective control’, will mean that tax and regulatory authorities may be disposed to satisfy themselves that the operations of entities located in specific jurisdictions are being genuinely conducted there and that there are no short cuts that are capable of generating a different tax analysis. Anticipating this type of change, it would be prudent for those engaged in managing those entities to be in a position to demonstrate appropriate ‘mind and management’. In this context, it will be critical to ensure that there is consistency between formal board or meeting minutes and

informal communication with beneficial owners, properly conducted meetings held at the right time, and sufficient time given for reflection before decisions are taken. This could be a good time to ‘stress test’ substance, given the enhanced likelihood of tax audits in future.

In this context, we are likely to see directors in IFCs limiting the overall numbers of directorships that they take on once their multiple roles become more apparent. This is certainly an issue that should be raised with directors, to ensure they can act in a credible manner.

Scope for simplificationThere may be instances where there is a silver lining to the increased reporting burden. There is a basic precept of all planning suggesting that, where one is in doubt, it is always better, if possible, to establish a simpler structure with fewer layers. The principal justification for this approach is that consequential changes are always more complex in structures where one has more ‘moving parts’ to address. When establishing new structures, therefore, it may be that, as advisors, we will tend to be more sceptical about the value of the use of underlying companies and choose to hold assets, for example, at the level of the trust or foundation directly. Where existing compliant structures are concerned, both advisors and families may also be less inclined in future to embrace complexity and prefer to concentrate on being able to demonstrate the substance of those layers that are required to execute the relevant planning objective.

In this context, it should not be forgotten that a key issue that creates greater complexity is the need to demonstrate the movement of value between layers in a structure, whether by way of loan repayment, dividend or appointment. It is also critical to note that, where one is looking for flexibility and portability, a simpler structure is one that can be effectively lighter on its feet should the need for change arise. This is not least demonstrated in the context of the requirement to provide comprehensive client due diligence on the entire structure to relevant financial institutions or service providers.

Another consequence of transparency is the importance

of ensuring that trusts, foundations and companies that are organised

and resident in a particular jurisdiction have the appropriate substance there,

and that this can be demonstrated should the need arise



Risk of confusionThere is undoubtedly going to be a scope for very significant confusion to arise with the advent of the new rules. For instance, the test of where an entity is deemed to be resident for the purposes of FATCA and CRS may well generate different outcomes. Some structures may be dual-resident by being deemed to be resident in the country of incorporation, as well as in the country of effective operation, and the initial stance of authorities at this point may be to prefer duplicate reporting where an entity falls to be treated as resident in more than one jurisdiction.

Another term open to significant ambiguity is that of ‘any other natural person exercising ultimate effective control over the trust’, referred to in section VIII, paragraph D6 of the CRS. It is very uncertain at this stage how this phrase would be interpreted in the context of complex fiduciary structures. Is it, for instance, invoked by the use of reserved power trusts that may give administrative powers, such as those relating to investment, to a third party other than the settlor? Or is it mainly intended to apply to dispositive powers? Will it apply to governance powers that allow a third party to intervene to hire and fire protectors, who can in turn appoint and remove trustees?

There are bound to be teething problems of this nature, and both tax authorities and service providers will need clarity. What is essential is an ongoing engagement with policy-makers that provides practical and usable guidance, minimising ambiguity.

Trustee residenceThe July 2014 CRS guidance contains some helpful guidance on trusts that might be regarded as dual-resident as a result of having multiple trustees in different jurisdictions.15 It notes: ‘In the case of a trust that is a Financial Institution

(irrespective of whether it is resident for tax purposes in a Participating Jurisdiction), the trust is considered to be subject to the jurisdiction of a Participating Jurisdiction if one or more of

15. www.oecd.org/ctp/exchange-of-tax-information/standard-for-automatic-exchange-of-financial-information-in-tax-matters.htm, page 159, paragraph 4 of commentary on Section VIII (defined terms)

its trustees are resident in such Participating Jurisdiction except if the trust reports all the information required to be reported pursuant to the CRS with respect to Reportable Accounts maintained by the trust to another Participating Jurisdiction because it is resident for tax purposes in such other Participating Jurisdiction.’

This guidance does provide some helpful pointers to avoid trustees having to engage in multiple reporting of the same information because of the presence of trustees in more than one jurisdiction. It will be interesting to see if this reasoning will also apply to a corporate trustee, perhaps a private trust company that is incorporated in country A but which is managed and controlled from country B. Will this by analogy be allowed to report for CRS purposes solely from country B?

Reporting profile of different fiduciary structuresAt this early stage in the development of guidance on FATCA and CRS disclosure on entities, it is interesting to note that discretionary structures would appear to have a much lower reporting profile than those that revolve around the existence of fixed-income interests. The guidance in draft that has been published in the context of FATCA, and the UK’s IGAs with its Crown Dependencies and certain of its Overseas Territories,16 is more forthcoming than that provided in the CRS commentary:17 • FATCA/ UK IGA guidance Specifically, for trusts, requirements to disclose

information as a beneficiary will, in the case of a trust where an individual has an income interest, currently oblige a filing of underlying capital values of fiduciary assets, while, in the case of discretionary trusts, the guidance directs that the disclosure should be limited to distributions made in the relevant year (the following extract has been taken from the draft Crown Dependencies guidance on FATCA and the UK IGAs, issued on 31 January 2014):

16. Draft Crown Dependencies guidance was published in January 2014, while the Cayman Islands published its own draft guidance in May 201417. See www.oecd.org/ctp/exchange-of-tax-information/standard-for-automatic-exchange-of-financial-information-in-tax-matters.htm, page 178, paragraphs 69 and 70



‘The total value of the assets of the trust must be consistent with that used by the trustees for valuation purposes and should be based on a recognised accounting standard. Listed securities should be valued at the appropriate market. The Equity Interest attributable to the settlor of any settlor interested trust is the whole value of the trust. Where a settlor is excluded from the trust, the Equity Interest can be considered to be nil but will still be a Financial Account and hence reportable.

‘The Equity Interest of a beneficiary that is entitled to mandatory distributions (directly or indirectly) from a trust will be the net present value of amounts payable in the future and should be measured on a recognised actuarial basis. It is recognised that this may be difficult and expensive to calculate, in which case it is permitted to use the accounting net asset value of the assets in which the beneficiary has an interest.

‘For a discretionary trust, the Equity Interest attributable to a beneficiary in receipt of a distribution will be the amount of the distribution made in the relevant reporting year.’

• CRS guidance: paragraphs 70–71 of commentary on defined terms (Section VIII)

The commentary on CRS guidance published on 21 July 2014 is rather less explicit about the contrasting levels of disclosure for different types of trusts. It states at paragraphs 69–70: ‘69. The definition of the term “Equity Interest”

specifically addresses interests in partnerships and trusts. In the case of a partnership that is a Financial Institution, the term “Equity Interest” means a capital or profits interest in the partnership. In the case of a trust that is a Financial Institution, an “Equity Interest” is considered to be held by any person treated as a settlor or beneficiary of all or a portion of the trust, or any other natural person exercising ultimate effective control over the trust. The same as for a trust that is a Financial Institution is applicable for a legal arrangement that is equivalent or similar to a trust, or foundation that is a Financial Institution.

‘70. Under subparagraph C(4), a Reportable Person will be treated as being a beneficiary of a trust if

such Reportable Person has the right to receive, directly or indirectly (for example, through a nominee), a mandatory distribution or may receive, directly or indirectly, a discretionary distribution from the trust. For these purposes, a beneficiary who may receive a discretionary distribution from the trust only will be treated as a beneficiary of a trust if such person receives a distribution in the calendar year or other appropriate reporting period (i.e. either the distribution has been paid or made payable). The same is applicable with respect to the treatment of a Reportable Person as a beneficiary of a legal arrangement that is equivalent or similar to a trust, or foundation.’

What is clear from both sets of guidance is the strongly contrasting nature of the level of disclosure required for fixed-interest versus discretionary trusts. This may well cause families and their advisors to reflect carefully on the merits of continuing with fixed-interest structures, given the apparently higher profile in reporting terms that they will involve.

As a separate matter, it is notable that settlor-interested structures are similarly ones where full disclosure of capital values on an annual basis will be required. It may be in this environment that settlors may choose to ring-fence their interests to a smaller portion of overall value on the basis that their personal financial needs will not require them to have access to the entire capital value of an ongoing structure.

Change of circumstances and corporate settlorsI referred above to the express cross-reference to FATF guidance. One helpful element of the CRS commentary is when it references a change of circumstances. Paragraph 134 of the commentary states (in the context of controlling persons): ‘For beneficiary(ies) of trusts that are designated by

characteristics or by class, Reporting Financial Institutions should obtain sufficient information concerning the beneficiary(ies) to satisfy the Reporting Financial Institution that it will be able to establish the identity of the beneficiary(ies) at the time of the pay-out or when the beneficiary(ies) intends to



exercise vested rights. Therefore, that occasion will constitute a change in circumstances and will trigger the relevant procedures.’This may well be helpful in allowing trustees of

trusts with a very broad class of potential objects to limit their enquiries in a practical manner until the point where they are distributing to particular individuals and need to verify their identity. It is a helpful reminder to trustees to be vigilant in monitoring the impact of ‘trigger events’ in trusts that could require a change in reporting profile.

Another point to bear in mind is that, where a corporate settlor is involved, it will be necessary to discern who owned that settlor at the time the trust was settled and treat the owner/s as the controlling person (this is consistent with OECD AML guidance). Paragraph 134 at page 199 of the CRS guidance states: ‘With a view to establishing the source of funds in the

account(s) held by the trust, where the settlor(s) of a trust is an Entity, Reporting Financial Institutions must also identify the Controlling Person(s) of the settlor(s) and report them as Controlling Person(s) of the trust.’18

Profile of fiduciariesAn inevitable consequence of the new rules for trusts will be a requirement to give greater disclosure about fiduciaries involved. This is implicit in FATF’s guidance on fiduciary holding structures (see Recommendation 25).19 Where those acting, in particular, as protectors are required to provide information to authorities, families may wish to reflect on the merits of involving family friends or indeed close relatives in this capacity, given that, in some cases, the inference that will be drawn by revenue authorities will be less positive than in circumstances where an independent third party is serving in this specific role.

It will be interesting to see what will happen if the only nexus between a fiduciary holding

18. www.oecd.org/ctp/exchange-of-tax-information/standard-for-automatic-exchange-of-financial-information-in-tax-matters.htm19. www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF_Recommendations.pdf

structure and another jurisdiction is a resident protector with no other role. Will the protector’s status be required to be reported on an otherwise nil return?

Tax-transparent entitiesAnother possible consequence of the changes might be to favour structures that have legal substance but are accepted by authorities as tax-transparent. In particular, the use of partnership entities may become more popular because of their ability to insulate fiduciaries from certain legal risks that arise from the direct ownership of assets in the same way as corporate entities, without generating the additional complexity of further layers.

FUTURE SCOPE It is interesting to note from the initial commentary of the 21 July 2014 CRS guidance that consideration may well be given in future to expanding the scope of CRS from being confined to financial accounts and similar assets to a broader class of interests.

Paragraph 4 of the introductory comments notes:20 ‘The global model of automatic exchange is drafted

with respect to financial account information. Many jurisdictions – OECD and non-OECD – already exchange information automatically with their exchange partners and also regionally (e.g. within the EU) on various categories of income and also transmit other types of information, such as changes of residence, the purchase or disposition of immovable property, value added tax refunds, tax withheld at source, etc. The new global standard does not, nor is it intended to, restrict the other types or categories of automatic exchange of information. It sets out a minimum standard for the information to be exchanged. Jurisdictions may choose to exchange information beyond the minimum standard set out in this document.’It is quite apparent from this that there is scope

for the evolution of the reporting model in future

20. www.oecd.org/ctp/exchange-of-tax-information/standard-for-automatic-exchange-of-financial-information-in-tax-matters.htm at page 10



so that it encompasses a much broader range of information:• concerning individuals, such as change of tax

residence; • on different asset classes, such as real estate; and• on a broader range of tax data, including levels of

withholding tax. It should, therefore, be expected that, in future,

the CRS may well broaden in scope, and families with cross-border interests and their advisors should plan accordingly in terms of capturing relevant data.

CONCLUSIONThere will undoubtedly be profound changes to the way in which fiduciary structures operate in the more transparent world that will become the norm over the next three years.

As advisors, it is essential that we keep abreast of the implications of these changes so that we can offer practical and proactive advice to our clients. We will need to develop a working

knowledge of how the new standards will apply in diverse cases.

The new era of transparency will require greater diligence on the part of clients and advisors so that reporting is both accurate and comprehensive. It should not, however, alter the fundamental drivers that require us to design workable, tax-compliant strategies to facilitate the effective oversight and transmission of family wealth. The era of greater transparency will also create opportunities to simplify complex arrangements that may have become outdated.

JOHN RICHES TEP IS CO-CHAIR OF THE STEP PUBLIC POLICY COMMITTEE, AND PARTNER AT RMW LAW. THIS ARTICLE IS AN EXTRACT FROM DEVELOPING A GLOBAL AGENDA: EXPERT INSIGHT FROM THE INAUGURAL STEP GLOBAL CONGRESS

It should be expected that, in future, the CRS may well broaden in scope, and families with cross-border interests and their advisors

should plan accordingly in terms of capturing relevant data


B O O K R E V I E W P A U L S E A L

Trust Taxation and Estate Planning,

Fourth Edition By Emma Chamberlain and Chris Whitehouse

Reviewed by Paul Seal

Chris Whitehouse and Emma Chamberlain need no introduction. A series of their publications over the years have expertly and clearly explained

difficult areas of UK tax law, with strong views expressed as to the appropriateness of the legislation and the way it should be applied.

Faced with a publication of 2,418 pages, where does the reviewer start? I selected areas where I have a passing understanding, to see whether the authors’ views matched my own (a gross conceit), and found those areas clearly explained, with both helpful examples and key warnings of appropriate bear traps.

This is not a dry publication. The authors have a clear view of the often absurd complexity of UK tax legislation. It is here that conspiracy theories arise:

HMRC constructs complex rules to trap the unwary or ill advised, with the consequence of more cash devolving to the Treasury than should be received. Is this unjust enrichment? Meanwhile, the well advised retain their wealth, by making sure that potential bear traps are identified, because, apart from anything else, their advisors use this publication, and they stay on the compliant side of the law. It cannot be the mark of a fair taxation system that those with the deepest pockets achieve the fairest result. The tax-simplification project has much to commend it, but it has a long way to go, particularly in the areas of trust taxation, which is why this publication is so welcome.

All reviewers need to indulge in the odd pedantic quibble. I tried to find a problem, but only the index

This is not a dry publication. The authors have a clear view of the often absurd complexity of UK tax legislation


B O O K R E V I E W P A U L S E A L

gave me difficulty – and, once I’d adjusted to the style of the index, I could find those matters I wanted to find. However, I have one aside: the publication includes a useful range of supplementary material, including HMRC exchanges of correspondence with relevant professional bodies on matters of interest. It would, in my view, have been helpful if those matters could be cross-referenced to the text where they are generally discussed.

This is a classic text, much updated for the fourth edition, and, in many areas, life goes on much as before. However, in respect of new material or new views of the law, this publication scores highly. Inevitably, any authors are at the mercy of changes in the law and the 6 June 2014 consultation document on ‘Inheritance tax: a fairer way of calculating trust charges’ just missed the deadline – that, no doubt, will be included in the next edition.

We are entering an era where transparency in relation to tax affairs is expected to be the norm. We must be able to defend the views we take of the law. Earlier this year, I was at a major conference, where

one speaker’s whizzy idea was discussed. The speaker was asked: ‘Does it work?’ The reply was: ‘Provided the revenue authorities do not ask the right question.’ That should have been the end of the idea. There are no such issues with this publication. The authors are clear on where the line between avoidance and evasion is, and where it should be.

Finally, this reviewer has a confession. He did not read all 2,418 pages when preparing this review. However, he did read enough pages to confirm his initial view that his copy of the publication will be off the bookshelf for much longer than it is likely to be on the bookshelf, providing guidance and reassurance in terms of the advice he gives. For any serious tax advisor, it must form part of their library, containing, as it does, much that is sound and much that makes you think about the legislation, its meaning and where it can be used to best advantage.

PAUL SEAL TEP IS A MEMBER OF STEP BOARD AND COUNCIL

E D I T O R SRobin MacKnight, Wilson Vukelich, Ontario, Canada, +1 905 940 0516, [email protected]

Ed Powles, Maurice Turnor Gardner, London, UK, +44 (0)20 7456 8623, [email protected] Prudhoe, Kobre & Kim, Tortola, British Virgin Islands, +1 284 852 1600, [email protected]

Keith Wallace, Reed Smith, London, UK, +44 (0)20 3116 3624, [email protected] Wallace Wilson, Schellenberg Wittmer, Geneva, Switzerland, +41 22 707 8000, [email protected]

Richard Williams, Queensland Bar, Australia, +61 (0)7 3012 8539, [email protected] Editor: Hannah Downie, [email protected]

Assistant Editor: Blathain Iqbal Editor-in-Chief: Louise Polcaro

P U B L I S H E R S Think, The Pall Mall Deposit, 124-128 Barlby Road, London W10 6BL,

tel: +44 (0)20 8962 3020, fax: +44 (0)20 8962 8689, www.thinkpublishing.co.uk Publisher: Polly Arnold

Publishing Executive: Kieran PaulArt Director: Clair Guthrie

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tel: +44 (0)20 8962 1258, [email protected]

Reading the Trust Quarterly Review counts towards STEP’s CPD requirements: www.step.org/cpd The articles published in this review are for general guidance and education only. They do not necessarily represent the views of STEP or TACT. Reliance should not be placed on these articles, nor should decisions be taken, or not be taken, on the basis of the articles, without specific advice being obtained. ISSN 1466 7932.

© 2014 Society of Trust and Estate Practitioners. All rights in and relating to this publication are expressly reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without written permission from the Society of Trust and Estate Practitioners (STEP). The views expressed in Trust Quarterly Review are not necessarily those of STEP and readers should seek the guidance of a suitably qualified professional before taking any action

or entering into any agreement in reliance upon the information contained in this publication. While the publishers have taken every care in compiling this publication to ensure accuracy at the time of going to press, neither they nor STEP accept liability or responsibility for errors or omissions therein, however caused. STEP does not

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