Knowledge

Joanne Verbiesen looks at a decision of the Hong Kong Court of First Instance that considered res judicata in a breach of trust claim.

The Hong Kong Court of First Instance’s (the Court’s) recent decision in Lo Kai Shui v HSBC International Trustee Limited & Ors (we are informed that the decision is subject to appeal) provides a useful practical illustration in the trust context of the fairly esoteric legal principles of res judicata, or cause of action and issue estoppel.¹ In non‑legalese, res judicata is concerned with the question of when a person should be barred from asking a court to decide an issue or claim that has already been decided by a court, whether in the same or different proceedings.

This case concerned a discretionary trust set up in 1984 (the Trust) by Mr and Madam Lo as a family trust for their own benefit and that of their nine children. Their children included the plaintiff in the case, Lo Kai Shui (known as Lu), and the second defendant, Lo Ka Shui (known as KS). From 1999 onwards, HSBC International Trustee Limited was the trustee of the Trust.

Background

In 1963, Mr and Madam Lo founded the Great Eagle group of companies; in 1990, Great Eagle Holdings (GE) became the listed holding company of the group when it was listed on the Hong Kong Stock Exchange. The Trust’s main asset was a substantial chunk of shares in GE. As of December 2016, the Trust’s GE shareholding represented around 33 per cent of the total issued share capital of GE. Various members of the Lo family also held shares in GE personally and/or through their own trusts. KS, in particular, held a substantial number of GE shares, including through his own trust, the KSL Trust, of which HSBC was also the trustee.

Mr Lo died in 2006 and, as frequently happens, familial relations deteriorated thereafter as the children became concerned over control of GE. Things reached a head in 2015 when KS proposed his son be appointed to the board of GE and, according to Lu, KS asserted that he had a sufficiently large interest in GE to control the board. Thus, the family became divided into two camps: the Lu camp and the KS camp, and their mother sided with Lu. This ultimately culminated in Madam Lo bringing proceedings against the trustee in 2016 for breach of trust for, among other things, a failure by the trustee to comply with her repeated requests that the trust acquire further shares in GE to maintain a controlling interest and/or distribute the entire trust fund to her.

Although Madam Lo was ostensibly the plaintiff in those proceedings, it was common knowledge that Lu was significantly involved; this is perhaps unsurprising, given that Madam Lo turned 100 years old during the trial. Notwithstanding his involvement in Madam Lo’s case, Lu also commenced his own proceedings against the trustee for breach of trust in 2018.

Madam Lo’s case went to trial in 2018 and the judgment was delivered in May 2019, dismissing all of Madam Lo’s claims against the trustee. Significantly, the Court made the following findings in that decision:

• the Trust did not have, and was never intended to have, a controlling interest in GE (the Controlling Shareholding Claim);
• the trustee had not acted negligently and/or in wilful default by failing to vote its shares at an AGM of GE that resulted in Lu not being reappointed to the board (the AGM Claim); and
• the trustee did not have a conflict of interest as a result of its trusteeship of both the Lo Family Trust and the KSL Trust (the Conflict Claim).

In 2019, the trustee and KS applied to strike out the parts of Lu’s proceedings that related to the Controlling Shareholding Claim, the AGM Claim and the Conflict Claim on the basis that these matters had already been decided in Madam Lo’s case.

The Court agreed, striking out the claims on the basis that it was just to hold that the decision in Madam Lo’s case should be binding on Lu because he:

• had the same direct interest as Madam Lo (they were both discretionary beneficiaries of the trust seeking, essentially, the same outcome);
• was so closely involved in Madam Lo’s action that he was effectively a co‑plaintiff; and
• had stood by and let Madam Lo fight his battle for him.

The Court observed that, in the trust context, where one beneficiary brings a claim against a trustee for breach of trust, the other beneficiaries are normally deemed to have interests that overlap with the plaintiff and will therefore be bound by any decision unless they have a demonstrably separate interest in the matter. In this sense, a breach of trust claim is generally akin to a class remedy such as a winding‑up petition in the company context.

The Court also emphasised that a person will be bound by a previous decision in circumstances where the person knew that their interests might be at issue in the earlier proceedings and chose to stand back and let the plaintiff in the earlier proceedings fight their battle for them. Alternatively, in Lu’s particular case, one should not let their mother fight their battles for them and then try to get a second bite at the cherry if they are unhappy with the outcome.

Interestingly, in Guernsey, this principle has been enshrined in statute in s.62 of the Trusts (Guernsey) Law, 2007, which provides that: ‘any order, judgment or finding of law or fact of the Royal Court in an action against a trustee founded on breach of trust is binding on all beneficiaries of the trust, whether or not yet ascertained or in existence, and whether or not minors or persons under legal disability’.

The rule only applies if the beneficiary was represented in the proceedings (whether personally, by their guardian, as the member of a class or otherwise) or was on notice of the proceedings and given a reasonable opportunity to be heard.

Conclusion

A key takeaway from the decision in Lo, which is echoed in the Guernsey law, is that, when a breach of trust claim is made, all of the beneficiaries of the trust who may have an interest must be notified by the trustee and given an opportunity to be heard. Likewise, for those advising beneficiaries, they should be warned that if they sit on the sidelines during the litigation, they may not get another opportunity to argue their case if they do not like the outcome.

This topic is trending in other jurisdictions too. In JSC Mezhdunarodniy Promyshlenniy Bank v Lenux Group Limited,² the British Virgin Islands (BVI) High Court found that there was a sufficient commonality of interest between the trustee and the beneficiaries of the trust in an earlier English and Welsh High Court decision relating to the validity of certain trusts (the Pugachev litigation),³ such that the beneficiaries were barred from asserting in the BVI that the trust in question was valid.

It is important to note that these principles only apply where there is an earlier final judgment, order or decision from a court or tribunal on the particular issues. This can cause a real problem for trustees who are looking to settle litigation with certain beneficiaries of a trust, because any beneficiaries who are not part of the settlement agreement would be free to pursue the same claims in the future. In these circumstances, trustees should carefully consider whether it is possible to obtain waivers of claims from the other beneficiaries in advance of any settlement.

1 [2021] HKCFI 1539   2 BVIHC (COM) 2020/0188   3 See Christen Douglas and Lynsey McIntyre, ‘The tangled Webb we weave’, Trust Quarterly Review (Vol19/Iss3)

Article first published in STEP Journal, Issue 6, 2021.