Knowledge

Private Client analysis: The Royal Court in Jersey held, disagreeing with a recent judgment of the Supreme Court of Bermuda, that protectors of trusts with a veto over certain trustee decisions have a genuine discretion to exercise, and are not limited to a rationality review of the trustee's decision-making process. It further held that protectors are entitled to understand what a trustee's reasons for their discretionary decisions are before deciding whether or not to consent.

In the matter of the Piedmont and Riviera Trusts [2021] JRC 248

What are the practical implications of the case?

Many offshore trusts, particularly in the last 20 years, have been settled with provision made in their terms for the decisions of trustees to be subject to the veto of a protector (i.e. only exercisable with the protector's consent). Many forms of protector power exist which are not powers of veto; equally, some trust deeds define how a protector's power of veto is to operate. This case involved the most common situation, whereby the trust deed simply states, without any further guidance, that certain trustee powers cannot be validly exercised without protector consent. It was agreed that the powers of veto in this case were fiduciary. Accordingly they could not be wielded in the protector's own interest, but only in good faith in the interests of the beneficiaries.

There is a dearth of judicial analysis on protector powers and, accordingly, the decision is an important one for the international trust industry.

Shortly before the decision in Piedmont was handed down, the Supreme Court of Bermuda in Re the X Trusts [2021] SC (Bda) 72 Civ handed down a decision dealing with the same issue, namely the nature of protector veto powers. The Court in X Trusts reached the opposite view to the Court in Piedmont. Although the Court in Piedmont had the benefit of the reasoning in X Trusts before it, trust practitioners will need to tread carefully until the tension is resolved.

What was the background?

The trustees had decided to distribute all of the assets of two trusts to the beneficiaries in certain proportions, and sought the blessing of the Court for that decision. When the trustees made a decision in November 2019 and sought the (professional, corporate) protector's consent for it, the protector's consent was not forthcoming. This was for a number of reasons: the protector had certain concerns about the decision, in particular in relation to the way it departed from the relevant Letter of Wishes ("LoW"); it wanted to understand the trustee's reasons for so departing; and there were also certain other issues which it is beyond the scope of this article to explore (the "Other Issues").

It took approximately a year to resolve the Other Issues, during which period the trustees refused to provide detailed explanation of their reasons for their decision, stating that trustees were not obliged to provide detailed reasons for their discretionary decisions.

In January 2021, the trustees then made a slightly different decision, which to some extent answered the protector's previous concerns, and also provided the protector with detailed reasons for their decisions, including as to why they were proposing to depart from the LoW. The protector gave its consent to this decision.

One group of beneficiaries sought to argue that the protector's role was limited to exercising a review function such as the court does on a blessing application, namely to review whether the trustees' decision has been made bona fide in the interests of the beneficiaries, takes into account relevant (and only relevant) factors, is within the reasonable range of decisions open to the trustees and is not vitiated by conflict. Once the protector has concluded that this test is met, it was argued, it is bound to give its consent to the decision. This argument was deployed in aid of the submission that the protector should have given its consent to the decision made in November 2019 (or alternatively, that it would have been obliged to do so had the trustees provided (at the time) detailed reasons for reaching that decision).

What did the Court decide?

In relation to the submission that a protector fulfils a review function only, the Court found that there was no authority for such a submission, and had no hesitation in rejecting it. A protector's duty is to act in good faith in the best interests of the beneficiaries; a protector is subject to ordinary principles in relation to not committing a fraud on the power, but must reach its own decision. A court exercises a limited review function because it is not the trustee, but rather is in a judicial supervisory role; these considerations do not apply to a protector, who has been appointed to a fiduciary office by the settlor; if a protector's role was equivalent to that of the court it would effectively be almost redundant. Accordingly, a protector must, in the right circumstances, be able to veto a decision of a trustee even if it would be blessed as reasonable by the court.

However, the Court did warn that a protector is not a trustee and its discretion must be exercised more narrowly. It is for the trustee to make the decision. It is not for a protector to tell a trustee that it will only consent to a particular decision, thereby seeking to make the decision itself. That would be to use the power otherwise than for its intended purpose, and therefore be a breach of duty. Accordingly, a protector might often find itself having to consent to a decision of a trustee, on the basis that it is in the interests of the beneficiaries to do so, even though it is not the decision the protector would have made. The Court also commented that full and open discussion is expected between trustee and protector with a view to finding a solution on which they can both agree.

Further, the Court found that protectors (being in a completely different position to beneficiaries) are entitled to detailed reasons from trustees (in addition to other information) in order to consider whether consenting to the proposed exercise of the trustee's powers is in the interests of the beneficiaries. On the facts, however, the trustees' initial refusal to disclose detailed reasons made no difference to the case, and the January 2021 decision was blessed.

Postscript

After draft judgment had been handed down, but before it had been finalised, the X Trusts decision was brought to the Court's attention. The Court in X Trusts concluded that protectors did only exercise a review function, and could not refuse to consent to a decision which passed the rationality test.

The Jersey Court considered this authority in a postscript but declined to change its view, for a number of reasons, but principally because (i) nothing in the language of an ordinary protector consent provision suggests anything other than a real veto; (ii) a role limited to a rationality review would leave the protector role unacceptably toothless; and (iii) the ordinary settlor, when appointing a trusted friend or advisor as protector, naturally intends them to have a far more effective role than one which gives them no choice but to consent to all but the very rare decisions that are truly irrational. The Jersey Court suggested, in relation to cases of deadlock between trustee and protector, that the Court might have the power to resolve such cases by exercising the discretion itself, as it does with deadlocked trustees, but left that question open to be resolved another day.

Case details

- Court: Jersey Royal Court, Samedi Division
- Tribunal: Sir Michael Birt, Commissioner, and Jurats Ramsden and Olsen
- Date of judgment: 5 October 2021

Article first published on LexisPSL Private Client on 12 October 2021.

Robert Christie acted for the protector in this case.