Knowledge

There is no substratum rule in relation to trusts, the Jersey Royal Court has held in Representation of Rysaffe Fiduciaires Sarl [2021] JRC 230, following the decision of the Court of Appeal for Bermuda in Grand View Private Trust Company Limited v Wong & Ors Civil Appeal No. 5A of 2019.

In blessing a series of decisions by the trustees of a trust, which included the addition of a beneficiary to the beneficial class and the distribution of trust assets to that beneficiary, the Royal Court held the following:

• There is no substratum rule in relation to trusts, as has been fashionable to argue in recent years; that is, there is no rule that the exercise of a power of amendment, or of a power to add beneficiaries, is confined to such amendments or additions of beneficiaries as were reasonably within the contemplation of the parties when the trust was established; nor any rule that the substratum or basic purpose of a trust cannot be changed.
• Rather, the relevant rule is simply that any such power must be exercised in accordance with its express or implied terms, ie for a proper purpose.
• In considering the proper purpose (ie the scope) of such a power, evidence of the settlor’s subjective intentions in setting up the trust, and/or of the settlor's purpose in granting the powers contained in the trust instrument, may be admissible. This may include evidence in the form of the Letter of Wishes.

Although it may be thought that the proper purpose rule and the now-rejected substratum rule play broadly the same role, the contrasting result in Grand View at first instance and on appeal demonstrates how the differing starting points of the two rules (one starting with the concept of a coherent whole, the other focusing on the individual powers which on their terms are designed to provide flexibility) can lead in practice to dramatically different conclusions.

This decision preserves the attractiveness of Jersey as a jurisdiction for settlors looking to settle a trust which will retain flexibility. However, trustees should always ensure that they consider the exercise of such powers carefully – and if necessary take appropriate advice – especially where the exercise of such a power might be considered a marked change of direction for the trust.

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