Limitation of trustee liability under Jersey law - some clarity for trustees

A judgment, eagerly awaited by Jersey and Guernsey trustees, has been delivered by the Privy Council (on appeal from the Guernsey Court of Appeal) in a matter involving the Tchenguiz family trusts - click here to read the judgment. Of most interest to trustees and their contractual counterparties are the findings related to the application and meaning of Article 32(1) of the Trusts (Jersey) Law 1984) (''TJL''), which can protect the personal assets of Jersey law trustees by limiting a counterparty's recourse if the counterparty is aware that it is dealing with a trustee.

The case involves large sums initially advanced by Kaupthing Bank and ultimately borrowed by Investec Trusts (Guernsey) Ltd and Bayeux Trustees Limited (both Guernsey based trustees) who administered a Jersey law governed trust. The most relevant issues from the judgment for trustees can be summarised by reference to the following five questions:

Question 1: does Article 32 of the TJL protect the trustees of a Jersey law trust when the issue of their liability is being litigated before the Royal Court of Guernsey? To the relief of the trustees, the majority of the Privy Council confirms that the extent of their liability (as trustee) is governed by the proper law of the trust (Jersey law), which includes the protection offered by Article 32.

Question 2: how does Article 32(1) change the ''normal'' rules of trustee liability? The Privy Council refers to one of the well-established rules of English law, that where a trustee transacts, it does so personally. This puts at risk not just the assets in the trust being administered, but also the trustee's personal assets. Where the trustee of a Jersey law trust transacts, however, the effect of Article 32 is that the trustee can transact either in a personal or in a fiduciary capacity. Where the trustee transacts in a fiduciary capacity and the counterparty is aware of this, the latter's recourse is limited to the trust assets and cannot extend to the trustee's personal assets.

Question 3: does the creditor counterparty have direct recourse against the trust assets? The Court of Appeal's view was that creditors had a form of direct recourse to the trust assets, rather than deriving their rights by way of subrogation to the trustee's rights of indemnity. The Privy Council disagrees, such a result being a ''radical departure'' from English law unduly favouring creditors over beneficiaries. One effect of this is that if the trustee loses its right of indemnity (perhaps as a result of a breach of trust) then there is no such right to which the creditor can be subrogated.

Question 4: when is the trigger point allowing the trustees' rights to pay, or seek reimbursement for, reasonably incurred expenses and liabilities? Can the trustees' right to reimbursement (out of trust assets) in respect of the loans (Article 26(4) of the TJL) be engaged but subsequently lost? The Privy Council confirms that if the loans were reasonably incurred, resulting in indemnity rights being triggered, then the indemnity cannot itself be lost, for example by a subsequent unreasonable failure to discharge those loans.

Question 5: can the trustees rely on the statutory limited recourse provisions to protect themselves from earlier adverse costs orders? In the Privy Council's view they cannot: Article 32 is not engaged, since this would be inconsistent with another provision (TJL Article 53), which provides the court with full discretion as to costs.

Lord Mance disagrees with the majority's approach on the first four questions: he regards the issue of a trustee's liability to a third party as being governed by the law of the obligation in question, which is not overridden by the law of the trust. Further, he sees no justification for characterising a trustee's ''capacity'' in different ways. Last, he sees the right to reimbursement under Article 26 of the TJL as operating at the time reimbursement is claimed, with reasonableness being judged by reference to all conduct which has gone before.

This judgment represents an important analysis of Article 32. It is clear from the judgment that the Guernsey equivalent (section 42 of the Trusts (Guernsey) Law 2007) will be interpreted in a similar way. Trustees will be relieved. Some re-balancing as between creditors and beneficiaries (favouring the latter) has taken place. Whether or not the protection offered to trustees by the Jersey and Guernsey limited recourse provisions are ''transportable'' to courts outside the Channel Islands is quite another matter. For the time being, to give the issues some broader context, trustees and their contractual counterparties are always free to transact on whatever terms they wish. Trustees may wish to ensure limited liability provisions form part of any contract and their counterparties may deem it appropriate to take security or guarantees.