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Exclusions and Exemptions in Onshore and Offshore Trusts

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Exclusions and Exemptions in Onshore and Offshore Trusts Daniel Clarry Exclusions and exemptions in onshore and offshore trusts Article (Published version) (Refereed) Original citation: Clarry, Daniel (2014) Exclusions and exemptions in onshore and offshore trusts. Trust Quarterly Review, 12 (3). pp. 31-43. © 2014 The Society of Trust and Estate Practitioners This version available at: http://eprints.lse.ac.uk/68773/ Available in LSE Research Online: January 2017 LSE has developed LSE Research Online so that users may access research output of the School. Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. You may freely distribute the URL (http://eprints.lse.ac.uk) of the LSE Research Online website. EXCLUSIONS AND EXEMPTIONS DANIEL CLARRY 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 for a trustee’s own fraud, wilful default or gross • The en bon père de famille obligation in Guernsey negligence cannot be exempted; in England and trusts law has effectively been translated in the Wales, all liability save actual fraud can be exempted. Spread v Hutcheson litigation, in which it was • Despite leading trust precedents recommending uniformly accepted to be equivalent to the standard against broadly drafted trustee-exemption clauses, of care applicable to trustees in England and Wales and attempting to strike an appropriate balance and in Jersey, i.e. the ‘prudent man of business’. between accountability and protection of trustees, This removes a latent uncertainty in Guernsey law. trustees may nevertheless insist on lower standards • Despite difficulties in the reasoning of the Privy of care being imposed, consonant with the general Council in Spread, the alignment of standards of and statutory law. care of trustees develops greater cohesion across • As a matter of public policy, the minimum these prominent trust jurisdictions and facilitates standards of care that apply to trustees and any the coherent development of trusts jurisprudence. consequent liability ought to be clearly stated as a • Unlike in England and Wales, the standards of care matter of law, irrespective of trust drafting. Trustees in Guernsey and Jersey are mandatory, rather than would not be unduly exposed as there remain applicable by default, which ensures greater internal mechanisms in trusts law that protect accountability in offshore trust administration. diligent trustees from liability, including obtaining • Guernsey and Jersey have also taken a more robust legal advice, concurrence from beneficiaries and position on trustee exemption clauses, where liability protection from the court, where necessary. NOVEMBER 2014 31 WWW.STEP.ORG/JOURNAL EXCLUSIONS AND EXEMPTIONS DANIEL CLARRY his article builds and reflects on an article the Privy Council.4 Third, although the Privy published in the Jersey & Guernsey Law Council accepted that the statutory draftsmen in Review, 1 which was primarily concerned Guernsey followed a similar amendment in Jersey,5 Twith Spread Trustee Co Ltd v Hutcheson.2 In the prohibition on ‘gross negligence’ was also Spread, a preliminary question of law made its introduced in Jersey without any indication that it way to the Privy Council: could a trustee be was a significant change to the pre-existing law.6 exempted from liability for gross negligence in One interesting feature of the Spread litigation a trust instrument before 19 February 1991?3 If a warrants further attention because it resolves a trustee could not be so exempted, the provisions peculiar aspect of Guernsey trusts law. In in the relevant trust instruments were invalid and determining the position of trustee exemption the beneficiaries could pursue their claim against clauses under Guernsey customary law as a matter the trustee. of statutory interpretation, the Privy Council did Departing from the Royal Court of Guernsey and not consider that the unique obligation to act en the Guernsey Court of Appeal judgments, and only bon père de famille in the Trusts (Guernsey) Law by a slim majority (3:2), the Privy Council held that 1989, which was accepted to be declaratory of a trustee could be exempted from liability for gross Guernsey customary law, had any particular role negligence in a trust instrument under Guernsey to play in the determination of the question of customary law. Essentially, the Privy Council whether a trustee of a Guernsey trust could be aligned the Trusts (Guernsey) Law 1989 with exempted from liability for grossly negligent Guernsey customary law such that, until 19 conduct. Instead, the Privy Council equated February 1991 when statutory amendment came the obligation to act en bon père de famille with into force, Guernsey customary and statutory the standard of care expected of a trustee in law both allowed trustee exemption clauses that English and Welsh law. excluded liability for gross negligence. The consequence of doing so is that the There were three problems with that approach. standards of care in onshore and offshore trust First, the Trusts (Guernsey) Law 1989 was not a administration are aligned, even though the law codification of Guernsey trusts law and it should on trustee exemption clauses remains quite not have been treated as such by approaching different. The duties of care applicable to trustees the determination of Guernsey customary law in England and Wales, Guernsey and Jersey are the as simply a matter of statutory construction. subject of this article, as well as the law on exclusion Second, the explanatory material that and exemption clauses and the drafting practice accompanied the relevant amendment to the that has arisen responsively. It will be shown Trusts (Guernsey) Law 1989 to explicitly prohibit that, while the duties of care are similarly framed the exemption of liability for gross negligence in a in onshore and offshore trust administration, trust instrument did not treat that amendment as a the mandatory nature of Guernsey and Jersey particularly momentous occasion, even though it trusts laws ensures that duties of care cannot be was the first time that gross negligence could not excluded by the terms of a trust in the Channel be excluded by the terms of a trust instrument Islands and trustees cannot be exempted from under Guernsey law, according to the majority of liability for gross negligence. This enhances the 4. States’ Advisory and Finance Committee, ‘Report on Amendments to the 1. Daniel Clarry, ‘The Offshore Trustee en bon père de famille’, Jersey & Guernsey Guernsey (Trusts) Law 1989’, 16 March 1990, Billet d’État VIII of 1990, article VI. Law Review, 5 (2014) 18(1) See also Spread Trustee Co Ltd v Hutcheson (2009) 10 GLR 403 (Spread (GCA)), 2. [2012] 2 AC 194 (Spread (PC)) 35–38, per Martin JA 3. On 19 February 1991, an amendment to the Trusts (Guernsey) Law 1989 came 5. Spread (PC) at 216, per Lord Clarke into effect that explicitly prohibited the exemption of liability for a trustee’s grossly 6. Finance and Economics Committee, Explanatory Note (lodged with the draft negligent conduct Jersey Amendment Law au Greffe), 31 January 1989 NOVEMBER 2014 32 WWW.STEP.ORG/JOURNAL EXCLUSIONS AND EXEMPTIONS DANIEL CLARRY accountability of offshore trustees, relative to the shares as trustee. In Spread, the relevant their onshore counterparts. conduct concerned the alleged failure by the trustee to monitor shares, the value of which STANDARDS OF CARE IMPOSED plummeted over several years by some ON TRUSTEES GBP50 million.9 A duty of care is a fundamental aspect of trust Such cases give rise to the common complaint administration that regulates the manner in which that trustees did not take appropriate steps to a trustee executes the trust and performs their preserve the value of the trust fund and did not duties as trustee. The difficulty in defining the act diligently. Similarly, trustees who do not duty of care is in shaping an objective standard actively administer the trust may also be held of care to be applied to the different persons that liable for failing to monitor the performance 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 may occupy the office of trustee. Nevertheless, of the trust by their co-trustees. In such cases, it is fundamental to ensuring that a trust will the difficulty is in setting the appropriate actually be performed. threshold for liability where the trustee has Aside from active or positive breaches of trust not actively breached the trust. For this reason, (i.e. misapplication or misappropriation of trust the framing of duties of care to regulate such property), trustees commonly commit passive conduct is especially important, albeit difficult breaches of trust by failing to act diligently – in to define in abstraction, and has given rise to particular, by failing to monitor trust investments shifting standards of care to take account of that have not been diversified but simply comprise the circumstances. a concentrated shareholding in a particular company that declines in value. Three examples England and Wales may be given of such cases. In Re Lucking’s Will In England and Wales, a trustee’s duty of care is Trusts,7 a trustee was held liable for failing to expressed as, or likened to, that of the ‘ordinary supervise the management of a company in prudent man of business’ or, in other words, it is which the trust had a controlling interest.
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