AB Jnr & Another v MB & Others was a significant decision of the Financial Services Division of the Grand Court of the Cayman Islands, relating to a Trust Deed, dated 21 November 1985.  The weighty judgment of Hon. Anthony Smellie, CJ, at some 204 pages, follows an In Camera hearing taking place over the course of a 9 week period, between April and June 2012.

Summary

Against a complicated factual background, and considerable animosity between the parties, the case related primarily to the question of whether the conduct of a beneficiary (referred to as Mme B), after the death of the Settlor, was sufficient to result in the forfeiture of her interests under the Trust.  The Court decided that the conduct was sufficient to justify invoking a "no contest clause" within the Trust Deed.  However, the remaining beneficiaries of the Trust were estopped from raising the claim for forfeiture due to the terms of a settlement reached with the Trustees in 1999.  Mme B failed to complain about the terms of the 1999 settlement, at a time when it would have been possible to restore the trust assets, and so while it was still possible to avoid prejudice to the remaining beneficiaries of the Trust.

The case is also interesting as the Court was willing to find that there had been a breach of the fair dealing rule by the Trustees, arising from the Trustees' failure to disclose that negotiations were taking place in relation to a company held by the Trust, at a time when an exit settlement was being discussed and negotiated.As a result of the breach of the fair dealing rule, the court ordered equitable compensation for that breach.  The Court also concluded that "equitable compensation is a free-standing remedy independent of the right to rescind".  As for the methodology of the calculation of that equitable compensation, the Court asked whether or not a loss resulted from the failure of the Trustees to disclose the negotiations in the context of the exit settlement, in 1999.

What is a "No Contest" clause?

A "No Contest" clause (sometimes referred to as a "No Challenge" clause) is a clause which is often found in wills and trusts.  The goal of such a clause is to prevent challenges to any aspect of the trust by a member of the beneficial class, by providing that such a challenge will result in the interests of that beneficiary being forfeited.  Typically, the termination of the beneficiary's interest occurs automatically in response to the taking of any actions described within the No Contest clause, but there are some variations in which the Trustee has to discretion to take action to impose the forfeiture.

The Facts (in brief)

The relevant events took place over the course of over two decades, and so are necessarily heavily summarised in this review.  The case concerned a trust, known as the AB Trust (the Trust), the settlor, of which, AB Snr (the Settlor), died in 1991.  The Trust contained the bulk of the Settlor's wealth.  Legal action started shortly after the Settlor's death, and took place in several jurisdictions throughout the world, culminating, in 1999, with what appeared to be a final settlement (the 1999 Agreement), which was approved by an order of the Cayman Islands court, later that same year.

The 1999 Agreement resulted in the interests of the Settlor's third wife, Mme B (the Settlor's Wife) and the Settlor's son, AB Jnr (the Settlor's Son) being appointed out of the Trust and into a Guernsey trust, for their benefit.  There was a considerable amount of distrust between the Settlor's Wife, on the one hand, and the rest of the Settlor's family, on the other, and so this legal separation of interests was considered desirable.  At the time when the 1999 Agreement was reached, there were significant arguments around the valuation to be attached to the various assets, in order to arrive at an outcome that was "fair" to all parties.  Given the nature of the assets of the Trust, these valuation issues were complex.

The present case arose from arguments by the Settlor's Wife and the Settlor's Son (together the Plaintiffs) that the 1999 Agreement arose only as a result of a breach of the Trustees' fiduciary duties owed to them.  That breach, allege the Plaintiffs, resulted in a significant diminution of the value ascribed to their interests in the Trust for the purpose of their departure from the Trust.

At the same time that the terms of the 1999 Agreement were being negotiated, there were ongoing negotiations to sell some of the Trust's assets (of significant value).  The existence of these negotiations was not disclosed to the Settlor's Wife, or to the Court.  As matters progressed, the Trustees selected the higher of two valuation figures, for the purpose of finalising the terms of the 1999 Agreement, but did not disclose to the Plaintiffs the reason for selecting the higher valuation (which was due to the ongoing sale negotiations, of which the Plaintiffs were unaware).  The Plaintiffs also agreed to a discount in their entitlement, due to the fact that the 1999 Agreement resulted in them receiving largely liquid assets, whilst most of the assets remaining in the Trust were illiquid.  A further argument by the Plaintiffs was that this discount would not have been agreed had the Plaintiffs been aware of the ongoing negotiations.  The Court ultimately found that there had been a breach of the "fair dealing" rule by the Trustees, in failing to disclose these negotiations to Mme B, at the time of the 1999 Agreement.  This is something of an over-simplification of a complicated situation, but is sufficient for the purpose of this summary.

The Trust was not a standard discretionary trust.  Instead, the assets of the Trust were divided into shares, and specific numbers of shares were allocated to named beneficiaries.  Over the years, the share entitlements were altered, firstly following the Settlor's mother's death, and then again following the buy out of the shares of the Settlor's sister.  The Court commented that "some of the provisions of the Trust were not well drafted".

Lessons from the Case

Several important legal points can be taken from this case.  The first is that "No Contest" clauses are enforceable in the Cayman Islands, and they are not considered to be contrary to public policy (the public policy requirement being that one should not seek to preclude a challenge before the Court on justifiable grounds).  This is confirmation of the approach taken by the Grand Court of the Cayman Islands in the earlier case of AN v Barclays Private Bank & Trust (Cayman) Ltd [2006] CILR 365.

From a draftsman's perspective, this underlines the need to include an appropriately worded "carve out" from the No Contest Clause, to permit justifiable challenges before the Court.  In the present case, the following wording was used:

"provided however, that a petition, made in good faith and not objected to by the Trustee, seeking an interpretation of this instrument shall not be considered a contest of, an attack on, or an attempt to frustrate the dispositive plan of this instrument."

The case also provides an illustration of some types of conduct which may lead to the invocation of a "No Contest" clause.  There were 5 main actions by Mme B, which the Court determined were sufficient to result in a forfeiture of her interests under the Trust.  However, on the facts of the case, the remaining beneficiaries of the Trust were held to be estopped from bringing that claim, largely on the basis that the 1999 Agreement, and the Court order approving it, were premised on Mme B being a beneficiary of the Trust at that time (indeed, the power of advancement used to transfer assets from the Trust, into the Guernsey trust, was only exercisable in favour of a "beneficiary" of the Trust).  Briefly summarised, the actions of Mme B, which were said by the Court to have been sufficient to invoke the No Contest clause (although such comments were made in obiter), were as follows.Mme B refused to allow access to a valuable art collection, owned by the Trust, which was kept in a property in Paris.  She did this by claiming diplomatic immunity.  "Limb 2" of the "No Contest Clause" provided that a beneficiary's interests in the Trust would be forfeited if a beneficiary did anything which "would frustrate the dispositive plan contemplated in this Trust".

Mme B also applied for and obtained the placing of judicial seals on the contents of the Paris property, after the death of the Settlor.  The placing of seals was an act that was premised on the contents of the Paris property belonging to the Settlor's estate, when Mme B knew that they belonged to the Trust.

In addition, Mme B took steps to obtain court orders to permit raids on companies owned by the Trust, which raids resulted in the seizure of papers relating to Trust assets.  Further, Mme B defended proceedings taken by the Trustees, which related to the art collection, on the grounds of diplomatic immunity (amongst other things).  Finally, Mme B arranged for the sale of several items from the art collection, via a "friend".  Ten lots were sold before the Trustee was able to obtain an order to prevent further sales from taking place.  Mme B claimed that the sales of these items was a "mistake" and something that she did not authorise.

From a trustee perspective, the judgment is a cautionary tale on the need to comply with the fair-dealing rule (the Settlor's Son not being estopped from claiming a breach of the Trustees' duty to observe the fair-dealing rule in respect of the 1999 Agreement).  Attempts to rely on legal advice, as a justification for their failure to disclose the ongoing negotiations, failed to provide a defence to the claims of a breach of the fair-dealing rule.

Finally, the case acts as guidance as to when equitable compensation may be available (and as to the method in which that compensation should be calculated).  The Court concluded that equitable compensation is a remedy available at law, which the Court may award for loss resulting from a breach of the fair-dealing rule.  They went on the explain that, while the claim must relate to the impugned transaction said to be tainted by the breach of the fair-dealing rule, equitable compensation may nonetheless be awarded even if the right to rescind the impugned transaction has been lost, or the opportunity to rescind no longer exists.  The Court concluded that "equitable compensation is a free-standing remedy independent of the right to rescind".

In terms of calculating the equitable compensation, the Court concluded that, in this case, the appropriate basis is to enquire into whether or not a loss resulted from the Trustees' breach of the fair-dealing rule (the failure to disclose the ongoing negotiations), rather than attempt to look at what "alternative transactions" might have been entered into, but for the breach.