TRUSTS AND GLOBALISATION
When we came together at Herbert Smith Freehills to plan the next 12 months for our contentious trusts practice earlier this year, it became apparent just how many multi-jurisdictional cases around our network involve trust issues. These cases can involve traditional trust or estate disputes but just as often they involve general commercial disputes where commercial parties have for a variety of reasons chosen the common law trust as their business structure or, more usually, as part of their business structure.
Sometimes the parties may have done no more than chose a jurisdiction or governing law which imports into their relationships notions of equity or fiduciary duties. The individuals who may have chosen this structure often come from a completely different culture where the family trust is unknown and their domestic legal systems may not even recognise the concept of the trust or, indeed, a distinction between legal and beneficial ownership. Often, either for psychological reasons or because they do not obtain the best advice, they find it difficult to plan for the future and when litigation breaks out their lawyers have to fall back on equitable principles to regulate their relationships.
All of this is very familiar to trust practitioners. It seems that they now have to be experts in conflicts and if they practise in England they have to be just as familiar with the recast Brussels Regulation as their commercial litigation colleagues and they may spend as much time in the Commercial Court as in the Chancery Division. They also have to know something about insolvency and may have to be ready to execute a search and seizure order.
It is unsurprising therefore that we all seem to be giving or attending talks where the title is “Trusts and…”…either “arbitration”, “asset tracing” or “insolvency” (to give just a few examples). One of us also came up with the bright idea of calling our USP “Trusts Plus” or “@trusts” or, more prosaically, just “Trusts and…”. (A truly full service global law firm would of course allow you to input the jurisdiction you want after the words “Trusts and…” and give you access not only to trusts specialists in the relevant jurisdiction but also flight details, hotels and extra-curricular activities. If you search our website for “Trusts and Bermuda” you will not, sadly, get cheap rates at the Fairmont Southampton or priority tickets to the Bermuda Jazz Festival although we definitely recommend both.)
The conjunction between trusts and other disciplines – and it is truly a conjunctive “and” rather than a disjunctive “or” – reveals, however, a more serious theme which we hope to develop in our subsequent pieces and that is how the internationalisation of families and their wealth has transformed both the law of trusts and the demands on contentious trusts specialists. It is not only a narrative of how the English law of trusts has developed in global disputes but how common law trusts jurisprudence is becoming truly global and being moulded by the senior courts of offshore jurisdictions. Trusts practitioners may also become involved in global disputes of which the common law trusts element is a very small part. For instance, one of our more interesting matters involves the Dai al-Mutlaq who is the spiritual leader of the Dawoodi Bohra, a sect within Islam.
The Dai al-Mutlaq is also a corporation sole in English law under a private act of parliament controlling assets in the United Kingdom. There is a currently a dispute in India where the legitimacy of the current leader has been challenged. Whilst this issue is being resolved by the Indian courts we have been helping with English trust and charity law issues. To introduce this theme a bit better in this piece we have also been gazing into our crystal ball to explore the kind of issues which we expect you to see in Courts around the world in the coming year.
TRUSTS AND ARBITRATION
Last year, in London, we saw a trust arbitration for the first time (although our office in Hong Kong had done one before). There has been a keen debate for some time about the arbitration of trust disputes and in 2012 the journal Trusts and Trustees devoted a special issue to the topic. But trust arbitrations themselves are in our experience very rare for a number of well-known reasons.
In this case, the trust in question was created as part of a settlement of commercial litigation in London, Switzerland and Israel and a claim was brought by a beneficiary against the trustee for breach of trust. The trust was governed by English law and contained an English jurisdiction clause. It also contained an arbitration clause for determination of the relevant dispute. The arbitration duly took place and the award is now the subject of proceedings before the Commercial Court in London. If the challenge survives a preliminary ruling, it will be heard later this year. The case came to us because of a modest piece on laches published many years ago in the Trusts and Estates Journal which was stimulated – or provoked – by appearing in the Thyssen litigation in Bermuda. It appeared to generate no interest whatever at the time but it just goes to show that legal scholarship (if that is the right term for it) can be a good form of advertising.
The conceptual issues over arbitration of trust disputes are well-known and in this case a contract forming part of a series of settlement agreements was expressed to create a trust. One issue which the tribunal had to determine was whether this contract gave rise to a valid and enforceable trust (although this issue is not the subject of challenge). But this experience also illustrated the benefits of arbitration: first, the flexibility of the process. The seat of the arbitration was England but the tribunal was able to conduct the substantive hearings in both Israel and London before delivering its award.
Secondly, it illustrates the importance of enforcement both at the drafting and the litigation stage. The assets of the trust were held in a number of jurisdictions. The New York Convention offers an alternative to the choice of a jurisdiction whose laws may conflict with the law of the jurisdiction in which the parties are domiciled or registered or the assets held. Although the jurisdiction in which the trust is sited may contain “firewall” legislation this may not assist a party seeking to enforce the trust in another jurisdiction.
Thirdly, the consensual nature of arbitration and the confidentiality may give arbitration a greater appeal. By coincidence, the editors of Trusts and Trustees cite the Thyssen litigation as demonstrating the “shortcomings of the court process” and the benefits of arbitration. That case was in many ways unique and it came at a stage where active case management was at an embryonic stage. But even now it would still take the best part of a year or even longer to try that case.
TRUSTS AND ASSET TRACING
The interplay between trusts and arbitration also arises in asset tracing. Many commercial agreements – especially loan agreements – now specify the LCIA rules and a London seat for dispute resolution.
One of the reasons for that choice is that it is perceived to be easier to enforce an arbitration award under the New York Convention in, say, a jurisdiction like Ukraine than it is to enforce an English judgment. Another reason for that choice is the ability to obtain interim relief in the form of a worldwide freezing order (WFO) in aid of the arbitration in the English court than it is to obtain such relief in local courts (where interim relief of this nature may be in its infancy). (The Pugachev case involved New Zealand-based trustees and we have also seen a number of cases recently involving New Zealand aspects. Joanna Caen of our Hong Kong office, who qualified in New Zealand, will be picking up this theme in one of our later papers.)
The question whether a claimant can obtain a WFO over trust assets or disclosure of trust assets in aid of a WFO will be familiar to trusts lawyers from the decision of the English Court of Appeal in JSC MB Bank v Pugachev  EWCA Civ 39. The question whether a claimant can obtain a WFO over the assets of a subsidiary will also be familiar from the earlier decision in Lakatamia Shipping Company Limited v Nobu Su  1 WLR 291 where the Court of Appeal held that the assets of the subsidiary did not fall within the terms of the standard Commercial Court wording but that the shares in the subsidiary did. Importantly, however, the Court also held that it would be a breach of the order for the owner of the shares in a subsidiary to allow the subsidiary to deplete or transfer its assets away.
One issue which has troubled us in the Commercial Court in London is the extent to which trust assets (particularly assets of a discretionary trust) or the assets of a subsidiary are “assets” within section 44(3) of the Arbitration Act 1996 which gives the English Court jurisdiction to make a freezing order in aid of arbitration proceedings. If they are assets, then a claimant can get a WFO in aid of arbitration proceedings in appropriate cases of urgency. If they are not assets, then it is an open question whether a claimant would be able to use the wider power to obtain a freezing injunction under section 25 of the Civil Jurisdiction and Judgments Act 1982. In Cetelem SA v Roust Holdings Ltd  1 WLR 3555 the English Court of Appeal held that assets for the purpose of the section include a chose in action (and this is consistent with the very recent decision of the Supreme Court in JSC BTA Bank v Ablyazov (No 10)  UKSC 64). The importance of this issue for both a claimant and a defendant is obvious.
If there is no jurisdiction to make a WFO over trust or group assets, a claimant will not be able to freeze them or, equally importantly, obtain disclosure orders which may enable it to invoke the Chabra jurisdiction against the trustees or subsidiaries. If there is jurisdiction a defendant may be faced with a huge disclosure task if it is the holding company of a substantial group and even if the WFO contains the usual exception for the ordinary course of business.
TRUSTS AND INSOLVENCY
On 22 December 2015 the Court of Appeal of Guernsey gave permission to appeal to the Privy Council in Investec Trust (Guernsey) Ltd v Glenalla Properties Ltd in relation to the construction and application of Article 32(1)(a) of the Trusts (Jersey) Law 1984 which provides that where a trustee is party to a transaction affecting the trust any claim by the other party shall be against the trustee as trustee and shall extend only to the trust property.
The case relates to loan arrangements that the former trustees of a Jersey trust had recorded as having been entered into with several BVI companies owned by the trust. Those companies subsequently demanded repayment of the loan arrangements and obtained a judgment in respect of the loans. The case will be familiar to many as part of the “Tchenguiz litigation”. A number of jurisdictions have provisions similar to Article 32 which limit the liability of trustees to trust assets where they contract in their capacity as trustees. Provisions of this kind can have obvious significance where commercial parties use a trust as a vehicle for investment funds or trading, especially where the funds involve gearing. Indeed, one can readily see how provisions of this nature may be a significant factor in the choice of jurisdiction to locate a particular fund or trading vehicle. On the other hand, they could be a trap for creditors or counter-parties who may then wish to contract with a different party altogether or to seek some other security (possibly in a different jurisdiction). Finally, they may generate a concern for new trustees who are asked to take over the management of investment funds particularly if the trust is exported to a different jurisdiction.
In Glenalla the legal position was complicated by two features: first, by the fact that the new trustee had brought proceedings in Guernsey in relation to a Jersey trust and, secondly, by the fact that the original contracting party was the former rather than the current trustee of the trust. In their first decision in Investec Trust (Guernsey) Ltd v Glenalla Properties Ltd (2014) 18 ITELR 1 the Guernsey Court of Appeal held that as a matter of private international law the Guernsey court should recognise and apply Article 32 and in Investec Trust (Guernsey) Ltd v Glenalla Properties Ltd (No 2) (2014) 18 ITELR 30 they held that it could be invoked by the former trustee (whether or not there were allegations of breach of trust). In their most recent judgment they recognised that both of these issues were issues of general public importance and gave permission to appeal. The Privy Council will now have to decide whether Article 32 is limited to domestic Jersey trusts and trustees and the extent of the protection it provides.
TRUSTS AND SHARIA LAW
The Dubai International Finance Centre (DIFC, which is a legal jurisdiction in its own right, separate to the Emirate of Dubai) now has a trusts law which is closely modelled on the common law and by way of comparison with Jersey, Article 66 of Trust Law No 11 of 2005 provides that a trustee is not personally liable on a contract properly entered into in the trustee’s fiduciary capacity if the trustee disclosed that capacity in the contract.
Last year Justice Sir David Steel gave a second judgment in the DIFC Court in Taaleem PJSC v National Bonds Corporation which concerned the rights and liabilities of the parties under a trust over a development in the Financial Centre itself. The DIFC Court of Appeal has now given permission to appeal and one issue which it may have to decide is whether it is possible to incorporate the Sharia Standards published by the Accounting and Auditing Organisation of Islamic Financial Institutions into an agreement or instrument governed by the law of the DIFC.
The extent to which it is possible to incorporate Sharia law into an English law contract was considered by the English Court of Appeal in Shamil Bank of Bahrain EC v Beximco Pharmaceuticals Ltd  1 WLR 1784 (followed in Halpern v Halpern (No 2)  QB 195). These decisions suggest that it is possible to incorporate specific provisions of Sharia law into an English contract if the terms are sufficiently certain to be enforced and it is clear that they were intended to be contractual terms and more than just an expression of intent. Again, the DIFC Court of Appeal will have to decide whether it is necessary to address this issue and, if so, whether to give effect to the standards.
On 28 December 2015 the DIFC Court also handed down judgment in Ziad Azzam v Deyaar Development PJSC after the most recent hearing. This decision related to a claim for an anti-suit injunction to restrain Deyaar from bringing claims against its former officers in the courts of the Emirate of Dubai where the company was registered. One question which arose was whether the DIFC Court had jurisdiction over these proceedings under the Trust Law purely because the breaches of duty related to a DIFC trust. It also showed how difficult it is to compare the liability of a director for breach of fiduciary duty and of third parties for accessory liability with civil law systems under which these equitable claims are unknown.
TRUSTS AND BERMUDA
Easily one of the more talked about decisions of recent years was the decision of the Court of Appeal for Bermuda in Re an Application for Information about a Trust  CA (BDA) 8 Civ which involved the validity and effect of an “information control” clause in favour of the Protector of a Bermuda trust.
The Court of Appeal held that the Court may exercise its power to override the information control clause when the trustees or the Protector have discriminated between beneficiaries without authority from the settlor or other proper grounds for doing so. They also held that if it was necessary to establish a threshold which the beneficiary had to cross, that threshold had been passed because there was ‘real cause for concern’.
The decision is an important one both in the context of disclosure and the control of Protectors. It remains to be seen whether this will be the last word on this subject both in Bermuda and in the common law world.
Section 47A of the Bermuda Trustee Act 1975 was introduced in response to the English Court of Appeal’s decision in Pitt v Holt and gives the court jurisdiction to set aside the flawed exercise of a fiduciary power. The only other jurisdiction which has introduced similar legislation to date is Jersey although the new provisions (Articles 47B to 47J of the Trusts (Jersey) Law) are considerably more complex than section 47A.
These provisions were in part influenced by the decision of the English Court of Appeal handed in Pitt v Holt  Ch 132 which severely restricted the ability of trustees to apply to set aside a disposition under the so-called rule in Re Hastings-Bass (particularly where the disposition had unintended tax consequences) and adopted a narrow interpretation of the law of mistake. In the subsequent appeal in Futter v Futter  2 AC 108 the Supreme Court dismissed the appeal on the Hastings-Bass issue but allowed the subsequent appeal on mistake and held that the test for rescission was a causative mistake of sufficient gravity.
Unlike Futter and unlike some of the new provisions in Jersey, section 47A does not depend on a causative mistake. Nor does it depend on proof that the trustee was guilty of a breach of duty. Nor is the jurisdiction limited to a claim by a beneficiary. The section replicates, therefore, the rule in Re Hastings-Bass as it was understood before the decision in Pitt v Holt: see, eg, Sieff v Fox  1 WLR 3811. Whether the English tax authorities will accept the decision of the Bermuda Court without a fight is a moot point and in Re Onorati ST  JRC 182 the court recorded that HMRC had reserved its right to challenge the recognition of any judgment given by the Jersey court. Having said this, it is difficult to see how such a challenge could be effective.
The traditional rule reflected in the Hague Convention is that the English court has to apply the foreign law to determine the rights and liabilities of the parties before applying the English taxing statute. From our perspective the more interesting question is whether the Bermuda court will set aside the disposition once the conditions of the section are met or whether it retains a residual discretion and how it should be exercised.
This may not be important in cases where the trustees and beneficiaries agree that the disposition should be set aside but may be important where there is a serious dispute between the beneficiaries or between the trustees and the beneficiaries.
These are some of the more important issues which will be troubling us over the next 12 months. No doubt there are many more. We look forward to swapping intelligence with all of our friends and colleagues over the coming year both in Bermuda and elsewhere.