Return to Contents

The Jersey Law Review - February 2004

SHORTER ARTICLES AND NOTES

THE SETTLOR/TRUSTEE RELATIONSHIP – SOME SENSE AT LAST

Julian Clyde-Smith

1       In the final stage of the litigation brought in Jersey by the Kuwaiti Investment Office through its company Grupo Torras SA (“GT”) against the Esteem Settlement, GT was unsuccessful in each of its claims namely that the Esteem Settlement was a sham, that it infringed the maxim “Donner et retenir ne vaut”, that its “veil” should be lifted, that it was contrary to public policy and that it should have a remedial constructive trust imposed over its assets.

2       In earlier proceedings, GT had recovered everything to which it was entitled pursuant to the established remedies available to creditors (i.e. its proprietary and Action Paulienne claims – the latter relating to transfers made to the Esteem Settlement in fraud of the settlor’s creditor GT) so it was concerned in this final stage (there has been no appeal) with assets which had been settled for legitimate purposes and which were wholly untainted.

3       I wish to deal in this article with the beneficial effect the judgment (Grupo Torras SA and another v Al Sabah and others)[1]should have upon the working relationship between beneficiaries and trustees of discretionary settlements.  I am concerned here with family trusts and will refer for convenience to the relationship as being between the settlor and the trustee on the basis that the settlor is a beneficiary and naturally acts as the point of contact for his or her family.

4       Prior to the judgment there was some considerable uncertainty about the relationship between the settlor and the trustee, how close it should be, and the extent to which the wishes of the settlor could safely be followed.  Different views were held but I have heard learned speakers at seminars recommending that trustees refuse requests from the settlor from time to time (presumably without regard to the merits) in order to demonstrate their independence.  There was no consideration given as to the effect that such an arbitrary refusal would have on the relationship between the settlor and the trustee or to the inevitability that in practice such refusals would be flagged in advance – in other words there would be a sham request and a sham refusal, and the impact such conduct between the settlor and the trustee would have if the trust itself were ever to be attacked as a sham. 

5       Other speakers, in the context of the Hastings-Bass[2] jurisdiction (by which decisions of trustees can be set aside by the court if the trustees are held to have failed to take into account considerations that they should have taken into account and vice versa), have counselled trustees against recording the reasons behind their decisions on the (unspoken) basis that such reasoning can be improved with hindsight should the decision ever be challenged.  Such advice ignores the reality of hostile litigation and how easily such after the event rationalisation can be exposed under cross examination.  In the context of letters of wishes, trustees have often been advised to depart from their terms from time to time, again purportedly to show their independence.

6       All GT’s claims relied upon the allegation that the settlor Sheikh Fahad (“the settlor”), who was a beneficiary along with a small class comprising at the material time his wife and son, was in “effective and substantive control” of the assets of the Esteem settlement.  In relation to the allegation of sham, GT relied on the settlor’s “control” as evidence of his intention at the outset to retain beneficial ownership of the assets – the unilateral sham argument. 

7       It was common ground that the trustee of the Esteem settlement (Abacus (C.I.) Limited (“Abacus”)) had physical control of its assets apart from possession of the residential properties that the beneficiaries occupied under licence.  The case accordingly centred upon whether the decisions made by Abacus in relation to those assets were its own decisions or those of the settlor that it merely implemented.

8       No clear definition of what “effective and substantive control” meant in the context of trusts was provided by GT.  It examined all the decisions taken by Abacus and because those decisions had only been made as a result of an actual or presumed request on the part of the settlor, GT concluded that he was in control.  GT accepted that Abacus would not have complied with a request which was illegal or patently absurd, but argued that it was not necessary to show total control but merely that in practice the settlor had exercised control.  GT argued that the settlor could be in control of the assets of the trust even if Abacus were acting properly as trustee.  Abacus, it observed, took no steps which were contrary to the settlor’s wishes or against his interests, and did nothing without his approval, explicit or implicit which was indeed the case.

9       In summary, GT argued that trustees had to be independent and had to demonstrate that independence from the beneficiaries by refusing requests or taking steps which did not have the settlor’s approval or were even against his interests, a contention which gave rise, inter alia, to the prospect of courts having to “audit” the conduct of settlements for the purpose of establishing their validity by investigating the number of occasions on which the trustees said “no” to requests made by beneficiaries.

10     Abacus argued that such contentions were unsupported by authority and fundamentally misunderstood the role of the trustee and the relationship between the trustee and the beneficiaries.  It contended that a trustee acting in good faith, who consciously puts his mind to the exercise of a discretion vested in him, who arrives at a decision, and implements that decision, can never be regarded as being under another’s ‘substantial and effective control’, an expression which is not a recognised legal term of art.  It clearly could not have meant control exercised pursuant to a power given to or retained in law by the settlor, as in this case he had no such express powers other than the power as protector to appoint new or additional trustees.  The term had therefore to be descriptive of the relationship between the settlor and Abacus, namely that through his domination of Abacus, the settlor was in a position substantially and effectively to control the assets of the trust, i.e. to negate or override the proper exercise by Abacus of the discretions vested in it.  In other words, GT had to show that by reason of that relationship, Abacus was never prepared to decline a request from the settlor.  Permitting such control, Abacus contended, would constitute an unauthorised delegation by Abacus to the dominant settlor of powers which under the trust deed and in law vested solely in Abacus which must constitute a breach of its duties as trustee.

11     In the view of Abacus, GT was in effect asking the wrong question.  GT asked “Why was something done?” and responded “Because the settlor wanted it to be done”.   Abacus contended that the appropriate question was “Did the trustee retain its discretion, exercise it and implement the decision?”

12     Abacus pointed out that the sole rationale for the existence of a trust is to provide benefits to its beneficiaries (see passage from Letterstedt v Broers[3]cited below), and it is hardly surprising therefore, that the trustee would seek to give effect to the wishes of the settlor who was not only a beneficiary but the father of a close knit family.  It did not follow that because Abacus gave effect to the wishes of the settlor, it cannot have exercised its discretion.  The exercise of a discretion by a trustee means no more and no less than the intellectual process of taking a decision in relation to the assets held by it as trustee and implementing that decision.  It involves the trustee in -

(1)        being aware that it has a discretion;

(2)        applying its mind to the exercise of that discretion (Turner v Turner[4]);

(3)        being open as to the decision it will take;

(4)        implementing the decision.

13     That exercise is not, however, conducted in vacuo or independently of the interests and needs of the beneficiaries.  It is an exercise conducted within a trust which exists for the sole purpose of providing benefits to its beneficiaries. 

14     The stance taken by GT took no account of the importance of the working relationship between a trustee and its beneficiaries.   The general principle in guiding the courts when considering the position of a trustee (in the context of its possible removal) is “the welfare of the beneficiaries and the competent administration of the trust in their favour”.[5]  The absence of an harmonious relationship is regarded as sufficiently important for a trustee to be advised by counsel to resign, notwithstanding that there is no misconduct on the part of the trustee.  A refusal to follow such advice without reasonable grounds would be sufficient to justify the trustee’s removal by the court.[6] Thus while a trustee should not allow the need for harmony to negate the proper exercise of the powers and discretions vested in it, an harmonious relationship with the beneficiaries is important and is recognised by the courts as such.  The contentions of GT, if they had been accepted, would lead to trustees seeking out confrontation with beneficiaries artificially in order to safeguard the trust against this kind of attack.  Abacus argued that the existence of an harmonious relationship between the trustee and the beneficiaries in the administration of a trust should never in itself constitute grounds for criticism.

15     GT analysed each decision of Abacus as if it were conducting a Hastings-Bass review, searching for considerations which Abacus should have taken into account and did not and vice versa.  Abacus contended that, whilst within the domestic confines of a trust it was open to beneficiaries to challenge decisions of the trustees on this basis, in the event of an attack by third parties upon the trust itself, the Court should not be concerned with the quality of the decision, but whether the trustee in good faith consciously put his mind to the exercise of the discretion.  A trustee consciously making qualitatively poor decisions in good faith is no more under the control of the settlor than a trustee who always gets the decision right.

16     The Royal Court found as a matter of fact that the decisions were those of Abacus and not the settlor, and accordingly that the assets of the Esteem settlement were not under the settlor’s substantive and effective control, but it also rejected GT’s approach.  The Court expressed the view (conceded by GT to be correct) that in the majority of genuine discretionary trusts, it was likely that the trustee would not in fact have to turn down a request from a settlor, and the mere fact that trustee has not refused a request from a settlor could not of itself prove substantial or effective control.  Birt, Deputy Bailiff, stated -

“122   Trustees have a fiduciary duty to their beneficiaries.  They must exercise their discretion only in the interests of the beneficiaries.  In order to exercise a discretion trustees must first be aware that they have a discretion and secondly must apply their mind to the exercise of that discretion (see Turner v Turner[7]).  This exercise must be carried out in good faith in the sense that the trustees must not only be open to the possibility of deciding not to give effect to a request put to them but also be quite prepared to do so if of the opinion that this is the right course.  In our judgment trustees who consider a discretion in good faith in the way that we have described cannot be said to be under the substantial or effective control of the requesting settlor.  Whether or not the settlor gets his way is dependent upon what the trustees decide in exercise of their fiduciary powers.  The decision lies with the trustees.  If they refuse to go along with the settlor’s request, there is nothing that the settlor can do about it.  Conversely if trustees were to come under the control of a settlor so that they did not consider the matter in good faith in the way we have described but simply went along with the settlor’s request because it was the settlor’s request, such a decision would be reached in breach of their fiduciary duties and would be liable to be quashed (see Turner v Turner and In re Hasting Bass[8]).  It cannot be sufficient simply to show that, in practice, trustees have gone along with a settlor’s wishes.  Such an event might of course be evidence that the trustees had abdicated their fiduciary responsibilities and come under control of the settlor.  But it would often be equally consistent with the trustees having exercised their fiduciary responsibilities properly but having decided that each request of the settlor was reasonable and in the interests of one or more of the beneficiaries so that it could be accepted.  After all, as Lord Blackburn put it in the Privy Council decision in Letterstedt v Broers[9]:  “It must always be borne in mind that trustees exist for the benefit of those to whom the creator of the trust has given the trust estate.”

123    Accordingly, we reject the plaintiffs’ submission that they do not need to show that Abacus acted improperly or in breach of trust and that it was enough that in practice, even if exercising a discretion, they complied with Sheikh Fahad’s wishes.  If trustees genuinely exercise their discretion in good faith, they are not under the substantial or effective control of the settlor even if they in fact decide to go along with the settlor’s request.  We think that Abacus and the defendants are right to assert and Mr Journeaux was right to concede that, in order to establish substantial or effective control, it is necessary for the Court to conclude that Abacus went along with the request from Sheikh Fahad without applying its mind to the matter in question i.e. without exercising a bona fide discretion.  That, of course, is not to say that Abacus must show that it got everything right.  There will no doubt be many occasions where trustees take a genuine decision which turns out to be unwise or even in breach of trust for some reason.  The question in this context is whether the trustees acted in good faith, consciously put their mind to the discretion vested in them, arrived at a decision and implemented that decision.  Such persons cannot be regarded as being under another’s substantial or effective control.”[10]

17     A Court will decide whether a trustee has consciously put his mind to a decision principally from the evidence of the trustee or its officers and from the documents.  Even before the establishment of the Esteem settlement in 1981, Abacus had progressively developed procedures manuals (which in the main it followed), and its files and records were maintained to a high standard.  However, it was not the practice of Abacus to record the reasons for decisions either in the minutes or in the file (although there was no policy to this effect).  The officers who had administered the Esteem settlement were available to give evidence, and the Court had no hesitation in finding them to be honest witnesses who were doing their best to assist the Court.  The Court commented that the witnesses were in general careful to confine themselves to what they could actually speak of, and when they were hypothesising or rationalising after the event, they were happy to concede this.  The Court accepted their evidence that they did put their minds to the decisions that were made. 

18     However, the officers involved in the administration of a trust may not always be available to give evidence and it would be a wise precaution, in my view, for the procedures of a professional trustee to ensure that where possible there is documentary evidence of the decision making process.  A professional trustee should not be reluctant to explain his reasoning in writing either in the minutes or in a file note.  To do so is conduct which is consistent with good faith – a policy not to do so can be misinterpreted.  The Hastings-Bass jurisdiction has on the whole been invoked by trustees to undo decisions they subsequently came to regret for whatever reason, but in my view a court is unlikely to hold a trustee personally liable for losses to the trust fund arising from a decision which can be criticised with the benefit of hindsight under the Hastings-Bassprinciple where the trustee has acted honestly and reasonably at the time in reaching the decision he did.[11]

19     Having been involved in this exhaustive dissection of Abacus’s files maintained over a period of 20 years, it seems to me that in addition to file notes setting out the trustee’s reasoning, the best documentary evidence of the application of a conscious mind to a matter is where there is documentary evidence of questioning and probing of those making the request and (where appropriate) the taking of independent legal or other expert advice before the decision is made. 

20     Where such documentary evidence is clear on the face of the file, it is much less likely that anyone will seek to assert that the trustee had abandoned its fiduciary duties.  

21     Ironically, in Esteem, GT criticised Abacus for taking decisions which did not accord with the settlor’s intentions as expressed in the letter of wishes, which had not been substantively reviewed over the years.  In fact, the Court found that the trust had changed out of all recognition and it was not surprising that Abacus had taken into account wishes expressed by the settlor from time to time which may have been inconsistent with the wishes originally expressed by him.

22     Birt, Deputy Bailiff, expressed it in this way -

“215   At various points during his cross-examination and submissions, Mr Journeaux referred to the letter of wishes and suggested that various actions taken by Abacus were inconsistent with it.  A letter of wishes is not a formal document and does not impose any legal obligation.  It may be changed from time to time.  As the wishes of a settlor change, these changed wishes may be reflected in an updated letter or may simply be communicated orally.  The Court has certainly seen numerous examples of letters of wishes the opening of which states something along the lines that the settlor would wish the trustees to have regard to such wishes as he may from time to time express to them during his life, before then going on in the letter to specify his wishes as to what should happen after his death.  It is quite clear that a settlor – to whom, after all, the funds belonged before he decided to give them to the trustees – is entitled to express his wishes from time to time to the trustees.  The trustees are entitled to take such wishes into account when deciding how to exercise their fiduciary powers.  As Mr Blampied said in evidence he has always regarded the letter of wishes as important but it is only guidance.  The fact that the trustees are entitled to take account of the settlor’s wishes as they may be expressed from time to time was emphasised in the case of Abacus Trust (IOM) Ltd. v Barr.[12]  Indeed, on the facts of that case, it was held that the decision by the trustees to make an appointment could be set aside on the Hastings-Bass principle because the trustees had misunderstood the settlor’s wishes.  Had they known his true wishes, they would have appointed in accordance with those wishes.

         … …

217    It can be seen therefore that the Settlement had changed out of all recognition and now contained assets which had originally been retained for Sheikh Fahad’s benefit.  It is therefore hardly surprising that Sheikh Fahad’s wishes in respect of the Settlement should have evolved and not remained exactly as set out in the original letter of wishes when $1 million was settled in 1981.  We therefore do not find it surprising that Abacus was prepared to take account of Sheikh Fahad’s wishes (as communicated to it by Stephenson Harwood) as they varied from time to time, particularly bearing in mind that he was a beneficiary as well as the head of what appeared to the trustee to be (and indeed was) a small, close knit family consisting of a husband, wife and only son.  Mr Blampied made it clear that his approach to Sheikh Fahad’s wishes was the same as his approach to requests from settlors generally in relation to trusts which he administered.  Such wishes were an important consideration but trustees had to have regard to the particular circumstances of the trust e.g. the value of the trust fund, the needs of the beneficiaries and whether they had other income, how many beneficiaries there were etc.”[13]

23     In the context of the settlor/trustee relationship, I draw the following conclusions from the judgment.

(1)  The relationship between the settlor (and the beneficiaries as a whole) and the trustee should be harmonious and founded in trust and confidence. 

(2)  Trustees should not be worried about giving effect to the wishes of the beneficiaries expressed through the settlor – indeed the whole purpose of a trust is to benefit the beneficiaries and the courts would regard it as unusual for reasonable requests to be turned down.

(3)  Trustees must, however, in good faith consciously put their mind to the exercise of the discretions vested in them, and must be open to the possibility of saying no.  Each decision must be considered on its merits but there is absolutely no need for trustees to demonstrate their independence by, for example, arbitrarily turning down requests from the beneficiaries.

(4)  The best evidence of that decision making process is documentary evidence contained in the file showing the trustee probing and questioning the request and (where appropriate) taking legal or other expert advice before the decision is taken and recording the reasons for that decision.

Julian Clyde-Smith is an advocate of the Royal Court and a partner in Ogier & Le Masurier of Whiteley Chambers, Don Street, St. Helier, Jersey, JE2 4TQ.  He acted as counsel for Abacus in the case under review.

Return to Contents