In trust terms, the office of protector is a relatively recent development, born principally out of a rising popularity amongst settlors to establish trusts in offshore jurisdictions. Settling an offshore trust usually necessitates the appointment of a local (offshore) trustee, usually a corporate trustee, who may have limited, or indeed any, familiarity with the settlor or the beneficiaries. In such circumstances, the appointment of a protector by the settlor is an attractive safeguard over the trustee, ensuring the trustee has regard to the wishes of the settlor and the welfare of the beneficiaries.
The scope of a protector's fiduciary powers has been the subject of much debate (and litigation) in recent years. Offshore jurisdictions have been divided on whether a protector's role is, in essence, limited to ensuring only that trustee decisions are lawful (the "Narrow Role"), or whether it comprises an independent decision-making discretion (the "Wider Role").
This week, the Privy Council gave judgment on this conundrum in the final instalment of the X Trusts litigation, unanimously finding that protectors have a Wider Role in the absence of express wording to the contrary. The Privy Council provided some much-welcome guidance on the construction of protector powers, demonstrating that issue is not quite as binary as once thought.
The facts
The X Trusts litigation concerns a number of discretionary trusts for the benefit of two family branches (A and B) administered by Bermuda-based trustees. The protectors held two main powers: to approve or refuse capital appointments to beneficiaries, and to approve or refuse dealings with specified securities (principally shares in an operating company, "OpCo").
In 2017, the trustees proposed a scheme to divide the aggregate trust property (worth£billions) between branches A and B, but in unequal proportions. The protectors, adopting the Wider Role, concluded the scheme did not serve the beneficiaries' best interests and withheld consent. The trustees sought declarations as to the legal basis on which the protectors were entitled to withhold consent.
The issue
The central question posed to the Privy Council was whether fiduciary protectors exercising a power of consent are limited solely to reviewing the lawfulness of the trustees' proposed action, or whether they are empowered to exercise an independent discretion by reference to their own view of the merits.
At first instance, Kawaley AJ in the Supreme Court of Bermuda had held that the protectors were confined to the Narrow Role on the construction of the trust instrument as a whole and given concerns around the practical implications of affording protectors a wider function (in particular, the risk of potential deadlock between trustee and protector).
On appeal ,the Court of Appeal of Bermuda similarly upheld the Narrow Role, finding that the Wider Role would offend the trustees' "paramount substantive role" with the result being that a protector with independent discretion would effectively become the ultimate decision-maker rather than a 'watchdog' and that this might lead to wasteful duplication and, again, the risk of deadlock.
The Court of Appeal decided not to follow the judgment of the Royal Court of Jersey in In the Matter of the Piedmont Trust & Riviera Trust which shortly followed the first instance decision in Re X Trusts. In the Piedmont case, the Royal Court found in favour of the Wider Role on the basis that the Narrow Role had little practical utility where the protector's function was essentially akin to blessing the trustee's decisions (which if often done by the Court). The Court of Appeal further sought to reason that the term "protector" as a matter of ordinary language was ancillary in nature and more naturally described the Narrow Role.
The Privy Council's decision
The Privy Council unanimously upheld the Wider Role as the default position in absence of provision to the contrary in the trust instrument. It rejected the binary assumption, in the construction of protector powers, that the settlor had in mind one or the other of the narrow or wide views. In doing so, the Board posed the relevant issue to be the following:
"Where… the settlor has made provision for one or more persons (calling them protectors) to exercise precisely defined powers, including powers to approve or disapprove steps being proposed by the trustees in the appointment of administration of the trust property, but remained silent about how those powers should be exercised, the question is not which of two roles was specified (Narrow or Wider) but rather: what if any constraints did the trust instrument actually impose, construed in its context and with regard to any constraints imported by the general law?"
Overwhelmingly, the Board found no terms in the relevant trust deeds supporting the Narrow Role; by contrast, several provisions gave significant support to the Wider Role:
- The protectors had power to release or waive their consent powers generally or in relation to any particular matter. The Board found that, if the protectors' function is merely to police the trustee, a settlor would not allow them to permanently abdicate that watchdog role;
- The protector powers provided that if the protectors could not agree, the trustees could proceed but must consult each protector and take their views into account. This made sense on the Wider Role but not on the Narrow Role. On the Narrow Role, it would be incongruous that a trustee could proceed even where one protector considered the proposed action unlawful;
- The consent requirement was limited to particularly important decisions in which it could readily be understood that a settlor would wish the protectors to fulfil the Wider Role in the exercise of their power to give or withhold consent.
In addition, the Board clarified that the fiduciary nature of the protectors' powers, whilst imposing a significant constraint upon the way in which consent powers must be exercised, operated "within, and in harmony with" the Wider Role. Those constraints "come nowhere near confining the Protectors to the Narrow Role…".
Finally, the Board emphatically rejected the reasoning of the Court of Appeal that the term "protector" had attracted any particular quality by law (unlike the word "trustee").
Dealing briefly with the contention that the Wider Role would carry the risk of costs and delay, the Board found no evidence for this submission, but noted that a well-informed protector would be unlikely to cause significant delay.
On deadlock, the Board recognised that there may be cases in which the trustee and protector cannot find common ground; however this was not a reason for rejecting the Wider Role. Ultimately, the purpose of a protector under the Wider Role is to prevent a major transaction which the protector considers to be an inappropriate exercise of the trustees' powers. In that regard, the possibility of deadlock is "deliberately built into the structure but… it is the duty of both trustees and protectors to seek to find common ground".
Conclusion
Although the Privy Council has provided some much-needed clarity, a well-drafted trust instrument will always be the best means of avoiding any uncertainty around the scope of protector powers.