CONFIDENTIALITY AND TRUST INFORMATION Documents/JLR1406-… · depends upon confidence and confidentiality. The settlor seeks to have the trustee resolve, without unnecessary abrasion,

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Jersey & Guernsey Law Review – February 2014

CONFIDENTIALITY AND TRUST INFORMATION

Toby Graham

With the advent of multilateral initiatives leading to TIEAs and the introduction of FATCA it might be thought that confidentiality is being marginalised. This article examines, by reference to recent decisions of the Courts of Appeal of Guernsey and Bermuda, the extent and nature of trustees duties in this regard, both in the context of strangers to the trust and beneficiary disclosure.

Introduction

1 When it comes to disclosure to outsiders, the general position is that by virtue of the nature of the information they hold and their fiduciary function, the law of confidence requires trustees to keep trust information and documents confidential.1 This is thought to be analogous to the duty owed by solicitors to clients, or bankers to their customers. Some jurisdictions have gone further—with legislation criminalising disclosure of confidential information to outsiders.2

2 When it comes to beneficiaries, confidentiality is much less of an issue, as we saw in Schmidt, where the Privy Council suggested that confidentiality had to be weighed in the scales, the competing consideration being the beneficiaries’ need for

1 Underhill & Hayton, Law of Trusts & Trustees (18th edn) at 56.31: “as a

general proposition, trustees must keep the affairs of the trust confidential, as

well as personal information relating to the beneficiaries, as part of the law

relating to breach of confidence”. The authority cited in support is Hereema v

Hereema 1985–86 JLR 293. See also Hartigan Nominees v Rydge (1992) 29

NSWLR 405, at 406 “However the importance of the Queensland case

[Tierney v King [1983] 2 Qd R 580] is that it acknowledges, in my opinion

correctly, that a settlor can effectively impose conditions of confidentiality on

trustees”. 2 Cayman Islands, Confidential Relations (Preservation) Law (2009 Revision)

s 3(1); Cyprus s 11 International Trusts Law (as amended). There is no

equivalent in the law of Jersey and Guernsey.

sufficient information to police the trustees—part of the irreducible core and necessary because without it the court’s jurisdiction to supervise trustees is effectively ousted.3 The Privy Council suggested that confidentiality could usually be addressed by undertakings or possibly redaction. Thus the scales tip in favour of disclosure and accountability. Though the Privy Council did not say so in Schmidt, Re Londonderry’s Settlement establishes that letters of wishes and trustees reasons are a special case—otherwise it would be difficult for trustees to do their job—the need to keep these confidential trumps the factors militating in favour of disclosure.4 This is

3 Jones v Shipping Federation of British Colombia (1963) 37 DLR (2d) 273,

where a term that purported to exclude the trustee’s duty in the context of a

pension fund arrangement was held to be void and illegal as ousting the

jurisdiction of the court. In AN v Barclays Private Bank & Trust (Cayman)

Ltd [2007] WTLR 565, at 597, Smellie, CJ held that: “Such a complete

prohibition would be repugnant to the trusts themselves, to the beneficial

interest of the beneficiaries and to their right to seek vindication of their

position before the court in an appropriate case when such vindication may be

necessary.” 4 In Hartigan Nominees Pty v Rydge (1992) 29 NSWLR 405, the New South

Wales Court of Appeal refused to order disclosure of the letter of wishes.

Mahoney, JA said—

“I would, for myself, see the matter of confidentiality as being of

particular significance in discretionary trusts of the present kind. In

deciding questions of disclosure, it is important in my opinion to have

regard to the essential nature of such discretionary trust. Such a trust is

not a mere commercial document in which the public may have an

interest. It is a private transaction, a disposition by the settlor of his own

property, ordinarily voluntarily, in the manner in which he is entitled to

choose. Special cases apart, it is proper that his wishes and his privacy

are respected. In a discretionary trust of this kind, the settlor has placed

confidence in his trustee and has on that basis transferred property to

him. It has, I think, been the purpose of the law to respect that trust. It

depends upon confidence and confidentiality. The settlor seeks to have

the trustee resolve, without unnecessary abrasion, the conflicting claims

of persons in an area, the family, where disputes are apt to be bruising.

In cases of this kind, if a settlor’s wishes cannot be dealt with in

confidence, the purpose of the trust may be defeated.”

Sheller, JA said—

“That (the instigator of the trust) did not disclose his wishes in, or in a

document attached to, the deed of settlement, but delivered a separate

memorandum of wishes to the trustees, leads to the conclusion that it


broadly reflected in art 29 of the Trusts (Jersey) Law 1984 (as amended).

3 The exercise of weighing the scales—envisaged by the Privy Council in Schmidt—was considered by the Supreme Court in its recent decision of Kennedy v Charity Commission5 (albeit in a different context) where Lord Mance opened with the following—

“Information is the key to sound decision-making, to accountability and development; it underpins democracy and assists in combatting poverty, oppression, corruption, prejudice and inefficiency. Administrators, judges, arbitrators, and persons conducting inquiries and investigations depend upon it; likewise the press, NGOs and individuals concerned to report on issues of public interest. Unwillingness to disclose information may arise through habits of secrecy or reasons of self-protection. But information can be genuinely private, confidential or sensitive, and these interests merit respect in their own right and, in the case of those who depend on information to fulfil their functions, because this may not otherwise be forthcoming. These competing considerations, and the balance between them, lie behind the issues on this appeal.”

4 Thus disclosure to outsiders and beneficiary disclosure need to be considered separately, which is how they are tackled in this paper, starting with disclosure of trust information to outsiders.

Disclosure to outsiders

5 The idea of disclosure to outsiders may seem like an anathema, and rarely arises, with the result that there are few reported cases in this area. The most recent is the Guernsey decision in Re B; B v T where the trustee wanted to disclose to a French investigating magistrate, as it had been advised that this was necessary in order to reduce the risk of criminal

was his, and thus the settlor’s, intention that his wishes should remain

confidential, and consequently that the contents of the memorandum

were obtained by the trustees in circumstances of confidence, which

bound the trustees not to disclose them to the respondent and to

withhold the memorandum from him.” 5 [2014] UKSC 20.

charges being preferred against it personally for allegedly assisting in the evasion of French tax.

6 Following an application by a beneficiary to prevent the trustee from disclosing information, the trustee sought directions, under s 69 of Trusts (Guernsey) Law 2007, that it be at liberty to disclose trust information. The Guernsey Royal Court gave the trustee permission to disclose. A beneficiary appealed—suggesting that disclosure would put the trustee in breach of its duty of confidentiality.

7 The case concerned two Guernsey law trusts settled by a French resident in February 1989. The settlor died in 2001. The trustee had assumed office in 1999. The Court of Appeal’s anonymised judgment simply described the trustee as part of a global banking and wealth management business. It records that the trusts owned (through a company) French situs assets described as “an agricultural property” and other “non real estate assets”. These were said to be of “substantial value”. The trustee was served with a summons issued by a French judge (“the summons”) seeking its attendance at a pre-indictment hearing in Paris. The summons explained that the judge was considering placing the trustee under judicial investigation for offences—relating to its administration of the two particular Guernsey trusts—of “possession of stolen goods and complicity in tax evasion” and “aggravated money laundering”. These possible offences followed a criminal complaint made in Paris by the French tax authority (and certain of the settlor’s heirs). The Court of Appeal’s judgment—given by Pleming, JA—contains limited information on the nature of the tax authority’s complaint or the basis for the incidence of French tax. It merely stated—

“In addition to the criminal proceedings referred to above X [a director of the trust company] also discloses that there have been tax investigations in France and, following an amendment to the French tax code pursuant to changes in tax law in July 2011, disclosure obligations are now imposed on trustees. These provisions came into force in January 2012 and are the subject of some dispute in the expert evidence but it seems to us reasonably clear that a trustee is under a duty to make disclosure of the market value of any real estate interests held by the trust in France


(referred to as Wealth Tax French Assets) with failure to report leading to financial penalties”.6

8 The judgment quotes from the summons as follows, and shows that the magistrate was concerned with events that took place before 2011—

“possession of stolen goods and complicity in tax evasion . . .

For having aided and abetted and concealed, in Guernsey beginning in 2007, the tax evasion committed in Paris by the heirs of [S], consisting in deliberately concealing a portion of the sums subject to French estate tax [the summons then specified certain assets] held by [the first trust and the second trust], of which [the respondent] is the trustee”. [Emphasis supplied.]

9 The italicised text in the above passage suggests that the tax authority considered that estate tax was payable in relation to trust assets. Expert evidence quoted later in the judgment (with which the trustees’ expert is said to have been in agreement) states that “the FTA seem to consider that the assets held by the Trusts belong to [the settlor’s] estate”.7 Given that the judgment states that the trusts were established for the benefit of the settlor’s sons and grandchildren, that they were settled in February 1989 (12 years before his death), and in the absence of any suggestion (in the Court of Appeal’s judgment) that the trusts might be invalid, it is unclear how the trust assets could be treated as part of the settlor’s estate and thus subject to French estate tax, particularly during the period beginning in 2007 referred to in the summons. These matters are not dealt with in the judgment. The summons continued—

“aggravated laundering . . .

For having aided and abetted, in Guernsey beginning in 2007, the operation of concealing and converting the direct proceeds of an offence which procured a direct profit for [S’s] heirs, by having accepted to falsely qualify as loans distributions of income or capital to the . . . heirs.”

10 The Royal Court’s judgment is not publicly available. The Court of Appeal’s judgment states that the Royal Court ordered that the trustees could attend before the French judge and

6 Anonymised final judgment 31 July 2012 at para 12. 7 Ibid, at para 57.2.

disclose information about the trusts that it “reasonably considers necessary” so as “to protect the interests of the [trustee] personally” (as well as protecting the beneficiaries of the trust and the trust property). A beneficiary (described in the judgment as the settlor’s granddaughter) appealed. She based her appeal on the duty of confidence.

Confidentiality

11 The appellant contended that disclosure would result in a breach of the trustee’s duty of confidentiality. Whilst the respondent trustee appeared to accept that it was subject to a duty of confidence, it suggested that the duty was not absolute but subject to limitations, which permitted disclosure where reasonably necessary for the protection of the trustees’ interests.

12 The judgment records that there was nothing in the terms of the two trusts or the Trusts (Guernsey) Law 2007 restricting or permitting disclosure of trust information to outsiders. Moreover, there were no Guernsey authorities which specifically considered the question of whether a trustee is under a duty of confidentiality, or English authorities which considered disclosure in the particular context.8

13 A starting point might have been the Code of Practice—Trust Service Providers9 which requires trust service providers to—

“maintain confidentiality except where disclosure of information is required or permitted by an applicable law or by guidance by the Guernsey Financial Services Commission, or authorised by the person(s) to whom the duty of confidentiality is owed.”

This is analogous to a solicitor’s duty of confidence, found in the solicitor’s code of conduct. In the case of a solicitor, the duty is owed to its client or former client. Without its consent,

8 Ibid, at para 47—“We are informed that neither Guernsey nor English

counsel for the Respondent, nor Guernsey counsel for the Appellant, are

aware of any authority in which there is specific discussion of the use which a

trustee may make of trust documents and information to protect itself against

criminal charges.” 9 3 July 2009, available at http://www.gfsc.gg/The-Commission/Policy%20

and%20Legislation/Code-of-practice-TSPs-2009.pdf.


disclosure would not be possible.10 The Code of Practice is silent as to the identity of the person to whom a trust service provider owes the duty of confidence. The Code is not considered in the Court of Appeal’s judgment.

14 Instead the starting point was the decision of the Jersey Court of Appeal in Re Internine Trust11 which concerned a trustee’s obligations of confidence vis à vis outsiders in relation to trust information held in different capacities (arising from its trusteeship of two separate trusts) in the context of litigation disclosure for the purpose of hostile proceedings. The Jersey Court of Appeal rejected the notion that there was an “irrefutable presumption” that trust information was confidential and suggested that it depended on the nature and content of each particular document—

“When one turns to trust documents, other matters may have to be taken into consideration. Where a natural or legal person is a trustee, it is almost inevitable that such a person will hold different property rights. First, there will be personal property, secondly, the property held for the purposes of Trust A and, thirdly, perhaps, the property held for the purposes of Trust B. It is trite that these are separate rights and, for example, the property held under Trust A is not available for meeting the claims of personal creditors or creditors relative to Trust B. Accordingly, when called upon to produce documents held in one capacity, we consider it correct that the person be entitled to identify trust property to which he has title or possession in a different capacity. However, the position may be little different from that of an agent who possesses property for the purposes of an agency, such as a solicitor holding papers in respect of his client’s affairs, or a Health Board, albeit with the possible distinction that the client may own the papers whereas it is the trustee who has title to trust property. In such cases, the agent should be entitled to bring to the attention of the court the fact that the property sought is held by him in a special capacity. We therefore incline to the view that there is no speciality which attaches to trust documents to the end that there is an irrefutable presumption that documents held by trustees for the purpose of a trust, or some classes of them, are

10 See for example, Singla v Stocker [2012] EWHC 1176 (Ch). 11 2006 JLR 195.

confidential. We are conscious that many trust documents will either be confidential or have aspects which are confidential and as regards which that confidentiality will have a strong claim to protection. But many will not. Many trusts enter into ordinary contracts daily: the management of assets, the repair of property and the employment of carers are a few examples. Few documents relating to such activities would be likely to be so wholly or partly confidential as to be entitled to protection when lawfully called for, e.g. by a contractor whose own documents had been destroyed and who sought to pursue a sub-contractor. On the other hand, the circumstances in which a stranger to the trust could legitimately call for primary trust documentation, such as the deed of trust, letter of wishes or minutes of the trustees’ meetings, are likely to be very restricted. In respect of each disputed document, however, it seems to us a matter of fact as to whether there is a piece of confidential information in a document; a matter for the interests of justice whether that information should be disclosed notwithstanding its confidential nature; and a matter for the court as to whether there are protective mechanisms which can and should be put in place to preserve the confidentiality except in so far as it must be breached for the purposes of other litigation”.12

15 The Guernsey Court of Appeal considered that the Jersey Court of Appeal’s decision in In re Internine Trust was either confined to its particular facts (confidentiality in the context of disclosure in hostile proceedings) or was incorrect. They considered that—

“one cannot express a trustee’s duty of confidentiality by reference to a particular document, so that some documents are defined as confidential and others are not. Take the example of a contract for the provision of a carer for one of the beneficiaries. In our judgment it is not possible to say in the abstract that that document is not confidential. The legitimacy of any disclosure would depend upon the circumstances. It would in our judgment be a breach of the trustee’s duty to disclose such a document to, for example, the media, so that they could run a story about the beneficiary who is being cared for. On the other hand, disclosure of a copy of the contract to the

12 Ibid, at paras 31–33.


contractor providing the carer, because the contractor had mislaid his own copy of the contract, would be entirely permissible as it would be disclosed for the purposes of administering the trust”.13

16 The Guernsey Court of Appeal considered that there was a general duty of confidence. The judgment states—

“We accept that, in general terms, a trustee is under a duty to keep the affairs of the trust confidential. In many respects, this duty is akin to the duty of confidence owed by a bank in relation to the affairs of its customer. However, the duty of a trustee is not identical to that of a bank. In the first place, it does not arise as a matter of contract. Furthermore, there will be many cases where a trustee has to disclose information concerning the trust and/or its beneficiaries for the very purpose of administering the trust e.g. in order to open a bank account or obtain a loan. However, in relation to the issue with which we are concerned in this case, we consider that the principles applicable in the case of a bank are equally applicable to a trustee.”

The duty and its limits are dealt with in Tournier v National Provincial & Union Bank of England14 allowing a bank to disclose (inter alia) where the interests of the bank “require” disclosure. This was thought to be equally applicable to trustees.

17 The Guernsey court weighed up competing interests of the beneficiaries (in withholding disclosure) and the trustees (in giving it). They came down on the side of the trustees. Their reasons were as follows—

“on the facts of this case, the potential injustice to the Respondent here ‘trumps other considerations’ such that the balance falls firmly on the side of dismissing the appeal and granting the application by the Respondent.”15

And—

“In the last analysis, on the facts of this case and bearing in mind the jurisdictions involved, the result of a decision to reject the judgment of the Royal Court would be to deny the

13 Ibid, at para 35. 14 [1924] 1 KB 461. 15 Ibid, at para 70.

Trustee and X (as its representative) [X was a director of the trustee] the opportunity, which they wish to make use of, to defend themselves against serious criminal allegations. To prevent them from availing themselves of that opportunity might result in charges being preferred against them and convictions being recorded in their absence. It is not for this Court to make any assessment of their chances of success in persuading the French Judge of the falsity of the allegations made against them. But, granted X’s wish to take the opportunity on her own behalf and that of the Trustee, it would be plainly wrong for this Court to inhibit it. In weighing the principle of confidentiality to which the beneficiaries are entitled and the principle that no court should connive at possible injustice, it is plain where the balance lies. This appeal must be dismissed.”16

18 This boiled down to saying the trustees should not be exposed to the risk of criminal charges in connection with unpaid tax. This risk would (or might) have been avoided if it were able to disclose what it had done. Some might consider that this places the trustee’s interests above the interests of the beneficiaries. They might say that if the Guernsey court had been bold and refused disclosure, then the French judge would surely realise that the trustee was not being uncooperative because it had something to hide; it was constrained by what the local court had ordered. They might suggest that the impact of this is that whenever a foreign tax authority wants information about a Guernsey trust, it need not go to the effort and trouble of seeking mutual legal assistance, which requires it to evidence reasonable grounds for believing involvement in a serious criminal offence. All that it needed is to threaten criminal charges against the trustee and the wall of secrecy falls down and the foreign revenue authority will get disclosure it seeks (subject of course to protecting the interests of the beneficiaries and the trust itself).

19 The Guernsey Court of Appeal’s decision—that there is a duty of confidentiality implied into the relationship between trustee and beneficiary—akin to that owed by a bank to its customer—does not appear to be confined to its particular facts. This duty gives rise to a number of questions such as the following.

16 Ibid, at para 72.


20 The duty had to be owed to be someone. The settlor—as the person who contributed property to the trust—might be an obvious candidate, given that the duty is akin to that owed by banker to its customer. In this case the settlor was dead and anyway, once the trust is constituted, he became irrelevant, a matter of no more than historical record, unless he reserves powers to himself. The Court of Appeal did not consider the settlor and instead considered the duty was owed to the beneficiaries. The Court of Appeal did not say who they meant by this but it seems from the judgment that they had in mind the living adult beneficiaries, chiefly the appellant who challenged disclosure. But she had a mere spes or hope of benefitting. She had never actually benefitted from the trusts and may never receive any benefit in the future. The Court of Appeal’s order would presumably be binding on future unborn or unascertained beneficiaries, even though they were not represented and their interests might be different to that of the appellant. This was not considered in the court’s judgment. What is the position if the beneficiaries can not agree whether something should be released from the duty of confidence? What if all the living beneficiaries want disclosure, but disclosure is not obviously in the interests of the future beneficiaries?

21 If trustees have a duty of confidentiality to beneficiaries, do beneficiaries have a matching equivalent duty? As a matter of principle, if a document is confidential in the trustees’ hands, then one might expect the beneficiary to be subject to a similar duty.

22 What happens if a beneficiary discloses a confidential document to a third party? Would this breach of confidence give rise to a right of action against the disclosing beneficiary and the third party recipient? Would this cause of action vest in the trustee or the other beneficiaries?

23 If beneficiaries are subject to a matching duty of confidence, might this give the beneficiary a better claim for disclosure? Confidentiality was recognised in Schmidt v Rosewood Trust Ltd17 as a factor in deciding whether to give disclosure. If the trustee and beneficiaries are subject to mutual duties of confidence, then it seems that this factor ceases to be so compelling.

17 [2003] UK PC 26.

24 A usual concomitant of the duty of confidence is that the person to whom the duty is owed has rights in relation to the document. Papers supplied to or generated by a solicitor or company director belong to the solicitor’s client or the company. Might similar considerations apply to the trust information?

25 Other than saying the duty “does not arise as a matter of contract” and that it was akin to the duty owed by bankers to customers, the Court of Appeal did not explain the jurisdictional basis of this duty. As Gurry explains,18 this is important in determining when third party recipients come to be regarded as under an obligation of confidence, the remedies that are available, limitation periods and the applicable rules of private international law.

26 Finally, the question whether one of the Tournier exceptions might be available to permit disclosure—and how the balance of competing interests between trustees and beneficiary should be struck—is a matter of interpretation. To avoid any criticism from beneficiaries that the trustee struck the wrong balance, a trustee is likely to be advised to seek the court’s directions, so as to bind beneficiaries and prevent them from bringing a claim for breach of confidence.

27 Thus, the application of principles developed in a bank/customer relationship might be difficult to apply in a trust setting. It remains to be seen whether other jurisdictions will follow the approach of the Guernsey Court of Appeal in In re B, and apply a general duty of confidence, or whether the duty will depend on the content of each particular document, as the Jersey Court of Appeal suggested in In re Internine Trust.

Beneficiary disclosure

28 As we know, Lord Walker’s opinion in Schmidt v Rosewood Trust heralded a new approach to beneficiary disclosure. It no longer turns on whether the person seeking disclosure has a proprietary interest under the trust. Instead, disclosure is to be viewed as the corollary to the trustees’ duty to account to beneficiaries and the need for them to have sufficient information to monitor the trustees effectively. For this purpose, the court has a wide jurisdiction as part of its inherent

18 Aplin, Bently, Johnson and Malynicz (eds), Gurry on Breach of

Confidence: The Protection of Confidential Information, 2nd edn (OUP,

2012).


supervisory role. The key consideration is whether disclosure is needed for the beneficiary to police the trustee effectively. This depends on the nature and extent of the applicant’s expectations from the trust (an applicant with no more than a theoretical possibility of benefit will often not be granted relief) and the nature of the documents and information sought. If the document or information is confidential, then the court has a discretion to refuse disclosure, to order disclosure in redacted form and/or to impose safeguards to limit the use which might be made of documents disclosed.19 The exercise of these

19 In Schmidt, Lord Walker simply said—

“Especially when there are issues as to personal or commercial

confidentiality, the court may have to balance the competing interests of

different beneficiaries, the trustees themselves, and third parties.”

The issue of confidentiality and beneficiary disclosure was dealt with at

greater length by Doyle, CJ in Rouse v IOOF Australia Trustees Ltd [1999]

SASC 181, as follows—

“However, it seems to me that it would be right to recognise that a

trustee might refuse to permit inspection of trust documents on grounds

of confidentiality, however the claim of confidentiality might arise. To

say that is not to say that it will always be open to a trustee to claim

confidentiality. It is to do no more than acknowledge that in principle a

trustee should be able to advance a claim of confidentiality in answer to

a right of inspection asserted by a beneficiary. Whether the claim is a

valid answer in a particular case will depend upon the particular

circumstances. There must be various situations in which a trustee,

particularly a trustee conducting a business, would be put in an

impossible position if the beneficiary of the trust could, as a matter of

right, claim to inspect documents in the possession of the trustee and

relevant to the conduct of the business. It is readily conceivable that

there will be situations in which an undertaking of confidentiality is not

sufficient protection. The fact that the trust is one in which numerous

beneficiaries have an interest, and the further fact that those

beneficiaries may have differing views about the wisdom of the course

of action being pursued by the trustee, only serve to emphasise, in my

opinion, the need for the law to recognise some scope for a trustee to

refuse to disclose information on the grounds that it is confidential and

on the further ground that the disclosure is not in the interests of the

beneficiaries as a whole. I make that observation on the basis and on the

assumption that the ultimate right of the beneficiaries will be to have

the trustee removed if they are dissatisfied with the approach of the

trustee. Ultimately, I would rest the existence of the relevant discretion

upon the need to reconcile the undoubted duty of a trustee to make

discretions is highly fact specific and there is little new to say; the position post Schmidt, is that, when it comes to exercising their discretion,20 trustees generally approach disclosure requests by asking how the matter might be considered by the court, not least because of the possibility that a beneficiary dissatisfied with the trustees decision might well proceed with his own court application.

29 One of the consequences of decisions like In re B is that settlors might want express provisions in the trust that seek to restrict disclosure. Such provisions are unlikely to distinguish between outsiders and beneficiaries—though their positions are different. There is some pre-Schmidt authority on the workings of such information control mechanisms.21 The decisions of the

disclosure to beneficiaries of information about the trust, and the

undoubted duty to permit the inspection of trust accounts and trust

documents, with the equally fundamental obligation of a trustee to

conduct the affairs of a trust, and particularly a trust which involves the

conduct or management of a business, in the interests of the

beneficiaries as a whole. I consider that on occasions the reconciliation

of these interests may entitle a trustee to decline to provide information

to particular beneficiaries, when the trustee has reasonable grounds for

considering that to do so will not be in the interests of the beneficiaries

as a whole, and will be prejudicial to the ability of the trustee to

discharge its obligations under the trust. It may be that the ultimate

foundation of the discretion is the obligation of the trustee to discharge

its duties to manage the affairs of the trust in the interests of the

beneficiaries. I wish to make it clear that the discretion that I envisage is

a limited one, and must always be limited by the general duty of

disclosure by a trustee to which I have referred. The existence of the

discretion cannot be used as an excuse for paternalism or to disregard

the interests of beneficiaries. Its existence depends upon the need to

protect the trustee’s ability to discharge its obligations. The availability

of the discretion will depend very much upon the circumstances of the

particular case . . . I do not, in what I have said, contemplate the use of

that discretion to enable a trustee to deal in a partial or discriminatory

manner as between beneficiaries or groups of beneficiaries, except to

the extent that the necessary result of a proper exercise of the discretion

may be that particular beneficiaries are not given access to a

document”. 20 Lewin on Trusts (18th edn), at 23–20. 21 However, the question seems to have arisen in the Australian decision of

Tierney v King [1983] 2 Qd R 580, where disclosure of actuarial reports was


Supreme Court of Bermuda (Kawaley, CJ) and its Court of Appeal (Zacca, P, Evans and Ward, JJA giving a unanimous judgment) in In re an Application for Information about a Trust22 provides the first authority on how such provisions are to be approached in the post-Schmidt era.

30 The applicant beneficiary is described as having “potentially . . . an absolute interest in 35% of the Trust”. He sought disclosure of historic financial information about the trust assets. The trust instrument contained an information control mechanism, which empowered the protector to veto disclosure. The judgment of Kawaley, CJ explained23 that there were four key elements to this—

(1) The trustees are required to keep books and records of account which must be independently audited;

(2) The protector alone has an express right to receive financial information about the trust from the trustees;24;

(3) Any other requesting person, including a beneficiary, can only obtain information about the trust’s finances from the trustees with the protector’s consent;25 and

refused on grounds that they had been obtained to enable the trustees to

exercise their discretionary powers in circumstances where the trust deed

contained a secrecy provision. The general rule that a beneficiary has a

proprietary interest in and a right to inspect trust documents was balanced

against a rule to the effect “that trustees acting in good faith are not bound to

disclose reasons for the exercise by them of a discretionary power or the

information (even if committed to writing) which may bear upon or affect

those reasons”(para 44). 22 [2013] SC (Bda) 16 Civ (12 March 2013) and [2013] CA (BDA) 8 Civ. 23 [2013] SC (Bda) 16 Civ (12 March 2013) at para 8. 24 Clause 24: “The protector shall have power to request information and

accounts from the Trustees (which information and accounts shall forthwith

be supplied to the protector.” 25 Clause 9.2: “Subject to the provisions of clause 24 below and except to the

extent that the Trustees (with the prior written consent of the Protector) in

their discretion otherwise determine no person or persons shall be provided

with or have any claim right or entitlement during the Trust period to or in

respect of accounts (whether audited or otherwise) or any information of any

nature in relation to the Trust Fund or income thereof or otherwise in relation

to the Trust or the trusts powers or provisions thereof (and whether from the

Trustees or otherwise).”

(4) The protector’s power to grant or withhold consent in respect of an information request is a non-fiduciary power and acts or omissions on the part of the protector in this regard cannot be legally impugned in the absence of fraud or dishonesty on the protector’s part.26

31 It seems from the postscript to Court of Appeal’s judgment that the trustee had not decided how to exercise its discretion to provide disclosure. Doubtless this was because the protector (who was described as the principal beneficiary of the trust) was intent on exercising the veto power (in the event that the trustee decided to disclose). The Court of Appeal judgment records that the protector did not give reasons for this. The non-disclosure was challenged by the beneficiary applicant, who sought orders that both trustee and protector provide disclosure.

32 This gave rise to two related questions: first, whether the information control mechanism was valid. Secondly (if it were valid), whether the mechanism should be allowed to operate, or whether the court might intervene and if so on what basis. We consider the first instance judgments of Kawaley, CJ, and the Court of Appeal in parallel, as they seem to have been in broad agreement.

Are information control mechanisms invalid?

33 The question is whether such information control mechanisms are invalid for offending the irreducible core for a valid trust or ousting the court’s jurisdiction. Kawaley, CJ suggested there were no reported authorities on these points and that there was no clear consensus amongst editors of leading text books. Lewin on Trusts and Waters’ Law of Trusts in Canada illustrate the point.

34 Lewin on Trusts27 states—

“Blanket prohibitions on access to accounts and information by beneficiaries are generally void. Such prohibitions would be inconsistent with the irreducible core

26 Clause 28: “The protector shall not owe any fiduciary duty towards and

shall not be accountable to any person or persons from time to time interested

hereunder or to the Trustees for any act of omission or commission in relation

to the powers given to the Protector by this Deed to the intent that the

protector (in the absence of fraud or dishonesty) shall be free from any

liability whatsoever in relation to such powers.” 27 Paras 23–83 to 23–84.


of obligations of a trustee . . . There are a number of ways by which the terms of the trust might seek to limit rights of disclosure. One way is to restrict generally the kinds of information and accounts to which all beneficiaries are entitled [by excluding particular kinds of information from the ambit of disclosure or providing that disclosure shall not be given without an order of the court]. Limitations on the information to be disclosed, as distinct from any general exclusion of accountability, may be valid . . . Another way to restrict, suspend or even exclude rights to seek disclosure of some beneficiaries who would otherwise be entitled to seek disclosure. This would be effective, in our view, in the case of a settlor or other beneficiary who was a party to the trust instrument, or otherwise effected a release, but is of doubtful efficacy in the case of other beneficiaries, since prima facie the trustees must be accountable to all beneficiaries.”

35 Though not a party to the trust instrument, the beneficiary applicant had “positively agreed” in 2002 to a restructuring which resulted in the principal beneficiary becoming protector. The Court of Appeal’s judgment records that the trust instrument had not been seen by the beneficiary’s Swiss lawyers at the time. Thus, the Court of Appeal dismissed the protector’s suggestion that the beneficiary had assented to the information control mechanism—and could not complain about its operation. At first instance, Kawaley, CJ seemed to reach a different conclusion on whether the beneficiary had assented to the information control mechanism, but reached the same conclusion as the Court of Appeal—

“the fact that P [the beneficiary seeking disclosure] positively agreed to the Trust mechanism cannot constitute grounds for depriving him of the ability to enforce the terms of the Trust properly construed. Such agreement would be far more relevant to an attack by P on the validity of the Trust as a whole and/or its most important provisions.”28

36 Waters’ Law of Trusts in Canada29 suggests a divergence between the approaches onshore and offshore—

“As it is axiomatic that the trustee must account to the beneficiary, so it is fundamental that the beneficiary is

28 Ibid, at para 52. 29 3rd edn, at 1077.

entitled to information that allows him to enforce the trust. Beneficiaries must be able to satisfy themselves that the trust is being properly administered. As we have seen, the rule is disclosure subject to exceptions. It follows that instructing or authorizing the trustee to deny a beneficiary access to information is not part of the settlor autonomy that is usually associated with trust law . . . mainland jurisdictions, including those of Canada, will place first in importance the ability of the beneficiary to compel the trustee to act within their authority, in good faith and with attentiveness to their duties. Such clauses are therefore declared invalid. By way of contrast, in several instances offshore jurisdictions have amended their trust legislation to permit the settlor to achieve a significant level of secrecy from beneficiaries.”

37 Kawaley, CJ quoted the above passage and considered30 that it “does not . . . support the invalidity of an information control clause as nuanced as the one under consideration in the present case”.

38 There were two key elements in the information control mechanism, which raised issues of construction.

39 Clause 9.2 which provided as follows—

“Subject to the provisions of clause 24 below and except to the extent that the Trustees (with the prior written consent of the Protector) in their discretion otherwise determine no person or persons shall be provided with or have any claim right or entitlement during the Trust period to or in respect of accounts (whether audited or otherwise) or any information of any nature in relation to the Trust Fund or income thereof or otherwise in relation to the Trust or the trusts powers or provisions thereof (and whether from the Trustees or otherwise).”

Kawaley, CJ held31—

“Clause 9.2 (as read with clauses 24 and 28 of the Trust Deed) is not invalid on its face for violating the irreducible core content requirements for a valid trust. The information control mechanism of the Trust neither eliminates the

30 Ibid, at para 18. 31 Ibid, at para 27.


Trustees’ duty to account altogether nor purports to oust the jurisdiction of the court to order appropriate disclosure.”

40 There were four reasons for reaching this conclusion—

“27.1 The Trustees are required not merely to prepare their own accounts but to have those accounts independently audited by an internationally recognised firm of accountants;

27.2 The Protector is expressly empowered by the Deed to obtain financial information from the Trustees;

27.3 The Protector is implicitly required to have regard to the interests of the beneficiaries in exercising his admittedly non-fiduciary powers of supervising the Trust’s administration;

27.4 It is true that the Protector is not expressly accountable to the beneficiaries in respect of the exercise or non-exercise of his powers and is given an indemnification for all liability save for that occasioned by his fraud or dishonesty. However, the instrument does not purport to exclude this Court’s supervisory jurisdiction over the Trust generally or in respect of the specific matter of the ability of beneficiaries to enforce the due administration of the trust through obtaining appropriate financial information about the Trust.”

41 Paragraph 27.3 importantly suggests the power must be exercised with regard to the interest of the beneficiaries. The Court of Appeal’s judgment went a little further, stating—

“the protector’s power under the clause must be exercised in the interests of the beneficiaries, notwithstanding that the protector owes no fiduciary duties [cl 28] and notwithstanding that the protector is one of the beneficiaries. The protector who is a beneficiary therefore cannot withhold consent where a protector who was not a beneficiary would not be justified in doing so.”32

42 The second key provision in the information control mechanism was cl 28, which provided—

“The Protector shall not owe any fiduciary duty towards and shall not be accountable to any person or persons from time to time interested hereunder or to the Trustees for any

32 [2013] CH (Bda) 8 Civ, at para 45.

act of omission or commission in relation to the powers given to the Protector by this Deed to the intent that the Protector (in the absence of fraud or dishonesty) shall be free from any liability whatsoever in relation to such powers . . .”

43 There were two possible interpretations. The first (contended by the protector) was that the power was entirely personal and its exercise could only be challenged if it could be shown to have been exercised perversely or capriciously or in bad faith. The difficulty was a beneficiary would have no means of finding this out, because information was being withheld. Kawaley, CJ considered33 that “This would potentially lead to an ousting of the supervisory jurisdiction of the Court altogether” which settlors could not do, rendering the clause (or even possibly the trust itself) invalid.34 Kawaley, CJ applied the rule of contract interpretation—that where there are two possible interpretations—one of which is legal and the other is illegal—the court should prefer that which is legal. He suggested that, in view of this, the only way the clause could be interpreted as ousting the court’s jurisdiction was if it said so clearly. He concluded this cannot have been the settlor’s intention. He rejected the “plain words of the Trust Deed” and instead applied a “more pliable purposive” approach having regard to the settlor’s presumed intention to create a valid trust “which does not oust the supervisory jurisdiction of the Court and/or the fundamental requirement that the trustees should be accountable to the beneficiaries for the due administration of the trust”. He concluded35—

“As I have already found above, there is nothing repugnant about the concept of the Protector receiving information from the Trustees about the Trust and being conferred a power to veto the supply of information to other persons including beneficiaries. But this assumes that this power is, by necessary implication, intended to be used for the benefit of the beneficiaries. It also assumes that clause 28 is construed as an indemnity clause rather than as a clause designed to ensure that the Protector’s use of the veto

33 Ibid, at para 40. 34 Ibid, at para 21, which quotes from Underhill & Hayton, Law Relating to

Trusts and Trustees, at 56.21, which suggests that this could be the

consequence of an over-extensive information control mechanism. 35 Ibid, at para 40.


power can only be challenged on grounds of capriciousness or perversity which can only be made out if the information withheld is in fact supplied.”

44 The Court of Appeal appeared to agree—

“. . . the Protector’s powers must be exercised within the limits imposed by the trust instrument and in the interests of the Trust, the same limits as those recognised by the Court.”36

45 These limitations to the protector’s powers in cll 9.2 and 28 to veto disclosure were important in the second question—the impact of an information control mechanism on the court’s supervisory jurisdiction. Such jurisdiction was recognised in Schmidt. As noted above, Kawaley, CJ found that—

“the instrument does not purport to exclude this Court’s supervisory jurisdiction over the Trust generally or in respect of the specific matter of the ability of beneficiaries to enforce the due administration of the trust through obtaining appropriate financial information about the Trust.”

Court intervention in information control mechanism

46 Given the information control mechanism was valid, it was necessary to consider the circumstances in which the court might intervene. The protector suggested the mechanism should be respected and the court could only interfere if it could be shown that the protector’s decision to veto disclosure was perverse or capricious.37 The applicant beneficiary suggested this narrow approach was inconsistent with trustee accountability; the court’s supervisory jurisdiction should not be constrained by the information control mechanism; the court must exercise its own discretion afresh rather than merely reviewing the way in which the discretion has been exercised by the trustee or protector. Whilst the court should pay regard to

36 Ibid, at para 51. 37 It was suggested that the position was analogous to that of trustees,

described in Thomas on Powers (2nd edn), at 10–188 as follows—

“If the exercise is based upon some capricious or utterly perverse

foundation, it is difficult to see how the power could be said to have

been exercised ‘for the end designed’ . . . Here, the issue is essentially

whether such a requirement can properly be implied; and there is no

obvious reason why a similar implication can not be made in the case of

a non-fiduciary power found in a trusts context.”

the information control mechanism, Kawaley, CJ concluded that it did not constrain its wide supervisory discretion38—

“In Bermuda, as in England and Wales, this requires the Court to adopt the following approach commended in Lewin on Trusts, 18th edition, paragraph 23–20 upon which Mr Hargun heavily relied:

‘We consider that the court in determining whether, what and how disclosure should be made under the principles of Schmidt v Rosewood Trust Ltd to a beneficiary is exercising its own discretion in supervising, and where necessary intervening in, the administration of trusts. It is not, in our view, the case that the function of the court (in the absence of a surrender of discretion) is merely to review, on limited grounds, an exercise of discretion by trustees or give its blessing to a proposed exercise of discretion by the trustees, so that the court can and will intervene only if it is proved that the trustees’ decision or proposed decision on disclosure is wrong or of a kind that no reasonable trustees could reach.’” [Emphasis in original]

47 Kawaley, CJ held39—

“While clause 28 of the Trust Deed does not go so far as to specify that the Protector’s powers are personal powers, I do not construe them as in any way limiting the circumstances in which a beneficiary under the Trust can invoke this Court’s supervisory jurisdiction in circumstances where the Protector has vetoed an information request made by the beneficiary to the Trustees.”

48 He suggested that if the information control mechanism did have the effect of limiting the circumstances in which a beneficiary could invoke the supervisory jurisdiction, then they could be “so offensive as to be invalid”.

Application of these principles to the facts

49 Kawaley, CJ suggested that general approach to information control mechanisms should be as follows—



“whether, in all the circumstances of any particular disclosure application, declining relief on the bare ground that the beneficiary is not entitled to disclosure under the mechanism prescribed by the trust instrument would substantially impair the fundamental requirements of trustee accountability.”40

And the court should—

“assess the extent to which mechanism either theoretically and/or practically gives rise to a need for judicial intervention to guarantee minimum standards of trustee accountability.”41

In this case this meant—

“P in the present case must simply make out a prima facie case that the Court’s intervention is required to meet the minimum requirements for trustee accountability in objective terms. And this entails assessing how the Trust information control mechanism operated in all the circumstances of the relevant information request. Putting aside for present purposes the potential impact of any breakdown in the information control mechanism, one neither starts off with a presumption in favour of disclosure, as Mr Hargun contended, nor does P have to show a capricious or perverse use of the Protector’s veto powers as Mr Alexander contended . . . Rather, as Mr Ham effectively submitted in distilled form, the Court must show due deference for the terms of the Trust Deed and only order disclosure if this is shown to be necessary in the proper exercise of this Court’s supervisory jurisdiction over the Trust . . .”

50 Kawaley, CJ found that a prima facie case for the court’s intervention had been made out for the following reasons—

“54.1 The current Protector is also the Principal Beneficiary creating a potential conflict between the distinct roles of protector and beneficiary, a dual role expressly permitted by the Trust;

54.2 while P is beneficially interested in the same fund as the Principal Beneficiary, it is theoretically possible that P’s


interest could be eroded by distributions made to the Principal Beneficiary;

54.3 although the Protector might be presumed to have natural affection for P, the parties have been engaged in open warfare for approximately 5 years;

54.4 the Protector has manifested a blanket refusal to supply any documents whatsoever to P including documents as basic as the Trust Deed (which were only disclosed in the context of the present proceedings). Moreover the Protector has elected to file no evidence personally thus sidestepping any possibility of oral evidence and cross-examination. Rather, reliance has been placed on the indirect evidence of a legal adviser to explain the Protector’s reasons for exercising the veto power contained in clause 9.2.”

Thus42—

“In my judgment it is self-evident and clear beyond sensible argument on this highly unusual alignment of facts that the information control mechanism in the Trust is not currently working in a manner which is substantially consistent with the presumed intention of the settlor.”

And43—

“Having regard to the information control mechanism of the Trust and simply analysing the relevant provisions of the instrument, the usual presumption in favour of access to information44 might well have been displaced. I am bound to find that the usual presumption in favour of information

42 Ibid, at para 55. 43 Ibid, at para 57. 44 The presumption in favour of disclosure arose once the applicant made out

a prima facie case. Kawaley, CJ cited Re Rabaiotti’s Settlement [2000] 2

ITELR 763—

“Clearly, the general principle is that a beneficiary is entitled to see

trust documents which show the financial position of the trust, what

assets are in the trust, how the trustee has dealt with those assets etc.

This is an essential part of the mechanism whereby the trustee can be

held accountable for his trusteeship to a beneficiary . . . One starts with

a strong presumption that a beneficiary is entitled to see trust documents

of the nature described. There would have to be good reason to refuse

disclosure of such documents.”


access is brought back into play in the present case because the prescribed machinery for the beneficiaries to hold the Trustees accountable has effectively broken down. The impact of the clauses which might otherwise restrict P’s access to trust documents is neutral on the facts of this case”.

51 The Court of Appeal agreed holding—

“If it were necessary to do so, we would find that the evidence establishes ‘real cause for concern’ sufficient to cross the suggested threshold as a pre-condition to the exercise of the Court`s power to order disclosure. We agree with the Chief Justice that the machinery envisaged by clause 9.2 has ‘broken down’ which justifies intervention by the Court. The breakdown consists of the fact that the Protector has refused consent apparently for reasons not connected with the due administration of the Trust. Suggested reasons for the refusal do not justify withholding the information from the Applicant, subject to suitable safeguards as to confidentiality and the use he may make of it. There is no provision in the Trust Deed which excludes him from the beneficiaries` right to receive the information from the Trustees, other than the Protector`s suggested power to refuse consent.”45

Conclusion

52 It is submitted that trustees should, in these particular circumstances, provide disclosure, even if the construction of cl 28 might be questioned as an indemnity clause and the suggestion despite its clear wording that the protector’s powers had to be exercised having regard to the interests of the other beneficiaries. The Bermuda Court of Appeal has granted permission to appeal to the Privy Council. The outcome of that appeal is awaited with interest.

Toby Graham is Head of Contentious Trusts & Estates at Farrer & Co, London.

45 Paras 49 and 50.