Round up of other key cases
Published March 2015
- FHR European Ventures LLP v Mankarious  UKSC 45
- Crociani v Crociani  UKPC 40
- AIB v Redler  UKSC 58
- Exoneration clauses and self-dealing: Barnsley v Noble  EWHC 2657 (Ch)
- Akers et al (as joint official liquidators of Saad Investments Company Limited) v Samba Financial Group  EWCA Civ.1516
FHR European Ventures LLP v Mankarious  UKSC 45
At the end of the judgment of the Sir Terence Etherton C, sitting in the Court of Appeal in the FHR case, he identified a need for informed debate and ultimately determination by the Supreme Court of a number of matters. One of these was as to which of certain authorities should be preferred on the question of whether secret profits earned by a fiduciary were subject to a proprietary or merely a personal claim. The decision of the Court of Appeal in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd  Ch 453, applying and following an earlier case of Lister & Co v Stubbs (1890) 45 Ch D 1, had favoured the personal claim. An earlier decision of the Privy Council in Attorney General of Hong Kong v Reid  1 AC 324, had favoured a proprietary claim.
An appeal to the Supreme Court in the FHR case followed, which appeal has now been determined, putting to bed at least one of the Chancellor’s areas of concern. The Supreme Court ruled on 16 July in favour of a proprietary claim in addition to the personal claim which was available, thereby overruling various inconsistent authorities. The FHR case concerned an agent, who received a commission in respect of a transaction in which he was acting, namely the purchase of a hotel.
The classification of a claim for secret profits as a proprietary claim has a number of consequences. Examples are as follows: a proprietary claim is of greater value in an insolvency situation than a personal claim. A proprietary claim is not subject to the statutory limitation defences available in respect of personal claims. A proprietary claim provides an easier route to tracing and the receipt of investment returns on the secret profits than a personal claim. The FHR decision is good news for claimant beneficiaries, as well as for those who prefer the law to be certain rather than food for academic debate.
Crociani v Crociani  UKPC 40
When is an exclusive jurisdiction clause not an exclusive jurisdiction clause? This was the issue before the Privy Council in this important appeal from Jersey. The relevant clause in the trust deed provided that if new trustees were appointed, the trust fund would be held “… subject to and governed by the law of the country of residence of incorporation of such new Trustee or Trustees and thereafter the rights of all persons and the construction and effect of each and every provision shall be subject to the exclusive jurisdiction of and construed only according to the law of the said country which shall become the forum for the administration of the trusts hereunder”. In issue was whether the decision of Jersey trustees to resign and appoint a Mauritius company as sole trustee conferred exclusive jurisdiction on the Mauritius courts, so that a beneficiary was not entitled to bring breach of trust proceedings before the Jersey’s Royal Court.
First, the Board advised that the clause in question was not an exclusive jurisdiction clause. “[T]he forum for the administration of the trust” could just as well refer to the place where the trust is administered as to the court which can enforce the trust, and even if these words did confer jurisdiction on the courts of Mauritius, the reference to “the forum” was not enough to render that jurisdiction exclusive. The Board also attached weight to the failure of the clause to refer to the courts of the country, and to the reference to “exclusive jurisdiction” being found in a clause primarily concerned with choice of law. Even if this clause did confer exclusive jurisdiction, it would operate in favour of the jurisdiction whose law was the proper law at the time of alleged breach.
Secondly, the Board was of the view that exclusive jurisdiction clauses should not be given the the same weight in trusts as in contracts. Whereas a contracting party must show “strong reasons” to persuade a court not to give effect to such a clause, it should be “less difficult” for a trust beneficiary, who should not be viewed as having made a “commitment of the same order as a contracting party”. The Board would not have given effect to the clause, in view of Jersey law being applicable to most of the issues, and the trust administration and relevant documents being in Jersey.
The Privy Council has clearly taken a very restrictive view of exclusive jurisdiction clauses in trusts. Whilst there was clearly some ambiguity in the words used, it is arguably surprising that a clear reference to “exclusive jurisdiction” was so readily explained away, and trustees and their advisers ought now to check whether their own trusts use similar language. Although applying the clause at the time of the relevant breach of trust is conceptually pure, this may lead to serious practical difficulties where related claims are made against trustees but are subject to different exclusive jurisdictions. Failing to give exclusive jurisdiction clauses the same weight in trusts as in contracts allows the Court a degree of flexibility, but the price seems too high: uncertainty and an increase in forum-shopping will doubtless follow. It is in any case unclear why a volunteer beneficiary does not take his or her gift from the settlor strictly on the terms upon which it is offered. Should a beneficiary find those terms unacceptable, he or she may of course disclaim.
AIB v Redler  UKSC 58
In AIB v Redler, the Supreme Court considered the principles governing a beneficiary’s claim against a trustee who has wrongly paid money out of the trust fund, and affirmed the general approach outlined by Lord Browne-Wilkinson in Target Holdings v Redfern.
In brief, the case concerned a property owned by S, previously valued at around £4.25m, which was subject to a legal charge in favour of Barclays, securing a debt of some £1.5m. S then sought to borrow £3.3m from AIB, also to be secured on the property. It was a condition of AIB’s loan agreement that Barclays’ existing mortgage was to be fully redeemed, such that AIB would have the first legal charge on the property. AIB transferred £3.3m to the defendant solicitors to hold on trust (for AIB) until completion. D paid money to Barclays, but were at fault in failing to discharge the full amount of the debt, with the result that AIB held only a second charge over the property; Barclays continued to hold a first charge over the undischarged element of their debt (of some £300,000). On S’s default, the property was repossessed and sold by Barclays for £1.2m. Barclays, as first secured creditor, received £300,000, leaving only the balance for AIB.
The unanimous decision of the Supreme Court was that the loss to the trust estate as a result of D’s breach was £300,000, comprising the pecuniary difference made by AIB obtaining a second charge as opposed to a first charge. AIB’s argument that it was entitled to £3.3m, less the £800,000 received, was rejected.
Any criticism of Redler is most likely to focus not on the result, but on the reasoning. The claim here was conceptualised as “equitable compensation for breach of trust”, and the result justified by reference to causation: D as trustee had to restore the trust fund to the position it would have been in but for the breach (and if the trust has come to an end, to compensate the beneficiary directly). An alternative analysis is based on the trustee’s liability to account.
AIB were not entitled to pay out the monies until the first charge was redeemed, which never occurred. Therefore the payment out of the trust fund could have been falsified, the trustee coming under an obligation to restore the fund to the position it ought to be in. But the Supreme Court has come down in favour of an analysis based on equitable compensation for breach of trust; and as a matter of authority causation now undoubtedly plays a central role in quantifying a beneficiary’s loss where a trustee wrongfully pays money out of a trust fund. One practical effect of Redler, therefore, is to forestall claims for losses which were not caused by the trustee’s breach, such as losses suffered by reason of a fall in the market.
Although on these facts, the characterisation of the claim made no practical difference to the result, one can posit situations where this might not be so. For example, if a beneficiary has suffered consequential loss, falsifying the account would merely restore the sum that had been removed from the trust, whereas equitable compensation could in principle cover the extra loss that the beneficiary has suffered. This places a greater burden on the trustee, one that goes beyond mere responsibility for the correct stewardship of the property. Therefore, Redler is also important in potentially opening the door to these types of claims.
Exoneration clauses and self-dealing: Barnsley v Noble  EWHC 2657 (Ch)
The Barnsley v Noble judgment of Nugee J is the latest instalment in the fallout of the demerger of the Noble Organisation, an extremely successful entertainments, restaurant and property group built and run by two brothers, Michael and Philip. Michael died in April 2006, leaving a widow, Gill, and after his death it was agreed, in broad terms, that the business would demerge so that “Gill’s side” would acquire the property side of the business and “Philip’s side” would acquire the trading businesses. The demerger was negotiated over 2008/2009. A number of claims were brought in these proceedings by Gill’s side against Philip in relation to the value of certain particular assets that formed part of the subject matter of the demerger. Claims were brought for breach of contract, deceit, negligence and (focusing on the fact that Philip was an executor of Michael’s will) breach of the self-dealing rule and breach of fiduciary duty.
The short answer to the claims brought against Philip in his capacity as executor was that, in relation to the demerger transaction, he had the benefit of an exoneration clause under the terms of the will. This is explained by Nugee J at paragraphs 284 to 292. The clause was in a standard form. Two points of interpretation arose.
First, it was argued on behalf of the Claimants that the words at the start of the exoneration clause “In the professed execution of the trusts and powers…” meant that the Defendant could not rely on it unless he was consciously seeking to exercise a particular power. Nugee J rejected this argument: paragraphs 285 to 288.
Second, it was argued on behalf of the Claimants that on the proper interpretation of the carve-out from exoneration for “wilful and individual fraud or wrongdoing”, any “wrongdoing” on the part of the Defendant disapplied the exoneration, and that “wilful and individual” did not qualify “wrongdoing” as that term appeared in the clause. Nugee J rejected this as contrary to both authority on identically worded clauses and in any event contrary to a fair reading of the clause: paragraphs 289 to 290.
Philip also raised other defences based on (a) the proper interpretation of an authorisation clause authorising self-dealing in certain circumstances, (b) the type of transactions to which the rule about self-dealing applies (relying on Farrar v Farrars Ltd (1888) 40 ChD 395), (c) circumstances in which the self-dealing rule has no application (relying on Holder v Holder  Ch 353 and Sargeant v National Westminster Bank (1990) 61 P&CR 518), and (d) appealing to the application of discretion by the Court (relying again on Holder v Holder).
These defences did not succeed before the Judge (see paragraphs 263 to 283 and 292 to 298) but in the circumstances the Defendant did not need them.
Akers et al (as joint official liquidators of Saad Investments Company Limited) v Samba Financial Group  EWCA Civ.1516
When is a Trust an oxymoron?
What happens when foreign trust property is in a country which does not recognise the concept? What if the settlor makes a nonsensical choice of law? Is the trust invalid under the Hague Convention on the Law Applicable to Trusts and on their Recognition (the “Convention”)? This was the issue in Akers et al (as joint official liquidators of Saad Investments Company Limited) v Samba Financial Group  EWCA Civ. 1516 which answered the question in the negative.
Why has this question not been tackled by the Courts before? In the course of its judgment the Court of Appeal observed that it was “surprising that the questions raised by this appeal have seemingly never been fully addressed before.” After all “there must be large numbers of trusts established under the laws of common law jurisdictions, onshore or offshore, that comprise registered shares in civil law countries amongst their assets.”
Mr. Al-Sanea, a Saudi Arabia citizen, declared himself a trustee of certain shares for the benefit of his own vehicle, a Cayman Islands company (“SICL”), now in liquidation. He declared himself trustee in a series of separate transactions. The early transactions were governed by a Saudi choice of law clause that expressly purports to govern “the relationship of the parties” in connection with, amongst other things, the creation of an express trust. The later transactions were all the subject of separate declarations of trust that neither included nor referred to any express choice of law.
The shares in question formed part of a portfolio of companies incorporated in Saudi Arabia and listed on the Tadawul, the Saudi Arabian stock exchange. They were registered in Mr. Al Sanea’s name. It is well-established that the ownership of shares is determined by the law of the place where the shares are registered as lex situs for this purpose (see Macmillan v Bishopsgate Trust Plc No 3  1 WLR 387).
Immediately before SICL was wound up, notwithstanding the earlier declaration of trust, Mr. Al Sanea transferred the shares to Samba in purported discharge of personal indebtedness. The question was whether he was able to do so or whether he was disposing of property that already belonged to SICL. That question in turn depended on the validity of the various declarations of trust. The Chancellor, held that whichever analysis was sought to be adopted the Convention inexorably pointed to Saudi Arabian law as governing the validity of the trusts. He therefore held that SICL had no beneficial interest.
Art. 4 provides that the Convention does not apply to preliminary issues relating the validity of acts by which property is transferred to a trustee. This relates to the so-called “rocketlaunching” issues. The liquidators’ position was that Art.4 only governed the validity of the transfer of legal title to the trustee and not any other questions such as validity of
the “transfer” of the beneficial interest to the beneficiary affected by the declaration of trust. This along with other matters set out in Art. 8 of the Convention would therefore be settled by the law chosen by the settlor under Art. 6 or, if no law recognizing trusts was chosen, the proper law of the trust determined in accordance with Art. 7. Samba argued that the validity of the trust itself was covered by Art. 4, with the consequence that the lex situs of the trust property governed these matters.
The Court of Appeal agreed with the liquidators. It held that there was a clear distinction between the capacity to alienate property (which is governed by the lex situs) and the capacity to create the trust structure (which is governed by the law of the trust). The interest of the lex situs was engaged on the question whether the settlor could alienate the trust property. Once it was accepted that Mr. Al Sanea could dispose of the shares, Saudi law law no longer governed the validity of any trust. That question had to be determined in accordance with Part II of the Convention. Delivering the judgment of the Court Vos LJ said:
“Provided that the property that is made the subject of a trust can be alienated at all under the lex situs , questions as to the validity and effect of placing such assets in trust, even though the assets are shares in a civil law jurisdiction, can be determined by the governing law of the trust.”
In doing so, the Court distinguished the Scottish decision in Joint Administrators of Rangers Football Club Plc  2 BCLC 436 on the footing that the future receipts (which were arguably the subject of a trust) could not be alienated in the first place under Scottish law, accepting the interpretation of that case put forward by Professors Hayton and Harris.
The Court of Appeal also rejected the argument that Art. 15(d), which preserves the application of mandatory rules of the lex situs concerning “transfer of title to property”, applied to the creation of equitable interests rather than the proper law of the trust. The Court of Appeal held that the purpose of Art. 15(d) is to prevent certain mandatory rules of the lex situs from being overridden by the law of the trust. That law could not be used, for example, to ignore conveyancing formalities of the lex situs. Nor could the trust override the non-derogable rights of, for example, a child entitled to an inheritance or those of a wife.
Samba argued that a number of mandatory Saudi rules applied which prevented equitable title from vesting. The Court of Appeal held that the evidence was not sufficient to establish that any of these rules applied on a summary application. In reality, the Court of Appeal cautioned, there has to be a distinction between laws, which merely amount to local non-recognition, and others which amount to a positive prohibition of the recognition of equitable interests. The evidence did not suggest that Saudi law went that far.
At least the decision of the Court of Appeal now confirms that so long as the settlor is able to alienate property, the trust is not invalidated merely because the lex situs cannot recognise the division of legal and equitable title, so long at least as a rational choice of law can be applied to the trust itself, either by choice or by the Article 7 factors.