New world order for trusts?: The meaning of ‘prior interest’ in section 32

To read and download this piece as a pdf, please click here.

The statutory power of advancement conferred by section 32 of the Trustee Act 1925 is a valuable tool for trustees given them as an aid to enable trust property to be used for the fullest benefit of a beneficiary with an interest in capital: see Lord Inglewood v IRC [1983] 1 WLR 366, 372–3 per Fox LJ, a judgment which contains a useful catalogue of ways in which the power has been exercised.^[1]

But the power is not unrestricted:

Unless section 69(2) it applies only if and so far only as a contrary intention is not expressed in the trust instrument and takes effect subject to the terms of that instrument.
For trusts created before October 2014 it is limited to one half, unless extended by the trust instrument.
Paragraph (c) of the proviso to section 32(1) says that no advance may be made that would prejudice any person entitled to any prior life or other interest, whether vested or contingent, unless that person is in existence and of full age and consents in writing to the advance.

In Womble Bond Dickinson Trust Corporation v Glenn [2021] EWHC 624 (Ch) Master Clark had to consider how that last restriction applied to a trust in Hancock v Watson [1902] AC 14 form, that is to say a trust where there there is an absolute gift to a beneficiary in the first instance and trusts are engrafted or imposed on the interest of the beneficiary. In such cases, the court reconciles the two inconsistent dispositions made by the absolute gift, on one hand, and by the engrafted trusts, on the other hand, by imputing to the settlor an intention to modify the absolute gift only in so far as necessary to give effect to the engrafted trusts. If the engrafted trusts fail for any reason, the result is that the initial absolute gift stands except to the extent to which it is cut down in the events which have actually happened.

The Hancock v Watson principle does not apply where there is no separate initial gift but merely a gift coupled with a series of limitations over so as to form (as it is put) one system of trusts – for example .where a trust fund is divided into shares, each held on trust for a beneficiary for life, with remainder to his/her children and an ultimate trust for the beneficiary if the share is not wholly disposed of, without an initial trust of the share for the beneficiary.

In the Womble Bond Dickinson case, there was a trust in favour of a class of beneficiaries made up of the settlor’s present and future grandchildren contingently on attaining the age of 25 in such shares as the trustees should appoint. The next clause – which was in the form of a proviso – then laid down that the share taken by any of the beneficiaries should not vest in him or her absolutely but should be retained by the trustees (a) on trust for the beneficiary for life, and subject thereto (b) for the sons of the beneficiary in tail with remainder (c) to the beneficiary absolutely.

The trustees wished to advance capital for the benefit of grandchildren to enable them to buy homes to live in. The question was whether there was power to do so, and the Master held that they did:

Much of the judgment consists of an analysis of whether the rule in Hancock v Watson was engaged, and the Master held that it was notwithstanding the inclusion of a trust of capital for the beneficiary in the engrafted trusts. This was (she said) insufficient to displace the inference to be drawn from the other features of the trust deed: in her judgment this was a “belt and braces” provision by the drafter, seeking to draft provisions falling within the rule in Hancock v Watson or, putting it another way, the drafter was, by including the beneficiary as ultimate beneficiary, acknowledging that Hancock v Watson was intended to apply.
The Master then held that the grandchildren had interests in capital for the purposes of section 32.
Finally, she held that the interests of the unborn beneficiaries were not “prior” interests for section 32 purposes.

There can be no doubt that the grandchildren had interests in capital, but it is not clear what part (if any) the rule in Hancock v Watson has to play in the case of trusts where (as in this case) the engrafted trust are exhaustive and themselves contain a trust of capital for the beneficiary. The function of the rule is to reconcile two inconsistent dispositions made by (a) the absolute gift, and (b) the engrafted trusts and to determine the devolution of the trust property if the engrafted trusts fail. But here there is no inconsistency and there is no possibility of the engrafted trusts failing, given that the grandchild beneficiary has a vested interest in capital under the engrafted trusts.

Nor is it clear that the Master was right to hold that the interests of the unborns were not prior to those of the grandchildren. She treated “prior” as referring to the order in which the trust property is enjoyed, with a life interest being enjoyed before the interest in remainder and her starting point was the position if a son is born to a grandchild. This would (said the Master) cause the grandchild’s absolute interest to become a life interest, limiting his or her entitlement to the income of the trust property. That interest was a “prior life interest” to that of the son, and it followed that the son’s interest, even when unborn, was not prior, but subsequent, to that of the grandchild, and fell outside para (c) of the proviso.

The result is convenient, because as the Master pointed out the trustees as fiduciaries were bound to consider the interests of the unborns, but provided they have done so, and made a balanced decision, the power was there to be used.

However, as a matter of substance – and putting on one side the question whether the rule in Hancock v Watson applies – the interests in capital of unborn sons (and their heirs under the entails) rank ahead of the interest in capital of a grandchild. It is clear that the settlor intended capital to go to the sons of his grandchildren (and their heirs) rather than the grandchildren themselves and whether or not the interests of the sons are classified as prior interests it is suggested that the decision frustrates the intention of the settlor. The status of decisions of Masters as a matter of precedent is not clear, but whatever that may be, it would not be safe to rely on this decision in other cases without a further application to the court.

For more information on our Trusts, probate and estates: non-contentious practice, please click here.

^[1]The judgment downplays the flexibility given by section 32, understandably in the context of a Revenue argument that the statutory power was inconsistent with accumulation and maintenance trust status. But the cases referred to by Fox LJ speak for themselves.

This material is provided free of charge by Wilberforce Chambers for general information only and is not intended to provide legal advice. No responsibility for any consequences of relying on this as legal advice is assumed by the author or the publisher; if you are not a solicitor, you are strongly advised to obtain specific advice from a lawyer. The contents of this material must not be reproduced without the consent of the author.

GAR Awards 2021: Most Important Decision shortlisting

We are delighted to announce that VRG Linhas Aéreas v MatlinPatterson has been nominated in the “Most Important Decision” category at this year’s GAR Awards (read more here). The case was heard in the Cayman Islands Court of Appeal last year and saw Brazilian airline VRG’s ICC award enforced in Cayman Islands, overturning the earlier decision of the Grand Court. Thomas Lowe QC acted for the successful appellant (VRG) and was instructed by Marc Kish and William Jones of Ogier. You can read the full judgment here.

The awards ceremony will be held online on Thursday 1 July from 5.30pm. We wish all those shortlisted the best of luck.

To read more about our arbitration practice please click here.

Betamax v STC – when may an arbitral award be set aside or enforcement refused?

To read and download this piece as a pdf, please click here.

Commentary by Stuart Isaacs QC

The important and much anticipated judgment of the Privy Council in Betamax Ltd v State Trading Corporation [2021] UKPC 14, on an appeal from the Supreme Court of Mauritius, puts right several errors into which the Supreme Court fell in terms of both the circumstances generally in which a court may set aside or refuse enforcement of an arbitral award and the issue whether the award in the particular case was in fact illegal and hence contrary to the public policy of Mauritius. The decision has been welcomed by the international community at large. The reaction to it in Mauritius has been more mixed.

The facts of the case are straightforward. Betamax is part of a substantial group of Mauritius companies. STC is a trading arm of the Government of Mauritius set up by statute and entrusted with the responsibility for importing essential commodities such as petroleum products and LPG for use and trade in Mauritius. In November 2009, the parties entered into a 15 year contract of affreightment (“COA”) under which Betamax agreed to transport Mauritius’ entire petroleum product requirements from a refinery in India on a vessel specially designed for that purpose. At the time the COA was concluded, the then coalition government of Mauritius at all times maintained the legality and promoted the economic benefits of the COA. However, following a general election in 2014, there was a change of government. The new government included a party which, during the election campaign, for the first time claimed that the COA had been entered into in breach of the Public Procurement Act 2008 (“PPA”) and undertook, if elected, to terminate the COA. Soon after the election of the new government, STC made it clear that it did not intend to continue to perform the COA and failed and refused to perform it further. Betamax accordingly gave notice of termination whereby it accepted STC’s repudiation and failure and refusal to perform as bringing the COA to an end.

Betamax initiated arbitration proceedings in the Singapore International Arbitration Centre claiming damages and interest of over $150 million – a sum representing about 1.5% of Mauritius’ GDP. Importantly, although the SIAC Rules applied, the governing law of the COA was Mauritius law and the seat of the arbitration was Port Louis, Mauritius. Mauritius’ International Arbitration Act (the “IAA”) was applicable because the ship management obligations under the COA were to be performed in Singapore and India.

Before the sole arbitrator, Dr Michael Pryles, Betamax’s claim succeeded. He held inter alia that, on the proper construction of the PPA and its associated Regulations, the PPA had no application; and that, therefore, there was no basis for STC’s argument that the COA was illegal.

The Supreme Court set aside the award under section 39(2)(b)(ii) of the IAA on the ground that the award was in conflict with the public policy of Mauritius since, contrary to what the arbitrator had held, the COA had been entered into in breach of the PPA and was therefore illegal and that the illegality was flagrant. At the time of the Supreme Court’s judgment, rendered some two years after the award, enforcement proceedings in India were ongoing.

Revealingly, the Supreme Court reached its conclusion as to the illegality of the COA without first considering whether it was open to it to review the arbitrator’s decision – a matter to which it gave only the most cursory consideration.

The general importance of the Privy Council’s judgment results from two particular aspects of the case. First, the IAA implements the UNCITRAL Model Law on International Commercial Arbitration. Section 39 of the IAA mirrors Article 34 of the Model Law. Second, the IAA treats the setting aside and enforcement of awards made under it in the same way as it treats the enforcement of foreign awards. The judgment is therefore significant since it indicates the likely approach of the English courts towards applications to enforce a foreign arbitration award in England and may be applied similarly in other common law jurisdictions such as Singapore.

Following a review of the IAA’s relevant provisions, the Privy Council accepted Betamax’s submission, which the Supreme Court had rejected, that since the arbitrator has determined that the COA was exempted from the scope of the PPA and there was no illegality, it was not open to the Supreme Court to determine the question whether the award conflicted with the public policy of Mauritius: it had been finally determined in the arbitration that there was no illegality. The question of the illegality of the COA depended on the detailed interpretation of the provisions of the PPA and its associated Regulations. The questions of interpretation gave rise to no issue of public policy. The Privy Council rejected the Supreme Court’s reliance on the Singapore Court of Appeal’s decision in AJU v AJT [2011] SGCA 41 and an obiter statement of Waller LJ in the English Court of Appeal’s decision in Soleimainy v Soleimany [1999] QB 785.

As the Privy Council pointed out, at [47], STC’s argument, if correct, would enable section 39(2)(b)(ii) of the IAA “to be used as a means of reviewing any decision of an arbitral tribunal in an award on an issue of interpretation of the contract or of legislative provisions where, on one of the alternative interpretations of the contract or the legislative provisions, the result was that the agreement was illegal”. Such a result would be inconsistent with the purpose of the IAA and the Model Law.

In the light of the Privy Council’s decision that the Supreme Court had lacked the power to set aside the arbitral award, it was unnecessary for it to decide the questions whether the COA was illegal and, if so, whether the award giving effect to it was in conflict with the public policy of Mauritius. Nevertheless, and perhaps unusually, the Privy Council went on to decide that the arbitrator was correct in concluding, as Betamax had submitted, that the COA was exempted from the PPA and its associated Regulations and was therefore not illegal under those provisions. Understandably, the Privy Council then avoided answering the question whether, if the COA had been illegal, the award giving effect to it was in conflict with the public policy of Mauritius: when such an issue actually arises, it would be one on which “close regard to the Supreme Court’s determination” would be necessary.

Stuart Isaacs QC represented Betamax in the arbitration and before the Supreme Court. Wilberforce Chambers’ Arbitration Breakfast Briefing on the appeal to the Privy Council may be viewed here.

For more information on our International Arbitration practice, please click here.

Clare Stanley QC and James Goodwin appear in landmark Privy Council appeal

This week, Clare Stanley QC represented the Appellant on appeal from the Court of Appeal in Jersey in a Privy Council appeal which considers whether the claim of a former trustee of a Jersey law trust takes priority over the claims of successor trustees on a first in time basis and trust creditors and what is the status of a trustee’s right of indemnity and associated equitable lien in relation to a trust governed by Jersey law. James Goodwin represented the Respondent.

The Appellant and the Respondent are assumed to be creditors of a Jersey law discretionary trust whose liabilities substantially exceed its assets. The Respondent is a former trustee of the Trust which contends that its rights of recourse to the trust fund take priority to those of other creditors, including the Appellant, who disputes that contention.

The Royal Court of Jersey, giving judgment in favour of Clare’s client, held that as between a former and current trustee, their liens rank on a pari passu basis and not first in time. It also held, in the alternative, that a trustee’s right of indemnity and lien arise on a liability by liability basis with the trustee acquiring (and releasing) successive rights of indemnity and lien as it acquires (and exonerates) liabilities. The Royal Court further held that a creditor of an “insolvent” trust, including a former trustee claiming pursuant to its right of indemnity, was not entitled to claim its costs of proving its claim from the insolvent fund.

The Court of Appeal of Jersey reversed those findings and held that a trustee’s equitable lien ranks in accordance with the time of its creation; a trustee has priority over the creditors with which it has transacted as trustee.

The Appeal was heard over three days this week, alongside an appeal from the Guernsey Court of Appeal in a different case but which raised similar issues. The Committee’s advice to Her Majesty will be handed down in due course.

Clare Stanley QC is instructed by Damian James of Collas Crill, and appeared along with Shân Warnock-Smith QC and Simon Hurry of Collas Crill for the Appellant.

James Goodwin is instructed by Taylor Wessing and appeared along with Emma Jordan of Taylor Wessing for the Respondent.

S Franses Ltd v The Cavendish Hotel (London) Ltd

HHJ Parfitt handed down judgment today in “round two” of this well-known case under the Landlord and Tenant Act 1954. S Franses Ltd having established its right to new tenancies of premises on Jermyn Street in the Supreme Court, this was the trial to determine the terms and rent of the new tenancies and the amount of interim rent – the latter payable over a particularly long period because of the time the litigation has taken.

The parties had substantially agreed the terms of the new leases and further agreements were reached during the trial, so that only four disputed terms remained. These were resolved substantially in the tenant’s favour.

The rent for the new tenancies was a major battleground and made more difficult by upheaval in the property market due to the Covid-19 pandemic and the absence of comparables. By the time of trial, both valuers had reduced their rental valuations from their original expert reports, in light of the large number of vacancies on Jermyn Street and the limited transactional evidence there was. The Judge found that good points had been made in cross-examination of both valuation experts but his ultimate rental value (£102,000 p.a.) was substantially closer to the valuation of the tenant’s expert witness (£96,500 p.a.) than the landlord’s (£174,750 p.a.). This valuation was approached using the traditional zoning methodology rather than assuming any particular percentage reduction in rental valuations attributable to Covid.

On any basis, the new rent is a very large drop from the previous passing rent of £220,000 p.a. This had been set on a rent review in 2011 on an artificial hypothesis which required the user and alienation covenants in the leases to be ignored.

The valuation date for the interim rent was as long ago as January 2016. Here, a major problem for the Landlord was that its valuation expert witness had not properly valued a year-to-year tenancy, as required by the Act as the starting point for the interim rent decision. Because the Tenant had in fact had more than 5 years’ of occupation, he had approached the valuation as if it were of a 5-year term, ignoring the fact that the Act intends the interim rent figure to reflect the uncertainty to a tenant of not knowing whether or when its tenancy will be reviewed. The Judge accepted the Tenant’s expert’s valuation of £140,650 p.a. but held that needed to be adjusted to take into account various factors, including the difference between that figure and the passing rent of £220,000 p.a. He determined an interim rent of £160,000 p.a.

Whilst this decision – unlike the Supreme Court in “round one” – does not make new law, it will be of interest to the market, which is keen to understand how the courts are likely to approach the valuation challenges that the pandemic (and resulting steep decline in West End rental values) has brought.

Joanne Wicks QC, instructed by David Cooper & Co, acted for S Franses Ltd.

The judgment can be downloaded here.

Britvic PLC v Britvic Pensions: Court of Appeal Decision Overturns High Court on Interpretation and “Corrective Construction”

The Court of Appeal has just handed down its decision in Britvic PLC v Britvic Pensions [2021] EWCA CIV 867, overturning the first instance High Court decision. It is a major decision on interpretation (applying principles applicable to contracts and other documents, and not just pension schemes). This note focuses on the interpretation issue of general application; a second note will touch on the pensions-specific aspects.

The decision is a clear restatement of the current primacy of the words used by the parties and the limits on what is called “corrective” construction. The prospect of successfully using background context to get a “sensible” or “commercial” outcome which strains the natural meaning of contractual words has receded further.

Those with an interest in the developments of construction may note this Panel has a long history with this issue: Vos MR was (successful) leading counsel in ICS v West Bromwich [1998] 1 WLR 896 and Nugee LJ was (again successful) leading counsel in Chartbrook v Persimmon Homes [2009] 1 AC 1101. The Master of Rolls said “It does not seem to me to be profitable to consider whether or not the applicable principles have developed over the years…”.

The Main Issue

Simplifying the drafting background hugely, the Britvic Pension Plan contained provisions for members’ pensions to increase in accordance with inflation. Those provisions were subject to a power of the employer to set the rate: the dispute was how to interpret that power. There are certain statutory protections providing for pension increases (relevantly under s51 Pensions Act 1995) which gives further limited protection.

The pension increase rule (C.10) had a sub- rule first providing that each pension increases in each year starts to be paid, then:

“C.10(2) The part of a pension which exceeds any guaranteed minimum pension in payment is increased on 1 October in each year. The rate of increase is the percentage increase in the retail prices index during the year ending the previous 31 May but subject to a maximum of 5 per cent… (or any other rate decided by the Principal Employer).” (emphasis added)

The issue related to the words in brackets. Did it mean the Principal Employer could set any other right, higher or lower, or (as the members argued) did it mean the Principal Employer could only set a higher rate.

The members succeeded below ([2020] EWHC 118 (Ch), [2020] Pens LR 11). The judge relied on a range of factors, including the background documentation provided to members when they joined the scheme (which proceeded on the basis of RPI increases and a discretion to award increases above 5%)(see the appeal decision at [5]-[7]). According to a strong Court of Appeal Panel (Vos MR, Coulson LJ, Nugee LJ), he was wrong to do so: other meant other, not higher.

The Court of Appeal Leads with the Words

Vos MR traced the well-known history of interpretation cases from ICS and Chartbrook through Rainy Sky [2011] 1 WLR 2900, Arnold v Britton [2015] AC 1619 and Wood v Capita [2017] AC 1173. He derived from those cases the key proposition that where the parties have used unambiguous language it must be applied (at [29]-[30). Since “any other rate” is unambiguous and naturally means “higher or lower”, the Court applied it. All of the Panel adopted that approach.

Two points warrant emphasis:

This decision makes it clear that “corrective construction” is functionally treated by the Courts as a different exercise to the construction exercise of working out what the words mean. A “corrective construction” exercise “is only normally adopted where there really is an obvious mistake on the face of the document” (Vos MR at [33], and similarly Coulson LJ at [60]-[61] and Nugee LJ at [75], [77]) – such as the wrong date in Mannai, or wrongly naming a pub when it was clear which pub was referred to. The cure for the mistake also needs to be clear: [32]. So, it appears rather than there being a spectrum of interpretation having regard to literal wording at one end, and emphasising background context at the other, the exercises of “what do the words mean” and “was there a mistake” are different. Importantly, all of the Panel proceeded on the basis that unless there is ambiguity, there is no scope for use of context to “rewrite” the clear words (Vos MR [29]-[30]; Coulson LJ [56]-[57]; Nugee LJ at [70] There needs to be “a basis in the words used and the factual matrix for identifying a rival meaning” (see Coulson LJ at [57] quoting Rainy Sky).
The Panel applied the strict words even though they recognised that this result “may or may not give the transferring members grounds for complaint” (Nugee LJ at [74]) and that “I can quite see there may have been a mistake” (Vos MR at [32], original emphasis). Certainly, by allowing the appeal, the Court of Appeal gave full effect to the words used, and was not swayed from that outcome by the explanations in relation to the factual background and other materials that arise. As counsel for the Trustee, it would be inappropriate to comment further.

Jonathan Chew acted for the Britvic Trustee, instructed by Gowling WLG (UK) LLP (the team led by Ian Gordon), both in the Court of Appeal and below. The Court of Appeal’s judgment is available here.

Let’s talk about trusts law: A discussion on the future of trusts law and upcoming trends

As part of our ‘Private Client eBriefing’ series, Brian Green QC interviews Emily Campbell about her experience as a trusts law barrister as they look to the future and consider and predict what might change in the private client area.

This is the second of two videos. In the first video, released two weeks ago, Emily interviewed Brian about his experience as a trusts law barrister as they looked back over the years and considered what has changed in the private client area.

If you would like to subscribe to our Private Client eBriefing newsletter, please email marketing@wilberforce.co.uk.

To read the transcript of this interview as PDF, please click here.

David Phillips QC chairs FA Regulatory Commission biting case against Jefferson Lerma (AFC Bournemouth)

David Phillips QC has chaired the FA Regulatory Commission with Lawrence Selby and Faye White that heard the biting case against Jefferson Lerma of AFC Bournemouth. The allegation was that Mr Lerma had bitten an opposing player during AFC Bournemouth’s match against Sheffield Wednesday FC on 3 November 2020. The Commission found the breach of FA Rule E3 to have been proved. Mr Lerma was suspended for 6 matches and fined £40,000. In the Written Reasons (Lerma suspended (thefa.com)) the Commission reiterated that although this was an unpremeditated spontaneous incident all biting incidents are significant in themselves.

Let’s talk about trusts law: A look back at the development of trusts law and what has changed over the years

As part of our ‘Private Client eBriefing’ series, Emily Campbell interviews Brian Green QC in the video below about his experience as a trusts law barrister as they look back over the years and consider what has changed.

This is the first of two videos. In the sequel, which will be released in two weeks’ time, Brian will interview Emily about the future of trusts law and how she anticipates things will change going forward.

If you would like to subscribe to our Private Client eBriefing newsletter, please email marketing@wilberforce.co.uk.

To read the transcript of this interview as a PDF, please click here.

Opportunity to join Wilberforce’s Trusts, Tax, Probate and Estates Group

Our Trusts, Tax, Probate and Estates group is seeking to recruit specialist barristers, and professionals looking to qualify as barristers, who have an established practice (of at least 5 years’ call or other PQE) in any or all of the areas of trusts, tax, probate and estates, and related professional negligence, whether on the advisory or litigation side, to complement Chambers’ longstanding top-tier rated practice group.

Applications are particularly encouraged from practitioners who already have an expertise in advising on the taxation of trusts, in the drafting of trust documents or in tax litigation generally, and such applicants are referred to our “Trusts: Non-Contentious” and “Tax” sections under the Trusts, Tax, Probate and Estates area of the website for more information on our experience in these areas. Practitioners with expertise in the area of trusts, probate and estates without expertise in tax are also encouraged to apply.

Applicants should be able to provide evidence of strong performance in respect of their practice, combined with a high level of academic ability.

Wilberforce Chambers is committed to providing equal opportunities and promoting diversity. We therefore encourage and welcome applications from groups that are potentially disadvantaged or under-represented at the Bar.

If you are interested in finding out more about this opportunity, please click here or contact Nicholas Luckman, our Practice Director, for a confidential discussion about any aspect of the tenancy process.

All applications should be made in writing to Nicholas Luckman. Please include a CV and covering letter.

Applications will be treated in strict confidence.

Nicholas Luckman (Practice Director): nluckman@wilberforce.co.uk / +44(0)20 7304 2856