Bermuda: Following In The Footsteps Of Schmidt

It is now more than ten years since the seminal decision of the Privy Council in Schmidt v Rosewood Trust Ltd [2003] established that a beneficiary's right to seek the disclosure of trust documents was '... one aspect of the court's inherent jurisdiction to supervise, and if necessary to intervene in, the administration of trusts' (per Lord Walker at para 51). Since the decision in Schmidt , there has been very litte case law that examines the working out of this general principle in particular or in difficult circumstances. One such case was Breakspear v Ackland [2008] that concerned the disclosure of a settlor's letter of wishes. We now have some further learning as a result of a recent decision of the Chief Justice of Bermuda in In the Matter of An Application for Information About A Trust [2014]. This article will look in detail at this decision, together with the decision of the Bermuda Court of Appeal which upheld the first instance ruling.

Facts

The case of Re Information About A Trust concerned an application by a beneficiary seeking disclosure of information about a trust. The beneficiary had an interest that could not be described as remote or speculative in the trust which had very considerable value. However, the trust deed included a precise provision with regard to the disclosure of information, the effect of which was that the trustees were prohibited from disclosing information without the prior consent of the protector. The key provision of the trust deed (clause 9.2) read as follows:

The beneficiary made a request of the trustees for information about the trust, and the protector (who was also the principal beneficiary) withheld consent to disclosure. The terms of the trust made detailed provision for accounting by the trustees, including (clause 17) that they were to have trust accounts audited annually (or so often as the protector may otherwise direct) by a firm of accountants of '... high standing and repute internationally...'. In addition, the terms of the trust dealt expressly with the nature of the powers of the protector. The key clause was clause 28, which read as follows:

The application by the beneficiary thus raised what the Chief Justice referred to as the '... apparently novel question of the impact of an information control clause or mechanism on this court's supervisory jurisdiction over a Bermudian trust'. In deciding that there ought to be disclosure to the beneficiary, the Chief Justice framed two broad questions of principle, namely:

• Is the information control mechanism in the trust deed valid on its face, or are its terms incompatible with the irreducible core obligations inherent in a valid trust?
• Assuming the clause to be valid on its face, what principles delineate the scope of the court's jurisdiction to grant relief in circumstances which arguably entail a departure from the strict terms of the governing instrument?

Was the information control mechanism valid on its face?

In analysing this first question, the Chief Justice referred with approval to the decision of Millett LJ (as he then was) in Armitage v Nurse [1997] when he said (at 253) that:

While the Chief Justice accepted that there was an irreducible core of obligations owed by trustees to beneficiaries, he did not appear to be of the view that beneficiaries had 'information rights' which were part of this 'irreducible core'. The Chief Justice held that clause 9.2 (when read with clauses 24 and 28 – both referred to above) was not invalid on its face for violating the irreducible core contents required for a valid trust. This was on the basis that the information control mechanism in this trust neither eliminated the trustees' duty to account altogether (since there was a clear obligation to account to the protector) nor did it purport to oust the jurisdiction of the court to order appropriate disclosure. It was not argued by any of the parties, including the protector, that the supervisory jurisdiction of the court was ousted (as opposed to influenced) by clause 9.2. In particular, the Chief Justice held that:

It seems clear that had there been any such ouster, this would have been held to be invalid. On this point the Chief Justice referred with approval to the Cayman case AN v Barclays Private Bank & Trust (Cayman) Ltd [2007] in which Smellie CJ said this:

In reaching this finding regarding the validity of the information control mechanism, the Chief Justice made an interesting observation with regard to the powers of the protector. He stated that the protector was 'implicitly' required to have regard to the interests of the beneficiaries in exercising their '... admittedly non-fiduciary powers of supervising the trust's administration'. I will return below to this analysis of the nature of the powers of the protector.

What principles delineate the scope of the court's jurisdiction?

While the beneficiary relied heavily on the general principle of judicial intervention provided for in Schmidt , the trustee submitted that the court should only intervene when the beneficiary had established a 'real cause for concern'. The protector went further and argued that the court should not intervene unless 'something had clearly gone wrong' and pointed to the basis upon which non-fiduciary powers are open to challenge, namely capriciousness or perversity. The Chief Justice did not accept any of these submissions. Firstly, he held that the breadth of the court's jurisdiction to intervene could not be as broad in this case as it would have been had the trust instrument been silent on the issue of the disclosure of information. In other words, the Chief Justice rejected the argument that all the court was required to do was to apply Schmidt simpliciter saying that:

Secondly, the Chief Justice added an important gloss to his finding that there was nothing repugnant about the protector having a power of veto over the supply of information to beneficiaries. He said that this assumes that the power is intended to be used for the benefit of beneficiaries and that clause 28 be construed not as a clause which is designed to ensure that the protector's use of the veto power can only be challenged on the grounds of capriciousness or perversity, but rather as an indemnity clause. Of course, a fiduciary power if exercised is one that must be exercised bona fi des and in the best interests of the beneficiaries and while the reasoning of the Chief Justice does not expressly find that the power of veto in clause 9.2 is a fiduciary power, this in substance appears central to his reasoning. The court held that the correct approach was for the court to show due deference to the terms of the trust deed and only order disclosure if this is shown to be necessary in the proper exercise of the court's supervisory jurisdiction. All that the beneficiary was required to show was that there was a prima facie case that the court's intervention is required to '... meet the minimum requirements for trustee accountability in objective terms'. There was neither a presumption in favour of disclosure (as the beneficiary had argued) nor did the beneficiary have to show capricious or perverse use of the protector's veto power (as the protector had suggested).

Was the test for intervention made out?

On the facts of the case the court held that the beneficiary had made out a prima facie case for the court's intervention, applying the threshold test of whether or not such intervention was required in order to hold the trustees accountable for the due administration of the trust. The court's role was stated to be to take account of the information control mechanism created by the settlor and how it had operated in practice in relation to the information request at issue. The Chief Justice appears to have viewed this as a question of construction which involved asking what the implied intention of the settlor was – namely an intention:

The Chief Justice went on to set out his reasons for holding that on the facts, the information control mechanism of clause 9.2 had 'broken down'. These included the facts that the protector was also the principal beneficiary and thus that the protector and the beneficiary requesting information were beneficially interested in the same fund. The Chief Justice also held to be relevant on this point that the protector and the beneficiary had been involved in a dispute for a period of years and that the refusal to provide requested documentation had been a 'blanket refusal'. The Chief Justice found that it was 'ultimately obvious' that the beneficiary had made out a prima face case for the exercise by the court of its supervisory jurisdiction. On the facts (which were set out in a confidential appendix) the court ordered disclosure of financial information about the trust assets.

Court of Appeal

The protector then appealed to the Court of Appeal for Bermuda, which upheld the decision of the Chief Justice without greatly adding to his legal analysis. It is clear that while the beneficiary expressly argued before the Court of Appeal that clause 9.2 was invalid, little time was spent with this argument and the Court of Appeal proceeded on the basis that it was valid on its face. Of note is the statement by Evans LJ that:

As with the decision of the Chief Justice, it appears that the Court of Appeal construed the protector's power of veto as a fiduciary power notwithstanding the wording of clause 28. The Court of Appeal also made clear that if the relevant test had been that the beneficiary needed to show a 'real cause for concern' then this test was satisfied on the evidence. In short, the Court of Appeal held that clause 9.2 'works' and its application could be supervised by the court.

The Court of Appeal judgment contains a 'postscript' that has some important things to say about the proper function of the trustees in the application of clause 9.2. The Court of Appeal pointed out that the decision of whether or not to make disclosure under clause 9.2 is that of the trustees and not the protector (who only has a power of consent). In other words, while the trustees must obtain the protector's consent, clause 9.2 does not have the effect of transferring the exercise of the trustees' discretion to the protector. Oddly, the Court of Appeal appears to have taken the view that there was certain information that a beneficiary is entitled to 'as of right'. The Court of Appeal stated:

This final passage in the Court of Appeal judgment is difficult to analyse for a number of reasons. Firstly, Schmidt established that a beneficiary of a discretionary trust did not have an entitlement as of right to any disclosure. Secondly it is hard to understand why the Court of Appeal referred to disclosure the release of which the settlor was 'taken to have approved'.

Conclusion for practitioners

Notwithstanding the diffi culties of analysis referred to above, Re Information About A Trust is clearly a case that follows on the traditions of Schmidt in being an example of the courts being sympathetic to benefi ciary information requests. However, as with Schmidt , it is clear that disclosure will often be subject to stringent confi dentiality requirements. Re Information About A Trust also suggests that the courts will jealously guard their supervisory jurisdiction over trusts and that benefi ciaries will readily be able to satisfy the hurdle of establishing a prima facie case in favour of disclosure. Re Information About A Trust is less helpful when it comes to what it has to say about the nature of the powers of protectors. It seems that judges will look to the substance of the powers and the factual matrix and will be unimpressed by labels such as 'non-fiduciary'.

Previously published in The Trusts and Estates Law and Tax Journal

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.