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International Trust Litigation: Choosing Your Battleground?

David Brownbill QC and Edward Cumming of XXIV Old Buildings explore jurisdiction clauses and their impact on international trust litigation:

"A multiplicity of parties and places inevitably implies a multiplicity of potential forums in which the litigation may take place. A question frequently being asked is whether the choice of forum can in any way be controlled by express provision in the trust instrument."

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International trust litigation is booming.  Every major financial centre is entertaining an ever-growing number of cases: Hong Kong, British Virgin Islands, Cayman Islands, Bermuda, Jersey, Guernsey, Gibraltar, Isle of Man, Bahamas, Nevis, Anguilla, England, Geneva and Zurich.  The list goes on.  This is very much a reflection of the popularity of trusts as asset-holding vehicles,  rapidly changing family structures and, above all else, the “second-generation problem” whereby first-generation settlors are passing away and handing the baton over to next-generation beneficiaries and surviving spouses in circumstances where enormous familial pressures have been left unresolved. 

In the past, when litigation ensued, as it so often did, it usually took place in the “home” of the trust, typically the place where the trustee is situated and whose law provided the governing law of the trust.  This simple model has not escaped the modern disruptive world and, today, it is just as likely to have a multiplicity of trustees and places, with administration in one place and the governing law in another, and for there to have been critical changes of governing law and trustees over the years.  International trust litigation is almost always multiparty and, in addition to the trustees, it will frequently involve several competing classes of beneficiaries and protectors and other third-party power holders.

A multiplicity of parties and places inevitably implies a multiplicity of potential forums in which the litigation may take place.  A question frequently being asked is whether the choice of forum can in any way be controlled by express provision in the trust instrument.

Jurisdiction clauses in trust instruments are a relatively recent, but increasingly common, phenomenon.  They were largely unseen 15 years ago except in the occasional sophisticated structure, usually at the hands of lawyers from the United States, the concept of the peripatetic trust being well established in that multi-state environment.  Courts in the leading trust jurisdictions have accordingly been called upon to scrutinise these clauses and to grapple with the novel problems they generate. 

The common forms of jurisdiction clause in trust instruments have provoked much debate.  How should they be construed?  Do clauses providing for a particular jurisdiction, or for the courts of a particular jurisdiction, to be “the forum for administration” of the trust mean to confer exclusive jurisdiction on that forum for the resolution of contentious trust disputes?  Even if a clause does seek to confer exclusive jurisdiction on a forum, how should the court apply and give effect to it?  Should the court adopt the same approach as in relation to exclusive jurisdiction clauses in contract?  If not, then why not, and what approach should be adopted?

The highest level of scrutiny to date comes from the Jersey Court of Appeal in Koonmen v Bender (2003-2004) 6 ITELR 568

The Court of Appeal’s decision in Koonmen suggested that, where a clause provides that a particular jurisdiction was to be “the forum of administration”, the clause may be construed as both a choice of law clause and a jurisdiction clause.  This is particularly so if there are other indications that “the forum of administration” is intended to mean a judicial forum, rather than simply where the trustee should administer the affairs of the trust. 

In Koonmen, the key part of the clause in issue provided that the trust be “established under the laws of Anguilla and the Proper Law shall be the law of Anguilla which said Island shall be the forum for the administration thereof”.  “Proper Law” was defined elsewhere as “the law to the exclusive jurisdiction of which the rights of all parties and the construction and effect of each and every provision of this Settlement shall from time to time be subject and by which such rights construction and effect shall be construed and regulated”.

Thus the clause was found to be an exclusive jurisdiction clause requiring any disputes relating to the trust, whether commenced by trustees or beneficiaries, to be pursued in Anguilla.  The Court of Appeal further found that, as a general rule, the courts will give effect to such a choice of forum and will only override it in “exceptional” or “very special” circumstances (by at least broad analogy with the approach to exclusive jurisdiction clauses in contracts).

Many thought that, following Koonmen, the broad approach to jurisdiction clauses would be relatively settled, notwithstanding some criticism of the decision, including, most notably, an article by Professor Matthews in the Jersey Law Review in October 2003.  Recent decisions in offshore jurisdictions have prompted further debate, however.

In Re A Trust [2012] Bda LR 79, in the context of an application for an anti-suit injunction against proceedings pursued by a disgruntled beneficiary in a foreign jurisdiction, Chief Justice Kawaley had to consider whether a “forum for administration” clause amounted to an exclusive jurisdiction clause in favour of Bermuda.

Broadly following the approach adopted in Koonmen, Chief Justice Kawaley concluded that the mandatory language of the “forum for administration” clause in that case, taken with the choice of the law of Bermuda as the governing law “points towards the draftsman’s intent that the courts of Bermuda should exclusively determine matters relating to the administration of the trust.”  He characterised the claims which had been brought in the foreign jurisdiction as being “matters relating to the administration of the trust”, although he did not go on to say that all claims concerning the trust would necessarily be caught by the clause.

Both Re A Trust and Koonmen were cited more recently by the Royal Court of Jersey in Crociani v Crociani [2013] JRC 194A.  In Crociani the defendants (present and former trustees against whom the plaintiffs sought to pursue various claims, including for breach of trust) sought an order staying the proceedings on the basis that Jersey was not the proper forum to determine the claims.

Underpinning the application for a stay was a clause in the trust deed which the defendants contended was an exclusive jurisdiction clause in favour of Mauritius.

The Royal Court found that the key parts of the clause in question, which contained a power for the trustees to appoint a replacement trustee in a new jurisdiction, were as follows:

“…and upon such appointment being made the then Trustee or Trustees shall immediately stand possessed of the Trust Fund upon trust for the new Trustee or Trustees as soon as possible so that the Trust Fund shall continue to be held upon the trusts hereof but subject to and governed by the law of the country of residence or incorporation of such new Trustee or Trusteesand thereafter the rights of all persons and the construction and effect of each and every provision hereof 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 (but so that nonetheless the then Trustee or Trustees or the new Trustee or Trustees may by deed declare that the trusts hereof shall continue to be read and take effect according to the laws of the said Commonwealth of The Bahamas as provided by Clause 15 hereof) and Clause 15 hereof shall take effect and be subject to the provisions hereinbefore declared by this clause”. [Emphasis added.]                                                              

The present and former trustees contended that nearly a year before the proceedings had been commenced, this power had been exercised to appoint the present trustee (a Mauritian trust company), change the proper law of the trust to that of Mauritius, and make Mauritius the exclusive jurisdiction for claims such as that brought by the plaintiffs in Jersey.

The precise construction given to the clause by the Royal Court is not entirely clear from its judgment.  However, it dismissed the stay application, finding that “whatever the ambit of [the clause above], it cannot have been intended by the parties to the Grand Trust to place any restriction on where claims against former trustees for recovery of trust assets could be brought… if that is the case then [the clause] had no application at all”.  The Royal Court went on to suggest, citing Professor Matthews’ article, that the reference to “the forum for the administration of the trusts” was to make “clear that this provision is concerned with the domestic or internal affairs of the trust… with its administration” – as opposed, presumably, to more hostile litigation such as that which was before the Royal Court.

Despite having found against the defendants on this basis, the Royal Court went on to consider, in the alternative, what the effect of the clause would have been if in fact it was an exclusive jurisdiction clause requiring the claims to be brought in Mauritius. 

In so doing the Royal Court departed from the approach widely thought to have been adopted by the Court of Appeal in Koonmen, finding that “It had been thought that the Court of Appeal in Koonmen applied a stricter test as to whether the Court should override an exclusive jurisdiction clause, namely that it should only do so in exceptional circumstances… [However] on closer examination of the reasoning of the Court of Appeal, it appears… that it was somewhat equivocal as to the test to be applied in relation to trusts”.

Instead, the Royal Court found, the issue to decide when considering the effect of an exclusive jurisdiction clause in a trust is whether there are circumstances which justify the court, in its discretion, overriding the provisions of an exclusive jurisdiction clause.  In exercising this discretion the court had to take into account all the circumstances of the case.

The Royal Court went on to apply that test and found that there were, in all the circumstances, “good reasons” to override an exclusive jurisdiction clause in favour of Mauritius, including that the Royal Court considered the principal claims “to have their closest and most real connection with Jersey”, one of the plaintiffs’ claims was to challenge the appointment of the Mauritian trustee, and that it would otherwise be “unjust to the plaintiffs to send the case away to Mauritius, where they will face a number of uncertainties which do not apply here”.  It remains to be seen whether this approach offers the certainty sought by the early draftsmen of jurisdiction clauses in trusts. 

An appeal from the decision of the Royal Court in Crociani was heard in January 2014.  Judgment is awaited.  In the meantime these recent decisions will continue to prompt further interest and debate.

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