Competing approaches to the roles and powers of protectors in offshore trusts

The Supreme Court of Bermuda: Re the X Trusts [2021] SC (Bda) 72 Civ

The case of Re the X Trusts [2021] SC (Bda) 72 Civ (the "X Trusts") centred on the construction of the protector provisions in the X Trusts, in particular, whether the scope of the protectors' powers of consent accorded with the Wider View or the Narrower View. In that case, the trustees of the X Trusts were required to obtain the consent of the protectors to finalise proposals for the restructuring of the trusts to enable a division of the trust assets. The Narrower View would place the protectors' veto powers within limited bounds whereas the Wider View would expand them by conferring an unfettered veto power on the protectors.  

In his judgment handed down on 7 September 2021, Kawaley J favoured the Narrower View after considering extensive and detailed arguments made by the parties. His reasons can be summarized as follows:

1. The Narrower View reflected the true construction of the consent powers conferred on the protectors in the X Trusts primarily because the terms of the relevant instruments made it clear that their dominant purpose was to ensure the due exercise of the powers vested in the trustees. Unless a contrary meaning could be discerned in the instrument conferring the relevant consent powers, the usual role of a protector is not to exercise a power jointly with the trustee in relation to the matter requiring protector consent. The protector’s role is to be a “watchdog” to ensure due execution by the trustee of the powers vested in them.
2. The drafting of the trust deed clearly distinguished between powers expressly vested in the trustees, powers expressly vested in the protectors and powers expressly vested in the trustees subject to protector consent. A contextual reading of the protector provisions suggested that the consent powers were not intended to be powers exercised jointly with, or entirely independently from, the powers conferred on the trustees subject to protector consent. More importantly, the powers requiring protector consent were expressed to be powers vested in the trustees. Absent clear language to signify a contrary intention, the 'normal' function of 'standard' protector consent clauses was an ancillary power rather than a power exercised jointly with the trustee.
3. The decision of PTNZ v AS [2020] WTLR 1423, where it was held that consent powers conferred on a protector embodied an independent discretion jointly exercised with the trustee, was not persuasive because the protector provisions in that case were drafted in wider terms and the court had not received the benefit of exhaustive adversarial arguments on that issue.
4. It was not correct that the practical implication of the Narrower View was it would result in the protectors' role being a fundamentally limited one. The "watchdog" role of ensuring that the trustees properly exercise their important powers is in and of itself, an important and substantial responsibility.

The Royal Court of Jersey: Re Piedmont and Riviera Trust [2021] JRC 248

Shortly after the X Trusts judgment was handed down, the Royal Court of Jersey handed down its judgment in Re Piedmont and Riviera Trust [2021] JRC 248 ("Re Piedmont and Riviera Trust") on 5 October 2021. This case involved an application by the trustees of two trusts for the Court's approval of their decision to distribute all the assets of the trusts amongst the beneficiaries in specified proportions. The protector in the trusts had a power whether to consent to or veto the trustees' proposal.

One of the issues that the Royal Court was required to consider was the nature of the protectors' powers of consent. The competing contentions before the Royal Court mirrored those of the Narrower View and Wider View that had been argued before Kawaley J in X Trusts.

In arriving at its conclusion which favoured the Wider View, the Royal Court distinguished the considerations applicable to a review of a trustee's decision by the court and the role of a protector. The Royal Court held that whilst its function is a supervisory one to ensure that decisions taken by trustees are reasonable and lawful, these considerations do not apply to a protector, who should exercise his/her own judgment in matters where their consent is required, rather than to simply review the trustee's decision in the same way that the court would do. It followed that, depending on the circumstances, a protector may well be entitled to veto a decision of a trustee which is rational, in the sense that the court would bless it.

In a postscript to the judgment, the Court distinguished the X Trusts case and provided detailed reasons for doing so, whilst accepting that Kawaley J had the advantage of much more detailed argument on the point. In particular, disagreeing with Kawaley J, the Court held that:

1. Although it accepted that the role of a protector is not to exercise a power 'jointly' with the trustee, but to make a separate decision whether or not to consent to a trustee's decision, that did not favour the Narrower View over the Wider View.
2. It disagreed with Kawaley J as to the correct interpretation of the protector consent clause in the trust deed and instead preferred the submissions made in favour of the Wider View that as a matter of ordinary language, the requirement for the consent of the protectors in the trust deed is not intended to allocate to the protectors the Narrower View.
3. While no great weight could be placed upon the PTNZ decision, it found it of interest that PTNZ, which was the only known prior decision dealing with this issue, adopted the Wider View.
4. If the Narrower View is adopted, the protector's role would be a fundamentally limited one. The protector will simply be fulfilling the same role as the court and, provided the trustee's decision is a rational one and has not relied on irrelevant considerations or ignored relevant considerations, the protector is helpless, regardless of how wrong he thinks the trustee's decision is in respect of the interests of the beneficiaries.

If a Narrower View is adopted, there are also practical implications especially in the context of offshore trusts where the use of a protector is most common. In particular, it is not unusual for a settlor to be recommended to a particular trustee company by his advisers but for the settlor to have no personal knowledge of the expertise of the trustee company or its officers.  The role of the protector would therefore be critical to imposing supervision on the exercise of the trustee's power.  In the circumstances, the Royal Court concluded that there was no reason to diminish the ordinary and natural meaning of a protector consent provision so as to read the word 'consent' as being limited to an assessment of rationality.

Commentary

These decisions cast into the spotlight difficult but important questions surrounding the legal relationship between protectors and trustees.  There is no doubt that a protector assumes the role of a "watchdog" to ensure due execution by the trustee of the powers vested in the trustee. Should a Narrower View be preferred however, the protector would be akin to a watchdog with no teeth.  On the other hand, if the Wider View is to be adopted and the protector is conferred wide powers of veto, this might defeat the purpose of setting up a trust and diminish the role of trustees.  Taken to its extreme, the powers may be abused by zealous protectors, resulting in an impasse in the administration of the trust. 

The legal position is by no means settled and it remains to be seen how the role of protectors would be construed by the courts in other offshore jurisdictions.

An original version of this article was first published by STEP Journal, Issue 2, March 2022.