23 July 2013

Interpretation of Trusts

A recent judgment of the Royal Court of Guernsey, in the matter of the C Trust, has confirmed the Court’s modern approach to be taken to the interpretation of trust documents, and in particular, the meaning and effect of declaring someone an excluded person.

The matter concerned a deed of exclusion pursuant to which trustees had declared the lawful linear descendants of the settlor to be excluded persons “for all the intents and purposes of the trust so that none of them shall be eligible to benefit in any way from the trust”.

The question arose whether or not the trustees were able to make an appointment to a beneficiary of the trust, a Liechtenstein foundation, under which the excluded persons were beneficiaries and in circumstances where the intention of making the appointment to the foundation was so that benefit could be conferred on those excluded persons.  The foundation had been appointed to the class of beneficiaries contemporaneously with the exclusion of the descendants.

The Court granted declaratory relief to the effect that the relevant clauses of the trust which empowered the trustees to declare persons to be excluded persons and which prohibited the trustees thereafter from exercising any power or discretion or from applying trust income or capital in favour of an excluded person, did not preclude the trustee from conferring benefit on the foundation even if in consequence of doing so, one or more of the excluded persons would take an indirect benefit. 

INTERPRETATION GUIDANCE

The Court adopted and applied the principles for the construction of a trust instrument set out by the Royal Court of Jersey in the matter of the Internine and Intertraders Trusts (2005) JLR 236 as thereafter adopted and applied in the matter of the Representation of BBB Limited (2011) JRC 240.  That guidance explains and elaborates on the summary of the principles given by Lord Hoffman in his speech in Investors Compensation Scheme Limited -v- West Bromwich Building Society [1998] 1 ALL ER 98.

In summary the principles are as follows:

• The rules of interpretation of a trust instrument are to a large extent the same as they are for any instrument the meaning of which is in contention.  
• The aim is to establish the presumed intention of the maker(s) of the document from the words used.
• Words must however be construed against the background of the surrounding circumstances or matrix of facts existing at the time when the document was executed.
• The circumstances relevant and admissible for this purpose are those that must be taken to have been known to the maker at the time or, where there are more than one, known to the makers of or the parties to the document and include absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
• Evidence of subjective intention, drafts and negotiations and other matters extrinsic to the document in question is inadmissible, as is evidence of events subsequent to the making of the instrument.
• The critical provisions have to be read in the context of the document as a whole.
• Words should as far as possible be given their ordinary meaning but this last precept may have to give way if consideration of a document as a whole, having regard to the principles set out above or common sense, points to a different conclusion.
• When attempting to discern the true meaning of a power conferred in a trust deed or other instrument the Court must have regard to the nature of the deed and the purpose for which the power appears to have been granted.

The Court held that the power to declare someone an excluded person should not be construed in a manner so as to prevent the trustees from conferring a benefit on an excluded person indirectly, applying the decision of the English Court of Appeal in Commissioners of Inland Revenue -v- Botnar [1999] STC 711.

In this case, the deed of exclusion included the words “so that none of them shall be eligible to benefit in any way from the trust” in purported reliance upon a power which was limited to declaring persons to be “excluded”. Following the decision in Botnar above, such wording only empowered the exclusion of such a person from direct benefit.  The Deputy Bailiff noted that if looking at the deed of exclusion alone, the inclusion of those words may be construed as meaning that something over and above a direct exclusion was contemplated. However, that was not the only possible construction of the document and if the document were to be construed in this manner it would require imputing an intention to the trustee which would have been contrary to the interests of the beneficiary and would be inconsistent with the deed of addition of the foundation as a beneficiary.

If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine set out in Investors Compensation Scheme to prevent it being so regarded.  The Court confirmed the principles regarding contemporaneity of documents set out in the English case of Gartside-v- Silkstone and Dodworth Coal and Iron Company (1882) 21 CHD 762.  The Deputy Bailiff held that the execution of the declaration of exclusion and the execution of an instrument adding the foundation as a beneficiary were clearly so inter-related that the fact of and the terms of the deed of addition was relevant background for the purposes of the proper construction of the declaration of exclusion and that the precise order in which they were executed was irrelevant because they were being treated almost as if they were equal and opposite elements of a combined transaction.  A document executed contemporaneously with, or shortly after the primary document to be construed may be relied upon as an aid to construction, if it forms part of the same transaction as the primary document.

The Court further considered the English law principle of imputing to a trustee an intention to exercise a power available to him to achieve the desired result unless it can be inferred that there was an intention not to exercise it, which principle derives from Davis -v- Richards and Waddington industries Limited (1990) 1WLR 1511. Whilst apparently accepting that the principle could apply to the construction of trust documents under Guernsey law to render effective what would otherwise have been an ineffective act, the Deputy Bailiff noted that the application of the principle in the present case without more would arguably produce an outcome that was adverse to the interests of everyone concerned. The Court therefore did not apply the principle.

SUMMARY

The case illustrates that the modern approach to construction requires that words and documents are not construed in isolation but that the Court would, in appropriate circumstances, adopt a purposive approach in interpreting trust documents. It highlights that trustees should consider very carefully the extent of the powers that they are exercising and should ensure that documents clearly and effectively evidence their intention.