Making amends

In the words of Scottish novelist George MacDonald in The Marquis of Lossie: 'To be trusted is a greater compliment than to be loved.' But given the onerous duties and obligations that accompany trusteeship, MacDonald's words are likely to raise a wry smile on the lips of many a trustee. Of course, one advantage of a trust is its flexibility. However, that flexibility can often be a double-edged sword; with no comprehensive guidance the trustee may be afflicted by uncertainty and indecision.

From the outset of the Alhamrani proceedings, members of the legal profession were confident that here we had a piece of litigation that was going to provide clarity and much-needed direction in this difficult area and, to an extent, they were right.

The dispute related to three Jersey trusts: the Intertraders Trust, the Manastar Trust and the Internine Trust (together 'the trusts'). In the course of the proceedings, Trustcorp (Jersey) Limited replaced JP Morgan Trust Company Limited (JPM) as trustee of the Internine Trust.

JPM was the original trustee of the Internine Trust and the Manastar Trust. The original trustee of the Intertraders Trust was Russa Management Limited.

The assets which were the subject of this dispute had previously been held in certain Cayman Islands trusts and Liechtenstein foundations. At the time the dispute arose, those assets were held in the trusts. Each of nine siblings of the Alhamrani family was a beneficiary of each of the trusts. Two of those siblings '“ Sheikhs Abdullah and Mohamed Ali M Alhamrani '“ were also protectors of each of the trusts.

In the course of the proceedings, the Royal Court was asked to consider, among other things, the validity of unilateral amendments made to the trusts by Sheikh Abdullah, removing Sheikh Mohamed as protector of each of the trusts; the question of disclosure of information relating to the trusts; the availability of 'dog-leg' claims and the matter of trustee costs and expenses including those arising as a consequence of the use of English solicitors and Chancery counsel.

Protectors

There is no statutory definition in Jersey law of a protector; however, in most instances, a protector will be a fiduciary owing a duty of care to the beneficiaries.

The court found in Alhamrani v Alhamrani (2008) WTLR 753 Royal Ct (Jer) that the trusts' powers of amendment enabled Sheikh Abdullah unilaterally to make the amendments by which he had removed Sheikh Mohamed as a protector and eliminated the beneficiaries' power to displace Sheikh Abdullah as sole first protector.

The court went on to find, however, that that power to amend was a 'qualified fiduciary' power and that, therefore, any exercise of that power must be 'bona fide, for a proper purpose and in the interests of the beneficiaries as a whole'. It also found that the more radical the amendments made, the heavier the burden on the protector to justify those amendments as being for a proper purpose.

Disclosure of information to beneficiaries

It has generally been understood that a beneficiary is entitled to have sight of only the trust deed, correspondence between himself and the trustee, the trust accounts, and, save where there is good reason why not, details of any distributions made.

However, the Royal Court went further on this occasion, finding that '[a] sensible trustee will comply with any reasonable request by a beneficiary for information, even if there is no strict legal entitlement to it, as the relationship should be based on mutual trust'.

While this ruling does extend the general presumption regarding provision of information to beneficiaries, the court did qualify its findings by making clear that a trustee would not be required to allow unlimited access to trust documents and that no beneficiary should ever be permitted to 'ferret through' trustee files or to have sight of any document that might be used to support an attack on the trust.

'Dog-leg' claims

A so-called 'dog-leg' claim is a claim based on the duty owed by a company director to 'exercise the care, diligence and skill that a reasonably prudent person would exercise' in the performance of his duties as a director of the company and the assertion that the right to the performance of that duty is an asset of the trust.

Certain of the beneficiaries of the trusts applied to bring 'dog-leg' claims against directors of the trustee of each of the trusts. Although it did not rule out entirely the availability of such a claim, the court in Alhamrani refused the beneficiaries' application and found that only in 'exceptional circumstances' might it be 'in the interests of justice' to allow a 'dog-leg' claim to be brought.

Trustee costs

The Court of Appeal in Alhamrani was asked to consider the matter of the costs of the neutral trustee and found that, where it has acted 'properly and reasonably', such a trustee is 'entitled to be indemnified out of the trust fund for all its reasonable costs and expenses'. The court went on to say that a beneficiary is entitled to challenge a trustee's costs and expenses and to seek taxation of the same 'on the grounds that they were unreasonably incurred or of an unreasonable amount'.

The court found also that a beneficiary wishing to challenge a trustee's costs and expenses (be they litigation or non-litigation) could invoke the court's 'statutory and supervisory jurisdiction' by asserting that the costs and expenses in question 'had been unreasonably incurred' in breach of article 26(2) of the Trusts (Jersey) Law 1984 or in breach of trust.

Coupled with the question of the reasonableness of trustee costs and expenses was the question of those costs and expenses incurred as a consequence of the trustee instructing English solicitors and specialist Chancery counsel.

The court held that, where the matter in question was particularly complex, and so long as the trustee was able to demonstrate that such steps were 'reasonable and proportionate' both in relation to the issue upon which advice was sought and to the extent of the trust fund, 'it might be appropriate' to instruct English solicitors and members of the English Bar.

Lessons to be learned

Contact with and provision of information to beneficiaries

It became clear during the course of these proceedings that, during the two years immediately following the creation of the trusts, Sheikh Abdullah had been the trustees' sole point of contact. There had then followed a brief period during which the trustees were in contact with five of the nine beneficiaries, at the instigation of those beneficiaries. Unfortunately, that contact soon broke down and was only resurrected shortly before proceedings were commenced in the Royal Court in 2003.

While no one would suggest that a trustee is obliged to be in frequent contact with all of the beneficiaries of a trust, Alhamrani clearly demonstrates the pitfalls of corresponding solely with a protector and failing to correspond at all with the (other) beneficiaries. Had the trustee contacted the beneficiaries to provide to them copies of the trust instruments and of the amendments made to those instruments by Sheikh Abdullah, those beneficiaries would not have been in a position to argue, as they did, that they were ignorant of the actions of the trustee and/or Sheikh Abdullah.

In addition to developing a relationship of mutual trust with and, in the ordinary course of events, providing information to beneficiaries, a trustee instructed to make any radical amendment to the trust deed should not only relate those amendments to the beneficiaries but also seek the court's approval of the same. Indeed, whenever a trustee is in any doubt about a suggested course of action, it is advisable for that trustee to apply to the court for directions.

Similarly, while this decision clearly paves the way for increased openness between trustee and beneficiary, in the event that it is in any doubt, the trustee should seek court approval before disclosing information to a beneficiary or beneficiaries.

Directors' liability

The court's decision as to the availability of dog-leg claims sends a clear signal that such a claim is likely to be allowed only where beneficiaries have suffered significant losses, the trust company is either insolvent or uninsured, and where those beneficiaries have no other means of recovery. In all other instances, any beneficiary suffering a loss will be entitled to pursue only the trust company concerned and not any of its directors.

While this decision is good news for the directors of corporate trustees, it clearly does not rule out entirely the possibility of a dog-leg claim. To prevent such claims succeeding, directors should ensure that the trustee has in place adequate insurance and, if possible, avoid any director having sole responsibility for any one trust.

Trustee costs and instructing external counsel

Key to the Royal Court's decision on the question of both trustee costs and use of external counsel was the question of reasonableness.

In the event that a neutral trustee is able to demonstrate that its costs have been incurred 'reasonably', those costs will be protected from attack. The flip side of this decision, of course, is that, in the event that he or she is able to demonstrate that the trustee has incurred costs unreasonably, a beneficiary will be entitled to seek the assistance of the court.

Similarly, having concluded that the development of Jersey trusts law might be furthered by the use of appropriately qualified English solicitors and members of the Chancery Bar, the Royal Court found that, so long as the trustee was able to demonstrate that to do so was 'reasonable and proportionate' to both the issue upon which the advice was sought and to the extent of the trust fund, instruction of such individuals would be considered appropriate.

'Reasonableness' is, of course, a mercurial concept and there are no hard and fast rules as to how it might best be demonstrated. However, when it comes to costs, a trustee should, before taking any significant step or action, ensure that it has sought expert advice, received the court's approval or obtained an appropriate indemnity from the beneficiaries. This applies nowhere more than when considering the need to instruct external counsel, in regard to which the wise trustee will always turn first for advice to local counsel.

As a consequence of the settlement, many of the questions raised in these proceedings will, for the moment at least, go unanswered. However, as has been seen, this matter has produced many decisions from which important lessons can be drawn and that provide useful guidance to trustees and their advisers.