The soul of discretion

It is said that there's no fool like an old fool and Mr Peter Cundill, an award-winning Canadian investment guru who died in 2011 of a rare and untreatable neurological condition, appears by his own admission to have been one.

In his final years, he became very close to a former model, some 30 years his junior, Chantal Joseph, on whom he conferred considerable largesse: a flat in central London and a monthly income of £10,000. Subsequently, Cundill and Joseph made a joint request to the trustees of Cundill's $300m Bermuda-based discretionary trust, of which he was the sole discretionary beneficiary during his lifetime, for a $10m payment to 'secure her future' after his death.

Refusing the request, the trustees stated that they would be agreeable to ten biannual payments, totalling $5m, and the first two, of $500,000 each, were made to Cundill and, by him, to Joseph. Payments then stopped when Cundill's personal care was, the trustees felt, compromised by his dismissal of his personal housekeeper and carer, engaged pursuant to a lasting power of attorney granted to one of the trustees, and the revelation of plans to revoke the LPA, both admitted by him to have been under Joseph's influence.

Following Cundill's death, Joseph sued Farrer & Co for her £4m 'loss', alleging a retainer between Farrers and her as well as between the firm and Cundill. In Joseph v Farrer & Co [2017] EWHC 2072 (Ch), the court dismissed that assertion: the retainer letter supported only a retainer with Cundill, Joseph being 'the mere beneficiary of proposed bounty' in what was 'not a commercial negotiation'.

Indeed, there was every reason for Joseph not to be a party to the retainer, so as to permit Farrers to give uninhibited advice to Cundill. Nor did she even require independent advice since Cundill 'owed no legal obligation to make any gift or other equivalent provision to [her]. No amount of independent legal advice would ever have changed that'¦[she] had nothing to be advised upon' with no legal interest of her own to protect.

Similar considerations informed the court's finding that no duty of care arose either: the case was not one of simple gift; rather it involved 'persuading trustees to exercise their discretion in a way which was legitimate for the trustees, and which would achieve the objective that Mr Cundill had'. A letter of wishes was sent to the trustees which, however it had been phrased, could have created no legal obligation on them to comply with its requests.

Joseph asserted that Farrers failed to negotiate a proper commitment or raise with her the concerns regarding the care arrangements with which she was supposedly interfering, and that had she known, she would have conducted herself otherwise. The judge found that, had she done so, the trustees would have honoured the arrangement throughout the five years, if necessary by changing the class of beneficiaries after Cundill's death.

However, absent a retainer, and given the potential for conflicts emerging as a result of the differing interests of Joseph and Cundill, such that it could not be said that Farrers owed a duty of care to her, there could be no liability. Even if there had been such a duty, it can have gone no further than to ensure that the letter of request was in a proper form, coinciding with the instructions of Cundill. There could not have been a continuing duty to ensure that matters resolved in Joseph's favour.

It is odd that this case came anywhere near to trial. Joseph must have been advised that she had no claim against the discretionary trustees, yet she decided to proceed instead against solicitors who were instructed to do no more than represent Cundill in seeking to persuade them to exercise their discretion in a particular way. Even if the retainer had included her, how could Farrers have been liable?

Discretionary trusts operate as they do because otherwise their tax benefits go and they risk a finding of sham. Further, trustees found to have been forced to exercise discretion in a particular way risk a claim for breach of trust from the other discretionary beneficiaries, in this case Cundill's children.

Or, as the judge put it: 'The obstacle was the existence of the discretion, which meant that the trustees could change their mind. There was no getting away from that. That is of the essence in a discretionary trust.'

John Melville-Smith is a solicitor at Seddons