How to negotiate the minefield of litigation abroad
Trustees sometimes find themselves staring down the barrel of the litigation gun, whether as the target, or, more typically, as a neutral party standing among warring factions fighting over trust assets. Due to the increasingly international nature of trusts — with beneficiaries, trustees and trust assets often located in several different jurisdictions around the globe — the war may be waged abroad. So how should trustees respond to being caught up in foreign trust disputes, and how far reaching is the long arm of foreign law?
Foreign litigation can be a minefield for trustees. The law of enforcement and recognition of foreign judgments, in particular, is developing both onshore and offshore, but not necessarily in the same direction. So, how a trustee should respond to a foreign proceeding will depend on the location of the assets, any relevant firewall legislation (that is, legislation passed by a jurisdiction limiting the ability to enforce foreign orders regarding trusts located in that jurisdiction) and the nature of the proceeding.
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When a trustee is faced with foreign litigation, his first step should be to seek legal advice not only in the jurisdiction where the proceedings are taking place, but also in the trust's jurisdiction and in any other jurisdiction where trust assets are located. Proper advice is crucial to ensuring that the trustee doesn't do anything that could potentially expose the trust assets to an enforcement action or the trustee to personal liability.
If the foreign proceedings constitute an attack on the trust, the trustee may have to step into the fray and actively defend the proceedings. Whether the trustee's legal fees will be met out of trust assets depends on the nature of the litigation and what role the trustee plays in it.1 As a general rule, a trustee involved in proceedings in his capacity as trustee, who has acted responsibly and for the benefit of the trust, will be entitled to reimbursement from trust assets for out-of-pocket payments made to cover legal fees.2 To be protected from a legal fees perspective, before getting involved in the legal proceedings, the trustee must either obtain the consent of all beneficiaries or, if this isn't practical, make a Beddoe application3 by which the trustee applies to the court for directions as to whether to defend proceedings in his capacity as trustee. If the court directs the trustee to participate (having received a full account from the trustee of the strengths and weaknesses of the litigation), the trustee will be fully indemnified out of trust assets, regardless of the litigation's outcome. Without the protection of a Beddoe order, the trustee may find himself personally liable for his own costs, and, if unsuccessful in the litigation, for the costs of the adverse party.
If the proceedings concern competing claims to the trust assets, it's usually appropriate for the trustee to remain neutral. If the trustee's participation is necessary, taking a non-partisan role in the proceedings will generally preserve the trustee's shield against cost orders.4
In considering whether to direct the trustee to participate in foreign proceedings, the court will weigh factors such as:
- Is the trustee's participation necessary to protect the interests of beneficiaries — for example, to ensure that accurate information concerning the trust is provided to the foreign court or to present arguments that wouldn't otherwise be presented?5
- Will submission have an impact on the enforceability of the foreign order in the jurisdiction(s) where trust assets are located?6
- Will the trustee be compromising his neutrality by participating?
- In submitting to the jurisdiction of a foreign court, is the trustee placing himself in a position in which he may face orders to act in a way that could conflict with his duties under the trust deed and his fiduciary obligations?7
In the recent Cayman case of Re B Trust, RBS Coutts v. W & Others,8 the court considered the above-stated factors in the context of an application for directions by a trustee of a Cayman STAR trust,9 who was joined to a Hong Kong matrimonial ancillary relief proceeding ongoing between the settlors/primary beneficiaries of the trust, one of whom had applied to vary the trust. All the beneficiaries (including minors) were represented in the foreign proceedings, and it was clear to the Cayman court that arguments against a variation of trust and for the protection of the integrity of the trust were to be presented to the Hong Kong court without the trustee needing to be involved. The court directed the trustee not to participate and noted that it would be unwise and inappropriate for the trustee to allow itself to be placed in a situation in which its trust obligations may come into conflict with an obligation to obey a foreign court's order.
The RBS Coutts case falls within the category of cases that the English court in Alsop Wilkinson v. Neary described as disputes between rival claimants to a beneficial interest in the subject matter of the trust. In such cases, the English court stated, “the duty of the trustee is to remain neutral and (in the absence of any court direction to the contrary…) offer to submit to the court's directions leaving it to the rivals to fight their battles.”10
But neutrality isn't always appropriate. In the Cayman case of Lloyds Bank v. Byleven,11 in which a Cayman trust was under attack in the New York courts and potential beneficiaries' interests were at stake, the court, referring to the above-quoted section in Alsop Wilkinson, said:
I cannot accept that passage as being authority for the proposition that in the case of the kind of hostile litigation we are dealing with here the trustee has a duty to sit on the fence. The trustee has a duty to protect the interest of potential beneficiaries who cannot protect themselves.12
And in the Cayman case of Lemos v. Coutts,13 beneficiaries of a Cayman trust brought an action in the Greek courts against the trustees of the trust, which, if successful, would have significantly reduced the trust. The court held that it was the trustee's duty to guard against that risk and that it was right and proper for the trustees to apply for directions and permission to defend any action that threatened the trust.
Therefore, if the trust is under attack, or the interests of beneficiaries are otherwise undefended in the foreign proceedings, the trustee may need to participate to fulfill his duty to protect the trust. However, the trustee will be exposed to costs if he fails to maintain a neutral position or doesn't have the protection of a Beddoe order.
A successful claimant will have to enforce any order affecting the trust assets in whichever jurisdiction the assets are located. Steps taken by the trustee in the proceedings may impact upon the enforceability of any order made.
Generally, in common law jurisdictions, foreign judgments may be enforced either under any applicable statutory reciprocal arrangements14 or under common law principles. Leaving aside the application of firewall legislation, it's typically considered unwise for a trustee to submit to the jurisdiction of a foreign court and participate in proceedings, because a foreign judgment can only be enforced under common law principles if the foreign court was competent to give judgment against the defendant. The requirement for competency is generally satisfied if the defendant has voluntarily submitted to the foreign court's jurisdiction — for example, by participating in those proceedings. As the head note in In the matter of the H Trust,15 a Jersey case, states:
It would not generally be in the interests of the beneficiaries of a Jersey trust for the trustee to submit to the jurisdiction of a foreign court … If it were to do so, a variation of the trust ordered by the foreign court, which might not be in the interests of the beneficiaries, would be enforceable in Jersey without being reconsidered by this court … On the other hand, if the trustee were not to submit to the jurisdiction, any order made would not be enforceable and, on a subsequent application to the supervisory jurisdiction of this court to give effect to the variation ordered, the court would therefore have discretion to act in the best interests of the beneficiaries.
However, after the decision in In the matter of the H Trust, Jersey introduced firewall legislation preventing enforcement of foreign orders concerning Jersey trusts in certain circumstances. One of the effects of such firewall legislation is that submission to the jurisdiction of the foreign court won't be determinative as to the question of whether a foreign order concerning the trust assets is enforceable. But, even if firewall provisions exist, quite often the scope and effect of such legislation is unclear and untested in the local courts — and practitioners shouldn't assume that the legislative provisions will prevent enforcement of every foreign order concerning a trust.
Most offshore jurisdictions have foreign element provisions within their trust legislation framework that limit the enforcement of foreign judgments in relation to trusts governed by the law in question. The Bahamas, Bermuda, the British Virgin Islands, Cayman Islands, Guernsey, Isle of Man and Jersey all have such provisions.16 For example, the Cayman Islands foreign element provisions are set out in Sections 87 to 94 of the Trusts Law (2009 Revision). Section 90 provides that subject to the express terms of the trust and certain specified exceptions,17 all questions arising with regard to a trust governed by Cayman law18 or to any disposition of property upon such trust, are to be determined according to Cayman law, “without reference to the laws of any other jurisdictions with which the trust or disposition may be connected.”
Section 9119 provides:
… no trust governed by [Cayman law] and no disposition of property … is void, voidable, liable to be set aside or defective in any fashion, nor is the capacity of any settlor to be questioned, nor is the trustee, any beneficiary or any other person to be subjected to any liability or deprived of any right, by reason that —
(a) the laws of any foreign jurisdiction prohibit or do not recognise the concept of a trust; or
(b) the trust or disposition avoids or defeats rights, claims or interests conferred by foreign law upon any person by reason of a personal relationship to the settlor or by way of heirship rights, or contravenes any rule of foreign law or any foreign judicial or administrative order or action intended to recognise, protect, enforce or give effect to any such rights, claim or interests.
“Personal relationship” is defined to include “every form of relationship by blood or marriage.”
Section 92 prevents forced heirship rights constituting an obligation for the purposes of Cayman's Fraudulent Dispositions Law or from affecting ownership of immovable property.
Section 93 provides that “a foreign judgment shall not be recognised, enforced or give rise to any estoppel insofar as it is inconsistent with sections 91 and 92.”
The effect of these provisions is that any foreign court order or judgment concerning rights arising out of a “personal relationship” to the settlor or forced heirship rights won't be enforceable against a Cayman trust in the Cayman courts.
Section 93 prevents enforcement and recognition only to the extent that the foreign judgment is inconsistent with Sections 91 and 92 (and doesn't mention Section 90). This would be relevant, for example, if an attempt were made to enforce a declaration made by a foreign court that the disposition of assets into the trust constituted a transfer at an undervalue or a voidable preference to the prejudice of an unrelated third-party creditor. Such a declaration would fall within Section 90, but outside Sections 91 and 92. It's not clear how a Cayman court would apply Section 90 in this context, but Section 90 has been broadly construed in the past. In Grupo Torras SA v. Bank of Butterfield International Cayman Ltd,20 the Cayman court stated that the effect of Section 90 is that only the Cayman court has jurisdiction to determine questions concerning Cayman trusts (and so applied this section to the question of jurisdiction and not just governing law). In light of the wording of Section 90, that such questions be determined “without reference to the laws of any other jurisdictions,” it may be that the Cayman court, in exercising its discretion whether to enforce the foreign order concerning a Cayman trust, will refuse to do so if the foreign court has applied foreign law, even though Section 90 isn't mentioned in Section 93. But, such an approach arguably conflicts with the long established common law principles that apply to the enforcement of foreign judgments. Enforcement at common law isn't the domestic court agreeing with the foreign court as to the decision given, but rather it's the domestic court enforcing a personal obligation of the parties to be bound by the foreign judgment. So clarification from the courts is needed as to the correct approach to enforcement of foreign orders that come within Section 90 but are outside Sections 91 and 92.
When the firewall provisions don't apply, is it safe to say that the established common law principles will take effect and that as long as the trustee doesn't submit to the foreign court's jurisdiction, the judgment won't be enforceable against the trustee? In light of a recent English Court of Appeal authority, the answer is: not necessarily. According to the judgment of the English Court of Appeal in Rubin v. Eurofinance SA,21 the established common law principles as to when a foreign judgment may be enforced no longer apply in the context of insolvency proceedings. The apparent effect of that ruling is that the courts of England and Wales will enforce an order made in foreign insolvency proceedings against third parties, such as trustees, even though those third parties haven't submitted to, or been present in, the jurisdiction where the orders were made. So, if a settlor's trustee in bankruptcy obtained an order from a foreign court setting aside the disposition of assets upon the trust on the basis that the disposition was a voidable preference, under Rubin principles, that order will be enforceable notwithstanding that the trustee had no connection with the foreign jurisdiction (that is, he was never there and didn't submit to its jurisdiction).
This is a significant development. It's not clear if the Cayman Islands or other offshore jurisdictions will follow Rubin. Also, it's not clear how Rubin will be applied in light of Section 93 (and its equivalent in other jurisdictions). But, given the expressed willingness of offshore jurisdictions to assist foreign representatives in insolvency proceedings and the legislation in force reflecting the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency,22 it may be that the firewall legislation isn't such a solid barrier when the order being enforced is one made in an insolvency proceeding.
Effect of Foreign Judgment
Even if the firewall legislation takes effect to preclude enforcement, the trustee may not be able to simply ignore the foreign order. In the RBS Coutts case, the Cayman court noted that if a trustee had an opportunity to exercise its discretion so as to assist in the resolution of an ongoing matrimonial dispute while maintaining an even-handed approach to all beneficiaries, the trustee could respectfully consider the foreign court's views. A foreign order varying the terms of a Cayman trust wouldn't bind the trustee, but is, nevertheless, a material factor for the trustee to take into consideration when exercising its discretion. The trustee exercising its discretion to give effect to the foreign order isn't a matter of recognition or enforcement, but rather a matter of the trustee exercising its own powers in accordance with the terms of the trust; the existence of the foreign variation order being a material factor for that purpose.23
In deciding how to respond to the foreign order, and absent a consensus among the beneficiaries, the trustee may apply to the court for directions. In the Cayman Islands, Section 48 of the Trusts Law allows a trustee to apply for “an opinion, advice or direction on any question regarding the management or administration of the trust money …,” the effect of which is that: “the trustee … acting upon the opinion, advice or direction given by the Court shall be deemed, so far as regards his own responsibility, to have discharged his duty as such trustee … in the subject matter if the said application.” Other offshore jurisdictions have similar provisions.
- See the categorization of trust disputes set out in Alsop Wilkinson v. Neary  1 WLR 1220; followed in the Cayman Islands in Bridge Trust Company Ltd and Slatter v. AG et al.  CILR 132.
- See Order 62, Rule 6(2)of the Cayman Grand Court Rules and r.48.4 of the English Civil Procedure Rules.
- Named after the case of In re Beddoe  1 Ch 547.
- See Raymond Saul & Co v. Holden  EWHC 8565 for an example of the importance of neutrality in disputes involving competing claims to trust assets.
- See Re Ojjeh [1994-95] CILR 118, in which the Cayman court directed the trustee to intervene in French proceedings to urge the French court to consider Cayman law as the applicable law in determining questions regarding the trust; and Re Rabaiotti  JLR 173, in which the trustee was given leave to disclose documentation to the English divorce court (including a letter of wishes) to ensure a complete picture of the settlor's intentions and presented trust arrangements, rather than piecemeal disclosure, which might contribute to erroneous assumptions being made. But see note 7 infra.
- See In the Matter of the H Trust  JLR 280.
- The trustee should take care not to put himself into a position in which he may be susceptible to disclosure orders that may conflict with his confidentiality obligations and any applicable statutory confidentiality provisions (such as the Cayman Confidential Relationships (Preservation) Law). If such legislation applies, an application to court will generally be necessary before disclosure is made.
- Re B Trust, RBS Coutts v. W & Others, Nov. 26, 2010 (unreported).
- A trust created under Part VIII Special Trusts — Alternative Regime of the Cayman Trusts Law (2009 Revision).
- Alsop Wilkinson v. Neary  1 WLR 1220, at p. 1225.
- Lloyds Bank v. Byleven [1994-95] CILR 519.
- Ibid., at p. 528.
- Lemos v. Coutts [1992-93] CILR 460.
- If an applicable statutory enforcement reciprocation regime applies, the foreign judgment may be enforceable by simply registering it. Most offshore statutory reciprocation arrangements are limited in scope — in the Cayman Islands, for example, the arrangements extend only to some states in Australia.
- See H Trust, supra note 6.
- There are some significant differences among the different offshore jurisdictions' foreign element provisions: For example, Isle of Man's provisions don't have an equivalent of Section 93 of the Cayman Trusts Law, which precludes recognition and enforcement of certain foreign orders and judgments. Jersey's equivalent of Section 93 applies only to enforcement and doesn't expressly preclude recognition of inconsistent foreign orders.
- The provisions don't: (1) validate any disposition of property which isn't owned by the settlor or which he doesn't have power to dispose of, nor does it affect the recognition of foreign laws in determining whether the settlor is the owner of the property; (2) affect the recognition of the laws of the place of incorporation of a company with regards to the capacity of a company; (3) affect the recognition of foreign laws prescribing generally the formalities for disposition of property; (4) validate any trust or disposition of immovable property situated in a jurisdiction other than Cayman, which is invalid according to the laws of such jurisdiction; and (5) validate any testamentary trust or disposition that's invalid according to the laws of the testator's domicile.
- As to what will be considered to be the governing law: Section 89(2) provides that a term of the trust expressly selecting the laws of the Cayman Islands will be conclusive regardless of any other circumstances. Section 89(3) provides that a term of the trust that Cayman law is to govern a particular aspect of the trust or that the Cayman courts are the forum for the administration of the trust or any like provision is conclusive evidence, subject to any contrary term, that the parties intended Cayman law to be the governing law of the trust and is valid and effective accordingly.
- The same exceptions that apply to Section 90 also apply to Section 91.
- Grupo Torras SA v. Bank of Butterfield International Cayman Ltd  CILR 252.
- Rubin v. Eurofinance SA  EWCA Civ 895. This case is pending on appeal to the Supreme Court.
- The Cayman Islands has adopted The United Nations Commission on International Trade Law model law only as related to corporate insolvencies and not personal bankruptcies.
- See Re IMK Trust: Mubarak v. Mubarak  JRC 136 and in the Jersey Court of Appeal  JLR 430.
Rachael Reynolds is a managing associate at Ogier in the Cayman Islands