Bryan Shacklady and Ashleigh Carr write for Thought Leaders 4 on protectors

Senior Solicitor, Bryan Shacklady, and Senior Associate, Ashleigh Carr, have authored an article for Thought Leaders 4 on the topic of protectors.

The article was first published in Thought Leaders 4 Private Client Magazine Issue 5 - Year in Review 2021: Looking Back and Looking Forward on 01 December 2021, and can be read in full below.

For a variety of reasons, settlors may seek to have their voice heard when trustees exercise discretion, even from beyond the grave. One increasingly common way in which they do so is by appointing a protector, who will typically be granted powers of their own when the trust is settled. What steps are protectors required to take when exercising their power, particularly where they have a discretion in its exercise? 2021 has so far produced two apparently conflicting judgments exploring this issue:

• In the Matter of the X Trusts [2021] SC (Bda) 72 Civ (Supreme Court of Bermuda)
• In the Matter of the Piedmont Trust & Riviera Trust [2021] JRC 248 (Royal Court of Jersey).

Analysis of The Cases

Both cases concerned protectors with power to consent to, or veto, a trustee’s proposed exercise of power.

The issue is whether protectors should exercise independent discretion and make their own decision when deciding whether to consent, taking into account relevant considerations and disregarding irrelevant considerations (referred to by the Bermudian Court as “the Wider View”)? Or are protectors limited to satisfying themselves that the proposed exercise of the trustee’s power is one that a reasonable body of properly informed trustees could undertake, such that the role of a protector is essentially the same as that of the Court in a blessing application (“the Narrower View”).

In the matter of the Piedmont and Riviera Trusts [2021]

Despite noting that no assistance could be derived from any provision in the trust deed, the Jersey Court had “no hesitation” in rejecting the Narrower View.

They reasoned that a protector is often a longstanding friend or trusted advisor of the settlor, or the settlor themself. This suggested that the protector was appointed in order to exercise their own judgment, not to simply review the trustee’s decision. If the role was limited to judging issues of rationality, the settlor might as well have appointed someone with a legal qualification.

Furthermore, adopting the Narrower View would make the protector’s role almost redundant. It would add nothing to the Court’s role on a blessing application. The Court preferred the analysis that the protector was intended to fulfil a different role to the Court’s role and could therefore properly veto a trustee decision that was rational, which the Court might approve if faced with the same decision.

However, a protector’s power to consent did not equate to a duty to itself take the decision or dictate how a trustee must exercise its powers. A protector’s discretion to consent lies within a “narrower compass” than the decision-making role of a trustee. But a protector is not confined to a yes or no answer, and trustees and protectors should work together, as necessary, to identify an outcome on which they can both agree, in the interests of the beneficiaries. This requires full and open discussion. A trustee should provide all documents and information which may be reasonably necessary for the protector to properly discharge its fiduciary duties to the beneficiaries, which might include detailed reasons for the trustee’s proposed decisions.

Re The X Trusts [2021]

In stark contrast, the Supreme Court of Bermuda ultimately preferred the Narrower View, having considered the same question through the lens of construction principles.

Whilst the Court accepted that, when read literally, the protector provisions suggested a power of veto, it held that other relevant considerations must be taken into account in addition to the literal meaning. Thus the Court concluded that the Narrower View reflected the true construction. The Court considered that it was clear from the terms of the instruments that their dominant purpose was to ensure due exercise of the powers vested in the trustees.

As such, the Court concluded that, unless there is something to the contrary in the trust deed, then the usual role was not to exercise a power “jointly” with the trustees (a characterisation of the Wider View that the Jersey court did not share). Instead, it was an ancillary power that allowed the protector to act as a watchdog (the Narrower View).

In reaching its decision, the Bermudian Court had heard submissions that criticised the leap that the Wider View necessitated i.e. from the proposition that a protector is a fiduciary, to the conclusion that a protector must take its own independent view of whether and how the trustee’s power should be exercised. The Bermudian Court rejected the thesis that the Narrower View defined a protector’s role as a fundamentally limited one. It considered it to be substantial.

Conclusion

Both judgments acknowledged the scant judicial authority on the nature of a protector’s duties, particularly in the context of a requirement for a protector’s consent. It is perhaps unfortunate that although the Jersey judgment was handed down second, the case had been heard and the judgment prepared without the benefit of access to the Bermudian judgment, which was addressed in a postscript. This may explain why the two Courts adopted fundamentally different approaches: whilst the Bermudian Court approached the question as a “construction conundrum”, the Jersey Court (which, as it acknowledged, heard less detailed argument on the point) preferred a more intuitive approach and analysis that arguably promotes settlor influence.

It is also unfortunate that the cases are limited to considering consent powers of protectors that were also fiduciary. This might otherwise provide a clear basis for a distinction.

Whilst the tension remains, trusts practitioners should take a careful approach when advising settlors, trustees and/or protectors, and highlight the conflicting approaches taken by the different courts and the risks this poses. Whilst settlors may gravitate towards the Jersey forum (preferring this jurisdiction to others which would potentially reduce the role of protectors to “mere toothless tigers”), trustees, at least, may prefer the Narrower View (particularly given the reduced opportunity for deadlock).

Care should also be taken when drafting trust instruments to ensure that they best meet the settlor’s objectives and are clear about the nature of the power. As the Bermudian judgment suggests, that could make all the difference.