Protector's Powers: Narrow or Wide view? The Bermuda Court of Appeal has its say

Summary

In recent years the Bermuda, Jersey, and English Courts have considered the scope of a protector's power to consent to a proposed exercise of a trustee's power. In particular, these cases have considered whether these consent powers confer an independent decision-making discretion on the protectors (the "wide view") or merely a power to ensure that the trustees’ substantive decision was a valid and rational one (the "narrow view").

Recently, the Bermuda Court of Appeal in Re the X Trusts [2023] CA (Bda) 4 Civ unanimously concluded that a protector's consent powers in relation to the exercise of trustee powers is to be interpreted in accordance with the "narrow view". In coming to their decision, the Court of Appeal upheld the decision by the Bermuda Supreme Court and provided detailed consideration of two cases (In the Matter of the Piedmont Trust & Riviera Trust [2021] JRC 248 before the Royal Jersey Court and PTNZ v AS [2020] WTLR 1423 before the English High Court) which found in favour of the "wide view". The Court of Appeal in its considered judgment found that the two "wide view" cases had been wrongly decided and, subject to clear wording in a trust deed conferring an independent decision-making discretion, the "narrow view" was the proper interpretation.

Please note that we have considered the Bermuda Supreme Court's decision in our previous blog post (here). In this previous post we also considered the decisions in Piedmont Trust & Riviera Trust and PTNZ v AS in some detail.

Background

In this case, the trustees made proposals for the future administration of the X Trusts. The protectors of the X Trusts had to consent to these proposals under the terms of the trust instrument. The X Trusts comprised a selection of trusts which were governed by Bermudan, Jersey and English law. The relevant trust instruments contained provisions setting out the powers expressly vested in the trustees, but which were subject to protector consent (the "Protector Provisions").

The dispute arose because two groups of beneficiaries, the ‘A branch’ and the ‘B branch’, disagreed on the interpretation of the Protector Provisions. Whilst both branches agreed that the protector’s duty is fiduciary in nature, the A branch favoured the "narrow view" and the B branch favoured the "wide view" in respect of these Protector Provisions.

Decisions of the Bermuda Supreme Court, English High Court, and Royal Jersey Court

As noted above, we considered the decisions of the Bermuda Supreme Court, English High Court, and Royal Jersey Court in some detail in our previous post. However, we summarise these below for convenience.

Re The X Trusts [2021] SC (Bda) 72 Civ (Bermuda Supreme Court)

The Bermuda Supreme Court noted that the interpretation of the Consent Provision was an issue calling for iterative contextual construction. On analysis of various practitioner texts and legal authorities the Bermuda Supreme Court held that the "narrow view" was the better interpretation and rejected criticism of this view that it would reduce the protector's role to that of a rubber stamp. Further, the Bermuda Supreme Court noted that, for the X Trusts, the "narrow view" reflected "the true construction of the consent powers conferred on the Protectors of the X Trusts".

PTNZ v AS [2020] WTLR 1423 (English High Court)

This case concerned four discretionary trusts established in 2008 for the benefit of the settlor and his family. The settlor was the original protector of the trust and proceedings were commenced in the context of a proposed restructuring of the trusts, arising out of a history of alleged environmental and criminal offences made against certain members of the family, including beneficiaries of the trusts.

The English Court applied the "wide view" here with the Judge noting that the purpose of the protector holding the power of consent is to control the trustees' exercise of their broad discretionary powers. In this case, the trust deeds provided for a wide protector power, the protector's role was not fiduciary, the Judge did not hear from the protector, and there was not a full analysis of the authorities on this issue.

In the Matter of the Piedmont Trust & Riviera Trust [2021] JRC 248 (Royal Jersey Court)

This case concerned a trustee's decision to distribute amounts on the termination of a trust and whether the protector's consent to the trustee's decision should be interpreted in accordance with the "wide view" or the "narrow view".

The Jersey Royal Court held that the "wide view" was the better interpretation on the basis that the "wide view" would properly reflect the Settlor's intention, the "narrow view" would make the protector's role redundant, the "wide view" does not encroach on the trustee's role, and any deadlock between a trustee and protector could be resolved by the Courts.

Judgment of the Bermuda Court of Appeal

The Bermuda Court of Appeal unanimously upheld the decision of the Bermuda Supreme Court and determined that a protector's consent powers in relation to the exercise of trustee powers is to be interpreted in accordance with the "narrow view". Gloster JA (who gave the leading judgment) noted that her reasoning was different to that of the Bermuda Supreme Court. In short, Gloster JA's judgment considered, as a starting point, how the Protector Provisions should be interpreted and what the protector's role is. Gloster JA then considered other relevant Protector Provisions in the trust deeds, the authorities she was referred to, and the practical implications of the "wide view" as against the "narrow view".

Starting Point – Interpretation of the Protector Provisions

Gloster JA held that the starting point is that the Protector Provisions must be construed in the context of the whole trust deed and against the admissible factual matrix. Gloster JA noted this excluded the subjective intentions of settlors, beneficiaries, trustees, and advisors. On that basis, Gloster JA held that the proper starting position is that when one comes to consider the ambit of the consent powers, one is considering "a specific power of a separate fiduciary office holder in relation to the exercise by the trustees of a settlement of certain substantive powers conferred under the trust instrument on the latter".

On that basis, Gloster JA rejected the protector's submission that the natural meaning of the express language used in the Protector Provisions conferred an absolute and unfettered discretion which was only consistent with the "wide view". Gloster JA stated that "it is the Trustees who have the paramount substantive role of administering the trusts and exercising the powers conferred upon them. If the role of the Protectors was indeed the Wide Review Role, the Protectors, by threatening the exercise of their (on this hypothesis) absolute right of veto, would in effect themselves be taking the decision… That would not be a joint decision with the Trustees, but rather an entirely separate decision by the Protectors, trumping that of the Trustees."

Gloster JA then went on to note that irrespective of the language in the trust deed, the reality is that the discretion for a protector to refuse consent is not absolute. Gloster JA noted that in respect of these trust deeds, the protectors' powers were there to act as a watchdog or enforcer.

Other Relevant Protector Provisions supported the "narrow view"

Gloster JA considered the protector's submission that other Protector Provisions required a "wide view" as they required the trustees to "consult with each Protector and shall take into account the views expressed before making a final decision". Gloster JA held that these provisions were not inconsistent with the "narrow view" and that the trustees "in exercising their powers are bound to take into account relevant considerations, which necessarily must include the views of the Protectors."

Assessment of Relevant Authorities

Gloster JA then considered the key authorities which referred to the role of protector. Gloster JA found that these generally support the "narrow view" and emphasise that the role of a protector is "not to usurp that of a trustee."

In respect of PTNZ v AS, which came out in favour of the "wide view", Gloster JA was critical of Master Shuman's judgment and held that she did not regard the authority to be of "any assistance" and considered it was "wrong". Gloster JA held that the protector power in those cases could not be considered as a joint power with the trustees and noted that Master Shuman only had the benefit of rather limited argument on the scope of the protector power point. Gloster JA also considered that Master Shuman took into account "inadmissible material" to reach her conclusion.

In respect of Piedmont, Gloster JA considered this case in some detail and noted, as a starting point, that this case raised the same issue as the issue before the Court of Appeal. However, Gloster JA noted that Piedmont was incorrect and was somewhat critical of this judgment. Gloster JA, in short, noted that: (i) the Jersey Court only had the benefit of limited argument on the point of the "narrow and wide views", and no arguments in favour of the "narrow view" were recorded in the main body of the judgment or addressed; (ii) the Jersey Court was wrong to say that no assistance could be derived from any provision in the trust deed of either trust; (iii) protectors were not a recent development, but have been around in Bermuda for some 40 to 50 years; and (iv) it is possible for the court to discern, or develop, general principles which are likely to be applicable to protectors.

Further, Gloster JA disagreed with the Jersey Court's reasons for preferring the "wide view". For example, Gloster JA disagreed that protectors would necessarily be the settlor or settlor's friend or family member or that the "narrow view" would make the protector's role redundant.

Practical implications of the "wide view" as against the "narrow view"

Gloster JA's reverted to the Bermuda Supreme Court's decision on this point. She noted that the practical implications of the competing constructions favoured the "narrow view" rather than the "wider view" of the Protectors’ consent powers, considering the risk of wasted time and money in respect of the "wider view".

Sir Christopher Clarke's Judgment

Sir Christopher Clarke also gave a short judgment which agreed with Gloster JA's judgment but added four additional points which he stated were "of critical importance in any determination as to whether the Wide or the Narrow View is to be adopted" as follows:

1. The use of the word “Protectorate” itself. Sir Christopher Clarke explained that a protector is someone who provides a safeguard to others. He explained that the protection afforded is "to protect the beneficiaries from a breach of trust by the Trustees. Whilst the adoption of the Wide View could be said to afford the beneficiaries an enhanced form of protection by requiring a separate decision by the Protectorate on whether it would (or would not) exercise the power of the Trustees in the same way". He went on to say that the concept of protection seems more naturally applicable to "protect the beneficiaries by ensuring that the decisions of the Trustees are within the scope and ambit of their powers, rather than a body which is to make a freestanding decision of its own".
2. The role of the Protectorate is an important one, but one which is ancillary to that of the Trustees. In this regard, Sir Christopher Clarke explained that it is for "the Trustee to decide what appointments, distributions or payment from the Trust Funds to make. The Protectorate cannot make such dispositions itself. In those circumstances it seems to me inconsistent with the respective functions of the Trustees and the Protectorate that the latter should be required to make a separate decision of its own..."
3. The phraseology of the words “without obtaining the prior written consent of the Protectorate" begs the question as to the basis upon which the Protectorate is entitled to withhold its consent. Here, Sir Christopher Clarke noted that "[t]he function of the Protectorate is not that it shall be a body which is, in effect, albeit not in name, another trustee whose word is determinative even when the Trustees have reached what is otherwise a valid decision."
4. The adoption of the "narrow view" produces a result which means that the operation of the two fiduciary roles is simple, clear, efficient and complementary. Sir Christopher Clarke argued that the "wide view" could produce, in some case, "duplication, delay, cost and conflict which would not arise if the Narrow View was adopted".

Comment

The Bermuda Court of Appeal's decision highlights the status of the protector as “watchdogs” over the trustees’ exercise of their discretion and provides detailed analysis and consideration of the role of protectors. The Bermuda Court of Appeal made it clear that, subject to specific wording conferring a wide power, the "narrow view" is the approach which will prevail. In essence, this judgment seeks to create a general rule or presumption about the core nature of a protector's consent powers and notes that the rule is only displaced where there is clear wording to the contrary. It remains to be seen whether this interpretation will be followed by Courts in other common law jurisdictions, and of course the appellant may seek leave to appeal to the Privy Council.

Even though this decision is not binding on other common law jurisdictions, it is the most recent authority on the issue and, given that it is a judgment of a Court of Appeal, is the highest authority to date. The key takeaway for practitioners and settlors who wish to provide their protectors with wide powers is to draft these very clearly in order to displace any presumption that a protector's powers will be narrow.