In Zhang Hong Li & Ors v DBS Bank (Hong Kong) Ltd & Ors,(1) the Court of Final Appeal interpreted a so-called 'anti-Bartlett clause' in a trust deed and held that it excluded the imposition of a "high-level supervisory duty" on the trustee to supervise or review the investment decisions of an investment adviser appointed by the underlying private investment company.
The case was decided according to the laws of Jersey (the governing law of the trust), although the general principles are likely to be persuasive in many common law jurisdictions – particularly, given that the judgment is by Hong Kong's highly regarded 'top court'. While the outcome in the case will be welcomed by trustees, and those in the private wealth management industry, it is important to note that the court's decision is based on the wording of the clause in question.
The underlying circumstances go back a long way and are quite detailed. In short, two wealthy investors (husband and wife) sought to protect their family assets from inheritance tax and set up a trust arrangement for that purpose. Prior to this they had set up a BVI investment company, of which the wife was sole director and shareholder. The investment company was set up with the assistance of the bank's corporate services. The investment company appears to have been successful with its investments prior to the time of the financial crash in 2008.
The original trustee was the bank's trustee company (one of the principal defendants).(2) The beneficiaries were the two investors (settlors) and their children. The trust structure appears to have been commonplace and the wife remained as the investment company's principal adviser – she appears to have been an intelligent and sophisticated person.
On establishment of the trust, the sole share in the investment company was transferred to the trustee company and became the trust's principal asset. The wife was replaced as the sole director by a corporate director.
For a while things went well. However, in the run-up to and during the financial crash the investment company appears to have suffered significant losses as a result of extended credit facilities, certain foreign exchange transactions and 'decumulator' investments. These transactions appear to have been approved "after the event" by the trustee and the corporate director. However, the wife remained the principal investment adviser to the investment company (pursuant to an "investment advisor agreement") and directed its investment decisions.
The trust was subject to Jersey law and the respective parties presented their evidence on the relevant provisions of the 1984 Trust (Jersey) Law. The trustee owed typical statutory duties – including, to act with due diligence and in good faith in the execution of their duties and in the exercise of their powers. According to Jersey trust law, nothing in the terms of the trust deed could relieve the trustee from liability for (among other things) gross negligence.(3)
The trust deed contained typical provisions, including what are commonly referred to as 'anti-Bartlett provisions' (or clauses).(4) In short, these provisions (among other things):
- relieved the trustees of responsibility to become involved in the conduct of the affairs of the investment company in which the trust was interested;
- left the conduct of the company's affairs to the directors and provided that the trustee was under no duty to supervise the directors, save to the extent that the trustee had actual knowledge of any dishonesty relating to the affairs of the investment company;
- entitled the trustee to assume that the affairs of the investment company were conducted honestly and diligently, save to the extent that the trustee had actual knowledge to the contrary;
- stated that the trustee was not liable for any loss to the investment company or the trust arising from the acts or omissions of the directors, officers or other persons responsible for the conduct of the affairs of the company; and
- entitled the trustee to assume that the information supplied to them by persons involved in the conduct of the investment company was accurate and truthful, unless the trustee had actual knowledge to the contrary (and the trustee was under no duty to ascertain the accuracy of the information).
Having apparently suffered heavy financial losses, the two investors and the investment company commenced proceedings against the trustee and the corporate director of the company (among others). By this time the trustee had been replaced. The plaintiffs' claims against the trustee and the corporate director included claims for negligent breach of trust and negligent breach of fiduciary duty, respectively.(5) Those claims succeeded at first instance and before the appeal court. Claims against the bank and certain of its individual representatives failed.
First instance and appeal At first instance, the trial judge found that the trustee and the corporate director had behaved in a grossly negligent manner in approving the credit facilities, foreign exchange trades and 'decumulators'. This appears to have been on the basis that despite the anti-Bartlett provisions the trustee owed a "high-level supervisory duty" with respect to the company's investments. The Court of Appeal dismissed the trustee's and corporate director's appeal, deciding that while the anti-Bartlett provisions could be effective to exclude the obligations to which they referred there remained a "residual" duty as a matter of Jersey law on the trustee and that had been breached. Further, as far as the Court of Appeal was concerned, the corporate director was in the same position as the trustee.
Main issue The trustee and corporate director appealed to the Court of Final Appeal. The main issue for determination was whether the trustee owed a "high-level supervisory duty" notwithstanding the anti-Bartlett provisions and, if so, had it been breached.
Handing down of judgment After the hearing before the Court of Final Appeal and a short while before its judgment was handed down, the parties settled, and a novel point arose as to whether the court should still deliver its judgment. Applying established common law authority, the court decided that it could and should do so – particularly, given that the final appeal raised important points of public importance relating to the trust industry and given that it was necessary to correct certain erroneous propositions accepted in the courts below.(6)
Had the case not settled, the Court of Final Appeal (CFA) would have allowed the trustee's and corporate director's appeal.
The CFA disagreed with the trial judge that as a matter of Jersey law the trustee was subject to a "high-level supervisory duty" because this was inconsistent with the anti-Bartlett provisions. In particular, the trustee's duty to act with due diligence or in good faith laid down certain standards that trustees had to adhere to in the execution of their duties or in the exercise of their powers – however, it did not create a free-standing duty to act prudently. Rather, the court should first identify a duty or power and then determine whether it had been executed or exercised according to the specified standard – for example, through diligence and in good faith. If, considering the anti-Bartlett provisions, any potentially relevant duty had been disapplied, the applicable standard did not "come into play".(7)
To the extent that the Court of Appeal had proceeded on the basis that the trustee owed a "residual obligation", or that this amounted to a "high-level supervisory duty", the CFA considered that the Court of Appeal had misunderstood the evidence of the experts on Jersey law. The CFA considered that the extent of the trustee's residual obligation was no more (or less) than a reference to those areas not covered by the anti-Bartlett provisions – namely, for example, an obligation to act in instances where the trustee had actual knowledge of wrongdoing not covered by the anti-Bartlett provisions. Therefore, in this case, the extent of the carve-out in the anti-Bartlett provisions was limited to instances of actual knowledge but did not give rise to a broad implied residual duty on the part of the trustee. None of the parties' experts had disputed that anti-Bartlett provisions were valid under Jersey law.
The CFA appears to have given short shrift to the plaintiffs' argument that the trustee had, in approving the transactions in dispute, somehow chosen to exercise a supervisory role that could not be derogated from – for example, the trustee's approvals appear to have been after the transactions had been executed and the investment decisions had been taken by the investment adviser (one of the plaintiffs). In no sense could the trustee be said to have been in control of the affairs of the company. Indeed, under the trust deed, the trustee was (for example) relieved of any duty to enquire into the affairs of the investment company and was entitled to assume that the conduct of its affairs was in order, unless the trustee had actual knowledge to the contrary.
In conclusion, the CFA decided that there was no basis for finding that there was a "high-level supervisory duty" on the part of the trustee – once the trustee's liability fell away so did the corporate director's because it had been found by the Court of Appeal to be in the same position as the trustee.
This was enough to determine the appeal. The CFA also decided that even if the trustee or corporate director had been under a duty to supervise the company's investments, no basis had been shown for concluding that they had been negligent to any serious extent in approving the three disputed transactions – they would have been protected by an exculpatory clause in the trust deed covering acts or omissions short of fraud or gross negligence.(8)
As readers will appreciate, the outcome in the case clearly affirms the effectiveness of anti-Bartlett provisions. However, their effectiveness depends on the drafting of the clauses and the words used, rather than any overriding legal principle. Therefore, the case serves as a reminder to trustees to have well-drafted anti-Bartlett provisions and to exclude their liability to the extent permissible by applicable laws. It is important to note that this case did not involve an allegation that the trustee had failed to act properly with "actual knowledge" of wrongdoing.
It is worth emphasising that the case was determined according to Jersey law based on the expert evidence presented by the parties. The case is not binding on the Royal Court of Jersey, but it ought to be highly persuasive given the high regard in which the CFA is held and the detailed reasoning in its judgment. It is also worth noting that one of the two non-permanent judges presiding over the case is a former president of the Supreme Court of the United Kingdom.
Given the CFA's interpretation of the anti-Bartlett provisions and the findings based on Jersey law, it was not necessary for it deal with the lower courts' approach to the proper assessment of equitable compensation. However, considering the importance of determining the proper basis for equitable compensation for breach of fiduciary duty, the CFA did consider this issue in the final passage of its judgment – applying established Hong Kong case law in the process.(9)
Endnotes
(1) [2019] HKCFA 45, 22 November 2019.
(2) The original trustee (now known by a different name) was replaced by new trustees (the third plaintiffs).
(3) Trust (Jersey) Law 1984, Article 30(10). For Hong Kong, see (among other things) Section 3A ("Statutory duty of care") of the Trustee Ordinance (Cap 29).
(4) Bartlett & Ors v Barclays Bank Trust Co Ltd (Nos 1 and 2) [1980] 1 Ch 515. Supra note 1, at paragraph 34.
(5) The new trustees were co-plaintiffs. Supra note 2.
(6) Supra note 1, at paragraphs 3 to 6.
(7) Supra note 1, at paragraphs 48 and 80. The duties are set out in Article 21(1) of the Trust (Jersey) Law 1984.
(8) Supra note 1, at paragraph 90. The disputed transactions are described as "speculative" (paragraph 87).
(9) Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681.
Warren Ganesh assisted in the preparation of this article.
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