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11 April 2019
In a recent decision arising out of a long-running family dispute concerning two trusts, the Royal Court made several notable findings regarding the scope and effect of undue influence in a trust context.
The trusts, which were established principally for the benefit of the family of a wealthy businessowner, were the subject of long-running litigation owing to a breakdown in the relationship between the father and daughter.
The most recent decision arose out of an attempt by the settlors of the trusts to exercise their power to revoke the trusts by serving notices of revocation on the trustees of each trust (the revocation notices). The trustee was concerned about these actions and so petitioned the Royal Court for directions.
In this context, the validity of each of the revocation notices was challenged by the daughter on the following grounds:
The daughter argued that, as a result of conversations which she had had with the settlors, her father had placed considerable pressure on the settlors to revoke the trusts. The daughter contended that the father's behaviour towards the settlor had amounted to undue influence with the result that the revocation notices should be set aside as null and void.
The father argued that the only person who could apply to set a transaction aside on the grounds of undue influence was the victim of the undue influence (ie, the person who enters into the transaction as a result of the influence). In this case, the father submitted that this would be the settlors and them alone.
The Royal Court held that the father's arguments were incorrect. It held that undue influence enables the party who had been disadvantaged by the transaction to have that transaction set aside. In the case of the revocation of a trust, it was held that the disadvantage rests with the beneficiaries as they will have lost the ability to potentially benefit from the trust fund.
The Royal Court also gave the following reasons in support of its finding in favour of the daughter:
Alternatively, the daughter argued that, in issuing the revocation notices, the settlors had been operating under mistake as to either:
In relation to the tax mistake, the daughter contended that the settlors had been unaware that by revoking the trusts they would be exposing themselves to potentially considerable tax liabilities.
Alternatively, in relation to the nominee mistake, the daughter argued that the settlors had considered themselves to be acting as nominees of the father, with the result that they had considered that they were bound by his instructions that the trusts should be revoked. In support of this argument, the daughter was able to point to affidavits, albeit in draft and therefore unsworn, prepared for the settlors in which they had stated that they thought they were nominees for the father.
On the basis that the revocation notices were null and void as a result of undue influence, the Royal Court considered that it was strictly unnecessary to decide the question of mistake. Accordingly, the Royal Court gave only brief conclusions.
In respect of the tax mistake, the Royal Court found that there was insufficient evidence to establish that the settlors had been operating under such a mistake. Additionally, the Royal Court also opined that even if the opposite conclusion had been reached, it was ultimately a matter for the settlors as to whether they would wish to revoke the trusts notwithstanding the adverse consequences for them personally.
The Royal Court held that the case in relation to the nominee mistake was made out and that the settlors had been operating under a mistaken understanding of their position in issuing the revocation notices. In support of this conclusion, the Royal Court pointed to the following factors:
In a postscript to the decision, the Royal Court noted that Articles 40(3) and (5) of the Trusts (Jersey) Law 1984 provide that, on revocation, the assets of a trust are held absolutely for the person who settled them.
The Royal Court noted that it did not consider that this required an expensive and complex tracing exercise to be undertaken with the goal of identifying which parts of the trust fund originated from whom. Instead, the Royal Court stated that the appropriate approach would be to return the trust fund to each source in the proportions initially contributed by them. For example, if A contributed 10% in value of the original trust fund, B contributed 40% and C contributed 50%, then on revocation of the trust, A would receive 10% in value of the current trust fund, B would receive 40% and C would receive 50%.
What lessons can trustees take away from the decision in this case?
Trustees and other fiduciaries should be careful to avoid putting themselves in a position where prominent figures in a family structure might be said to be exerting undue influence and be aware of situations where there is a risk that this may arise.
In exercising powers, such as a power of revocation, trustees should be aware that a trust's beneficiaries may be able to challenge that exercise if they have reason to believe that it was procured by undue influence.
Trustees should be aware of how a trust fund might be distributed on the revocation of a trust. Trustees should review their terms and conditions of business to ensure that they are protected against any potential adverse consequences in these circumstances.
Finally, trustees should feel empowered and able to seek the assistance and direction of the Royal Court if similar issues arise.
For further information on this topic please contact Nick Williams or Matthew Davies by telephone (+44 1534 514 000) or email (email@example.com or firstname.lastname@example.org). The Ogier website can be accessed at www.ogier.com.
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