Cayman Islands: Trust Disputes In The Digital Age - Part 1

More than 1 billion people - representing about 15.7% of the world's population - regularly use the internet. This is an increase from 45 million in 1995 and 420 million in 2000. It is predicted that at least 2 billion users will be online by the year 2011¹.

It has been estimated that more than 60 billion emails are being sent around the world every day.² In the commercial world, 93% of all corporate documents are created, viewed and stored electronically although 70% of this electronic data is never produced to hard copy.³ This is an astonishing statistic, considering that businesses only seriously started taking notice of the internet less than 15 years ago.⁴

Although the use of electronic messaging and documents has been embraced by the commercial world, the issue of storing messages and documents for future reference has been relatively overlooked. A surprising number of businesses remain unaware of the potential for using (and misusing) the tools of modern technology.

For trustees, directors and other fiduciaries operating in a contentious environment, the importance of retaining and retrieving electronic data cannot be underestimated. One of the fundamental reasons for doing so is to assist in disaster preparedness and recovery, which is especially important for those living in jurisdictions prone to hurricanes and other natural disasters. Fairly basic methods can be employed (e.g. scanning and storing electronic documents offsite) to facilitate the continuation of business and enable service providers to be up and running within a very short period of time after a natural disaster.

It is well known that litigation triggers obligations and requests for discovery of documents. "Documents" are no longer confined to paper copies: they are electronic messages, data stored on servers, information displayed on ever-changing websites and data stored on personal data assistants. As a general proposition, if the information is relevant to the matters in dispute, it may be discoverable, whether it is contained in hard copy or electronic form. In most common law jurisdictions, the court will no longer accept a lack of electronic storage facilities as a defence to an order for production of electronic documents. There are, of course, limits that are frequently placed upon the nature and scope of discoverable material, since what may be reasonable and proportionate to disclose in one case may not be so in another. Notwithstanding well established procedural rules on discovery, applications for specific discovery continue to be made. Courts' decisions are invariably made on a case by case basis, so you can never be too prepared!

Many trust companies, even those that have fairly sophisticated electronic document management systems, do not necessarily adopt a logical approach to storing data. The way in which emails are handled is largely left to the individuals' deletion habits and storage choices. Emphasis is often placed upon the type of information and data that employees can access or download onto a company's computer network rather than the way in which work-related material is stored.

Trust companies may need to rethink the way in which certain types of electronic information is retained and stored. Different methods may be appropriate for different organisations, but it is worth considering the nature of the information and the level of internal and external confidentiality that should be preserved. Policies may be developed based upon whether the information relates to the trust and its investments, or to communications between the settlor, beneficiaries, third party service providers or attorneys.

All trust documents should be safely stored but readily accessible for discovery and potential deployment in evidence should litigation arise in relation to any aspect of the trust. Electronic communications are no exception.

The files and records of the settlement are obviously key documents. If trustees are ever required to defend the validity of the settlement, it will be helpful if there is some evidence of the reasons behind the establishment of the trust and any professional advice that was sought in relation to it.⁵ When a trust is established offshore it is even more important to keep records of the identity of and advice given by professional advisors who advised on the structure of the trust.

Any procedural manuals or similar documents containing a trust company's internal procedures relating to the administration of trusts generally should be retained. These procedural manuals are not, on the whole, required to be produced to a beneficiary enquiring about disclosure of trust documents. However, if litigation ensues in relation to the trust, they may become highly relevant documents to be considered along with the trustees' own evidence of internal practices at the relevant time.

Once the trust has been established, records of any professional advice taken from time to time should be retained, even if the advice was sought or given on an "informal" basis. If the advice was given orally, a contemporaneous note should be made and filed. Hard copies of documents and attendance notes should, if resources permit, be scanned and stored electronically as a matter of course.

Draft records include preliminary and subsequent drafts of trust documents, notes or annotations on documents, internal mark-ups or comments and other supporting materials. As a general matter, there is no legal requirement to retain drafts of trust documents (unless they are relevant to contemplated or actual litigation). Moreover, on a day-to-day basis, drafts of most documents may be of very limited value. As a practical matter, physical storage is always a challenge and for this reason, drafts are often shredded or archived in a warehouse, never to be seen again. However, draft documents may become relevant in a dispute about the trust or the trustees' decisions and should therefore be retained. If, as is often the case, the draft material has been sent in electronic form, it can be electronically archived or saved onto a CD. If sent in paper form, it can, very easily be scanned and saved in electronic form for easy storage and retrieval at a later date.

All of the factual matters taken into account by trustees when exercising their discretion should be recorded. Internal exchanges by email may be as valuable as (or certainly more revealing than) the actual trustee minutes recording the stated reasons for a decision. In this connection, communications with beneficiaries are frequently the subject of scrutiny and cross-examination in trust disputes. Care should be taken to record such communications and if sent electronically, they should form part of the file, whether the file is retained in paper or electronic form.

Unlike communications between a client and his legal adviser, trustees' communications with the settlor are not usually privileged from production.

Letters of wishes or indeed informal requests made by the settlor in respect of the trust (which may be communicated by email or even a text message) are not immune from discovery even though they were made and communicated by the settlor in confidence. Although a beneficiary has no "right" as such to sight of the documents evidencing the request, the court may override the expectation of confidence if the documents contain relevant information and if the benefits of disclosure outweigh the detriment of nondisclosure in the particular case. Thus, communications with the settlor, if relevant to the trust dispute, may be the subject of an order for production, whether sent or stored in electronic form.

Taking and slavishly following "instructions" or directions from the settlor after the trust has been established without any real exercise of discretion is at best, embarrassing for the trustee when used in evidence, and could be a breach of trust. However, trustees need not refuse to comply with a settlor's letter of wishes for the sole purpose of demonstrating independence in their decision-making, provided that they apply their minds to the proper exercise of their discretion.⁶ Although there is no requirement for these types of communication or the trustees' deliberations to be recorded in writing, the best evidence to demonstrate that the trustees have considered a request and properly exercised their discretion will usually be to show that they have questioned or probed requests from beneficiaries and/or the settlor and if necessary, have taken legal or other expert advice. A written record of these steps is often far more powerful than the parties' oral evidence.

Not all electronic records must always be retained: the systematic destruction of electronic material may be justifiable in an individual case depending on the size of the organisation and the amount of data produced. It is generally accepted that in order to properly manage and maintain information, organisations do need to create document retention policies. Such policies, of necessity, involve the destruction of certain material. Provided the policy is adopted and implemented in good faith, this may be consistent with a proper and reasonable approach to managing and maintaining information.

As a general matter, valid instructions may be given by any means, including email or other forms of electronic messaging. However, the internal policies of an organisation may dictate that certain types of instructions cannot be given in this way, or cannot be given solely by email. Agreements will frequently stipulate the method by which instructions may be given. For example, many banks and trust companies will only accept email instructions if confirmed by a telephone call or fax, in order to help verify the identification of the person giving instructions. Electronic signatures or other methods of encryption may also be employed (see below). In the absence of such constraints, it is possible to accept instructions solely by email but this may expose a trustee to the risk that such instructions can be manipulated by third parties with relative ease.

The use of an electronic signature (either used alone or with encryption) is one method of reducing the risk of interference with electronic communications, on the basis that the recipient will be aware that the email is in fact from the desired sender. If attached to all emails and recipients are trained to expect the signature, not only does the signature add to the security of the email, but in most cases allows recipients to recognise if spam or an email infected with a virus has been sent from that sender's email because it is missing the electronic signature.

Many jurisdictions have introduced legislation to regulate the use of electronic signatures and wholly electronic documents in place of originally signed documents. Such legislation provides that any electronic signature or related certificate will be permitted as evidence of the integrity or authenticity of the document. See for example, the Electronics Communications (Jersey) Law 2000, which was introduced in an effort to promote Jersey as a beneficial base for electronic business. Similar legislation has also been created in many other jurisdictions, including Australia⁷, Bermuda⁸, the Bahamas⁹, the Cayman Islands¹⁰ and the United Kingdom¹¹. The introduction of legislation regulating documents that have been created and executed entirely in electronic form is one step closer to the development of a paperless legal system.

Email encryption is another tool that can help to prevent unintentional disclosure of confidential communications. Email encryption involves the use of a public and a private key. The private key is used by the author of the email to encrypt the email and the public key is given to those who will receive the emails. Any external party who intercepts the encrypted email will not be able to read the email without the public key and it will appear as gibberish. Encryption can also be used on word-processed documents to protect the content of the document when attached to an email. This allows confidential documents to be sent by email and assures both the sender and recipient that they are the only people with immediate access to the document.

However, it is also important to use the right encryption tools, as not all of them are created equal. The U.S. military in Iraq found that out the hard way when the media found secret information had been hidden in an adobe document given to them. Someone in the military reportedly redacted a document by blacking out the secret text. However, when the document was opened in Adobe Acrobat, the original text could be readily viewed. Using the right tools could have removed information selected for redaction. Such a tool would parse the document, physically delete the selected information, and generate a new redacted document. The deleted information could not then be recovered, because the redacted file would have been created without it.¹²

Confidential communications passing between a client and its legal advisers for the purposes of giving or obtaining legal advice and, communications that come into existence in preparation of legal proceedings, are prima facie exempt from disclosure on the grounds of privilege. Privilege may be lost or waived and with so much privileged information being sent electronically, it is easy to send information to the wrong person or to attach privileged information by mistake.

Generally speaking, a communication cannot be confidential if made in the presence of a stranger unless it was made in its presence because of necessity.¹³ Emails may pass through one or more servers owned and controlled by parties outside of the privileged relationship. Those monitoring the servers (including IT administrators with unlimited access to a network) have the ability to access and alter the confidential information in the email before passing it along. Does this mean that emails cannot be deemed confidential because they pass through a public domain? How is this different from a letter passing through a number of people before being delivered to the intended recipient?¹⁴

The basic position is that the mere transmission of information through one or more servers does not, of itself, cause the communication to lose its confidentiality (or if privileged, to lose privilege). However, because of the risk with electronic communications that confidentiality and privilege may be more easily lost, it is important to take steps to minimise this risk.

First, it is important to ensure that emails are not circulated too widely. This will help counteract arguments that any expectation of confidentiality has been waived. Second, everyone needs to understand the risk of using electronic messaging and emails for certain types of discussions. For example, work colleagues who used to have face to face chats now choose to communicate by email. Discussions that were intended to be internal, informal or "just between us" are now recorded in a permanent document trail that could be required for disclosure in future litigation.

Documents which can become discoverable in litigation will include all computers, discs, back-up tapes or archived documents. It is almost impossible to completely delete an electronic file so any email sent will almost always be able to be recovered after deletion.¹⁵ It has been said that: "According to every expert in the field, it is virtually impossible to destroy a virtual document. Like the vampire of legend, it will always return."¹⁶

In the U.S., where applications and orders for electronic discovery are frequently made, the courts have required parties to take reasonable steps to ensure that they disclose back-up copies of files and archival tapes that would provide information about any deleted electronic data.¹⁷ In one case it was held that computer records that had been deleted were discoverable documents and the court ordered the examination of the hard drive in question to recover deleted files.¹⁸

The status of an email as a privileged communication can be supported and more easily identified if a confidentiality statement is attached to the document stipulating the attached privilege. A confidentiality statement made clearly in the header or at the beginning of an email may be a more effective protection tool than a short statement in tiny font at the end.¹⁹ However, these confidentiality statements are not required in order to claim privilege.²⁰

One practical suggestion to maintain privilege, particularly for in-house counsel, is to give restricted or limited access to sensitive materials. IT systems can be set so that emails named 'private' cannot be read by third parties with access to the user's inbox. This will not only demonstrate an intention to maintain confidentiality but may also help to avoid inadvertent waiver by disclosure to a third party.²¹

In Haynes v. Kline²² the plaintiff, a former employee of the Kansas State Attorney General, moved for a preliminary injunction prohibiting the Attorney General’s office from further accessing his private files on his former work computer. As part of the employee orientation, a distinction was made between "public" and "private" files and employees were warned that access to any other employee’s files without permission was forbidden. Passwords were issued to each employee to prevent unauthorised access, and prior to the litigation there had been no evidence that any other employee’s personal computer files had been monitored or viewed by supervisors. The court granted the injunction, holding that given the totality of the circumstances, the plaintiff's expectation of privacy was both subjectively and objectively reasonable.

In summary, emails and other forms of electronic messaging are capable of attracting privilege. Given the current dearth of case law in many offshore jurisdictions, every effort should be made to protect electronic messages from being inadvertently disclosed to third parties. There are a number of different tools widely available to do this, such as encryption and electronic signatures. Provided that the sender can demonstrate that sufficient measures have been taken to avoid disclosure of the information, it is strongly arguable that privilege should be maintained.

It is now established that where a request for disclosure of documents relating to the trust has been made, the court has complete discretion as to which documents may be disclosed either to a beneficiary, or indeed any other person with an adequate interest in the trust.²³ Disclosure is no longer limited to "trust documents", being those documents dealing directly with the management and administration of the trust. All documents that are relevant to the trust and the decisions made by the trustees may be subject to an order for disclosure at the discretion of the court.²⁴ This includes confidential documents, such as letters of wishes from the settlor and legal opinions relied upon by the trustees in their decision-making.²⁵ The question in each instance is whether, in the circumstances of the particular case, the requirement for disclosure to an applicant outbalances the competing interests and objections of the trustees, other beneficiaries or third parties.

In view of the courts' wide discretion trustees would be well advised to carefully maintain all records²⁶ relating to the trust, whether in paper or electronic form.

The courts have recognised that there are differences between electronic and paper discovery. One US court noted that:

Other differences include the widely differing electronic retention policies each organisation may employ, the fact that electronic documents contain information which is ordinarily concealed on paper documents and perhaps ironically, the fact that electronic documents are much more difficult to destroy than paper documents.²⁸

It is generally accepted that "documents" that must now be preserved and produced in litigation include all forms of electronic documents. In accordance with the 2005 Practice Direction relating to electronic disclosure in England and Wales, the definition of a document has been broadened to include email and other electronic messaging, word-processed documents and databases. This extends to less accessible documents such as those stored on servers and back-up systems and electronic documents which have been 'deleted' from the computer. Discovery can extend to any electronic device or media on which relevant documents may be held including mobile phones, blackberries, PDAs, laptops and even iPods.

Orders for disclosure may also be made in relation to the additional information that is attached to electronic documents called metadata. This information reveals not only email data regarding the "to", "from", "bcc", etc but also shows the "who" and "when" related to the creation of the documents and information about printing, editing and accessing the document.²⁹ Word-processed documents also have electronic information attached to them, such as who has worked on the document, changes and deletions that have been made and what previous versions looked like. This information is hidden from ordinary view but can be easily displayed through the use of specialised software.³⁰

Although the English Civil Procedure Rules have not been adopted wholesale by all offshore jurisdictions,³¹ it is a question of time before similar procedural requirements become the norm. This makes it vital for staff to become familiar with their own IT systems and processes for electronic document management and to ensure this information is communicated to their attorneys.

It should be noted however that these new rules do not have any impact on matters such as "proportionality, materiality, reasonableness, relevance or privilege", which all apply to discovery of electronic documents as they do to traditional documents.³² It follows that the disclosure of electronic material must still be proportionate to other factors.

A review of the procedural rules and authorities in a number of jurisdictions provides some indication as to the issues the courts will take into account when deciding what is a reasonable search for the purpose of electronic disclosure. These issues include:

• the number of documents required to be searched;

• the nature and complexity of the proceedings;

• the significance of any documents likely to be found during the search; and

• the ease and expense of the search and retrieval of the documents.

With the cost, time-consumption and volume of documents related to electronic disclosure, parties are encouraged (or in some cases required) to discuss their document retention policies and attempt to agree on the scope of electronic disclosure they will undertake.³³

Applications for specific discovery are focussing more than ever on electronic material. In the US case of Zubulake v UBS,³⁴ UBS who implemented an electronic storage system, were caught out when Ms Zubulake required the disclosure of emails which had been sent internally. UBS' storage system did not include emails and the discovery cost was estimated to be close to US$300,000, including the vendor charges and paralegal fees, for recovery of the emails requested. Although in this case the Judge ordered the plaintiff to pay 25% of the costs of discovery, she also ordered that UBS pay costs incurred by the plaintiff for the amount of time (2 years) it had taken for them to retrieve and produce the requested documents.³⁵ The Judge stated that "All parties and their counsel are fully on notice of their responsibility to preserve and produce electronically stored information".³⁶ She also said that any organisations facing anticipated or impending litigation should maintain their back-up tapes, especially those relating to "key players" and should have an effective way to retrieve and produce the emails contained therein.³⁷

The Judge in that case introduced a modified seven-factor test for shifting costs of discovery which is applicable in district courts of the U.S. but may also be applied in other jurisdictions:

1. The extent to which the request is specifically tailored to discover relevant information;
2. The availability of such information from other sources;
3. The total cost of production, compared to the amount in controversy;
4. The total cost of production, compared to the resources available to each party;
5. The relative ability of each party to control costs and its incentive to do so;
6. The importance of the issue at stake in the litigation; and
7. The relative benefits to the parties of obtaining the information.³⁸

It has been estimated that traditional electronic discovery methods used to recover emails can cost approximately US$2 per message, including the attorney review costs.³⁹ In 2004, one in five US companies had an employee's emails subpoenaed in the course of a lawsuit or regulatory investigation.⁴⁰ In September 2004, Phillip Morris USA was required to pay US$2.75 million in sanctions because it had failed to maintain court-required emails for just 11 employees.⁴¹

Email correspondence must be disclosed in legal proceedings, and the authorities show that a lack of adequate storage technology will no longer be accepted as an excuse for non-disclosure. Moreover, where the storage systems utilised allow employees to delete emails entirely, adverse inferences are likely to follow^42,43

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.