Cayman Islands: The Trust Protector: A Survey of Cayman Cases Dealing With This "Creature of The Trust"

Originally published in ACTAPS Newsletter, November 2005.

The Oxford English Dictionary defines a protector as:

In spite of that clear-cut ordinary, natural meaning, the roles and duties of trust protectors can often be anything but. Despite the fact that it is increasingly common for Cayman law governed trust deeds to provide for the role of protectors, or protectors by some other name¹, the role and liabilities of the trust protector as a matter of Cayman Islands law are not yet very clearly defined and there is little guidance available in the English common law.

To many, the concept of the trust protector conjures diverse images. Clint Eastwood in Dirty Harry, holding the metaphorical gun to the head of the trustee, waiting for the poor old trustee to make his day. Alternatively, the moral and upstanding Gregory Peck or James Stewart type character, poring over the intricacies of every single trustee decision and torturing himself with the pros and cons of every exercise of his own powers under the trust deed, so that the trustee and beneficiaries are waiting for weeks and months for an answer. Or more commonly but perhaps equally controversial, the family’s faithful factotum, their loyal and longstanding friend, ready to spring to the defence of the Settlor at the drop of a hat and rejecting out of hand, any decision of the Trustee which gives the appearance of not following the Settlor’s wishes.

While none of the above scenarios is really accurate in a properly functioning trust, there is a serious point to be made. Where do we look for guidance as a matter of Cayman Islands law as to the role and liabilities of the trust protector?

In the Cayman Islands, unlike some other offshore jurisdictions, there are no statutory guidelines in place to assist us in defining the role and liabilities of the trust protector. It is instructive to compare definitions from other jurisdictions.

In South Dakota, for example, the trust protector is defined as" … any disinterested third party whose appointment is provided for in the trust instrument."² The use of the word "disinterested" would apparently preclude beneficiaries of a trust (or indeed, anyone else who could be said to be interested, such as the settlor) from fulfilling the role of trust protector.

In the Cook Islands, a trust protector is defined as:

What about the position in English law? There are as yet no statutory definitions which might assist in constructing a definition for Cayman law purposes nor are there any reported decisions of the English courts which might provide some guidance.

In the absence of statutory guidance in the Cayman Islands, or any analogy to be drawn from English statute or common law, the first port of call is the terms of the trust instrument itself. As a result, questions concerning trust protectors are often dealt with as a question of construction of the powers of the protector conferred by the trust instrument. In the decision of Smellie J in Re Omar Family Trust the Protector was described as a "creature of the trust" and to a certain extent the Protector is what the trust instrument makes him. The protector’s powers can be wide-ranging, including:

the power to determine the proper law of the trust;

1. the power to change the forum of administration of the trust;
2. the power to add or exclude beneficiaries;
3. the power to appoint or remove trustees;
4. the power to consent or withhold their consent to particularized actions of the trustees.

Commonly, they can include, as well as those powers set out above, the power to (dis)approve the trustee’s distribution decisions, to make or (dis)approve amendments to the trust deed, to supervise the exercise of reserved powers by the Settlor, to determine whether the Settlor is suffering from mental or physical incapacity to the extent that the Settlor should be determined incapacitated and his reserved powers terminated or perhaps transferred to the protector or trustee, to scrutinise and approve the trust accounts, to supervise investments or to invest, to approve or disapprove trustee’s remuneration.

There are three reported cases in the Cayman Islands which contain important guidance on the role of trust protectors. In Re Omar Family Trust⁴, the trust protector, who was also a beneficiary of the trust, brought an action to replace the trustee. This action was opposed by the principal beneficiary of the trust who argued that it was the trust protector, and not the trustee, who was guilty of wrongdoing. The trustee made an application by originating summons for an order allowing its costs on a pre-emptive basis in the protector’s action and the Court granted the order. The Trustee had indicated that it intended to take a neutral position in relation to the dispute between the beneficiary and the protector but wished to place all evidence within its possession and control before the court and to explain to the court its concerns about the protector’s actions and the reasons for those concerns.

The basis for the court’s ruling was that the protector is a creature of the trust instrument and the propriety of its exercise of the power to remove the trustee was therefore a question of construction of the trust instrument. The real question therefore, according to Harre CJ, was "as to the true construction of the trust and in particular the powers and duties of the trustee vis a vis the protector" and a full presentation by the Trustee in the manner anticipated was necessary in determining that question. The learned judge therefore treated this as a case in which Kekewich J’s observation in Re Buckton that, on questions of construction and administration the trustees are entitled to the fullest possible protection the court can give them, was apposite.

In Lloyds Bank International (Cayman) Limited –v- Byleven Corporation S.A.⁵ the plaintiff trustee made a Beddoe application for directions as to whether it should actively defend proceedings in New York which had been brought by the administrators of the settlor’s estate to remove the shareholders of the corporate protectors of the trust. One of the intentions behind the New York proceedings was to gain control of the powers of appointment which had been vested in the corporate protectors in order to have 50% of the assets distributed in accordance with the settlor’s will. On the trustee’s application to the Cayman court, it was authorised to defend the New York proceedings and to indemnify itself from the trust fund in doing so. The court considered that the trustee had a duty to defend the trust in the New York proceedings and to safeguard the interests of the beneficiaries of the trust who would otherwise not be able to so defend it. The court also held that the protectors could be authorised to defend the New York proceedings jointly with the Trustee.

The Court declined the opportunity to consider whether the protectors owed fiduciary duties in that particular case⁶, on the basis that there was no need to do so and instead, based its decision on the Cayman authority of In Re Lemos⁷ which established that a trustee can be empowered to give support to persons jointly defending a trust fund. Schofield J said expressly that it was not a pre-requisite to such an order that the person defending jointly would themselves be entitled to an indemnity from the fund.

Finally, the case of Re Z Trust [1997] CILR 248, principally concerned the classification of a wide power to amend the trust which had been vested in the trust’s management committee. The management committee was made up of beneficiary and non-beneficiary members and, in addition to the power to amend, had various powers to supervise the trustee in relation to investment and the administration of the trust. The power to amend was exercisable by the management committee only jointly with the settlor and only prior to the death of the settlor or her daughter. The settlor’s daughter was the principal income beneficiary of the trust and a member of the management committee. In the event, the power was exercised to amend the trust to give the settlor’s daughter 50% of the capital, to which she had hitherto not been entitled. The contingent capital beneficiaries challenged this exercise of the power on the basis that the power in question was a fiduciary power and the management committee could not exercise it to benefit one of their number.

Smellie CJ held that the question was one of construction of the power in all of the circumstances of the case⁸, accepting counsel’s observation that "the nature of powers may be as varied as the circumstances of the settlements under which they are given" (this could certainly be said of protectors’ powers). He concluded that the power of amendment was a personal power (implicitly subject to the fraud on the power doctrine but not subject to fiduciary duties) notwithstanding the fact that other powers conferred on the management committee were arguably fiduciary powers. It appears from his judgment that central to this decision were the facts that (1) the power was given to a management committee which included beneficiaries; (2) the settlor’s intention from the terms of the deed that the power was not to be limited to benefiting only those family members not on the management committee and (3) the limit on the exercise of the power only jointly with the settlor and during the lifetime of the settlor or the daughter in question.

It can also be gleaned that, no matter whether a particular power is construed as personal or fiduciary, it will be subject to certain controls, such as the requirement to exercise it in good faith and in accordance with its purpose and that the court will interfere in the exercise of a protector’s powers (even if personal) to restrain excessive exercise or a fraud on the power. It is also, of course, arguable that, notwithstanding questions of construction of particular powers, the role itself is a fiduciary one so that the court has inherent jurisdiction to appoint or remove a protector. As far as we are aware, there has been no reported decision on this in the Cayman Islands.

It is worthy of note that the court will approach questions concerning the powers of protector as questions of construction; that it may make a difference whether the protector is a beneficiary or not and that certain powers (such as the power to remove or appoint or control trustees) are arguably always fiduciary although it should be noted that the Chief Justice said (obiter) in Re Z that even a power to direct trustees regarding the administration of the trust may not be fully fiduciary where (as in that case) vested in a beneficiary who is within the class of its objects (in which case the beneficiary would simply be required to act in good faith in exercising the power).

In Re Z, the Grand Court affirmed the Bahamian decision in Rawson Trust v Perlman [1990] 1 BOCM 135 in which the Bahamian court was faced with the question whether the protector’s power to consent to a re-settling of trust funds was fiduciary and the Bahamian court held that it was not fiduciary as the protector was a beneficiary and the trust settlement expressly allowed him to further his own interests.

What would a trustee do if he were to disagree with the exercise of a protector’s power? Depending on the circumstances, it may well be open to the trustee to apply to the court for directions and section 48 of the Cayman Islands Trusts Law (2001 Revision) provides the mechanism for doing so. Clearly, it would depend on the circumstances of the decision with which the trustee disagreed, for example, whether the exercise of the protector’s power was clearly capricious, wholly unreasonable, or malicious.

What should a trust protector do if a trustee does something with which the protector disagrees? The trust protector, if he is not a beneficiary, has no proprietary interest in the trust assets and yet he may, depending on the nature of his powers, have an interest in knowing that the trustee has exercised its powers in accordance with the trust instrument.

The recent Jersey case of Re The Hare Trust (2001) 4 ITELR 288 appears to confirm that principle and would be persuasive authority in the Cayman Islands. A trust protector had the power to appoint new trustees but if he failed to do so within a certain period of time, the outgoing trustee could appoint its own replacement. The retiring trustee in that particular case went ahead and appointed its replacement without reference to the protector and so the protector brought an action in the Jersey Royal Court. The Court held that the appointment of the new trustee was invalid. To the extent that the trust protector has an interest in the trust therefore, it is not only in knowing that he has exercised his own powers validly but it is also in knowing that the trustee has exercised its powers in accordance with the trust instrument.

What about the beneficiaries? Order 85 of the Grand Court Rules permits an executor, or administrator of an estate, a trustee, a beneficiary or an estate or trust (not being a special trust), or an enforcer of a STAR trust, to bring an action for relief⁹ including

The concept of the trust protector has been rejected by some on the basis that it is unnecessary, an artifice behind which the settlor is exercising direct control, or perhaps even that its existence offends the basic concepts of a trust. Others have embraced the concept as an attractive intermediary role between the trustee and the settlor and beneficiaries and an opportunity to act in the best interests of the trustee, the settlor and the beneficiaries. Regardless of which side is correct, the role of trust protector appears to be here to stay and as litigation increases and the law develops in this area, the role will become increasingly defined. We expect that the Cayman courts will deal with the role in the future and will do so in keeping with the approach that has developed – as question of construction of the trust instrument unless and until there is any statutory guidance on the question.

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