Part 2: Protector consent provisions as they have been interpreted in recent case law

This article is part of a mini-series that explores the role of trust protectors.

Ultimately, the protector’s role in relation to any given trust will be determined with regard to the express terms of the trust instrument. The powers granted to a protector can be broadly categorised as “positive” powers and “veto” powers.[1] If a power is granted to the protector (for example, the power to appoint trustees), the protector will plainly have to reach his own independent decision as to the exercise of that power. This is a “positive” power. Oftentimes, however, the trust instrument will provide for certain powers to be conferred on the trustees but that such powers shall only be exercised with the protector’s consent.[2] This is a “veto” power. It is these powers that have been the subject of recent controversy in offshore case law, although it is suggested than they might more accurately be thought of as “protector consent provisions” rather than “veto powers” for the reasons set out below.

When it comes to such powers, the trust instrument will often be silent as to whether the protector’s role is to reach his own independent decision as to whether or not the decision proposed by the trustees ought to be made, or else whether the protector’s role is limited to a review of the rationality of the trustees’ decision.

Broadly speaking, there are two competing schools of thought when it comes to the scope of a protector’s role in relation to protector consent provisions: the narrow view and the wide view. These views have each been espoused by conflicting recent authority from the Supreme Court of Bermuda, which was upheld on appeal to the Bermuda Court of Appeal (the narrow view) and the Royal Court of Jersey (the wide view). The narrow view says that the protector merely has ‘a discretion to ensure that the trustees’ substantive decision is a valid and rational one’.[3] Conversely, the wide view says that the protector has ‘an independent decision-making discretion’.[4]

X Trusts: the narrow view

In In the matter of the X Trusts,[5] the Supreme Court of Bermuda had to consider the scope of the protector’s role in relation to the proposed allocation of assets as part of a planned restructuring. One branch of beneficiaries contended for the narrow view and the other contended for the wide view. Although the protectors professed neutrality, the dispute arose when the protectors indicated that they were not minded to consent to a proposed distribution of the trust assets between the two branches of the family on the basis of a 2:1 split as proposed by the trustee (i.e. the protectors appeared to be approaching the question of consent on the basis of the wide view).

In reaching his decision that the narrow view was to be preferred, Kawaley AJ identified the following relevant factors:

(i) the consent powers were expressed in terms which suggested that the substantive decision-making powers were vested in the trustees;

(ii) the protectors had the ability to waive their consent;

(iii) where there was more than one protector, the requirement for consent fell away unless the protectors were unanimous; and

(iv) the trustees had the benefit of indemnities whereas the protectors did not.[6]

In addition, he noted that the predominant view in the literature and obiter dicta in other cases was to the effect that the role of protectors is generally subsidiary to that of trustees, and that protector consent provisions should not be used to ‘refuse consent to a trustee decision which was consistent with the settlor’s intention by virtue of the fact that it is both a lawful and rational decision on an issue requiring protector consent’.[7] Put another way:

‘Unless a contrary meaning can legitimately be discerned in the instrument conferring the relevant consent powers, the usual role of a protector is not to exercise a power jointly with the trustee in relation to the matter requiring protector consent. The protector’s role is to be a “watchdog” to ensure due execution by the trustee of the powers vested in the trustee.’[8]

He was supported in this conclusion by comments made almost 30 years previously in the Isle of Man Court of Appeal case of Rawcliffe v Steele,[9] in which Acting Deemster Smith suggested that the role of the protector was to ‘give proper consideration to the trustees’ proposals and decide whether to exercise his power of consent having due regard to the extent of the trustees’ enquiry, the basis of their selection and the overall purposes of the trust’.[10] It is plain that the Acting Deemster saw the protector in a supervisory role (i.e. the narrow view) rather than having an independent decision-making power.

Leave was subsequently granted to appeal to the Court of Appeal for Bermuda on the following principal question:

‘what role does a fiduciary protector have when it is asked for its consent to the exercise by trustees of a substantive power of appointment and/or the exercise of an administrative power of dealing with, or disposing of, particular assets, where such powers have been specifically entrusted to the trustees specified in the trust deed?’[11]

The protectors continued to profess their neutrality before the Court of Appeal, although they made submissions that effectively supported the appellants’ position[12] (i.e. contending once again for the wide view).

After an extensive review of the arguments, the Court of Appeal preferred the narrow view, finding that ‘a provision for protector consent is providing for protector supervision; thus the role of the protector is to sign off in relation to what the trustee is proposing to do in exercise of the discretion conferred on the trustee and the trustee alone.’[13]

Piedmont: the wide view

Shortly after the Supreme Court of Bermuda’s decision in X Trusts (and before the appeal), the Royal Court of Jersey had cause to consider the scope of the protector’s role in In the matter of the Piedmont Trust & Riviera Trust[14] in the context of a requirement for the protector’s consent to a proposed distribution of trust assets. The Court found that in deciding whether to consent to a proposed decision of the trustee, the protector ‘must have regard to relevant considerations, ignore irrelevant considerations and make a decision which a reasonable protector could arrive at; but he must reach his own decision.’[15]

In rejecting the narrow view, the Jersey Court suggested that ‘if the role of a protector was simply to review the trustee’s decision in the same way that the Court would do, his role would be almost redundant; he would bring nothing to the table that the Court itself would not bring on a blessing application.’[16] This, of course, overlooks the significant value to the settlor and the beneficiaries of having a rationality review of the trustee’s decision carried out by a trusted and independent third party (the protector) without the need to expend time and effort litigating a blessing application. Interestingly, no arguments in favour of the narrow view are recorded in the main body of the judgment, which suggests the matter was not fully argued before the Jersey Court.[17]

Although not available at the time of the hearing, the X Trusts decision was shared with the Royal Court after its draft judgment had been circulated and was dealt with in a postscript. The Court did not hear argument from the advocates on the effect of the decision. After a brief exploration of the judgment, it found that Kawaley AJ’s analysis did not cause it to depart from the decision it had already reached in favour of the wide view. One can only wonder whether it would have made a difference had the Jersey Court had the benefit of considering the X Trusts decision and the detailed analysis therein before it made up its mind.

The Bermuda Court of Appeal in X Trusts considered and rejected the wider view espoused by the Royal Court of Jersey in Piedmont on the basis that the Royal Court had not had the benefit of full argument,[18] that its reasoning in favour of the wide view overlooked the valuable role carried out by a protector even on the narrow view,[19] that parts of its reasoning were in fact inconsistent with the wide view,[20] and that the wide view leaves protectors (and, indeed, settlors and trustees) with very little guidance as to when a protector is and is not justified in refusing to consent.

Despite finding in favour of the wide view, the Court in Piedmont was clear that the trustee and the protector had separate decision-making powers and obligations and that it was not for the protector to take the decision for the trustee ‘or to force the trustee into making the decision which the protector would make if he were the trustee by stating that he will only consent to a particular decision.’[21] The protector’s discretion was described as lying ‘within a narrower compass than that of a trustee.’[22] This is contrary to the approach taken by the English High Court in PTNZ v AS,[23] which held that the protector’s consent provision gave the protector an independent discretion jointly held with the trustee. The Jersey Court in Piedmont did not consider the judgment in PTNZ or hear argument on it, although it did note as ‘of interest’ the fact that ‘the only known decision (prior to the X Trust and the present case) dealing with this issue has adopted the Wider View’.[24] The case of PTNZ was distinguished by Kawaley AJ in X Trusts on the bases that the provision in question was drafted more broadly, the judgment did not appear to have considered the authorities on protectors’ powers that were placed before Kawaley AJ, and the point was not the subject of full adversarial argument.[25] Gloster JA in the Bermuda Court of Appeal was more direct and scathing in her assessment of the PTNZ decision, saying: ‘I do not regard this authority of any assistance. In my view it is wrong.’[26]

Further articles in this series

This article is part of a mini-series that explores the role of trust protectors. Other articles in the series include:

• Part 1: An introduction to the use of protectors;
• Part 3: An analysis of the arguments in favour of the wide and narrow view of protector consent provisions;
• Part 4: The possibility of drafting to remove any uncertainty; and
• Part 5: The consequences for the protector who oversteps his role.

 

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[1] Chien, N., (2022) How onerous is the role of protector? Trusts & Trustees. 28 (5), 351-359 at 359

[2] See, for example, the provisions in the case of the X Trusts: ‘The Trustees shall not exercise their power to appoint, distribute or pay any part of the Trust Fund to or for the benefit of any member of the Appointed Class or any Beneficiary without obtaining the prior written consent of the Protectorate’ [emphasis added]. See also the provision in the Piedmont case: ‘Until the Perpetuity Date the Trustees shall stand possessed of the Trust Fund and the income thereof upon the following trusts, that is to say: (a) Upon trust for all or any to the exclusion of the others or other of the Beneficiaries in such shares and in such manner and subject to such limitations and provisions as the Trustees (with the written consent of the Protector) in their absolute and controlled discretion at any time or times before the Perpetuity Date by any deed or deeds revocable or irrevocable… may appoint…’ [emphasis added].

[3] Robinson, K., (2023) Protectors in the Bermuda courts. Trusts & Trustees. 29 (2), 106-111, at 110.

[4] Robinson, K., Loc. Cit..

[5] [2021] SC (Bda) 72

[6] Ibid. at [78].

[7] Ibid. at [94].

[8] Ibid. at [113].

[9] [1993-95] MLR (SGD) 426

[10] Ibid. at 511

[11] In the matter of the X Trusts [2023] CA (Bda) 4 Civ at [3].

[12] Ibid. at [7].

[13] Ibid. at [91].

[14] [2021] JRC 248

[15] Ibid. at [89].

[16] Ibid. at [91].

[17] This appears to have been acknowledged by the Court itself at [116]: ‘We acknowledge that Kawaley J [in X Trusts] had the advantage of much more detailed argument on the point than occurred before us…’

[18] Op. cit. (n 11) at [129(i)].

[19] Ibid. at [133]

[20] Ibid. at [136]: ‘On the one hand the Court attempts to narrow the role, but on the other hand it seems to envisage a degree of subordination of the Protector’s consent powers to the discretion of the trustees.’

[21] Op. cit. (n 14) at [92].

[22] Ibid. at [92].

[23] [2020] WTLR 1423

[24] Op. cit. (n 14) at [116(iii)].

[25] Op. cit. (n 5) at [116].

[26] Op. cit. (n 11) at [124].