Trustees are protected by anti-Bartlett clauses, says Hong Kong appeal court

Trustees are protected by anti-Bartlett clauses, says Hong Kong appeal court

An important judgment by the Hong Kong Court of Final Appeal (CFA) establishes that so-called anti-Bartlett clauses in the trust deed of a Jersey family trust exempted the trustees from any liability for losses incurred in transactions by the trust’s underlying investment company (Arboit, Sutton and Wise Lords Ltd v DBS, 2019 HKCFA 45; also known as Zhang and Ji v DBS Trustee).

Reversing the decisions of Hong Kong’s Court of Appeal and lower courts, the CFA unanimously found that the trustees had no ‘high level residual duty’ to supervise the company’s activities, given that the anti-Bartlett provisions relieved them from any duty to interfere with or supervise the company’s conduct, unless they became aware of actual dishonesty.

The events in question took place during the 2008 financial crisis. The trust, Amsun, was settled by a Madame Ji Zhengrong, an expert in financial investment, and her husband Zhang Hong Li. They created an offshore company, Wise Lords, owned by the trust to make high-return investments during the bubble that preceded the 2008 crash. Many were high-risk foreign exchange deals, and by August 2008, Wise Lords’ portfolio contained 85 per cent in foreign currency exposure, most of it in Australian dollars. Its borrowings of USD96.4 million were nearly three times its net assets.

When the crash came, Wise Lords suffered significant losses. Ji and Zhang, in their capacity as beneficiaries, together with the successor trustees and the company itself, sued the trustee, DBS Trustee HK, and the corporate director of the company for breach of trust or duty. Their claims succeeded at trial, the Court of First Instance finding that DBS Trustee HK had been in ‘serious and flagrant breach’ of its duties and had breached its ‘high level of supervisory duty’ when allowing Wise Lord to buy the high-risk products. The Hong Kong Court of Appeal agreed, despite the fact that the trust deeds contained anti-Bartlett clauses, which are commonly used to exempt the trustees from liability where the intention is to give the trust’s investment company a free hand to make high-risk investments.

DBS Trustee HK (now known as IQ-EQ), appealed to the CFA, which has now overturned the lower courts’ rulings. There could not, it found, be any ‘high level supervisory duty’, as the existence of such a duty was inconsistent with the anti-Bartlett provisions. Such a duty would require DBS Trustee to query and disapprove of the risky transactions, which would be interfering with Wise Lords’ business, contrary to the terms of the trust deed. There was no actual knowledge of dishonesty that required DBS Trustee to interfere, and thus no duty arose.

The CFA similarly found that the corporate director of the investment company also had no such high-level supervisory duty and was not in breach of its fiduciary duties. While the transactions were indeed speculative and risky, the trust deed specifically allowed the taking of such risks, so the trustees would still be protected by liability exemption clauses for any acts and omissions short of gross negligence.

Although the final appeal was settled before judgment was delivered, the CFA’s ruling indicates that no liability would have attached to the trustee given the presence of a strong anti-Bartlett provision, which would have been infringed if the trustee had attempted to interfere in the decision-making at company level.

Speaking to STEP shortly after the judgment was handed down, Shân Warnock-Smith QC TEP of 5 Stone Buildings in London and International Chancery and Trusts Chambers in Cayman, who led the successful appeal on behalf of the trustee and the corporate director of the underlying investment company, commented:

‘In its clear and definite unanimous judgment, the CFA rejected the notion that a trustee is under a high-level or residual duty … to supervise or interfere in the affairs of an underlying company where the trust expressly disapplies any duty to do so’.The case has been the cause of considerable discussion in the private wealth and trusts world. As it was heard in the Hong Kong courts, and as the governing law of the trust was Jersey law, the principles of the judgment may be applicable in most of the major common-law trust jurisdictions.

‘The case is likely to have wide impact internationally as the first (final) appellate level case anywhere to examine the detailed workings and effect of commonly-used anti-Bartlett clauses’, Warnock-Smith noted.

Warnock-Smith also highlighted some useful guidance provided by the CFA on the correct approach to equitable compensation in a breach of trust claim where the alleged breach is based on a failure of skill and care: ‘In such a case the Court considered that the remedy resembles common-law damages, applying the common-law rules of causation, remoteness of damage and measure of damages by analogy. The burden is on the complainant to prove his case on those aspects and not on the trustee to disprove it. This contrasts, both in principle and application, with cases in which the trustee wrongly parts with the trust fund itself. There the appropriate remedy is reconstitution of the missing trust fund rather than damages.’