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06 May 2021
This article considers a recent Court of Appeal judgment regarding the interpretation of a trust instrument. It provides useful guidance for trustees to apply when issues of construction arise in Guernsey law trusts.
A settlor set up two family trusts. One trust was created primarily for the benefit of his surviving spouse (Trust One) and the other was created primarily for the benefit of his two daughters (Trust Two). Sadly, one of his daughters passed away. This triggered a clause in the trust instrument for Trust Two which stated that, upon the daughter's death:
The Trustees shall transfer her share of the Trust Fund as determined under clause 7.2… as to one half to the [Trust One], and the other half to the surviving Daughter's share of this trust fund.
The unfortunate issue facing the trustee was that the critical term 'share' was not defined in the trust instrument. The reference to another clause (Clause 7.2) was unhelpful as it suggested that the share should be calculated by reference to a previously applied "notional split" of the trust fund "in line with the Settlor's wish to maintain the application of equal benefits to the Daughters as far as possible". However, the clause was clear that the application of this notional split was discretionary and the evidence before the court was that the trustee did not believe that it had applied such a notional split. As far as the trustee was concerned:
As Clause 7.2 did not assist, what meaning was to be given to the word 'share' in the context of a discretionary trust in which none of the beneficiaries had any absolute entitlement? Unusually, the settlor's memorandum of wishes was annexed to the trust instrument itself, but again, while the word 'share' was frequently used to express the settlor's desire to treat his children equally, he was not using it to mean a 'fixed share' in a legal sense. It was clear that he was focused on equal benefit, which is not necessarily the same as an equal financial share.
The trustee was therefore faced with the need to calculate what proportion of the fund (if any) should be transferred to Trust One and the possibility that its interpretation could be challenged in the future. The trustee therefore applied to the Royal Court for directions as to the true construction of the Trust Two trust instrument.
The trustee, while taking a neutral stance, presented the various possible interpretations to the court with the beneficiaries also making submissions which best suited their cause. The main alternatives were that:
The Royal Court (Sir Richard Collas, who was then the Bailiff) construed the clause by its natural meaning and stated that evidence of the settlor's intention which was extrinsic to the trust instrument was inadmissible. It ruled that neither alternative construction gave rise to an unreasonable result. The deceased beneficiary did not have any 'share' in Trust Two as the trustee had not applied a notional split and therefore the trustee was not required to make any transfer. The surviving spouse appealed the decision.
The Court of Appeal began by noting that the trust instrument itself was "very badly drafted" and displayed "an exceptional lack of care in checking whether words have been used appropriately, whether they have been used consistently, and how various provisions interact". The court also admitted the clear difficulty in applying the concept of a notional split in a trust fund.
Notwithstanding its criticism of the trust instrument, the Court of Appeal allowed the appeal. The court considered that by always treating the children equally in line with the settlor's wishes, the trustee had in fact applied a notional split, even if unwittingly. The deceased beneficiary therefore did have a quantifiable share of the trust fund to be transferred to Trust One.
In arriving at this decision, the Court of Appeal cited the legal principles set out in the Matter of the C Trust ( GLR 105), adopting the guidance in the Jersey case of in the Matter of the Internine and Intertraders Trusts (), which stated that the principles of interpretation of a trust instrument are broadly the same as those for the interpretation of a contract and other commercial instruments – namely:
This case provides helpful clarification of the principles to be applied when interpreting Guernsey law trust instruments. The Court of Appeal also helpfully confirmed that the trustee was absolutely correct in this instance to seek the court's directions.
When faced with an ambiguity in the trust instrument, a trustee should take legal advice to ascertain that the ambiguity is real in order to ensure that it is not risking wasting the court's time with strained interpretations of the trust instrument and possibly suffering an adverse costs order. However, in the event that a trustee is faced with a real ambiguity, the Court of Appeal (and indeed the Royal Court at first instance) agreed that the only proper course of action is to seek the directions of the court.
For further information on this topic please contact Sandie Lyne or Tehya Morgan at Ogier by telephone (+44 1481 721 672) or email (firstname.lastname@example.org or email@example.com). The Ogier website can be accessed at www.ogier.com.
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