Coming to a court near you?

No trustee, wherever they are based, wants to face contentious litigation outside of a jurisdiction of their choice. It is uncertain, complex and costly, and so best avoided if possible. But it isn’t always possible and there are a number of scenarios in which a trustee of an offshore trust can become embroiled in litigation in foreign courts.

Trust documents

Jurisdiction clauses in trust deeds are more prevalent than they once were. If a settlor wishes, they can stipulate that a trust will be governed by the law of a particular jurisdiction. Often the governing law can be changed, which often happens when the professional trustee changes. One might think that a jurisdiction clause would determine where any litigation would occur: such clauses are certainly recognised in international law. But, as the recent case of Crociani v Crociani illustrates, such clauses must be very carefully drafted if they are to have the intended effect.

Crociani concerned which court should hear a breach of trust claim worth more than US$100 million. The trust in question was, between 2007 and 2011, governed by the law of Jersey. In 2012 the professional trustee was replaced and, at the same time, the proper law changed to that of Mauritius. The trustee argued that Mauritius was the correct forum for trial of the breach of trust claim.

The Jersey Court of Appeal concluded that Mauritius did not have an exclusive right to hear the claim. The key clause referred to Mauritius having ‘exclusive jurisdiction’, but that meant that Mauritian law applied to all aspects of the trust. It also described Mauritius as “the forum for administration of the trusts hereunder”, but that referred to the administration of the trust (even by the courts), not contentious litigation. Neither provision limited which court could hear the breach of trust claim, and so the Mauritian trustee was stuck with Jersey litigation.

It should also be remembered that an exclusive jurisdiction clause in a trust can be overridden in exceptional circumstances - it is clear from the judgment that the court in Crociani would have done so if required.

Trust transactions

When trustees enter transactions the documents may contain a jurisdiction clause: if not carefully drafted, they can lead to jurisdictional disputes. In Rawlinson & Hunter Trustees SA v ITG Ltd (ITG), a Guernsey trustee loaned funds to a discretionary trust, with the loan agreement stating that the courts of England & Wales had exclusive jurisdiction in respect of any disputes. A Swiss firm replaced the Guernsey firm, both as trustee and as lender under the loan agreement. Although the relevant deed of novation gave the Guernsey courts exclusive jurisdiction over matters arising from the deed, a dispute arose as to which jurisdiction could hear a subsequent dispute under the loan agreement.

Nugee J concluded that England & Wales was the correct jurisdiction, and that the parties to the deed of novation did not intend to change the jurisdiction clause in the original loan agreement. Therefore the Swiss trustee was fixed with litigation in the English courts.

Assets and beneficiaries

There are various situations where litigation can arise due to assets or beneficiaries being located in other jurisdictions. An obvious example (for England & Wales) is divorce. The Matrimonial Causes Act 1973 allows the court to vary an existing trust on divorce, including an offshore discretionary trust. That trust’s native jurisdiction may not give effect to that variation, but if the trust has assets in England, the court order will bite against them.

Similarly, an English court can, on the application of a creditor, unravel transactions involving English assets and offshore trusts, regardless of the trust’s governing law. Freezing injunctions are a third example where an offshore trustee may face English litigation.

There is also the impact of civil law jurisdictions that historically have not recognised the concept of a trust. The rules relating to trusts are very complicated, but these jurisdictions may treat trust assets as being owned by a beneficiary. This will then be relevant if the beneficiary divorces, becomes bankrupt or dies. All of these events can lead to litigation involving the trust.

Similarly, whatever the jurisdiction in which the trust is located, if trust assets are located in a different jurisdiction, that can be the proper forum for disputes to be decided. For instance, if a Jersey trust owns English real estate, and the true ownership of that property is disputed, that dispute will be determined in England.

Tortious claims

Also, consider potential tortious liabilities of trustees. What if English property owned by an offshore trust gives rise to a claim in nuisance, or for some injury suffered by a third party caused by badly maintained buildings or whatever it may be. The forum for deciding that dispute would be England, and the offshore trustees could find themselves dragged into English litigation.

Comment

It is clear that while some jurisdictional issues are unavoidable, difficulties may arise due to imprecise drafting by professional advisors. In both Crociani and ITG, litigation arose partially because it was not clear precisely what the documents were meant to achieve. Advisers to professional trustees, and the trustees themselves, who fail to take care when drafting such documents could face criticism and a potential professional negligence claim if expensive satellite litigation ensues.

STOP PRESS: the Privy Council has recently upheld the Jersey Court of Appeal’s decision in the case of Crociani v Crociani.