The recent Guernsey decision in Investec Trust (Guernsey) Ltd & Bayeux Trustees Ltd v Glenalla Properties Ltd (2014) has far reaching consequences for Channel Island trustees administering foreign law trusts or entering into transactions not governed by the same law as their trust.

As a matter of English law, trustees are personally liable to the full extent of their assets to third parties with whom they contract on behalf of the trust. As an English lawyer I was surprised to discover the position in the Channel Islands is dramatically different. Under Art 32 Trust (Jersey) Law 1984 a trustee’s liability to a third party is limited to the value of the property of the trust fund if the third party is aware that the trustee is contracting as a trustee. The position is similar under the equivalent Guernsey legislation in Art 42 Trusts (Guernsey) Law 2007.

Until Investec Trust, the received wisdom has been that where Guernsey or Jersey trustees entered into a contract with a third party to the trust that was governed by any law that is not the law of the trust they would have the protection of the legislation. The effect of the judgment is to turn the position as hitherto understood on its head so that where a trustee contracts with a third party, it must now ensure that it contractually limits its liability.

Facts

Investec Trust (Guernsey) Ltd & Bayeux Trustees Ltd were the trustees of a trust governed by Jersey law. The trustee’s itself was a Guernsey corporate entity, administering the trust from Guernsey.

While in office the trustees entered into deeds of novation, assuming the liability for sums owed to four BVI companies owned by the trust. The loans were unsecured, repayable on demand and interest free. Importantly to the outcome of the case, they were also undocumented in any kind of formal written agreement.

The four BVI companies were put into liquidation and the liquidator called in the loans under the deeds of novation.

The trustees applied to the Royal Court of Guernsey for a determination on their liability under the loans. As trustees of a trust governed by Jersey law they sought a declaration that Art 32 applied so as to limit their liability only to the extent of the trust assets.

The Court’s Decision

The Court determined that the undocumented loans were governed by Guernsey law. Guernsey law was therefore applied to determined the liability of the trustees.

The Court determined that while under Guernsey law questions of enforceability of a foreign trust were properly to be determined by the law of the trust (in this case Jersey) the matter before the Court was not about the enforceability of the trust; it was about the enforceability of the loan agreements.

The Court therefore had no power to apply the Jersey law provisions to limit the trustee’s personal liability to the extent of the trust assets. The Court said Article 32 would have continued to protect the trustees had the governing law of the loans been that of Jersey rather than Guernsey.

The Court was not in a position to apply the Guernsey equivalent of Article 32 – Article 42 – because that provision only applied to trust governed by Guernsey law. As this was a Jersey law trust, albeit run by a Guernsey trustee, they fell into a gap in the protection provided by the Channel Island legislation.

The trust law proving a dead end, the Court turned to the novation documents to determine the trustees’ liability. The deeds included an express notice that the trustees were acting in their capacity as trustees.

However the Guernsey Court said that whether a trustee’s personal liability is limited to the assets in the fund is to be assessed in each case in light of all the circumstances of the transaction, including the words used in the operative documents. The Court suggested simply flagging up the capacity in which the trustees were acting was insufficient.

Conclusions

• This decision raises the spectre of doubt that Jersey or Guernsey trustees might not be as well protected from personal liability to third parties to the trust as hitherto thought. This risk that a trustee will fall into a gap similar to that in Investec arises where the proper law of the trust is different to the law of the jurisdiction in which the trust is administered.
• Transactions entered into by trustees should be fully documented, ideally specifying the governing law of the transaction.
• Trustees should also apply their minds to whether the governing law of the trust of which they are a trustee or relevant instrument provides the trustee with sufficient protection from personal liability and if not what drafting may be necessary to bring this about.
• It’s clear that after the decision in Investec Trust, more than a simple ‘warning trustees contracting’ notice may be required.