Coutts (Cayman) Ltd v Lemos

• Jurisdiction: Cayman Islands
• Court: Court of Appeal (Cayman Islands)
• Judge: (Zacca, P., Collett and Taylor, JJ.A.)
• Judgment Date: 07 July 2004
• Date: 07 July 2004

Court of Appeal

(Zacca, P., Collett and Taylor, JJ.A.)

COUTTS (CAYMAN) LIMITED and OTHERS

and

LEMOS and OTHERS

The respondent beneficiaries brought an action in the Grand Court against the appellant trustees for breach of trust.

A Greek-based shipping business was settled on professional trustees in the Cayman Islands. Disagreements over the management of the trust were later resolved by modifying the protection afforded to the trustees and by attaching a Statement of Investment Policy and Guidelines (‘SIPG’) to the trust deed. The present action, brought by certain of the beneficiaries against the successor trustees, alleged substantial losses through mismanagement of the shipping business. Two questions of construction were raised regarding the extent to which the trustees were exempt from liability by the provisions of the trust deed, in particular cl. 16, in the light of the restrictions imposed on their discretion by the SIPG. SIPG, para. 3.1 provided that ‘the trustees shall operate a fleet of bulk carriers so long as they duly consider that such operations are capable of generating an adequate, long-term return on capital employed’ and para. 2.11 stipulated criteria for the appointment of shipping advisers.

The Grand Court (Smellie, C.J.) held that SIPG, para. 3.1 required the trustees to act on their decision as to whether or not the business would produce an adequate long-term return by retaining or selling the ships with a reasonable delay to execute their decision so as to avoid forcing

Trusts-powers and duties of trustees-duty to act in best interests of trust-proper interpretation of investment policy that should cease high risk business when no longer believe capable of producing adequate long-term return-to be allowed adequate time to implement ‘exit strategy’

Trusts-liabilities of trustees-exclusion of trustees” liability-breach of specified investment policy putting trust assets at risk may preclude reliance on clause excluding liability

Trusts-liabilities of trustees-exclusion of trustees” liability-appointment of investment adviser in breach of specified criteria deprives trustees of all exculpatory protection in relation to damages flowing from breach

them to sell the fleet immediately, which could result in considerable losses; and that compliance with the criteria for the appointment of shipping advisers, in SIPG, para. 2.11, was a mandatory prerequisite for exemption from liability, breach of which deprived the trustees of all the protection of cl. 16. The proceedings in the Grand Court are reported at 2003 CILR 381.

On appeal, the appellants submitted that (a) para. 3.1 imposed an obligation on the trustees to operate the fleet for so long as they duly held the requisite opinion but left them free, when they no longer held that opinion, to operate the fleet under the discretionary investment powers provided in the trust deed and by the general law of trusts; (b) operation of the fleet at the latter stage would not constitute failure to comply with the SIPG and the protection of cl. 16 would therefore continue so long as there was no wilful breach or misconduct; and (c) with regard to para. 2.11, the loss in respect of which the trustees would forfeit their protection should be restricted to that flowing from the alleged breach of para. 2.11.

The respondents submitted that (a) the first sentence of para. 3.1 meant that the trustees could only operate the fleet when holding the requisite opinion, whether or not they were under an obligation to operate the fleet for so long as they held that opinion; (b) the purpose of para. 3.1 was to protect the trust assets from unreasonable risk; (c) if the investment adviser did not meet all the criteria laid down in para. 2.11, the trustees would lose the protection of all provisions of cl. 16; and (d) the SIPG was a strict mandatory code and to enjoy any protection under it the trustees had to have complied with every one of its requirements.

Held, affirming the Grand Court”s conclusions:

(1) The answers given to the questions posed to the Grand Court were correct. An obligation to cease operating the fleet arose when the trustees, a professional trust company, ceased to ‘duly consider’ that its operation was ‘capable of generating an adequate long-term return on capital employed.’ The obligation not to leave trust funds invested in a risky business when they no longer held the belief that it was capable of producing an adequate return, even in the long term, was reasonable and was within the intention of the settlor and the purpose of the SIPG (para. 27; para. 31; paras. 38–39).

(2) Implicit in the wording of para. 3.1, there being no clear instructions to the contrary, was that the trustees were not expected to sell precipitately the moment they lost the necessary degree of confidence, but were free to work out an ‘exit strategy’ within a reasonable time. While so doing, they would be entitled to operate, lease or tie-up the fleet, as seemed prudent to them in the prevailing circumstances (paras. 32–33).

(3) The SIPG, however, being a unilateral statement by the trustees of their policy, was declaratory, and compliance with it was mandatory

under the amended trust deed. A breach of the SIPG would prevent the trustees from relying on cl. 16 to exclude their liability (para. 41; para. 44).

(4) As the qualifications and experience of the investment adviser did not meet all the criteria of the SIPG, para. 2.11, the trustees lost not only the protection of cl. 16(iii)(c) (no liability for loss resulting from acceptance of advice of investment adviser) but the protection of all the provisions of cl. 16 (which in effect excluded all liability except for wilful misconduct/breach and non-compliance with the SIPG), but only in relation to the loss flowing from the breach of para. 2.11 alleged. The words ‘but only in relation to damages flowing from the breach of investment policy alleged’ would therefore be added at the end of the ruling of the Grand Court (paras. 53–54; paras. 61–62).

M.T.F. Briggs, Q.C. and C.D. McKie for the appellants;

R.G. Kaye, Q.C. and J. Stephens for the respondents.

1 TAYLOR, J.A., delivering the judgment of the court: By a deed of trust executed in 1984, Capt. Pandelis Christos Lemos settled his Greek-based shipping business on professional trustees in the Cayman Islands, for the benefit at their discretion of family members and charities, on terms that enabled him to direct its affairs during his lifetime and contemplated its continued operation thereafter by the trustees, notwithstanding the considerable risks that he acknowledged would be involved in running such a business.

2 Following the death of Capt. Lemos, in 1989, disagreement developed over the management of his trust-known as the Trofos Foundation-and litigation ensued between family members and the trustees, both in Greece and in the Cayman Islands. This was resolved in 1994 by a settlement involving important amendments to the trust deed, consented to by the Grand Court on behalf of minor, unascertained and unborn beneficiaries. The peace did not prove an enduring one. Four years later the present action was started by certain of the beneficiaries against the successor trustees, alleging the loss of many millions of dollars through alleged mismanagement of the shipping business. The issues raised include two questions of construction that were dealt with in a pre-trial ruling by the Chief Justice, the subject of this appeal.

3 The questions of construction posed to the court relate to the imposition on the trustees by the 1994 amendments of the obligation to adhere to a Statement of Investment Policy and Guidelines (SIPG) prepared by the trustees to record how they intended to carry out their duties. The questions are concerned with the extent to which the trustees enjoy the protection of exculpatory provisions of the trust deed in light of the restrictions imposed on their discretion by the SIPG with respect to

the continued operation of the shipping fleet and the choice by the trustees of a shipping expert to advise on its management. The Chief Justice decided both questions in favour of the plaintiff beneficiaries. The trustees appealed on the ground that, while the Chief Justice was correct in his understanding of the law, he erred in applying the accepted canons of construction in this case.

4 At the conclusion of the sitting we dismissed the appeal except as to a qualification sought by the trustees in respect of the answer to the second question, and awarded costs of the appeal to the...