Lemos v Coutts (Cayman) Ltd

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 30 July 2003
• Court: Grand Court (Cayman Islands)
• Date: 30 July 2003

Grand Court

(Smellie, C.J.)

C. LEMOS and FOUR OTHERS

and

COUTTS AND COMPANY (CAYMAN) LIMITED, COUTTS (JERSEY) LIMITED, SEATON TRUSTEES INCORPORATED and PARTHENON TRUSTEES INCORPORATED

R.G. Kaye, Q.C. and M.A. McMillian for the plaintiffs;

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

Cases cited:

(1) Armitage v. Nurse, [1998] Ch. 241; [1997] 2 All E.R. 705, dicta of Millett, L.J. applied.

(2) Investors” Compensation Scheme Ltd. v. West Bromwich Bldg. Socy., [1998] 1 W.L.R. 896; [1998] 1 All E.R. 98, referred to.

(3) Learoyd v. WhiteleyELR(1887), 12 App. Cas. 727; 57 L.J. Ch. 390; 58 L.T. 93, dicta of Lord Watson applied.

(4) Liverpool City Council v. Irwin, [1977] A.C. 239; [1976] 2 All E.R. 39, referred to.

(5) Mettoy Pension Trustees Ltd. v. Evans, [1990] 1 W.L.R. 1587; [1991] 2 All E.R. 513, considered.

(6) Moritz, In re, [1960] Ch. 251; [1959] 3 All E.R. 767, referred to.

(7) Reardon Smith Line Ltd. v. Hansen-Tangen, [1976] 1 W.L.R. 989; [1976] 3 All E.R. 570, dictum of Lord Wilberforce applied.

(8) Vickery, In re, Vickery v. Stephens, [1931] 1 Ch. 572; [1931] All E.R. Rep. 562; (1931), 144 L.T. 562; 47 T.L.R. 242; 100 L.J. Ch. 138, dicta of Maugham J. referred to.

(9) Z Trust, In re, 1997 CILR 248, referred to.

Trusts-liabilities of trustees-exclusion of trustees” liability-no exclusion of irreducible core of trustees” obligations of honesty, loyalty and good faith, nor to allow trustees to favour own interests

Trusts-powers and duties of trustees-trust company-paid, professional trustee required to exercise standard of judgment expected of those who claim knowledge, skills, experience and expertise-to show that acted in honest observance of trusts

The plaintiff beneficiaries brought an action against the defendant trustees for breach of trust.

The plaintiffs were the primary beneficiaries of a trust created by their grandfather with four professional trustees, of whom the defendants were successors. The settlor had made his fortune trading in ships and stipulated that the trust was to be invested in the shipping industry. Given the settlor”s expertise and the risky nature of the business, he continued to take the major decisions in the management of the shipping investments during his lifetime. To reflect this arrangement, the deed of settlement provided an express exemption from liability for the trustees in relation to losses occasioned by the settlor”s investment decisions.

After the settlor”s death, however, the trustees assumed full responsibility for the management of the trust. They divided the fund into two parts-the General Capital Fund and the Shipping Capital Fund-to be administered separately. The trustees introduced a Statement of Investment Policy and Guidelines (the ‘SIPG’), presenting their policy for the management of the Shipping Capital Fund. Paragraph 2.11 of the SIPG stipulated criteria for the appointment of shipping advisers and 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 the capital employed.’ To reflect these changes and to protect the beneficiaries, a compromise arrangement was approved by the beneficiaries and the court in 1994 and the SIPG was attached to the deed of settlement as a related trust document. The deed of settlement was revised to include, inter alia,

amendments to cl. 16(iv) which provided that the trustees were not to be entitled to the benefit of the exemption clauses unless they had first complied with the SIPG.

The plaintiffs alleged that as a result of breaches of trust committed by the trustees after the compromise arrangement, including a failure to administer the Shipping Capital Fund properly, the trust sustained losses. The allegations related to the failure to diversify assets held in the Shipping Capital Fund and the acquisition of three additional ships against the plaintiffs” wishes. The plaintiffs alleged further that the appointment of the third trustee breached the requirements of para. 2.11 of the SIPG. The trustees denied the allegations, but claimed that in any case they could not be held liable for losses sustained by the trust because they were exempt from liability by the exculpatory provisions in the deed of settlement.

The plaintiffs submitted that (a) cl. 16(iv) made compliance with the provisions of the SIPG a mandatory prerequisite for the trustees” exemption from liability for losses arising from the management of the Shipping Capital Fund; (b) the term ‘shall’ in para. 3.1 of the SIPG was permissive, i.e. it authorized the trustees to operate a fleet of bulk carriers, but only for so long as they held the qualifying belief, and once they no longer held that qualifying belief or were in doubt, they were obliged to sell the ships; (c) furthermore, the phrase ‘so long as they duly consider’ obliged the trustees to take action once they no longer held the qualifying belief or were in doubt, and were not allowed merely to ignore the issue; and (d) the appointment of the third trustee breached the requirements of para. 2.11 and therefore disentitled the trustees from relying on the exculpatory provisions in the deed.

The trustees submitted in reply that (a) if the SIPG were a mandatory code, it was not comprehensive and did not stipulate what should happen if the qualifying belief were no longer held, and in those circumstances they would therefore be entitled to the exemptions in the deed and revert to their general discretionary powers; (b) consequently, as long as they were not guilty of wilful default they would be entitled to the benefit of the exculpatory provisions; (c) ‘shall’ in para. 3.1 was mandatory so long as the trustees held the qualifying belief, but there was no further duty to act once it was no longer held; (d) a construction of para. 3.1 obliging the trustees to sell the ships once they no longer held the qualifying belief, whether or not the market conditions were favourable, was commercially unworkable and not in the beneficiaries” interests; (e) in any case, the court should avoid a construction of the trust which necessitated the implication of terms; and (f) even if the appointment of the third trustee had been in breach of para. 2.11 of the SIPG, as para. 2.11 was stipulated to be ‘for the purposes of cl. 16(iii)(c)’ of the deed, all other exculpatory provisions were available.

Held, construing the trusts:

(1) Clause 16(iv) of the deed made compliance with the provisions of

the SIPG a mandatory prerequisite for the trustees to invoke the protection of the exemption clauses. If the alleged losses suffered by the trust fund were the result of the trustees” failure to diversify the capital assets of the Shipping Capital Fund, and that failure was also a breach by the trustees of the requirements of para. 3.1 of the SIPG, they would not be exempt from liability. On the contrary, however, provided that they had operated within the deed and the SIPG, it was stipulated that the trustees would not be liable for losses howsoever caused-regardless of the desirability of such wide exemptions for paid, professional trustees-unless caused by wilful default, which was expressly excluded from the exemptions. Thus, the trustees would only be liable if the losses were caused by their negligent or deliberate breach of duty for a self-serving concern, such as intending to avoid personal liability. The exemption provisions would not be construed, however, so as to override the irreducible core of the trustees” obligations of honesty, loyalty and good faith, nor to allow them to favour their own interests (paras. 62–64; paras. 76–77).

(2) Paragraph 3.1 of the SIPG required the trustees not only to consider whether or not the Shipping Capital Fund would produce an adequate long-term return, but also to act on their decision by retaining or selling the ships. The exemption clauses were to be construed against the paid, professional trustees, and they were not able simply to invoke the exculpatory provisions of the deed as soon as they ceased to hold the qualifying belief or were in doubt. As paid, professional trustees they were expected to take this difficult decision in the management of the Shipping Capital Fund applying the standard of judgment expected of those who held themselves out as having the knowledge, skills, experience and expertise which the trustees offered, and they merely had to show that in retaining the ships they had acted in the honest observance of the limitations of the trust (paras. 83–87).

(3) It was necessary, however, to imply into para. 3.1 of the SIPG a reasonable hiatus for the trustees to decide whether to diversify the Shipping Capital Fund and to execute their decision, so as to avoid forcing them to sell the ships immediately they ceased to hold the qualifying belief, which could have resulted in considerable losses. During that period the trustees would still be exempt from liability if they complied with the SIPG. This implied term was necessary to make the trust commercially workable and it could be assumed that the beneficiaries and the court would not have approved the compromise in 1994 if it were not workable (paras. 89–91).

(4) Similarly, cl. 16(iv) made compliance by the trustees with the criteria for the appointment of shipping advisers, in para. 2.11 of the SIPG, a mandatory prerequisite for exemption from liability. Thus, if the appointment of the third trustee had breached the requirements of para. 2.11, the trustees would not be entitled to any of the exculpatory provisions provided in cl. 16 (para. 93; paras. 97–98).

1 SMELLIE, C.J.: By way of a preliminary trial I am now concerned with issues of construction relating to provisions of a deed of settlement and a related trust administration document. The general question is whether, properly construed, they provide the...