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What Information Must a Trustee Disclose to Beneficiaries?

The recent case, Whitell v. Whitell,[1] a decision of Master M.P. McGraw, is interesting because it concerns the overlapping issues of solicitor-client and litigation privilege and the right of a beneficiary to disclosure of documents pertaining to the trust. I do not have concerns about the actual order, but I question some statements made by the Master about the beneficiary’s right.

The deceased had appointed his son, Robert Whitell his Estate Trustee. The Will directed the Estate Trustee to establish a discretionary trust for the deceased’s grandson, Michael Whitell, a minor, who was the child of Karen Whitell, Robert’s sister. Karen was Michael’s litigation guardian. Karen had sought information about the trust and disbursements from the trust fund, but did not receive a satisfactory response from Robert. Michael had brought an application for an order removing Robert as trustee and a declaration that Robert had breached his fiduciary duties. In that proceeding Robert refused to disclose a number of documents for which he claimed solicitor-client or litigation privilege, or both. Michael then brought a motion for an order compelling Robert to produce the documents.

The Master first outlined the law of solicitor-client privilege and referred to Ontario (Attorney General) v. Ballard Estate[2] for the principle that a trustee cannot claim solicitor-client privilege as against a beneficiary over documents the solicitor sought and obtained with respect to the administration of the trust, because ‘[a] trustee and a beneficiary have a joint interest in the administration of the trust and legal advice sought by the trustee furthers the interests of the beneficiary”.[3] The Master then quoted an excerpt from the Ballard case,[4] which contained a quotation from the oft-cited judgment of Lord Wrenbury in O’Rourke v. Darbishire.[5] In that quotation his Lordship stated that a beneficiary under a will is entitled to inspect documents held by the executors. His right is “a proprietary right” and the beneficiary is entitled to see them “because they are trust documents and because he is a beneficiary. They are in a sense his own”. Lord Wrenbury continued:

This has nothing to do with discovery. The right to discovery is a right to see someone else’s documents. The proprietary right is a right to access to documents which are your own. No question of professional privilege arises in such a case. Documents containing professional advice taken by the executors as trustees contain advice taken by trustees for their cestuis que trust, and the beneficiaries are entitled to see them because they are beneficiaries.

The Master then went on to note, with reference to a quotation from the judgment of Dankwerts L.J. In Re Londonderry’s Settlement,[6]  that there may well be appropriate exceptions the “joint interest” rule. These include a situation in which a beneficiary and the trustee are in an adversarial relationship and the documents were procured by the trustee for his own protection, or where disclosure would cause dissension within the family and would compromise the trustee’s confidential role toward all the beneficiaries. On the other hand, documents in which the beneficiary is alleging lack of good faith or breach of fiduciary duty must be disclosed.

In paragraph 23 the Master then stated: “To the extent to which Robert’s communications with [his solicitor] relate to the administration of the Trust, Michael has a joint interest and proprietary right in and to such advice and Robert cannot assert solicitor-client privilege as against Michael”.

The Master rejected Robert’s argument that disclosure would conflict with his confidential role toward the beneficiaries in general, since there was only one beneficiary. The Master also rejected Robert’s argument that he and Michael were in an adversarial position during the entire time when the documents in question were created. Nor could Robert claim litigation privilege, because he could not show that litigation was contemplated and that the documents were created for the dominant purpose of litigation.

The Master then went on to examine the documents and upheld Robert’s claim of solicitor-client privilege to one document, but denied the claim for solicitor-client and litigation privilege to the other documents. However, Robert was entitled to redact some documents to remove any information not related to the trust.

I believe that the Master came to the right conclusion on these documents.

I now turn to my concerns about some of the statements made by the Master, which were derived from the above-mentioned cases. These statements are to the effect that a beneficiary has a joint interest in trust documents with the trustee and that he is the owner of them. It is true that older cases, relied on by the Master, used this kind of language, but modern cases have resiled from that approach. Thus, with respect, the cases relied on by the Master have largely lost their precedential value.

The leading modern authority is Schmidt v. Rosewood Trust Ltd.[7] Vitali Schmidt was the co-settlor of two offshore inter vivos trusts based in the Isle of Man. He and other executives of Lukoil, the large Russian oil company set up these offshore trusts together. Rosewood Trust Ltd. was the trustee. Vitali died unexpectedly and intestate and his son, Vadim was appointed his administrator. The trusts contained broad powers of appointment, exercisable by the trustees with the consent of the protector. They could appoint among the beneficiaries, who were named in schedules to the trusts and included the deceased. The trusts provided that on the death of a beneficiary the trustee should hold the beneficiary’s share for such persons as the deceased had indicated to the trustee, failing which it should be held for the deceased’s closest relatives. Vitali had informed the trustee that it should hold his share in trust for Vadim.

Vadim became convinced that his efforts to trace his father’s assets were frustrated by his father’s co-directors, so he brought an application in the Isle of Man against the trustee and others for full disclosure of information based on his entitlement as discretionary beneficiary under the trusts through his father. At first instance, Deemster Cain granted the application, but on appeal, the Staff of Government Division reversed, since Vitali was only a mere object of a power under the trusts. Vadim then appealed to the Privy Council. The advice of the Board was given by Lord Walker.

His Lordship faced the question of the basis on which the trustee must disclose information head on. He dealt first with O’Rourke v. Darbishire.[8] The testator’s will and codicils left his estate to his executors for their own benefit. The administrator of one of the intestate heirs of the deceased, who had meanwhile died, brought action to challenge the will and codicils for fraud. He sought disclosure of documents containing legal advice to the testator. The courts dismissed his claim because he failed to make out even a prima facie case of fraud. Four members of the House of Lord’s mentioned that a beneficiary has a “proprietary right” to such documents. However, that appears to have been dictum, since the plaintiff’s claim failed.

His Lordship also discussed In re Londonderry’s Settlement.[9] All three members of the Court of Appeal referred to O’Rourke v. Darbishire, but only Lord Salmon expressly adopted the proprietary basis of the disclosure principle. Lord Walker then stated:

[50] . . . The Board does not find it surprising that Lord Wrenbury’s observations have been so often cited, since they are a vivid expression of the basic distinction between the right of a beneficiary arising under the law of trusts (which most would regard as part of the law of property) and the right of a litigant to disclosure of his opponent’s documents (which is part of the law of procedure and evidence). But the Board cannot regard it as a reasoned or binding decision that a beneficiary’s right or claim to disclosure of trust documents or information must always have the proprietary basis of a transmissible interest in trust property. . . .

[51] Their Lordships consider that the more principled and correct approach is to regard the right to seek disclosure of trust documents as one aspect of the court’s inherent jurisdiction to supervise, and if necessary to intervene in, the administration of trusts. The right to seek the court’s intervention does not depend on entitlement to a fixed and transmissible beneficial interest. The object of a discretion (including a mere power) may also be entitled to protection from a court of equity, although the circumstances in which he may seek protection, and the nature of the protection he may expect to obtain, will depend on the court’s discretion.

Lord Walker went on to say that in order to obtain disclosure, a proprietary right is neither sufficient nor necessary.[10] He continued:

[54] . . . Since In re Cowin[11] well over a century ago the court has made clear that there may be circumstances (especially of confidentiality) in which even a vested and transmissible beneficial interest is not a sufficient basis for requiring disclosure of trust documents; and In re Londonderry’s Settlement and more recent cases have begun to work out in some detail the way in which the court should exercise its discretion in such cases. There are three such areas in which the court may have to form a discretionary judgment: whether a discretionary object (or some other beneficiary with only a remote or wholly defeasible interest) should be granted relief at all; what classes of documents should be disclosed, either completely or in a redacted form; and what safeguards should be imposed (whether by undertakings to the court, arrangements for professional inspection, or otherwise) to limit the use which may be made of documents or information disclosed under the order of the court.

And finally, his Lordship stated:

[67] However the recent cases also confirm (as had been stated as long ago as In re Cowin in 1886) that no beneficiary (and least of all a discretionary object) has any entitlement as of right to disclosure of anything which can plausibly be described as a trust document. Especially when there are issues as to personal or commercial confidentiality, the court may have to balance the competing interests of different beneficiaries, the trustees themselves, and third parties. Disclosure may have to be limited and safeguards may have to be put in place. Evaluation of the claims of a beneficiary (and especially of a discretionary object) may be an important part of the balancing exercise which the court has to perform on the materials placed before it. In many cases the court may have no difficulty in concluding that an applicant with no more than a theoretical possibility of benefit ought not to be granted any relief.

The Board then remitted the case to the High Court of the Isle of Man, but it provided guidance to the High Court on their views of the appellant’s case and in it they make clear that in their view the appellant had a powerful case for the fullest disclosure.[12]

Clearly, therefore, more recent cases disagree with and have replaced the older case law that allowed a beneficiary to claim disclosure on the basis that he is the owner of the relevant documents. Moreover, even remote beneficiaries will be granted disclosure in appropriate cases.

It should be noted that Michael Whitell was a beneficiary under a discretionary trust, so his interest was greater than that of Vitali Schmidt in the Schmidt case. Vitali was only a potential appointee under a power of appointment. But nonetheless, Michael’s interest could not be described as a proprietary interest. Under a discretionary trust a beneficiary cannot claim to be entitled to the capital or income of the trust. He is only entitled to what the trustee, in the exercise of his discretion pays him: only then does it become his property.

Thus, in conclusion, while the Master’s actual order in Whitell seems to have been appropriate, it was, with respect, based on older case law that has been superseded by more recent jurisprudence.

[1]    2020 ONSC 2310, 57 E.T.R. (4th) 273.

[2]    (1994), 20 O.R. (3d) 350, 1994 CarswellOnt 579 (Ont. Gen. Div. [Commercial List]) at paras. 2-4).

[3]    Ibid., para. 19.

[4]    Ibid., para. 2.

[5]    [1920] A.C. 581 at pp. 626-27, [1920] All E.R. Rep. 1 (H.L.)

[6]    [1964] 3 All E.R. 855 at 861, [1965] Ch. 918 (C.A.).

[7]    [2003] UKPC 26, [2003] 2 A.C. 709 (P.C. Isle of Man)

[8]    Supra.

[9]    Supra.

[10]   Schmidt v. Rosewood Trust Ltd., supra, para. 54.

[11]   (1886), 33 Ch. D. 179.

[12]   Schmidt v. Rosewood Trust, supra, para. 68.

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