1. Introduction
Many discretionary trusts confer broad powers on the trustees, including the power to add or exclude any person or class or description of persons. Do such powers give the trustees carte blanche, or are they constrained in any way? Trustees are in fact constrained by the ‘proper purpose rule’. What the proper purpose of a trust is depends upon construction of its terms. The issue arose in the recent important decision of the Privy Council, Grand View Private Trust Co Ltd v Wen-Young Wong and Grand View Private Trust Co Ltd v Wong (No 2).[1] It is another very long case that runs to 128 paragraphs.
2. Facts
Two brothers, YC Wang and WT Wang, built a group of companies into one of the largest business conglomerates in Taiwan. YC Wang died in 2008 and WT Wang died in 2014. They were the economic settlors (the Founders) of a settlement created in 2001, known as the Global Resource Trust (the GRT). The trust period was 100 years. The Trustee was Global Resource Private Trust Co Ltd (the GRT Trustee). The Founders caused a holding company which owned shares in the Wangs’ operating companies (FPG) to be transferred into the trust.
On the same day that the GRT was established, the Founders directed Grand View Private Trust Co Ltd (Grand View) to create another Bermuda-based trust, the Wang Family Trust (WFT). It is in fact a purpose trust that confers no benefits on members of the Wang family or any other persons. The purposes include holding the FPG shares with a view to ensuring the continued growth and prosperity of FPG; providing assistance to those in need through assistance to charities established by the Founders, and ‘improving the standard of living for mankind’; and ‘to implement and accomplish the Founders’ Vision’. That vision was contained in a statement reproduced in a recital to the WFT Trust Deed. The purposes of the trust are both charitable and non-charitable, and non-charitable purposes are permitted under Bermudian law. The trust’s assets comprise shares in investment companies that own FPG shares.
Although the trustee companies (GRT Trustee and Grand View) were separate entities, they had common directors, including two daughters of YC Wang, and two sons of YT Wang.
In May 2005, the Founders decided to retain their personal holdings in FPG. This meant that when they died, their heirs would inherit significant wealth. Thus, they concluded that there was no longer any need for a private trust for the benefit of their heirs.
Paragraphs 8 and 9 of the GRT Trust conferred powers on the GRT Trustee to add and exclude discretionary objects. The GRT Trustee proposed in May 2005 to exercise these powers and to appoint the entire fund to the trustee of the WFT and to exclude all the other discretionary objects (the children and remoter issue of the Founders). This would then lead to the termination of the GRT. However, this decision was not implemented. Instead, in September 2005 the GRT Trustee decided that it was in the best interests of the WFT, ‘as beneficiary of the [GRT]’, that the trust fund of the GRT be paid to WFT as a distribution pursuant to sections 3.1 and 4.1 of the GRT Trust. The GRT Trustee then executed an irrevocable deed to declare that WFT was included as a discretionary object, that all other current and future discretionary objects were excluded, and that the GRT would be terminated. The GRT Trustee did not seek the court’s approval for this action. The family members contested this decision (‘the challenged decision’).
Clause 3.1 of the GRT Trust Deed provides that the Trustees should hold the Trust Fund upon trust for the benefit of all or any one or more of the Beneficiaries, as the Trustees shall in their discretion appoint. Clause 4.1 provides that the Trustees may apply the whole or any part of the trust fund to or for the benefit of all or such one or more of the Beneficiaries as the Trustees should in their discretion decide.
Clause 8.1 permits the Trustees to declare that any person or class or description of person shall be included as a Beneficiary, and that any person or class or description of persons then included as Beneficiary shall cease to be a Beneficiary.
Clause 9 empowers the Trustees to transfer the Trust Fund to the trustees of another settlement.
In 2018 Winston Wong, the eldest son of YT Wang brought these proceedings alleging that the challenged decision was a breach of trust because the trustee: (1) took irrelevant considerations into account and did not act for the benefit of the beneficiaries of the GRT; (2) acted in excess of its power; (3) failed to exercise its powers for the purposes for which they were conferred; and (4) breached the rule against remoteness of vesting by transferring the Trust Fund to WFT, a purpose trust. The writ sought a declaration that Grand View holds the assets transferred to it on a resulting or constructive trust for GRT, and for other associated relief. Other family members joined the proceedings. Winston Wong then brought an application for summary judgment.
Kawaley AJ of the Supreme Court of Bermuda granted the application in 2019. In 2020 the Court of Appeal for Bermuda allowed Grand View’s appeal. The family members the appealed to the Privy Council.
3. Analysis and Judgment
Lord Richards, whom the other members of the Board agreed, delivered the Board’s advice.
Fiduciary powers
His Lordship noted first that the powers conferred on the GRT Trustee under clause 8 of the GRT Trust Deed are fiduciary powers and thus are subject to duties and restrictions imposed by equity. The issues, as formulated by the Court of Appeal, are these:[2]
(a) Whether the way in which the powers were exercised were within or contrary to their express or implied terms (the scope of the power rule);
(b) Whether the trustees had given adequate deliberation as to whether and how they should exercise the power; and
(c) Whether the use of the powers by the GRT Trustee, although within its scope, was for an improper purpose, i.e., a purpose other than the one for which it was conferred (the improper purpose rule).
The second duty was not relevant on the appeal.
The first duty ‘the scope of the power rule’ is not the same as the ‘improper purpose rule’ referred to in the third duty. Rather, it is concerned with the express and implied terms of the provision conferring the power, and that is determined by the construction of the provision.
The third duty, the proper purpose rule (which the Court of Appeal referred to as ‘the improper purpose rule’) requires the court to identify the purpose for which the power has been exercised and to determine whether that purpose is one for which the power has been given. This question arises only once the scope of the power has been determined. And once it has been determined, the court must then ascertain whether the exercise of the power was within its terms. In other words:
… the proper purpose rule is not concerned with excess of power by doing an act which is beyond the scope of the instrument creating it… It is concerned with abuse of power, by doing acts which are within its scope but done for an improper reason.
… The proper purpose rule is a principle by which equity controls the exercise of a fiduciary’s powers in respects which are not, or not necessarily, determined by the instrument.[3]
In paragraph 56, Lord Richards makes an important point. He says that in the past the proper purpose rule was normally referred to as ‘fraud on a power’ and it is still sometimes called that. However, the rule is not limited to cases involving reprehensible conduct on the part of the fiduciary, but, applies to any case in which a fiduciary power is used for a purpose that does not fall within the purposes for which the power was conferred. He also refers to cases that disapprove of the term ‘fraud on the power’ and says that it should be discarded and replaced by the term ‘the proper purpose rule’ (although there was no such letter in this case).
His Lordship then refers to a number of cases that explore the origin of the rule. Then he goes on to note that the proper purpose is determined by interpretation of the instrument that contains the purpose. For the interpretation the court may consider external documents that ‘objectively inform the context of the instrument’. These will clearly include the trust deed but will also include other substantially contemporaneous documents that are intended to be read with the trust deed, such as a letter of wishes.
The provisions of the GRT Trust Deed
His Lordship noted that the powers conferred by clause 8 are very wide. But the real question was whether the purpose for which the power was exercised was outside the purpose for which it was conferred. It was not disputed that the GRT Trustee’s purpose was to exclude all the existing Beneficiaries and replace them with a purpose trust (the WFT). The GRT Trustee acted in this way because, as explained above, the Founders had decided that there was no longer a need for a private trust for the benefit of their families. The GRT Trustee regarded this as a change in circumstances that changed the basis on which the GRT was formed. And therefore, it believed that it was justified in transferring the GRT assets to the WFT.
Thus, the issue was whether this purpose of the GRT Trustee was outside the purpose for which the powers of addition and exclusion under clause 8 had been granted.
Understandably, Grand View placed great emphasis on the broad terms of clause 8. But Lord Richards held that while clause 8 was very relevant in deciding the issue, it was only part of the enquiry. In his opinion, Grand View’s reliance on the broad scope of clause 8 was not really supported by the other provisions of the GRT Trust Deed. While clause 15 of the GRT Trust Deed states that every discretion and power conferred on the Trustee is ‘absolute and unfettered’, that does not oust the proper purpose rule.
The Board concluded that the natural reading of the GRT Trust Deed showed it created a family trust for the benefit of the direct descendants of the Founders, and the family character of the trust is emphasised throughout. In contrast, there was nothing in clause 8 beside the broad language that was intended to give the GRT Trustee power to exclude the family members from any benefit under the GRT Trust and to substitute another trust that was entirely different and could not confer any benefit on the Founders’ children and remoter issue.
Moreover, the context in which the GRT Trust was created supports the view that the powers under clause 8 are limited. It is particularly significant that the Founders created the WFT at the same time as the GRT. At the time they were dividing the FPG shares owned by their investment companies into two parts. The greater part of the value of those shares would be owned by WFT and other purpose trusts, whereas a much smaller part would be held by GRT for the benefit of the children and remoter issue of the Founders. Further, neither trust suggested that the two were linked.
The strong views of the Founders about the purposes to which their wealth should be applied, as expressed in a recital to the WFT Trust Deed, provides further support for the narrow interpretation of clause 8. Thus, the Founders established the GRT for the benefit of their families.
Although there was evidence that in 2000 the Founders were planning to create a single purpose trust with no beneficiaries that would the largest part of their wealth, and that their families would benefit on their deaths from the Founders’ retained assets, that plan was not implemented. Instead, a large part of the Founders’ wealth was divided among the two trusts. Moreover, neither the GRT Trust nor the surrounding circumstances suggested that the interests of the children and remoter issue could be terminated if the GRT Trustee should conclude that the trust in their favour was no longer needed.
In this respect the GRT Trust is very different from other modern discretionary trusts that give very wide powers and discretions to the trustees in favour of a widely defined class of beneficiaries. Those trusts are distinguishable from the GRT Trust, which has carefully prescribed classes of objects and default beneficiaries.
Therefore, it was the Board’s view the GRT Trust Deed’s focus on the children and remoter issue of the Founders, and the circumstances in which the GRT was created, meant that the purpose of the powers of addition and exclusion was to promote the interests of the Beneficiaries.
The ‘substratum rule’
Winston Wong argued that the powers under clause 8 could not be used to destroy the nature or substratum of the GRT Trust Deed. In his submission, the substratum rule is an absolute rule which circumscribes powers of amendment, including powers such as those in clause 8. However, the Board rejected this submission. First, because the powers under clause 8 are not powers of amendment and their exercise does not involve an amendment to the GRT Trust Deed. Second, there is no absolute substratum rule. If the rule is considered a rule of construction, it will be subject to all the matters that are taken into account in construing any instrument. It is not an overriding factor that determines how a power must be construed. Nonetheless, the purpose of a trust is of central importance in determining the scope of a power to amend it or to add or exclude objects.
The best interests of the identified objects and beneficiaries
It was also submitted by the appellants that the purpose of all fiduciary powers conferred on a trustee of a private trust with identified beneficiaries is to advance the interests of the beneficiaries as they are constituted when the power is exercised. The Board agreed that this is generally the case but noted that the power to add or exclude beneficiaries is of a different character, since it can be used to make significant changes to the trust. Thus, the court cannot determine the purpose of such a power by applying such an overriding principle that the power must be exercised in the interests of the beneficiaries.
Conclusion on proper purpose
Thus, the Board concluded that the challenged decision was taken by the GRT Trustee for an improper purpose. But it did not apply rigid approaches such as those raised by the appellants.
Remoteness of vesting
Clause 9 of the GRT Trust Deed provided that no payment or transfer can be made if it would or might infringe any rule governing remoteness of vesting. This could suggest that the stricter common law rule against perpetuities was being incorporated, even though, by statute in Bermuda, the ‘wait and see’ principle applies, that raised the question whether clause 4 (under which the transfer of assets was made) was subject to the express restriction in clause 9. The Board concluded that there were no grounds for reading the stricter rule into clause 4.
Conclusion
Therefore, the Board allowed the appeal.
—
[1] [2022] UKPC 47.
[2] Based on the judgment of Lord Walker in Pitt v Holt, [2013] UKSC 26, para 60-61.
[3] Eclairs Croup Ltd v JKX Oil & Gas plc [2015] UKSAC 71, pars 15, 30, per Lord Sumption.
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Written by: Albert Oosterhoff
Posted on: March 20, 2023
Categories: Commentary, WEL Newsletter
1. Introduction
Many discretionary trusts confer broad powers on the trustees, including the power to add or exclude any person or class or description of persons. Do such powers give the trustees carte blanche, or are they constrained in any way? Trustees are in fact constrained by the ‘proper purpose rule’. What the proper purpose of a trust is depends upon construction of its terms. The issue arose in the recent important decision of the Privy Council, Grand View Private Trust Co Ltd v Wen-Young Wong and Grand View Private Trust Co Ltd v Wong (No 2).[1] It is another very long case that runs to 128 paragraphs.
2. Facts
Two brothers, YC Wang and WT Wang, built a group of companies into one of the largest business conglomerates in Taiwan. YC Wang died in 2008 and WT Wang died in 2014. They were the economic settlors (the Founders) of a settlement created in 2001, known as the Global Resource Trust (the GRT). The trust period was 100 years. The Trustee was Global Resource Private Trust Co Ltd (the GRT Trustee). The Founders caused a holding company which owned shares in the Wangs’ operating companies (FPG) to be transferred into the trust.
On the same day that the GRT was established, the Founders directed Grand View Private Trust Co Ltd (Grand View) to create another Bermuda-based trust, the Wang Family Trust (WFT). It is in fact a purpose trust that confers no benefits on members of the Wang family or any other persons. The purposes include holding the FPG shares with a view to ensuring the continued growth and prosperity of FPG; providing assistance to those in need through assistance to charities established by the Founders, and ‘improving the standard of living for mankind’; and ‘to implement and accomplish the Founders’ Vision’. That vision was contained in a statement reproduced in a recital to the WFT Trust Deed. The purposes of the trust are both charitable and non-charitable, and non-charitable purposes are permitted under Bermudian law. The trust’s assets comprise shares in investment companies that own FPG shares.
Although the trustee companies (GRT Trustee and Grand View) were separate entities, they had common directors, including two daughters of YC Wang, and two sons of YT Wang.
In May 2005, the Founders decided to retain their personal holdings in FPG. This meant that when they died, their heirs would inherit significant wealth. Thus, they concluded that there was no longer any need for a private trust for the benefit of their heirs.
Paragraphs 8 and 9 of the GRT Trust conferred powers on the GRT Trustee to add and exclude discretionary objects. The GRT Trustee proposed in May 2005 to exercise these powers and to appoint the entire fund to the trustee of the WFT and to exclude all the other discretionary objects (the children and remoter issue of the Founders). This would then lead to the termination of the GRT. However, this decision was not implemented. Instead, in September 2005 the GRT Trustee decided that it was in the best interests of the WFT, ‘as beneficiary of the [GRT]’, that the trust fund of the GRT be paid to WFT as a distribution pursuant to sections 3.1 and 4.1 of the GRT Trust. The GRT Trustee then executed an irrevocable deed to declare that WFT was included as a discretionary object, that all other current and future discretionary objects were excluded, and that the GRT would be terminated. The GRT Trustee did not seek the court’s approval for this action. The family members contested this decision (‘the challenged decision’).
Clause 3.1 of the GRT Trust Deed provides that the Trustees should hold the Trust Fund upon trust for the benefit of all or any one or more of the Beneficiaries, as the Trustees shall in their discretion appoint. Clause 4.1 provides that the Trustees may apply the whole or any part of the trust fund to or for the benefit of all or such one or more of the Beneficiaries as the Trustees should in their discretion decide.
Clause 8.1 permits the Trustees to declare that any person or class or description of person shall be included as a Beneficiary, and that any person or class or description of persons then included as Beneficiary shall cease to be a Beneficiary.
Clause 9 empowers the Trustees to transfer the Trust Fund to the trustees of another settlement.
In 2018 Winston Wong, the eldest son of YT Wang brought these proceedings alleging that the challenged decision was a breach of trust because the trustee: (1) took irrelevant considerations into account and did not act for the benefit of the beneficiaries of the GRT; (2) acted in excess of its power; (3) failed to exercise its powers for the purposes for which they were conferred; and (4) breached the rule against remoteness of vesting by transferring the Trust Fund to WFT, a purpose trust. The writ sought a declaration that Grand View holds the assets transferred to it on a resulting or constructive trust for GRT, and for other associated relief. Other family members joined the proceedings. Winston Wong then brought an application for summary judgment.
Kawaley AJ of the Supreme Court of Bermuda granted the application in 2019. In 2020 the Court of Appeal for Bermuda allowed Grand View’s appeal. The family members the appealed to the Privy Council.
3. Analysis and Judgment
Lord Richards, whom the other members of the Board agreed, delivered the Board’s advice.
Fiduciary powers
His Lordship noted first that the powers conferred on the GRT Trustee under clause 8 of the GRT Trust Deed are fiduciary powers and thus are subject to duties and restrictions imposed by equity. The issues, as formulated by the Court of Appeal, are these:[2]
(a) Whether the way in which the powers were exercised were within or contrary to their express or implied terms (the scope of the power rule);
(b) Whether the trustees had given adequate deliberation as to whether and how they should exercise the power; and
(c) Whether the use of the powers by the GRT Trustee, although within its scope, was for an improper purpose, i.e., a purpose other than the one for which it was conferred (the improper purpose rule).
The second duty was not relevant on the appeal.
The first duty ‘the scope of the power rule’ is not the same as the ‘improper purpose rule’ referred to in the third duty. Rather, it is concerned with the express and implied terms of the provision conferring the power, and that is determined by the construction of the provision.
The third duty, the proper purpose rule (which the Court of Appeal referred to as ‘the improper purpose rule’) requires the court to identify the purpose for which the power has been exercised and to determine whether that purpose is one for which the power has been given. This question arises only once the scope of the power has been determined. And once it has been determined, the court must then ascertain whether the exercise of the power was within its terms. In other words:
… the proper purpose rule is not concerned with excess of power by doing an act which is beyond the scope of the instrument creating it… It is concerned with abuse of power, by doing acts which are within its scope but done for an improper reason.
… The proper purpose rule is a principle by which equity controls the exercise of a fiduciary’s powers in respects which are not, or not necessarily, determined by the instrument.[3]
In paragraph 56, Lord Richards makes an important point. He says that in the past the proper purpose rule was normally referred to as ‘fraud on a power’ and it is still sometimes called that. However, the rule is not limited to cases involving reprehensible conduct on the part of the fiduciary, but, applies to any case in which a fiduciary power is used for a purpose that does not fall within the purposes for which the power was conferred. He also refers to cases that disapprove of the term ‘fraud on the power’ and says that it should be discarded and replaced by the term ‘the proper purpose rule’ (although there was no such letter in this case).
His Lordship then refers to a number of cases that explore the origin of the rule. Then he goes on to note that the proper purpose is determined by interpretation of the instrument that contains the purpose. For the interpretation the court may consider external documents that ‘objectively inform the context of the instrument’. These will clearly include the trust deed but will also include other substantially contemporaneous documents that are intended to be read with the trust deed, such as a letter of wishes.
The provisions of the GRT Trust Deed
His Lordship noted that the powers conferred by clause 8 are very wide. But the real question was whether the purpose for which the power was exercised was outside the purpose for which it was conferred. It was not disputed that the GRT Trustee’s purpose was to exclude all the existing Beneficiaries and replace them with a purpose trust (the WFT). The GRT Trustee acted in this way because, as explained above, the Founders had decided that there was no longer a need for a private trust for the benefit of their families. The GRT Trustee regarded this as a change in circumstances that changed the basis on which the GRT was formed. And therefore, it believed that it was justified in transferring the GRT assets to the WFT.
Thus, the issue was whether this purpose of the GRT Trustee was outside the purpose for which the powers of addition and exclusion under clause 8 had been granted.
Understandably, Grand View placed great emphasis on the broad terms of clause 8. But Lord Richards held that while clause 8 was very relevant in deciding the issue, it was only part of the enquiry. In his opinion, Grand View’s reliance on the broad scope of clause 8 was not really supported by the other provisions of the GRT Trust Deed. While clause 15 of the GRT Trust Deed states that every discretion and power conferred on the Trustee is ‘absolute and unfettered’, that does not oust the proper purpose rule.
The Board concluded that the natural reading of the GRT Trust Deed showed it created a family trust for the benefit of the direct descendants of the Founders, and the family character of the trust is emphasised throughout. In contrast, there was nothing in clause 8 beside the broad language that was intended to give the GRT Trustee power to exclude the family members from any benefit under the GRT Trust and to substitute another trust that was entirely different and could not confer any benefit on the Founders’ children and remoter issue.
Moreover, the context in which the GRT Trust was created supports the view that the powers under clause 8 are limited. It is particularly significant that the Founders created the WFT at the same time as the GRT. At the time they were dividing the FPG shares owned by their investment companies into two parts. The greater part of the value of those shares would be owned by WFT and other purpose trusts, whereas a much smaller part would be held by GRT for the benefit of the children and remoter issue of the Founders. Further, neither trust suggested that the two were linked.
The strong views of the Founders about the purposes to which their wealth should be applied, as expressed in a recital to the WFT Trust Deed, provides further support for the narrow interpretation of clause 8. Thus, the Founders established the GRT for the benefit of their families.
Although there was evidence that in 2000 the Founders were planning to create a single purpose trust with no beneficiaries that would the largest part of their wealth, and that their families would benefit on their deaths from the Founders’ retained assets, that plan was not implemented. Instead, a large part of the Founders’ wealth was divided among the two trusts. Moreover, neither the GRT Trust nor the surrounding circumstances suggested that the interests of the children and remoter issue could be terminated if the GRT Trustee should conclude that the trust in their favour was no longer needed.
In this respect the GRT Trust is very different from other modern discretionary trusts that give very wide powers and discretions to the trustees in favour of a widely defined class of beneficiaries. Those trusts are distinguishable from the GRT Trust, which has carefully prescribed classes of objects and default beneficiaries.
Therefore, it was the Board’s view the GRT Trust Deed’s focus on the children and remoter issue of the Founders, and the circumstances in which the GRT was created, meant that the purpose of the powers of addition and exclusion was to promote the interests of the Beneficiaries.
The ‘substratum rule’
Winston Wong argued that the powers under clause 8 could not be used to destroy the nature or substratum of the GRT Trust Deed. In his submission, the substratum rule is an absolute rule which circumscribes powers of amendment, including powers such as those in clause 8. However, the Board rejected this submission. First, because the powers under clause 8 are not powers of amendment and their exercise does not involve an amendment to the GRT Trust Deed. Second, there is no absolute substratum rule. If the rule is considered a rule of construction, it will be subject to all the matters that are taken into account in construing any instrument. It is not an overriding factor that determines how a power must be construed. Nonetheless, the purpose of a trust is of central importance in determining the scope of a power to amend it or to add or exclude objects.
The best interests of the identified objects and beneficiaries
It was also submitted by the appellants that the purpose of all fiduciary powers conferred on a trustee of a private trust with identified beneficiaries is to advance the interests of the beneficiaries as they are constituted when the power is exercised. The Board agreed that this is generally the case but noted that the power to add or exclude beneficiaries is of a different character, since it can be used to make significant changes to the trust. Thus, the court cannot determine the purpose of such a power by applying such an overriding principle that the power must be exercised in the interests of the beneficiaries.
Conclusion on proper purpose
Thus, the Board concluded that the challenged decision was taken by the GRT Trustee for an improper purpose. But it did not apply rigid approaches such as those raised by the appellants.
Remoteness of vesting
Clause 9 of the GRT Trust Deed provided that no payment or transfer can be made if it would or might infringe any rule governing remoteness of vesting. This could suggest that the stricter common law rule against perpetuities was being incorporated, even though, by statute in Bermuda, the ‘wait and see’ principle applies, that raised the question whether clause 4 (under which the transfer of assets was made) was subject to the express restriction in clause 9. The Board concluded that there were no grounds for reading the stricter rule into clause 4.
Conclusion
Therefore, the Board allowed the appeal.
—
[1] [2022] UKPC 47.
[2] Based on the judgment of Lord Walker in Pitt v Holt, [2013] UKSC 26, para 60-61.
[3] Eclairs Croup Ltd v JKX Oil & Gas plc [2015] UKSAC 71, pars 15, 30, per Lord Sumption.
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