Trust but Verify: Foreign Trustee’s Liability Under English Agreement Limited by Foreign Law

Kevin Kee and Andy Lau

A Jersey trustee’s liability under an English law governed loan agreement was limited by Jersey trust law, the Privy Council has held. In doing so, the Privy Council laid down a general rule applying to foreign entities, including unincorporated entities. Under this general rule, the common law will give effect to limitations of liability under the entity’s governing law that arise by reason of the entity’s status or capacity: Investec Trust (Guernsey) Ltd & Anor v Glenalla Properties Ltd [2018] UKPC 7 (23 April 2018).

Before this decision the general rule was well established in relation to foreign companies and other foreign entities that had a separate legal personality (at least to some degree) under their foreign governing law. This decision extends the general rule to foreign entities that do not have a separate legal personality, such as common law partnerships, associations and trustees.

While this decision is strictly binding only as a matter of Guernsey law, the Privy Council’s decision is likely to be strongly persuasive in the English courts and in common law jurisdictions where the Privy Council is the apex appellate court. It is further likely to be given great respect in other common law jurisdictions.

For transactional lawyers, one consequence of this decision is that counterparty risk assessment for transactions with a foreign entity (including entities without separate legal personality) should include consideration of the law governing the entity to see whether it contains some provision that may affect the status or capacity of the entity and thereby vary contractual rights and liabilities that would otherwise exist.

For disputes lawyers, the general rule should be considered not only in assessing the contractual liabilities of a foreign entity (including entities without separate legal personality), but also arguably in assessing the foreign entity’s non-contractual liabilities, such as for negligent misstatement.

Facts and Issue

We set out a simplified summary of the facts so as to bring to the fore the key issue in dispute that gave rise to the Privy Council’s decision regarding the general rule. The case concerned a loan agreement governed by English law under which a trustee of a trust governed by Jersey law borrowed funds. The lenders brought an action under the loan agreement against the trustee in the Guernsey courts.

The trustee contended that its liability should be determined under Jersey law, the law governing the trust, with the result that its liability was limited to assets held by the trustee as a trustee, and not assets held by the trustee personally. The Jersey trustee relied on Article 32(1)(a) of the Trust (Jersey) Law, which provided that:

“…if the other party [to a transaction or matter affecting the trust] knows that the trustee is acting as a trustee, any claim by the other party shall be against the trustee as trustee and shall extend only to the trust property.”

The lenders contended that the trustee’s liability was governed by English law, being the law of the contract. Under English law, the trustee’s liability was not limited to trust assets, but also extended to the trustee’s personal assets, unless the trustee had excluded this personal liability by way of contract (which the Jersey trustee had not done in this case).

Lord Hodge, with whom Lord Sumption and Lord Carnwath agreed, delivered the majority judgment in favour of the trustee, including on the basis of the general rule. Lord Mance and Lord Briggs in separate judgments rejected this general rule, though Lord Briggs agreed with the majority judgment on other grounds. We focus below on the majority’s judgment based on the general rule.

The General Rule Regarding Foreign Entities

The question before the Board was a private international law issue that required the identification of the appropriate law. The contest was between English law, the proper law of the loan agreement, and Jersey law (specifically, Article 32 of the Trust (Jersey) Law), the law governing the Jersey trust.

Lord Hodge rejected the lenders’ contention that English law applied. While his Lordship accepted the general rule that the proper law of an obligation governed not only its discharge but its extent, he rejected the characterisation of the issue in this case as relating to the discharge or extent of the trustee’s obligation. His Lordship stated that Article 32 of the Trust (Jersey) Law does not affect the substance of the trustee’s obligation or how it must be performed – all it does is to limit the class of assets that the lenders may have recourse to in enforcing the loan agreement (at [79]).

Conversely, Lord Hodge accepted the trustee’s contention that Article 32 of the Trust (Jersey) Law applied. His Lordship accepted this contention on three grounds, one of which was on the basis of the general rule. His Lordship’s reasoning based on the general rule is summarised below.

  1. First, following a review of authorities, his Lordship held that “as a general rule the common law will recognise and give effect to limitations of liability which arise under an entity’s constitutive law by reason of the particular status or capacity in which its members or officers assume an obligation” (at [88]).
  2. Second, his Lordship held that the Jersey trust was covered by this general rule even though it did not have a separate legal personality. His Lordship said that the general rule was not confined “to entities which have separate legal personality, but would apply…to partnerships, including firms registered under the Limited Partnerships Act 1907 or similar foreign legislation, associations of persons without legal personality and also a Jersey or Guernsey trust.” (at [89]).
  3. Third, his Lordship held that Article 32 of the Trust (Jersey) Law was a law relating to the “status” of the Jersey trustee in the sense that it provided for the allocation of liabilities where the trustee assumed an obligation on behalf of the trust. Specifically, the Article provided that, where the trustee transacted openly as a trustee, the Jersey trustee’s liability would be limited to trust property (at [84], [91]).

As a result, Lord Hodge held that Article 32 of the Trust (Jersey) Law, being a law that related to the status of a foreign entity, should be recognised and given effect to so as to limit the Jersey trustee’s liability. This was so even though the liability arose under a loan agreement governed by English law.

The Dissenting Judgments

Lord Mance and Lord Briggs in separate judgments rejected this general rule. In particular, Lord Mance’s forceful dissent raised a number of practical and jurisprudential arguments against the adoption of the general rule. His Lordship described the general rule as “a radical and unprincipled innovation, with potentially far-reaching consequences, even if, at present, it may be confined to Jersey law.”

Discussion

The Privy Council’s decision was made on appeal from Guernsey and is therefore strictly binding only with respect to Guernsey law. However, there is no reason to think that Guernsey common law on this point of private international law would be different from the English common law. It may therefore be expected that the English courts, including the Supreme Court, would regard this decision as being of “great weight and persuasive value” even despite the narrow 3:2 majority by which the decision was reached (see Willers v Joyce (Re: Gubay (deceased) No 2) [2016] 3 WLR 534). It may also be expected that other common law jurisdictions where the Privy Council is the apex appellate court would attach great weight and persuasive value to this decision.

Further, it may be expected that the Privy Council’s decision would be accorded great respect in other common law jurisdictions where the Privy Council or Supreme Court is not the apex appellate court, such as Hong Kong (see A Solicitor v The Law Society of Hong Kong [2008] 2 HKLRD 576, [17]).

The general rule provides greater certainty in the law by laying down a single rule that gives effect to the status and capacity of all foreign entities under their constitutive law, whether or not they have a separate legal personality. Despite this, there remain areas of uncertainty in the application of the general rule (aside from whether it will be adopted in other common law jurisdictions).

First, Lord Hodge’s decision was not explicit regarding what amounts to an “entity” for the purposes of the general rule. There is a real prospect for litigation regarding whether relationships or structures recognised under a foreign law but unfamiliar to the common law would amount to an “entity” for the purposes of the general rule.

Second, there is room for significant argument regarding whether a particular provision under a foreign law amounts to a provision regarding the “status” or “capacity” of the foreign entity. Lord Mance’s dissent included a number of arguments directed at rejecting the characterisation of Article 32 of the Trust (Jersey) Law as going to the Jersey trustee’s status. We may expect such arguments to arise in many cases where a foreign entity seeks to invoke the general rule.

Third, it is not settled whether or the extent to which the general rule will apply to non-contractual liabilities of the foreign entity.

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