Analyzing The Legality of a Forfeiture Clause Within a Bermuda Will

Analyzing The Legality of a Forfeiture Clause Within a Bermuda Will

In an anonymised ruling of December 2014, In the Matter of the Estate of PQR, Deceased [2014] Bda No. 205, Chief Justice Kawaley analysed the legality of a forfeiture clause within a Bermuda will. The point of construction was one that had not been determined as a matter of Bermuda law and turned on the divergence between commonwealth case law (more hostile to the validity of forfeiture clauses) and English case law (less hostile to the notion of seeking to give reasonable effect to forfeiture clauses).

The forfeiture clause stated that if the daughter of the testator initiated any litigation of any type relating to the will or to the testator’s ownership of a certain property, or to his wife in general, then the daughter would forfeit the (significant) cash and investment legacy and would receive no benefit under the will.

On behalf of the daughter it was argued that the condition was void as being merely in terrorem, and/or void for uncertainty and/or void for repugnancy on public policy grounds.

The “in terrorem” policy can be summarised as a provision which cannot be imposed as an idle threat but, instead, has to be one that effects the termination of the forfeited interest by making a gift over of that interest to someone else. The Chief Justice held that there was an abundance of clear and highly persuasive authority supporting the Privy Council decision in Leong v Lim Beng Chye [1955] A.C 648 in which it was held that a forfeiture clause linked to a gift of personal property is void unless there is an express gift over linked to the relevant condition subsequently. In this particular will, the residue clause in favour of the testator’s wife was a standard residue clause containing no reference to the forfeiture clause.

The Chief Justice was not persuaded that just because there were only two beneficiaries under the will that it was therefore clear by necessary implication that the wife was intended to acquire the daughter’s interest if it was forfeited. Neither was the Chief Justice persuaded that the “in terrorem” policy applied solely to covenants in restraint of marriage (a large portion of 300 year old case law on the policy related to restraint of marriage) nor that allowance should be made where the will is effectively “homemade”.

As there was no gift over anywhere in the will, the Chief Justice therefore made his primary finding that the forfeiture provision was of no legal effect due to being merely in terrorem.

With respect to the argument that the forfeiture clause was void for uncertainty, the Chief Justice opted to save the forfeiture provision from invalidity following the broad purposive approach taken by Smellie CJ in A.N v Barclays Private Bank and Trust (Cayman) Limited [2006] CILR 67.

In that case, the uncertainty challenge was made to what was a “no contest” clause in a trust deed which stated “whosoever contests the validity of this deed and the Trust created under it …and of the decisions of the Trustee…shall cease to be a beneficiary of any of these trusts and shall be excluded from any benefits direct or indirect deriving from the trust fund”. The challenging beneficiary in that case sought to argue that the clause was uncertain, it being clearly established in the will cases that a forfeiture clause should be strictly construed. A beneficiary must be able to identify clearly from the terms of the clause what conduct or event will result in forfeiture. Although Smellie CJ held that, construed literally and in isolation, the no contest provision was too uncertain, he went on to provide a detailed analysis of the law of uncertainty in this area. In so doing, he found that the no contest provision had to be read in the context of the trust deed as a whole and that it “must be read by implication as allowing not only such contests which are successful, but also contests which are justifiable in the sense of being taken bona fide, not frivously or vexatiously and with probabilis causa litigandi”.

Adopting this approach, Chief Justice Kawaley in the PQR case construed the forfeiture clause as only prohibiting unjustified claims against the wife, be they related or unrelated to the will. A claim would be “unjustified” if it was either not advanced in good faith or if there was no good reason for it being pursued. The Chief Justice found this to reflect the predominant modern English approach of only invalidating a clause in a trust deed or will on grounds of uncertainty as a last resort.

With respect to the argument that the forfeiture clause was void for repugnancy on public policy grounds, the Chief Justice again construed the clause in such a way as to save it from invalidity, following the approach taken in A.N v Barclays. The general rule is that it is only in cases of ambiguity that public policy considerations are deployed to determine how the relevant provision should be interpreted. Clear words generally trump all.

Although public policy considerations were deployed in several commonwealth decisions, the Chief Justice preferred the approach in A.N v Barclays which he considered better reflected the predominant approach of English judges over the ages and was consistent with the distinctive approach to construing no contest and similar forfeiture clauses in wills and trusts. When confronted with a conflict between even clear words and an opposing public policy consideration, the presumption that the testator/trustee intended to make a valid gift is engaged to ensure validity and avoid invalidity.

Based on the primary finding on the in terrorem policy, the daughter was successful in obtaining a declaration from the court that the forfeiture clause was invalid and of no effect. Notwithstanding this finding, the daughter would be free to commence justifiable litigation including applications for the due administration of the will and any other good faith adverse challenges for which there was good cause.

MJM Director, Fozeia Rana-Fahy, recently presented on this case and on the impact of the recent Privy Council decision of Crociani & O’rs v Crociani & O’rs [2014] UKPC 40 in the context of complex cross border disputes at the Trust & Estates Litigation Forum in Provence this March. She is the leader of the trust and private client group within the Bermuda Business Development Agency which actively promotes and advances the industry internationally.