In the Matter of A Trust (Change of Governing Law) [2017] SC (Bda) 38 Civ (19 May 2017)

In the Matter of A Trust (Change of Governing Law) [2017] SC (Bda) 38 Civ (19 May 2017)

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Fozeia Rana-Fahy is a Director in the firm’s litigation practice group. Ms. Rana-Fahy practices in the areas of civil and commercial litigation and is an accredited mediator.

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The Chief Justice has recently considered the impact of the Children Act 1998 (“the Act”) as amended by the Children Amendment Act 2002 (“the 2002 Amendments”) upon the ability of trustees to change the governing law of a foreign law trust to Bermuda.

The 2002 Amendments, which came into force in January 2004, created a new rule for construing all instruments, including international trusts. On one reading of the Act, a person can no longer validly give a gift or make dispositions of property to their “legitimate children” only (unless each legitimate child is identified by name), since such a gift/disposition would be construed as a gift/disposition to their legitimate and illegitimate children.

Based on one interpretation of the Act, all references to child/children/issue in a foreign law trust changing its law to Bermuda would therefore be automatically construed to include any illegitimate children who may be currently expressly excluded under the trust.

Further, read literally, the Act applies to not just settlements or other instruments governed by Bermuda law made after January 2004 but also to dispositions of property and instruments which were validly made under foreign governing law after January 2004 but which subsequently changed their governing law to Bermuda.

In the Matter of A Trust (Change of Governing Law) a trustee wished to modernise various provisions of a Caymanian law trust (“the Trust”) and to change the governing law to Bermuda using Section 47 of the Trustee Act 1975. The Trust was supplemental to an earlier trust which was settled in 1983. The beneficiaries of the trust included the legitimate issue of the principal beneficiary.

The question in this case arose as to whether the change of domicile could be properly exercised if it triggered the application of the Act thereby adversely impacting the interests of the legitimate issue (by widening the class to include illegitimate children). Thereafter, it had to be determined if (i) a disposition made under the Caymanian law after January 2004 was inconsistent with Bermuda law and (ii) an instrument made under the same disposition after the governing law was changed to Bermuda was inconsistent with Bermuda law.

The Chief Justice held that the change of governing law power could be exercised without triggering the operation of Act to the Trust and any instruments executed under it.

He found that the Act could not sensibly be construed as extending to trusts governed by foreign law. This point was fortified by reference to the broadly analogous legislative context of the Human Rights Act 1981, which prohibits discrimination on the grounds of family status. Indeed Parliament had made it plain that the Human Rights Act did not apply to international instruments involving property beneficially owned by persons who were neither Bermudians nor ordinarily resident in Bermuda. The Chief Justice further highlighted the general legal presumption that a colonial legislature has no competence to legislate with extra-territorial effect.

Accordingly, trusts settled and dispositions validly made under foreign law after January 2004 are not impacted by the Act. An instrument made under the same disposition, after its governing law had been changed to Bermuda, is not caught by the Act. Also, an instrument making an appointment after January 2004 under a settlement made before January 2004 is not caught by the Act.

In the Chief Justice’s view, clearer statutory language would have been required to justify construing the Act to retrospectively interfere with rights under dispositions originally made under a foreign governing law after January 2004 merely because the trustees of such settlements choose to have the settlement governed by Bermuda law. In coming to this conclusion, the Chief Justice adopted a purpose approach to construction of statutory provisions which requires the interpreter to apply, inter alia, a starting presumption that Parliament does not intend to interfere with existing property rights or legislate with retrospective effect.

Some international clients, either on grounds of principle or religion, want the freedom to prevent illegitimate children from benefitting under trust. Other international clients are concerned about lack of certainty as to beneficiaries where illegitimate heirs could benefit from a trust. The curtailment of the freedom, imposed by the 2002 Amendments, to make gifts and dispositions to only legitimate children has been practically and significantly addressed by this recent case. International clients now have the comfort that they can move their trusts to Bermuda without impacting the exclusion of illegitimate children.