In the Zhang and Ji v DBS Trustee case, the Hong Kong Court of Final Appeal (CFA) established that so-called “anti-Bartlett clauses” in the trust deed of a Jersey family trust exempted the trustees from any liability for losses incurred in transactions by the trust’s underlying investment company.
Reversing the decisions of Hong Kong’s Court of Appeal and lower courts, the CFA ruled that the anti-Bartlett clause contained in the trust deed effectively excluded any “high level supervisory duty” with any purported residual obligation on the part of the trustee in relation to the losses caused by risky investment decisions made on behalf of the trust’s underlying investment company unless they became aware of actual dishonesty.
During the 2008 financial crisis, Madame Ji Zhengrong (an expert in financial investment) and her husband Zhang Hong Li, settled up a trust.
The couple also created an offshore company called Wise Lords.
The Wise Lords company was owned by the trust to make high risk investments during the bubble, prior the 2008 crisis.
When the crash came, the company suffered a large amount of losses.
The spouses (beneficiaries of the trust), together with the succesor trustee and the Wise Lords company itself sued DBS Trustee HK (the former trustee) and its corporate director for breach of trust.
The court of first instance finded that the trustee had been in “serious and flagrant breach” and had breached its “high level of supervisory duty” by allowing the Wise Lord Company to buy financial products with high risk.
This ruling was confirmed by the Hong Kong Court of Appeal, despite the presence of an anti-Bartlett clause, which is normally used to exempt the trustees from any liability.
Reversing the decisions of Hong Kong’s Court of Appeal and lower courts, the CFA unanimously found that the trustees had no ‘high level residual duty’ to supervise the company’s activities, given that the anti-Bartlett provisions relieved them from any duty to interfere with or supervise the company’s conduct, unless they became aware of actual dishonesty.
Furthermore such a duty would require DBS Trustee to query and disapprove of the risky transactions, which would be interfering with Wise Lords’ business, contrary to the terms of the trust deed.
This is an important decision (and rare high level decision on this issue) which may reassure private wealth and trusts practitioners of the strength and scope of anti-Bartlett clauses”
The governing law of the trust was Jersey law. The principles will therefore likely be applicable in most of the major common law trust jurisdictions.
In conclusion, it is always recommended to be aware of the presence of Anti Bartlett Clause in trust deeds, in order to not become involved in the underlying business of companies held in the trust save where they detect dishonest activities.