The Judicial Committee of the Privy Council recently delivered an important decision clarifying the role of trust protectors where trust instruments require protector consent but are silent as to how that consent is to be exercised. The decision, A and 6 Others v C and 13 Others, provides authoritative guidance for settlors, trustees, and protectors alike and has significant implications for the drafting and operation of modern trust structures.
Background
Many modern trust instruments confer on protectors powers to approve or withhold consent to certain trustee decisions, such as appointments of capital or dealings with key assets. Often, however, those instruments do not specify the basis on which the protector is to decide whether consent should be given.
This drafting silence has given rise to uncertainty and debate over recent years, with two competing views emerging. Under a narrow supervisory approach, a protector’s role is limited to checking that the trustees’ proposed decision falls within the range of decisions open to a reasonable body of trustees. If so, consent should ordinarily be given. Under a wider approach, the protector is entitled to exercise an independent fiduciary discretion and may withhold consent even where the trustees’ proposal is reasonable.
The RST Trusts Decision
This uncertainty was brought into focus in the Bermuda case of In the matter of RST Trusts, where trustees and a protector sought court approval for an urgent share sale against the backdrop of an impending Privy Council decision expected to settle the issue.
Recognising both the commercial importance of the transaction and the unsettled law, the Bermuda court adopted a pragmatic approach and assessed the application under both the narrow and wide approaches. The court concluded that the protector’s consent could properly be given in any event and approved the transaction. The case highlighted both the usefulness of court guidance in appropriate circumstances and the practical difficulties created by uncertainty regarding the protector’s role.
The Privy Council Decision
The Privy Council has now resolved the issue. The appeal arose from a complex family trust structure involving multiple discretionary trusts governed by English, Jersey, and Bermudian law. The protectors had powers to approve capital appointments and transactions involving significant trust assets. When trustees proposed a scheme dividing trust assets unequally between two family branches, the protectors declined to approve it, on the basis that they were entitled to exercise an independent discretion.
The courts in Bermuda held that the protectors were limited to a narrow supervisory role. The Privy Council disagreed.
The Board unanimously allowed the appeal and held that where a trust instrument confers defined consent or veto powers on protectors but is silent as to how those powers are to be exercised, the protector is generally entitled to exercise an independent fiduciary discretion. The correct question is not whether the protector should be assumed to have one of two predefined roles, but whether the trust instrument itself imposes any constraints beyond those arising under general fiduciary law.
The Board emphasised that limitations on fiduciary powers must be found in the express language of the trust deed or arise by necessary implication. Silence does not, of itself, justify implying a restriction. In professionally drafted trust instruments, an apparent gap may be deliberate, reflecting a choice to leave fiduciaries with flexibility rather than constrain them with detailed rules.
In this case, the trust deeds imposed no express or implied limitation confining the protectors to a supervisory function. Accordingly, the protectors were entitled to exercise an independent discretion when deciding whether to give or withhold consent.
Practical Implications
The decision provides welcome clarity. Where protector consent is required and the trust instrument is silent, protectors should assume that they are expected to exercise an independent fiduciary judgment, taking into account relevant considerations and disregarding irrelevant ones, rather than merely policing the reasonableness of the trustees’ decision.
For settlors, the case highlights the importance of ensuring that protector provisions reflect their intentions. If a limited supervisory role is desired, that should be made explicit. Conversely, if protectors are expected to act as an independent fiduciary check, the implications of that role should be clearly understood.
Trustees and protectors should also take care to understand the scope of their respective functions when appointments are accepted and advice should be sought where there is uncertainty. In light of the Privy Council’s guidance, careful drafting and a shared understanding of protector powers are now critical to the effective and predictable operation of trust structures.
AUTHOR
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