'No contest' clauses and the fair dealing rule - Cayman court decision

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The Cayman court has confirmed that ‘no contest’ clauses in Cayman trusts, which are designed to prevent a beneficiary from challenging the terms of the trust or the manner in which the trustees exercise their discretionary powers, are enforceable.

The ruling in AB Jnr & Another v MB & Others (18 December 2012) confirms the approach taken by the Cayman Grand Court in 2006 in AN v Barclays Bank & Trust (Cayman) Ltd.

The court also found that the trustees had breached the ‘fair dealing’ rule in their dealings with one of the beneficiaries.

What is a no contest clause?

A ‘no contest’ clause is a clause in a trust (or a will) which is designed to prevent a beneficiary from challenging the terms of the trust or the manner in which the trustees exercise their discretionary powers. No contest clauses usually provide that if a beneficiary challenges any provision of the trust, or the actions of the trustees, he or she forfeits any interest he or she has, or may in the future have, in the trust.

What conduct is sufficient to invoke a no contest clause?

The ‘no contest’ clause in the trust deed, in this case, stated that a beneficiary's interest in the trust would be forfeited if the beneficiary did anything which "would frustrate the dispositive plan contemplated in this Trust”.

It was alleged that the conduct of the settlor’s third wife, after the death of the settlor, was such that she should forfeit her interest in the trust.

On the facts of the case, the court found that the beneficiary’s conduct was sufficient to justify invoking the ‘no contest’ clause within the trust deed. However, the remaining beneficiaries of the trust were prevented from claiming that she should forfeit her interest as a result of the terms of a settlement reached between the beneficiaries and the trustees in 1999.

The court felt that the following actions, taken by the beneficiary, were sufficient to invoke the ‘no contest’ clause:

  • she refused to allow the trustees access to a valuable art collection, owned by the trust, which was kept in a property in Paris. She also arranged for several items from the art collection to be sold;
  • following the settlor’s death, she claimed that the contents of the Paris property belonged to the settlor's estate and took steps to obtain possession of those assets when she knew that they belonged to the trust;
  • she took steps to obtain an order of the court to permit raids on companies owned by the trust. The raids resulted in the seizure of papers relating to trust assets.

Fair dealing rule

The court also found that the trustees had breached the ‘fair dealing’ rule in their dealings with one of the beneficiaries.

The trustees had failed to disclose relevant information about a significant business transaction affecting the value of the trust fund to the beneficiary during negotiations concerning the splitting of the trust and the appointment of that beneficiary’s interest out of the trust to a separate Guernsey trust.

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