In Grand View Private Trust Co Ltd v Wen-Young Wong [2022] UKPC 47 the Privy Council analysed the purpose of a trust considering the scope of powers given to the trustees and whether any exercise of those powers is for a proper purpose.
Background facts
The case concerns two Bermuda-based trusts set up by two brothers, YC and YT Wang (the 'Founders'), founders of the Formosa Plastics Group (FPG), a large conglomerate business in Taiwan.
The first trust (irrevocable and discretionary) was the Global Resource Trust No 1 (GRT), created for the benefit of the Founders' children and remoter descendants living on or born after a certain date. The trustee was the Global Resource Private Trust Co Ltd (GPRT Co) and as defined by Clause 8 of the trust deed, the trustees had the widest powers of "addition and exclusion of beneficiaries".
The second trust, simultaneously created, was the Wang Family Trust (WFT), a separate purpose trust with non-charitable and charitable purposes (including holding FPG shares and helping those in need). The trustee was Grand View Private Trust Co Ltd (GVPT Co).
In 2005, the GRT trustee resolved to transfer the GRT trust fund to the WFT, excluding all family members from the class of beneficiaries and adding the trustee of the WFT as the sole beneficiary of the GRT as well as appointing the GRT’s assets to the WFT. The consequence was that the assets of GRT held for the benefit of the family members had then been moved to the WFT under which they were not beneficiaries.
In 2018, after the death of both Founders, some family members challenged the GRT trustee’s decisions. The case was heard in the Bermuda courts before being appealed to the Privy Council in the UK.
Key points of the decision
The Privy Council’s judgment opens with the following statement of principle:
“It is a fundamental principle of equity that a fiduciary power may be exercised only for a purpose for which the power has been conferred.”
The Privy Council wished to emphasise this fundamental principle of equity in order to ensure that, although technically intra vires and therefore permissible by law, the powers exercised by the trustee are not abused, i.e. exercised for an improper purpose.
The trustees, in assessing the validity of the exercise of a fiduciary duty, such as the power of addition and/or exclusion of objects of a discretionary trust, should consider both:
- the ‘scope of the power’ rule[1] which will require them to consider whether the exercise of the power fall within that power’s scope (objectively determining the intention of the settlor from the express terms of the trust instrument as a whole) and
- the ‘proper purpose’ rule[2] which will require them to consider whether the exercise of the power (although within the power’s scope, i.e. intra vires) was made for an improper purpose (i.e. a purpose extraneous to those for which the power was conferred). In that circumstance there could be a risk of challenge from beneficiaries.
In determining the proper purpose of a trust power, the trustee should have a look at the objective settlor’s intention[3] at the time the settlement was executed, based on the wording of the trust deed itself and the admissible ‘substantially contemporaneous documents’ (such as letters of wishes formulated contemporaneously with execution of the trust deed).
Finally in its decision, the Privy Council, held that although the trustee acted within the power’s scope, the challenged decision has been made for an improper purpose.
The Privy Council in formulating its decision also provided further key elements, such as:
- although the overall purpose of the trust is of central importance in determining the purpose of a trust power, the Board rejected the “substratum” rule[4] as an absolute principle of construction, on the basis that the exercise of the power to add or exclude persons from the class of beneficiaries involves no amendment to the provisions of the GRT trust deed[5];
- although in the present case the purpose of the power of addition and/or exclusion was to further the interests of the objects and beneficiaries, the question of the purpose of such a power is not to be answered by applying, as an overriding principle, a rule that all powers must be exercised in the interests of some or all of the beneficiaries (unless express provision to the contrary is made)[6];
- rejection of the misleading term “fraud on a power”[7] used to refer to a violation of the proper purpose rule. The Council's reason for criticism is based on the fact that the word “fraud” usually denotes a conduct which is dishonest, reprehensible or immoral. However, the principle itself merely means that the trustees have not acted or exercised their powers within the proper purpose of the trust (even though the trustee may have acted in good faith and genuinely with a view to benefiting the beneficiaries).[8]
Although the Privy Council's judgment will not be strictly binding on the English courts, it represents an important contribution to the ongoing debate in the trust law doctrine in relation to the nature and application of the “proper purpose” rule and it will be of considerable interest to practitioners, trustee as well as settlors in all trust jurisdictions.
[1] Grand View [51] [52]
[2] Grand View [72] [82]
[3] Grand View [61] - [63]
[4] i.e. the trustee may not use its powers of amendment to defeat the fundamental purpose or main structure of the trust.
[5] Grand View [95] [114]
[6] Grand View [115] [121]
[7] It is a trust law doctrine which is designed to limit and control the exercise by trustees of the powers conferred upon them, to being for the purpose, or in line with the intention, of the trust itself.
[8] Grand View [56]
