If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself. (Publius, Federalist No. 51, The New York Packet, Friday, February 8, 1788)
1. INTRODUCTION
Despite the paucity of domestic jurisprudence, some Canadian lawyers insert protector clauses into their trust instruments.
While there is no definitive convention as to what constitutes a protector, they are typically donees of powers that seek to limit the authority of an instrument's trustees.1
Consequently, unless a trust instrument specifies how protectors ought to conduct themselves, trustees and beneficiaries must rely on the courts to delineate a given protector's powers. On the surface, this is not a problem. Afterall, beneficiaries regularly petition the courts to remove or reprimand trustees despite the trust instrument's silence on such matters. Yet, protectors are (at least putatively) distinct from trustees. Moreover, as their powers may significantly vary based on the terms of a given instrument, we cannot presuppose that the jurisprudence on trustee powers will automatically elicit helpful guidance.
Considering the above, this article will provide an overview of how Canadian courts might approach the most common powers bestowed onto protectors. Particular attention will be paid to whether these powers will be viewed as fiduciary in nature, as well as to the expected judicial intervention. Regarding the latter issue, this paper will focus on protector removal, setting aside a particular a mistaken appointment, and the standard of review for a protector's trustee removal power.
2. WHAT IS A PROTECTOR?
Within a trust instrument's Dramatis Personae, "protectors" can enable settlors to "retain some power or powers of control that otherwise would be given to the trustee".2 The kind of control that a given protector has over a trustee varies with the terms of the instrument itself. Some have observed, "[t]he term 'protector' is used in such a variety of situations and ways that, absent specific context, it signifies little more than that a person who... has been granted a power affecting the operation of the trust".3
While a protector's powers may vary, some terms are more common than others. Helpfully, Birss J. found "that trust deeds which include a protector often provide for one or both of the following:
- a power to remove and appoint trustees and
- a power of negative consent, in that various powers of the trustees are only exercisable with the protector's consent."4
("Common Protector Powers")
3. WHY APPOINT THEM?
As aptly stated by Peter Hodson, "[e]very settlor who appoints a protector has a particular hazard from which he is seeking to protect the trust fund and those ultimately entitled to it".5 For international trusts, the hazard is quite clear. As Waters provides, "[t]he settlor of an offshore trust will not infrequently create a "protector" position, and assume that position him or herself, probably with the intention that another succeed him or her".6 Undoubtedly, the settlor is anxious about:
relinquishing part of his or her assets into the hands of offshore trustees whom he does not know personally and who are based thousands of miles away. This concern may be exacerbated by the fact that trust deeds often deliberately give trustees wide discretionary power over trust funds so that they may react promptly to any situation even if it was unforeseen at the time the trust was established.7
There are perceived benefits for appointing protectors in domestic trusts as well. Much like the mischief described above, settlors of domestic trusts may want some reassurance when relying on professional trustees that they do not know well.8 Alternatively, either kind of trust might opt to endow a protector with more targeted powers. As Waters notes, protectors can be empowered to break trustee deadlock where trustee unanimity is required as well as look after the interest of vulnerable beneficiaries.9 Relatedly, Phillip Renaud argues that:
The appointment of a protector in respect of a domestic trust has several distinct advantages: flexibility of the trust is maintained, and the appointment of an independent third party as protector may mitigate either against abuse of a power otherwise delegated to a trustee who is also a beneficiary (who would have a self-interest in the trust), or a trustee who may wish to avoid exercising broad powers for fear of exposing himself to liability.10
In their textbook on drafting trusts in Canada, James Kessler and Fiona Hunter acknowledge that the power to remove trustees (in both domestic and international trusts) "does seem to offer a solution to the settlor's fears that trustees may refuse to resign or will resign only on unacceptable terms".11 Similarly, both domestic and international trusts may include a protector provision in order to reduce agency costs. Taken this way,
The principal reason for choosing to appoint a protector rather than a co-trustee is the difference in decision making structure that results from the protector/trustee relationship... The settlor can use a protector as a check on trustee behavior without making the protector a full partner in trust decision making. Moreover, the authority model - trustee as decisionmaker with protector as a check - also limits (but does not eliminate) the potential for quid-pro-quo decision making by co-trustees who have to interact on a regular basis with respect to trust administration.12
4. PROBLEMS ENDEMIC TO THE OFFICE OF A PROTECTOR
Utilizing a protector is not without its downsides. The 2002 New Zealand Law Commission Report observed that "the promotion to centre-stage of a player who is neither trustee nor beneficiary necessarily creates uncertainty as to the precise obligations and liabilities of a protector and as to the effect of the protector's role on the obligations and liabilities of the trustee".13 This "uncertainty" may quickly devolve into a "inefficient diffusion of responsibility".14 On the flip side, where diffusion of responsibility is skewed rather than uncertain, a moral hazard might arise. For example, where the protector has the power to replace the trustee, the latter might "be especially inclined to follow the former's directions".15 This would incentivize the trustee to become the protector's agent, and not "a watchdog for the interests of the beneficiaries".16
Indeed, Kessler provides that "while powers to remove trustees can be found in Canadian trusts, the authors consider the power to be draconian and should not be a standard form".17 Then again, we might expect a Canadian court to respond to excessive or inappropriate protector control by attaching a fiduciary duty to their powers.
5. DOES 'FIDUCIARY' MEAN ANYTHING?
Before determining whether a Canadian court would classify a protector as holding a 'fiduciary power', it is important to acknowledge that the label does not have a universal meaning. In his highly influential paper, "Fiduciary Powers", Professor Cullity (as he was then known) identified nine different meanings to the term.18 Arguably, this degree of definitional variability renders the label meaningless. As Antony Duckworth put it, "You cannot sensibly talk of a protector being a fiduciary, or not being a fiduciary, without making clear what you mean by 'fiduciary'".19 Tellingly, the word was both problematized and pragmatically resolved in a 2017 Chancery Division decision whereby Birss J. reasoned that
The question whether the powers given to the protector can be labelled 'fiduciary' or not probably does not matter. The distinction which really matters is between a power which the protector (who in this case is also one of the Discretionary Beneficiaries) could lawfully exercise in a selfish way in favour of himself and against the interests of the other Discretionary Beneficiaries...[compared to] power which could only properly be exercised for the purpose of furthering the interests of the Discretionary Beneficiaries as a class on the other hand. The latter may well be the same thing as a fiduciary power but it does not matter. If the power is in the latter class then its exercise against the interests of the other Discretionary Beneficiaries could be unlawful and ineffective, and a court could so rule...20
Consequently, Birss J. defined a fiduciary power in the negative sense. In other words, a fiduciary power is one that is not held personally (which unlike a fiduciary power may be exercised selfishly).21 Similarly, for our purposes, the fiduciary label is primarily meant to describe donees who will be subject to greater judicial scrutiny when exercising their power in a selfish manner as opposed to those who can overtly benefit themselves with less intervention from the bench.
(a) Do Protectors Hold Fiduciary Powers?
Typically, the construction of the trust instrument will be the arbiter as to whether a given power is personal or fiduciary in nature.22 At the same time, "the court is entitled to construe the powers and duties as a whole and work out what is going on, as a matter of substance".23 The far reaching nature of the powers commonly given to a protector should make classifying them as fiduciaries an uncontroversial proposition (in absence of a clear intent to make them personal).
Indeed, viewing protectors as fiduciaries should help preserve the enforceable rights of beneficiaries. The importance of this objective was highlighted in the English Court of Appeal case of Armitage v. Nurse, in which Millet, L. J. held that: "There is an irreducible core of obligations owed by the trustee to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts."24 Arguably, protectors must also abide by this "irreducible core" and "exercise their powers and functions bona fide in the way they consider to be in the interests of the beneficiaries".25
On the other hand, some have noted that whether protectors are in fact fiduciaries is "open to argument".26 This perspective is well encapsulated by the Royal Court of Jersey in the Bird Trust which found that:
The powers of a protector vary considerably from one trust to another. In some he may be given very limited powers; in others they may be extensive. It is a question of construction of the particular trust deed as to whether a particular power of a protector is fiduciary or not. It may well be the case that, in relation to a particular trust, some powers of a protector are fiduciary and others are personal.27
A similarly tentative classification of their fiduciary status was also reached by the New Zealand Law Commission which reasoned that:
Where the provision under consideration in effect confers on the protector a dispositive power, a mandate to dispose of property not his own, it seems sufficiently probable that a court would treat the protector as the donee of a power of appointment...
Where, on the other hand, the provision under consideration confers on the protector a power other than a dispositive power, it seems reasonably clear that a court would, despite the terminology of the instrument, classify the protector as a trustee or subject to fiduciary or contractual obligations sufficient for the protection of the beneficiaries.28
Notably, Renaud argues that,
the New Zealand conclusion is likely the conclusion that will be reached by Canadian courts. Fiduciary relationships may arise depending on the circumstances of each case. The courts have been clear that the traditional categories of fiduciary relationships are not closed, and that, depending on the context of the situation, fiduciary relationships may arise.29
Invariably, we must also consider the dynamics that inspire the creation of a trust in the first place. On the one hand some settle a:
trust of family property where the objective is not to hide and protect the settlor's assets from creditors but rather to hold assets for the benefit of members of a family over an extended period of time. In that family context, a scheme with trustees–who may be professionals–and a protector who is neither a trustee nor the settlor nor a member of the class of beneficiaries, and who exercises their powers and obligations as a fiduciary, makes sense....30
By contrast:
an unscrupulous person seeking to use a discretionary trust to protect assets from creditors, a trust which includes a role for that unscrupulous person as a protector with very wide powers of veto and to remove and appoint trustees may perhaps achieve the desired result.... By construing expressly unfettered powers as subject to a fetter, whether it is as a fiduciary or as subject to some other limit and scrutiny, the court could be assisting the settlor in avoiding his creditors.31
Notwithstanding this juxtaposition, asserting that "context" determines a protector's fiduciary status is unhelpful. Practically, this means that solicitors will lack the kind of certainty that breeds effective planning. Relatedly, litigators will lack the concrete criteria needed to determine whether a duty has been breached. However, we might approach the fiduciary question "in a more confined way, by asking whether a particular power held by a particular protector is–or is not– held in a fiduciary capacity".32 Seen this way, it would be worthwhile to determine whether the common powers bequeathed onto a protector would be considered fiduciary. Establishing the status of these powers will, in turn, provide much needed clarity to planners and litigators dealing with protector clauses.
To read this article in full, please click here.
Footnotes
1. Waters' Law of Trusts in Canada, 5th Ed. 4.IV – PROTECTORS [Waters].
2. Ibid.
3. Matthew Conaglen and Elizabeth Weaver, "Protectors as fiduciaries: theory and practice" Trusts & Trustees, Vol. 18, No. 1, 2012 at 19 [Protector as Fiduciary].
4. JSC Mezhdunarodniy Promyshlenniy Bank and another v. Pugachev and others, 20 ITELR 905 at 180 [JSC].
5. Peter Hodson, "The trust protector: friend or foe?" Trusts & trustees, 2006, 12:6 at 9.
6. Supra, note 1, at footnote 86.
7. Deborah Hartnett and William Norris, "The protector's position - suggesting some basic principles", P.C.B. 1995, at 109-110 [Protector's position].
8. Ibid. However, surely the concerns over trusting one's trustees are less remote when settling a domestic trust. One is no longer required to fork over their wealth to a faraway company, but instead could chose a more suitable (and local) individual to be their trustee.
9. Waters, supra, footnote 1.
10. Philip J. Renaud, "Protectors in Domestic Trusts" (2008) 27:3 Est Tr & Pensions J 241 at 248 [Renaud].
11. James Kessler and Fiona Hunter "Drafting Trusts and Will Trusts in Canada" Chapter 7 Trustees' Powers- 5. Guidance And Control Of Trustees - h. Power to Dismiss Trustees [Kessler].
12. Stewart E. Sterk, "Trust Protectors, Agency Costs, And Fiduciary Duty" 27 Cardozo L. Rev. at 2776 [Sterk].
13. "Some Problems in the Law of Trusts," 2002 NZLC R79. Para 21 [NZLC]. Retrieved from https://www.lawcom.govt.nz/sites/default/files/projectAvailableFormats/NZLC%20R79.pdf.
14. Sterk, supra, footnote 12, at 2778.
15. Ibid.
16. Ibid.
17. Kessler, supra, footnote 11.
18. See Maurice C. Cullity, "Fiduciary Powers" (1976) 54:2 Can B Rev 229.
19. Antony Duckworth, "Protectors: law and practice" Trusts & Trustees, 19:1, 2013 at 99 [Duckworth].
20. JSC, supra, footnote 4, at 186.
21. Ibid., at 187.
22. Waters, 17.IV – THE CAPACITIES IN WHICH POWERS MAY BE HELD.
23. JSC, supra, footnote 4, at para. 167.
24. Armitage v. Nurse (1997), [1998] Ch. 241 (C.A.) at 253.
25. Terence Tan Zhong Wei, "The irreducible core content of modern trust law" Trusts & Trustees, Vol. 15, No. 6, August 2009 at 482.
26. Protector's position, supra, footnote 7, at 111.
27. Re the Bird Charitable Trust and the Bird Purpose Trust; Basel Trust Corporation (Channel Islands) Ltd. v. Ghirlandina Anstalt and others, 11 ITELR 157 at 82 [Bird trust]; see also Protector as Fiduciary, supra, footnote 3, at 20.
28. NZLC at para 21.
29. Renaud, supra, footnote 10, at 260.
30. JSC, supra, footnote 4, at 181.
31. Ibid., at 182 and 187.
32. Protector as Fiduciary, supra, footnote 3, at 20.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.