Protectors as ‘mere toothless tigers’?

1. Protectors’ powers to consent to or to veto a proposed distribution have been the topic of some debate following the recent decisions in which the debate between the ‘Wider View’ and the ‘Narrower View’ has been aired: PTNZ vAS[2020], Re X Trusts[2021], and Re The Piedmont Trust and the Riviera Trust[2021].
2. It is useful to commence by illuminating the distinction between the Narrower View and the Wider View, which was summarised neatly by Kawaley J in the Supreme Court of Bermuda in Re X Trusts[2021] (‘The X Trusts’) when framing the issue to be determined before the Court. Kawaley J distilled the essence of this distinction as follows: ‘do the Protector Provisions confer an independent decision-making discretion (Wider View), or merely a discretion to ensure that the Trustees’ substantive decision is a valid and rational one (Narrower View)?’
3. Kawaley J went on to note that support for the Wider View seemed to be ‘parasitic upon an assumption that the Narrower View necessarily produces powers of veto which lack any real bite at all, reducing the Protectors (in relation to the exercise of their consent powers) into mere toothless tigers’.
4. It may be contended in favour of the Wider View that on the Narrower View protectors can only bless and not veto, which indeed reduces protectors into ‘mere toothless tigers’, who lack any real bite and whose power is restricted to refusing consent in the same circumstances as would a Court. The Narrower View precludes protectors from exercising any powers they may have to refuse consent and disables them from being able to veto a decision which was objectively reasonable and within the discretionary powers of the trustees. The Narrower View also permits trustees to bypass the obtaining of consent from protectors by making an application to seek the blessing of the Court in respect of a decision, such that the protectors would be prevented from refusing consent as no basis for refusal would exist. The Narrow View, in effect, renders the role of protectors redundant.

It may be contended in favour of the Wider View that on the Narrower View protectors can only bless and not veto, which indeed reduces protectors into ‘mere toothless tigers’, who lack any real bite and whose power is restricted to refusing consent in the same circumstances as would a Court.

5. The Wider View affords a greater role to protectors, such that far from being toothless tigers, they are tigers with teeth. The Wider View permits of broader discretionary powers being conferred upon protectors, predicated upon a need for a clear form of words to define the powers within the trust instrument and the interpretation of such powers in accordance and natural meaning of the words used to allocate to the protectors a role concordant with the Wider View. The Wider View envisages the role of protectors as anticipated by the settlor when the trusts were established, which may extend beyond the ambit of a role that is merely supervisory. If the protector is the settlor they may wish not only to preside over decision-making, but may also wish to play a more active role in the decision-making process.

The Wider View affords a greater role to protectors, such that far from being toothless tigers, they are tigers with teeth.

6. Earlier cases such as Public Trustee vCooper[2001], Davison v Selig[2016],  and JSC MP Bank v Pugachev [2017] EWHC 2426 (Ch) have sought to construe protector powers, but it would seem that it was not until PTNZ v AS [2020] that the question of the protector’s role in relation to a similar power of veto conferred on a protector was considered in a reported Judgment of the Court.

The role of protectors as redundant?

PTNZ v AS

7. In considering how the role of protectors is rendered redundant under the Narrower View and why the Wider View is to be preferred it is helpful to commence with the earliest of the recent authorities, PTNZ v AS, in which Master Shuman (as she then was) rejected the Narrower View. The Court regarded as almost self-evident that the protector had a Wide Discretionary Role, not the Narrow Review Role. Master Shuman explained that on any view ‘[t]he protector’s powers of consent are independent of the powers of the trustee and are to be exercised by the protector on the basis of his own discretion’. She went on to say the protector’s power of veto ‘would permit the protector, if he disagreed with the trustees, to withhold his consent even if the trustees are neither acting unreasonably nor for improper purposes’. Master Shuman concluded succinctly: ‘[a] protector’s power of veto is as the name suggests exactly that and not a power of review.’ Such a power affords the protector greater discretionary powers rather than simply those of review.
8. Master Shuman was ‘satisfied that properly analysed the power of the protector is a joint power […] [with the trustee] and not a review power’: thereby endorsing the Wider View as appropriate to permit trustee and protector to exercise their own discretion and judgment independently with respect to their own powers. She concluded that in light of her decision ‘there is no reason to limit the role of the protector at the blessing hearing’.  The Wider View as espoused by the English decision thus permits the tigers to have teeth.

Re the X trusts

9. The debate regarding the role of protectors was rigorously contested in Re The X Trusts, in which the trustees were seeking a blessing for preliminary proposals for long-term administration of the trusts. A dispute arose about the proper role of the protectors whose consent would be required in taking subsequent steps. The Bermudian Supreme Court considered PTNZ v AS, but did not find it to be persuasive however. Kawaley J held that the Narrower View was not only the proper construction of the consent powers in the case of Re The X Trustsbut the correct construction generally, taking the view that the role of protectors when considering whether to veto or consent to a decision by the trustees was more akin to that of a blessing application, focussed on the trustees’ decision-making process and limited to a ‘watchdog’ role.
10. As the Judgment indicates, Counsel had engaged in detailed research and analysis of the appropriate authorities and commentary pertinent to the issue before the Court, which may be distilled as follows: ‘do the Protector Provisions confer an independent decision-making discretion (Wider View), or merely a discretion to ensure that the Trustees’ substantive decision is a valid and rational one (Narrower View)?’ The parties for the Narrower View placed the Protectors’ veto powers within limited bounds. The parties in favour of the Wider View contended for an unfettered veto power.

The parties for the Narrower View placed the Protectors’ veto powers within limited bounds. The parties in favour of the Wider View contended for an unfettered veto power.

11. In deliberating the issue Kawaley J considered academic commentary,  noting that the term ‘protector’ was used to describe a person, who is not one of the trustees of a trust, but upon whom the trust deed confers a ‘watchdog’ role in respect of the administration of the trust by the trustees, on one level to prevent those trustees from abusing their powers or breaching their duties, but also to ensure as far as possible that the trust is administered in accordance with the wishes of the settlor, at least in the case of the more important decisions and often on a day-to-day basis. He found that the text supported the Narrower View in contending that a protector’s general role is to ensure the due administration of the trust by the trustee but that it did not ‘suggest that the protector’s veto powers are absolute or highly significant; rather, real power is attributed to the entirely discrete power to remove and replace trustees’. Kawaley J went on to find that the academic remarks provided explicit support for the proposition that, consistent with the Narrower View, a protector’s role is ultimately to withhold consent only when the trustee is proposing a course of action which the Court would not approve onPublic Trustee v Cooper category 2 application.  Such a finding is merely to render the role of the protector redundant and to reduce it to a ‘mere toothless tiger’ as all the protectors can do is monitor the decision-making of trustees in a role akin to that of the Court.
12. At [94] Kawaley J examined and found the general principles relating to fiduciary consent powers conferred on protectors as extracted from Re Information About a Trust[2014]  as highly persuasive for the purposes before him and although he construed the case as favouring the Narrower View, the author asserts they can be construed with equal if not greater force in support of the Wider View: (a) the protector’s consent power was clearly regarded by the Court of Appeal as subsidiary to the primary decision-making power vested in the trustee; (b) the consent power was clearly regarded as capable, in appropriate circumstances, of amounting to a veto; (c) the consent power was clearly viewed as a power which could not be exercised in an unlawful or irrational way; and (d) although the consent power was not expressly framed as embodying an obligation to consent if the trustee’s decision itself was lawful and rational, the quoted passage implies that there should be such a result. The protector cannot refuse consent when the trustee’s proposed course of action is something ‘the Settlor is taken to have approved’. In Kawaley J’s judgment this amounted to saying that the protector cannot refuse consent to a trustee decision which was consistent with the settlor’s intentions by virtue of the fact that it is both a lawful and rational decision on an issue requiring protector consent.
13. To construe such principles in accordance with the Narrower View effectively strips the consent power of all meaningful practical force, thereby reducing the role of the protector to that of a tiger without teeth. Construction in accordance with the Wider View would mean the protector would have a wider discretion in the exercise of fiduciary consent powers, including the ability to veto.

To construe such principles in accordance with the Narrower View effectively strips the consent power of all meaningful practical force, thereby reducing the role of the protector to that of a tiger without teeth.

Re the Piedmont Trust and the Riviera Trust

14. In Re The Piedmont Trust and the Riviera Trust a dispute arose as to whether the corporate protector of the two trusts had exceeded the proper ambit of its power in declining to consent to an earlier proposal by the trustees. In Piedmont as in Re The X Truststhe protector’s powers were fiduciary, but the Jersey Court approached the issue of whether the protector’s power ought to be construed as more one of general principle. Sir Michael Birt observed: ‘the role of a protector varies so much, depending on the nature and extent of the powers conferred by the trust deed, with the consequence that it is difficult to develop general principles which are applicable to all protectors or to all decisions of a protector.’ He noted the paramount duty of a protector is to act in good faith in the best interests of the beneficiaries. In pursuance of this duty, as in the case of trustees, he must have regard to relevant considerations, ignore irrelevant considerations and make a decision which a reasonable protector could arrive at; but he must reach his own decision.
15. In contrast to Kawaley J’s view that the protector’s powers were ancillary and akin to those exercised by the Court in a blessing application, the Jersey Court dismissed the criticism of the protector and the argument that the Narrower View should be adopted, instead advocating that the correct approach was the Wider View. Sir Michael Birt drew a distinction between the role of the Court in a blessing application and that of a protector at [90]:

In contrast to Kawaley J’s view that the protector’s powers were ancillary and akin to those exercised by the Court in a blessing application, the Jersey Court dismissed the criticism of the protector and the argument that the Narrower View should be adopted, instead advocating that the correct approach was the Wider View.

[…] a settlor does not choose the Court as a trustee; he chooses his appointed trustee. It is that trustee upon whom the various discretions conferred by the trust deed have been conferred. If the Court were to exercise a wide-ranging role on such applications and decide the matter entirely for itself, the effect would be to constitute the Court as a trustee. That is not the Court’s role. The Court’s role is a supervisory one and it is simply to ensure that decisions taken by trustees are reasonable and lawful. Accordingly, the Court does not simply substitute its own discretion for that of the trustee.

16 These considerations do not apply to a protector. The settlor has decided that a protector (often himself or a longstanding friend or adviser whose judgment he trusts) should be appointed pursuant to the trust deed and has specified those matters where the protector’s consent is required. The settlor must be taken in those circumstances to have intended that the protector should exercise his own judgment in exercising those powers; otherwise, why bother to go to the trouble of appointed a trusted friend or adviser (or himself) as protector rather than someone with a legal qualification to judge issues of rationality. Furthermore, if the role of a protector was simply to review the trustee’s decision in the same way that the Court would do, his role would be almost redundant; he would bring nothing to the table that the Court itself would not bring on a blessing application. It follows that, depending on the circumstances, a protector may well be entitled to veto a decision of a trustee which is rational, in the sense that the Court would bless it.

16. In rejecting the Narrower View Sir Michael Birt considered the interaction between the trustee and protector as a joint enterprise. Both trustee and protector reach a collaborative decision based on their own judgment and acting in good faith. The protector’s role is not equal in discretionary ambit to that of the trustee, but the protector can make its observations known to the trustee. The protector should thus exercise caution in utilising its powers of veto which it cannot utilise to insist that the trustee adopt the protector’s decision.
17. In contrast to Kawaley J, Sir Michael Birt considered the Narrower View would render the role of protectors redundant, simply duplicating the function of the Court in a blessing application, thus reducing the role of protectors to ‘mere toothless tigers’.
18. Following the decision in Re The X Trustsin a postscript to its Judgment the Royal Court of Jersey considered and disagreed with the Judgment of the Bermudian Supreme Court. The Jersey Court found the Bermudian Judgment to be unpersuasive and reit- erated its position as to the proper role of a protector and the redundancy of a power to consent in the event of the adoption of the Narrower View, acknowledging the risk of deadlock between protector and trustee but observing that the Court had the power to resolve such deadlock.

The Court’s role: resolving deadlock

19. Arguments in favour of the Narrower View have levelled criticism at the Wider View, advocating that the interpretation of protectors’ powers in favour of the Wider View will result in a deadlock if protectors refuse to bless a decision of the trustees. The Court has the jurisdiction to resolve such deadlocks as was observed in Re The X Trusts, but more appropriately for present purposes in Piedmontas noted above.
20. The Court acknowledged that:

the approach we favour carries with it a greater risk of deadlock between trustee and protector if a protector refuses consent. Clearly, if a trustee considers that a protector’s refusal to consent is irrational or otherwise legally flawed, he may have recourse to the Court to overturn the protector’s veto. However, there is the potential for deadlock where the trustee and the protector both reach rational but opposing decisions. In our judgment, this is a natural consequence of the settlor’s decision to introduce the office of protector into the trust deed. A settlor must be taken to have intended (by imposing a requirement for consent) that a trustee should not be able to make certain decisions unless the protector consents. If consent is refused, the trustee’s decision cannot be put into effect. In most cases this is likely to lead to further discussion between trustee and protector in the hope of finding a sensible outcome. In the event of complete deadlock where such deadlock is causing real damage to the interests of the beneficiaries, we leave open the possibility of recourse to the Court. The Court has power to break a deadlock where this is caused by lack of agreement among trustees where they have to act unanimously (see Garnham v PC [2012] (1) JLR 204, approved by the Supreme Court in Children’s Investment Fund Foundation (UK) v Attorney General [2020] 3 WLR 461 at [219].

21. Thus can the Court resolve any issues arising from a deadlock on the Wider View approach, which the protector would not be able to do on the application of the Narrower View. In instances where the protectors have refused to consent to the trustees’ decision the Court would be able to consider an application under Public Trustee-v-Cooper Category 2, seeking Court confirmation that the Protectors ought to provide their consent. For these reasons, the contention that the Wider View would result in a deadlock can be surmounted, conferring the tiger with more teeth.

Interpretation of provisions

22. The issue of whether the Court should favour the Wider View or the Narrower View turns on the Court’s interpretation of the particular trust instruments in any given case and the powers ascribed to trustees and protectors within such trust instruments. The controversy in Re The X Trust centred on what inferences should be drawn from the agreed purposes as to whether the relevant provisions should be construed in accordance with the Wider or Narrower View. In reaching his decision Kawaley J scrutinised closely the protector provisions of the relevant trusts. He observed:

‘the importance of placing primary emphasis on the text and context when interpreting trust instruments is explicitly supported by the binding dicta of Sir Christopher Clarke (P) in Grand View Private Trust Company v Wong et al [2020] CA (Bda) 6 Civ (20 March 2020). The President critically opined as follows:

178 … In determining the true construction of the express words of a power, or whether any restriction is to be implied therein, it is relevant to consider what the settlor or the parties must have meant by them or what they must be taken to have had in contemplation at the time. In determining whether the exercise of a power, although within its scope, is for an improper purpose one of the considerations, but not the only one, is the wording of the instrument.

179. Each trust, and the powers contained within it, has to be considered in the light of its own nature, terms and context.

23. The powers will be a matter of construction depending on how the trust instrument has been drafted. Thus are the respective powers of the trustees and the protector to be interpreted in light of the nature, terms, and context of the trusts and the manner in which they are interpreted will depend on the language in which the powers have been couched within the trust instrument. Kawaley J considered further how protectors’ duties should be interpreted:

The answer to the question concerning a protector’s duties is in the first instance a matter of construction of the particular trust instrument. This primarily depends upon the language of the trust instrument, although the surrounding circumstances may of course be taken into account as an aid to construction as in the case of any other instruments . . . . [Emphasis added]

24. These dictacan apply equally in interpreting protectors’ powers in favour of the Wider View or the Narrower View and are useful when contemplating how the Courts may approach the interpretation of trust instruments when construing the respective powers of trustees and protectors since ultimately the Court’s approach to such interpretation will inform the Court’s decision as to whether the Narrower View or the Wider View should be adopted. Parties advancing a case in favour of the Wider View will of course contend for a construction of the relevant trust instrument permitting the protector to have a greater ambit of discretionary powers so that the tiger will have sharper teeth.

Intentions and role of settlor

25. Both the Bermudian and Jersey Courts observed that protectors may have a close connection to the Settlor and therefore more personal knowledge and understanding of the Settlor and his wishes and the family circumstances than remote offshore trustees.
26. As Sir Michael Birt observed: ‘It seems inherently unlikely that settlors would go to the trouble of appointing themselves or trusted friends or advisors as protectors if they intended the role of protector to be limited to that of assessing rationality. If that were the case, the key requirement for a protector would be a legal qualification rather than knowledge of the settlor’s wishes and sound judgment as to what is in the best interests of particular beneficiaries.’ To reduce the protector to an assessor of rationality is to revert to the role envisaged in Re The X Trusts: that of a supervisor, a watchdog, a tiger without teeth, who can only bless but never veto.

Conclusion

27. In light of these recent decisions, whilst the debate as to whether the Narrower View that a protector may bless, but never veto a valid and rational decision of the trustees versus the Wider View in favour of greater discretionary powers for protectors endures, evaluation of the above authorities evidences that the Courts tend to favour the Wider View. The Wider View permits of greater flexibility in the interpretation of the powers conferred upon protectors and in the interpretation of the provisions of trust instruments. The Wider View also permits of the conferring of protectors with greater powers than those of the ‘mere toothless tiger’ envisaged by the Narrower View. Any deadlock ensuant from such an interpretation of protectors’ powers may be resolved by the Court. Under the Wider View protectors have more flexibility in the exercise of their powers; they are neither watchdogs, nor ‘mere toothless tigers’, but tigers withteeth. As those familiar with the works of A.A. Milne will know, Tiggers are Bouncy and can do everything. And so can protectors under the Wider View.

In light of these recent decisions, whilst the debate as to whether the Narrower View that a protector may bless, but never veto a valid and rational decision of the trustees versus the Wider View in favour of greater discretionary powers for protectors endures, evaluation of the above authorities evidences that the Courts tend to favour the Wider View.

The published article in Oxford University Press can be read here (Volume 28, Issue 8, October 2022, Pages 715–721): https://academic.oup.com/tandt/advance-article/doi/10.1093/tandt/ttac076/6645774?guestAccessKey=4c902b46-5066-4a70-95da-d597295d7013