It is a fact of modern life that a significant proportion of marriages now end in divorce. Figures from the Office of National Statistics for the UK suggest that 42% of marriages in England and Wales end in divorce, with around half of these divorces expected to occur in the first 10 years of marriage. Rates are similarly high (or higher) in the US, Hong Kong and around the world.
With this in mind, offshore trustees are (rightly) often concerned about the potential impact of a foreign divorce order on the trusts that they administer. English courts, in particular, have purported to exercise their power to grant orders in the context of divorce which purport to vary the terms of an offshore trust. In this article, we seek to remind trustees of the importance of stopping to consider the enforceability of any order made by a non-Guernsey court on a Guernsey trust.
Take for example, the fictitious couple Sarah and Brian. Sarah and Brian live in London and have been granted a divorce in the family law courts of England and Wales. According to the terms of the financial settlement, all of their assets should be split 50:50 between them. Sarah is a beneficiary of a large Guernsey law trust and Brian is adamant that, under the terms of the English proceedings, he should have half of everything that Sarah is entitled to under the Guernsey trust. We are instructed by Trustee Co Limited (the trustee of the Guernsey trust) to advise them on their response to Brian's claim.
In the first instance, we would stress to Trustee Co that they should be very careful not to comply with the English court's order until we have assessed it and commented on its enforceability in Guernsey. If they were to comply with an unenforceable order, they could be acting in breach of trust and could, therefore, be liable to Sarah and the other beneficiaries for any losses sustained. Further, if a trustee voluntarily submits to the jurisdiction of a foreign court it risks losing the protection of the all important "firewall" provisions contained in s.14 of The Trusts (Guernsey) Law, 2007 ("Guernsey Law").
Guernsey has excellent firewall provisions and this is an important point for trustees to note. Firewall provisions can provide comfort to trustees of Guernsey trusts by ensuring that any questions relating to the validity, administration and/or dispositions into or out of a Guernsey trust are addressed in Guernsey by the Royal Court and only in accordance with Guernsey law.
Of course, each situation turns on its particular facts and specific legal advice should always be sought, but, as a general rule, s.14 of the Guernsey Law can prevent a Guernsey trust being varied by an order of a foreign court. The firewall provisions of s.14 of the Guernsey Law can, therefore, step in to safeguard beneficial interests and can provided an effective deterrent to a disgruntled spouse.
Importantly, the trust in this example has a 'governing law' clause which states that it is governed by Guernsey Law. This is key to the effectiveness of the firewall provisions as it ensures certainty as to which law is applicable to the trust. Without an express governing law clause the governing law of the trust is open to debate and this brings uncertainty.
In this example, the firewall provisions provide a useful rebuttal to the English court order that Brian is entitled to 50% of Sarah's beneficial interest in the trust, on the basis that the English court has purported to make Brian and Sarah equal beneficiaries of the trust in exercise of its power to vary the trust.
Following this initial rebuttal, Brian may then attempt to claim that the trust fund (or a proportion of it) belongs to Sarah rather than the trustee. As a result of the firewall provisions, Brian would need to bring this claim in Guernsey. However, even if the Guernsey Royal Court was to agree that the claimed trust assets actually belonged to Sarah, the firewall provisions mean that it would be up to the Royal Court, again, to decide if it would actually enforce the English court's 50:50 order. The Royal Court may decide that, to do so, would not be in keeping with the settlor's intentions for the trust.
To summarise, Guernsey's robust firewall provisions provide Guernsey trusts and trustees with a high degree of asset protection against interference from other jurisdictions. This can prove particularly useful in international divorce cases. Trustees should remember, however, that the Guernsey Courts have an overall supervisory jurisdiction over trusts and may choose to indirectly follow the terms of international divorce orders in some circumstances, as has happened in Jersey, where similar firewall provisions apply.
Further, in Guernsey, in the relatively recent case of Re T Limited (Guernsey Unreported Judgment 21/2017) the Royal Court directed the trustee to join English divorce proceedings. Although it is noted that the Royal Court considered this to be an exceptional case, based on the facts, where submission to the jurisdiction of a foreign court was appropriate.