Article on Grand View v Wong [2022] UKPC 47

Grand View v Wong [2022] UKPC 47

In December last year, the Privy Council released its judgment on the appeal, Grand View v Wong. The judgment concerns the following three actions taken by a trustee:

1.         The exclusion of all the members of a family who had until then, comprised the entire class of beneficiaries of the settlement.

2.         Appointment of a purpose trust as a beneficiary of the settlement in place of the family members.

3.         Simultaneous appointment of the entire trust fund to the purpose trust, thereby bringing the settlement to an end.

In the judgment, delivered by Lord Richards, the Privy Council provides clarification on the key elements and application of the proper purpose rule, the relevance of the substratum rule, and whether trustees can use a power to appoint and exclude beneficiaries to destroy rather than advance the interests of identified beneficiaries.  We briefly summarise these points below.

What is the proper purpose rule?

The proper purpose rule involves identifying the purpose for which a fiduciary power has been exercised by a trustee and then asking whether that is consistent with the purpose for which the power was given. The rule is a principle by which equity controls the exercise of fiduciary powers and prohibits abuses of power on the part of the trustee.  While in the past, the rule was referred to as “fraud on a power”, Lord Richards noted this as “historical language” as the rule’s application is not confined to cases involving blameworthy conduct.  A trustee’s actions may be in breach of the rule, even though they acted in good faith and with a view to benefitting the beneficiaries, if their actions were not consistent with the purpose for which the settlor bestowed the power on the trustee at the time the trust was created.

How does the proper purpose rule arise?

The first step is to determine the scope of the power and whether the trustee has acted within scope. This is a question of construction. The next step is to determine the purposes of a power.  To do this, the intention of the settlor must be ascertained by an objective assessment of the terms of the trust, construed in light of the circumstances in which it was created.  Other documents, such as a memorandum of guidance, which were created at the same time as the trust and provide context to the trust and evidence of the settlor’s intent, are relevant to this exercise.

In Grand View, the Court considered that though the trustee had acted within the scope of its powers,  its actions were not consistent with the proper purpose of the power.  This was because the trust had been established as a family trust, for the benefit of the family members, and there was no evidence of an intention on the part of the settlors to confer on the trustee the power to deprive all the family members from benefitting under the trust.

What is the relevance of the substratum rule?

Earlier cases considering the proper exercise of a power of amendment often refer to the “substratum rule”.  The substratum rule requires a trustee not to exercise its power to amend a trust instrument so as to destroy the nature or character (the “substratum”) of the trust.  In Grand View, the Court considered that the substratum rule may be viewed either as a rule of construction, going to the scope of an amendment power, or as a refinement of the proper purpose rule.  The Court considered that earlier cases referring to the substratum rule simply confirmed the central importance of the purpose of a trust, but they did not consider that the substratum rule was a stand alone principle.

Can trustees use their powers to appoint and exclude beneficiaries in a way that destroys rather than advances the interests of identified beneficiaries?

The Court noted that the power to appoint and exclude beneficiaries has the capacity to effect significant, even fundamental, changes to a trust.  The question is whether, in the case of such a power contained in any particular trust instrument, it is intended to have that capacity, or to have a purpose that goes wider than simply furthering the interests of the identified beneficiaries. This question 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.  Rather, the task is to discern the proper purpose of that power in the context of the particular trust in the manner that has been discussed above.

Key takeaways

In our view, this judgment highlights the fundamental question any trustee ought to consider before exercising a fiduciary power: Do I have the power to take the intended action?  This question is not only one of scope, but also whether the proposed action, even if within the scope of the power, was within the contemplation of the settlor as a proper exercise of the power at the time the trust was created.  In answering this question, wishes expressed by the settlor subsequent to the creation of a trust are not relevant in determining the purpose for which the power was bestowed even though those wishes may be relevant in exercising dispositive powers.

The particular nature of the trustee’s actions in this case is worth bearing in mind.  Trustees should note that this case involved the removal of all the identified and default beneficiaries of a trust and the appointment of the trust fund to a newly appointed purpose trust.  As such, it is quite an extreme case. The application of these principles will look different in alternative scenarios, for example, scenarios involving the removal of a subset of beneficiaries only, or the appointment of some family members in place of others in the context of a family discretionary trust.

For advice relating to trustee duties and administration, please contact TGT Legal.