Anti-Bartlett clauses – some clarity at last?

It is a well-established principle of trust law that (in the absence of contrary provision) a trustee has the same duty to safeguard a trust-owned company as it would any other asset, notwithstanding that the trustee may not possess the requisite skills to contribute to the management of that company. The result can be a tension between commercial imperatives and the fiduciary responsibilities of the trustee.

How to overcome this?

An “anti-Bartlett” clause is often included in a trust instrument to circumscribe a trustee’s duty to intervene in the affairs of underlying companies and delimit the trustee’s responsibilities vis-à-vis that asset. It is different to an exclusion clause which excludes liability for that which a trustee has responsibility. It instead allows the company to function without interference from the trustee, and generally relieves the trustee from any duty to intervene in the absence of actual knowledge of dishonesty or misappropriation of funds.

What are the practical effects of an anti-Bartlett clause?

This question has long exercised professional trustees. But the most recent jurisprudence on anti-Bartlett clauses in Zhang Hong Li and another v DBS (Hong Kong) Ltd and others has arguably brought some long-awaited clarity. In November 2019, the Hong Kong Court of Final Appeal (CFA) delivered its highly anticipated judgment, which overturned earlier judgments. It decided that the anti-Bartlett clauses in that Jersey law trust deed exempted the trustee from any liability incurred in transactions undertaken by the trust’s underlying company at the instigation of its appointed investment manager, the wife of the settlor.

In a unanimous judgment, it was held that the provisions of the trust deed restricted the powers of the trustee to interfere in management of the underlying investment business (in the absence of actual knowledge of dishonesty).

Importantly, there was not, and could not be, any “high level supervisory duty” because any such duty would be inconsistent with the anti-Bartlett provisions in the deed.

The judgment has brought home the importance of settlors, trustees and advisers agreeing the scope and intended effect of any anti-Bartlett clause at the outset of a trust relationship. It may be that a more appropriate balance of power can be achieved by expressly restricting the trustee from exercising voting rights that attach to its shareholding without the consent of a nominated person. This is quite different to being empowered not to do so by a traditional anti-Bartlett clause.

It is also worth remembering that, if there are investment management agreements or other contracts in place delegating trustee authority, the trustee will also always need to understand fully its duties and obligations under that agreement.

The prudent trustee

Whatever the nature of the anti-Bartlett provisions and delegation of investment powers, a prudent trustee will still undertake a general review of underlying investment activity. It will seek to maintain a sufficient level of oversight to ensure an appropriate understanding of underlying investment activity and comfort that any mandate has been observed. This is not of course the same as directly intervening in the underlying management of the company. Finally, while the Zhang judgment helpfully endorses a carefully drafted anti-Bartlett clause, it is worth noting the case was based on a relatively unique set of facts. All underlying investment decisions were made and executed by an investment adviser who was herself connected to the structure and had, for all intents and purposes, acquiesced to the investment activity – all during a deep global financial crisis unforeseen by most at that time.

It remains to be seen, therefore, how the judgement will be interpreted in the Channel Islands and elsewhere. Watch this space!

Written by Lydia Essa, Director – Trust Corporation International