Toby Graham discusses the numerous and complex issues that arose in the Alhamrani Case heard in Jersey last year, the biggest ever of its kind, relating the lessons learned along the way.
This article looks at some of the issues that arose in the Alhamrani litigation before the Royal Court of Jersey and seeks to draw out some lessons. The case originated from an extraordinarily acrimonious dispute between nine of the Alhamrani siblings, who had become locked in a bitter and herculean struggle to obtain control over family assets located in Saudi and in Jersey which held the family’s foreign assets.
The two Jersey trusts were known as the Intertraders and Internine Trusts the trustees of which were caught in the crossfire between warring family factions. Litigation ensued in both jurisdictions, a total of 16 claims being brought in Jersey, and numerous actions being pursued in Saudi between family members. These took place in private, making it difficult to ascertain precisely what was at issue.
The Jersey proceedings raised numerous and complex issues – and led to the largest trial in Jersey history in a specially adapted venue. The recent settlement of the case has deprived those practitioners involved with Shari’a trusts of clarification of practical and legal issues that are commonly encountered.
One issue raised in the Jersey litigation was the potential mismatch between a discretionary trust – conferring wide dispositive powers on trustees and giving beneficiaries no proprietary rights – and fixed property rights conferred by Shari’a succession law. This mismatch led to suggestions that the trustees discretions were not as wide as they had previously believed. Because distributions did not accord with Shari’a shares, it was suggested that trustees were in breach of trust.
Commonly, trustees communicate with the family through a gatekeeper, in this case a family member and protector of the two trusts who had been appointed agent under a family power of attorney. It was argued that the attorney acted in breach of his duties under Saudi law, with the result that his principals were not bound by his actions. This was one area of possible overlap between the Saudi and Jersey proceedings and where the defence of the Jersey claims was impeded by the difficulties in obtaining information about the Saudi proceedings.
The first lesson, then, is that settlors need to be clear with those whom they instruct to draft trust instruments as to whether beneficiaries are to enjoy fixed proprietary rights or if they want the trust to take the form of a conventional discretionary trust. Unfortunately, there were drafting infelicities in the trust instruments despite Jersey trust specialists having been involved at the time of drafting. The form of the trust depends to some extent on whether the property settled onto trust was itself impressed with Shari’a shares. This was not obvious in the Alhamrani case; the property settled onto trusts was situated outside Saudi and held through companies that were ultimately owned by Cayman trusts and Liechtenstein foundations. The draftsmen, perhaps understandably, did not contemplate that Saudi property and succession principles would be relevant to such property. The case demonstrates the need for settlors to understand basic trust principles and, equally, for trustees and their advisers to have some understanding of Shari’a principles – and, if appropriate, suitable legal advice.
The Alhamrani case suggests that Shari’a shares should not be regarded as ‘sacred’ in the sense that they are immutable. They are likely to be modified in practice, usually, as in this case, to the advantage of the elder siblings at the expense of their younger (especially female) siblings. In this instance, the departure from Shari’a shares was attributed to the elder siblings’ greater contribution to the success of the family business and the fact that the eldest siblings act as family patriarchs and incur expenses for the benefit of the family as a whole.
Further, there was a family office in Saudi with a team of accountants who kept records of payments made to each heir checking they received their Shari’a share as adjusted. Their remit extended to the Jersey trusts. Thus it was eminently possible for one sibling to do better out of the trusts, but receive less from other sources, so as to ensure that they received what was due.
The only people who knew the state of the running total were the siblings who received information from the family office which were discussed at occasional family meetings. The trustees were ignorant of all this and thus could not be expected to ensure that siblings received what was due. The trustees believed – understandably – that the trusts were discretionary.
The second lesson is that Shari’a compliant investment involves well known refinements to ordinary trustee investment. This could, with careful drafting, be accommodated within the terms of the trust. A more popular solution is to confer the power to direct trustees in relation to investments upon a trusted representative with suitable expertise, and to disapply trustees’ investment function and responsibility.
This is what the Alhamrani family did. The Intertraders and Internine trusts conferred powers on the protector to direct the trustees in making investments, and required the trustees to implement such directions. Directions were duly issued, and followed by the trustees. It was claimed that these directions were invalid as the trustees were on notice that the protector was acting in breach of his fiduciary duties because investments were made into trading businesses with which he was associated and which were suffering financial difficulties. The protector did not accept that his duties were fully fiduciary – pointing out that he was also a beneficiary of the trusts.
The fact that the payments were made to ailing trading businesses did not mean such duties had been breached. His explanation involved the family’s Saudi businesses – which was subject of the Saudi proceedings. The trustees denied knowledge of any breaches of duty. The case seemed some way from the paradigm of the direction to bet the whole of the trust fund on the 3.50 at Chepstow.
Thirdly, cultural, geographical and linguistic barriers can impede direct communication between beneficiaries and trustees. It is common for a gatekeeper appointed by the beneficiaries to represent them in their dealings with trustees. In this case, one of the siblings had been appointed protector and also appointed under a family power of attorney. If the rest of the family chose not to communicate with their trustees, then it seems the trustees have little alternative other than to deal with their chosen gatekeeper.
It is the principals’ job to ensure that their agent is acting properly and is accounting for his dealings with the trustees. As mentioned, the family office in Saudi appeared to monitor the trusts and the protector/attorney claimed to report to his siblings regularly about the Jersey trusts – but some of them disputed this. The presence of a gatekeeper does not prevent beneficiaries communicating directly with trustees, and they should certainly do this if they want trustees to take account of their needs and wishes. Had this happened, many of the family’s problems would have been avoided.
A fourth lesson to take from this case is that if beneficiaries disapprove of trustee actions, they should not stand idly by. On the contrary, they should speak up (if they have sufficient knowledge) or risk it being said of them that they acquiesced to the trustees’ actions. If they believe there to be a claim, they should do something about it at the first available opportunity; there was some suggestion that the Plaintiffs might have held back for tactical reasons.
If, as in the Alhamrani case, a beneficiary fails to bring proceedings in time, they will face limitation defenses. In this case, the focus of disclosure and trial was on the state of knowledge of the family. To try to overcome limitation difficulties, the Plaintiffs here claimed that the test for knowledge to start time running was high, and required them to know that there had been a breach. This necessitated knowledge of the terms of the trusts, the facts giving rise to the breach and that there were reasonable grounds for concluding they had a claim. The defendants argued that this was unrealistic and unprincipled. The court did not determine the relevant legal principles.
Finally, the case illustrates that litigation is not suited to resolving family disputes such as the one that flared up between members of the Alhamrani family, and which quickly escalated into no-holds-barred warfare. It is difficult, even for the most experienced of judges, to manage litigation of such proportions. The trial timetable grew and grew, and costs escalated. The real financial hazard of litigation like this is the collateral damage it can cause to structures that have been carefully crafted to preserve wealth. Confidentiality is another sure victim – this trial took place in the public spotlight and there were numerous judgments following interlocutory hearings.
In the end, litigation of this nature feeds a cycle of destructive behaviour. It focuses on the past, on blame, it seeks to seeks to find winners and losers, all of which can cause lasting damage to family relations. Sadly, this was the case not only for the combatants, but for the wider Alhamrani family. Litigation is not good for trustees, who can find themselves drawn into family warfare only to come under fire from both sides. Cool heads, wise counsel, self - restraint and mediation might well be the better course of action if ever another such dispute arises.
Toby Graham, Head of Contentious Trusts and Estates at Farrer & Co