Shan-Warnock Smith and Andrew De La Rosa cast their expert eyes over recent developments within the Cayman Islands Trust sector involving foreign laws and judgments.
Our central theme in this article concerns the protection currently afforded to Cayman Islands trusts against claims grounded on foreign laws. We emphasise “currently” not only because some of the Cayman Islands law relating to this subject is under review but also because legislative changes in other established international trust jurisdictions may have an impact on (a) how Cayman’s trust laws are viewed in the global market for trust and fiduciary services and (b) whether those laws should be changed in consequence.
Underlying this there are also questions of policy concerning relations between established trust jurisdictions such as Cayman and the foreign jurisdictions whose citizens, residents and domiciliaries they serve. One of these, which we will touch on below, is how far it is sensible and appropriate to go in preventing the enforcement of foreign judgments from jurisdictions that share not only a common legal heritage with Cayman but a commitment to scrupulously fair judicial procedures.
Firewalls and Hurricane Shutters
“Firewall” provisions now exist in the trust laws of many established and emerging international financial centres. They are designed to shield trust structures established under those laws from the impact of foreign laws and judgments (and indeed in some cases other decisions, such as of non-judicial tribunals). In the Caribbean jurisdictions such provisions are sometime referred to as “hurricane shutters,” which accurately reflects their function as a barrier against the occasional ill wind that blows in over the blue horizon, perhaps most frequently from the Mother Country herself but sometimes from other less familiar places.
It was from the Caribbean, and the Cayman Islands in particular, that provisions of this kind originated. Since the late 1980s they have been adopted in a large number of jurisdictions. It is perhaps remarkable that the classic Cayman model firewall legislation we describe below has substantially been copied in jurisdictions such as the Dubai International Financial Centre and the Qatar Financial Centre, both of which are common law enclaves carved out of Islamic law jurisdictions where a particularly strict and faith-based form of forced heirship regime applies. The avoidance of forced heirship rules of this and other kinds may have been the original impetus for the development of firewall rules but their potential impact is now much wider.
The Classic Cayman Model Firewall
The Cayman Islands are justly credited as the first jurisdiction out of the gate with what has commonly been described as an “AFH” or Anti-Forced Heirship regime in the form of the Trusts (Foreign Element) Law 1987. The rules are now contained in Part VII of the Cayman Islands Trust Law (2009 Revision) governing “Trusts - Foreign Element.” This legislation was fairly rapidly followed by similar laws in the Bahamas (1989), Jersey (also 1989), Guernsey (1989 and 1990) and thereafter across a swathe of jurisdictions on both sides of the Atlantic and beyond.
Reduced to its essentials the Cayman model has three elements:
First, whether or not the settlor is resident in the jurisdiction, he or she is free to adopt that jurisdiction’s law as the governing law of their trust and that choice of law is decisive. The relevant statutory language is normally framed in emphatic terms, e.g. that the settlor’s choice of governing law is “valid, effective and conclusive regardless of any other circumstance.”
Second, subject to certain prescribed exceptions, the choice of governing law excludes any other law that might otherwise have been applicable. The prescribed exceptions to this rule broadly concern issues as to (a) whether to begin with the settlor actually owned foreign property transferred into trust, the disposition of which fell to be governed by foreign law, (b) observance of formalities provided for by the lex situs regarding the transfer of property, whether owned by an individual or corporate body, and (c) the scope of the express terms of the trust, where a choice of foreign law specified in the trust will take precedence over the statutory rules.
Third, such provisions directly address potential attacks on the validity of the trust on the ground of foreign law rules or decisions by providing that no trust (or disposition into trust) that is valid under the chosen governing law is to be treated as “void, voidable, liable to be set aside or defective in any manner by reference to a foreign law”, nor is the trustee, any beneficiary or any other person “to be subjected to any liability or deprived of any right” by reason of (a) any foreign law not recognising the trust concept or (b) because “the trust or disposition defeats rights, claims or interests conferred by foreign law upon any person by reason of a personal relationship to the settlor or by way of heirship rights, or contravenes any rule of foreign law or any foreign judicial or administrative order or action intended to recognise, protect, enforce or give effect to any such rights, claims or interests” (section 91, Cayman Islands Trust Law).
It should be noted that the definition of “personal relationship” in Cayman’s legislation and statutes based upon it is usually very broad, encompassing any relationship by blood or marriage; as will be noted below, the evolution of firewall legislation has resulted in even wider definitions.
New Model Firewalls
It is not difficult to see that the classic firewall had as its primary object protection of trusts from foreign forced heirship claims and not only because of explicit statutory reference to them. However, it is clear that the actual terms of the legislation go further in terms of the scope of the protection afforded. In particular the exclusion of foreign law claims that arise “by reason of a personal relationship to the settlor or by way of forced heirship rights” is wide enough to cover adverse claims based on foreign matrimonial property adjustment orders, at least where the settlor is the husband or wife of the party claiming.
However, while the Cayman firewall legislation has remained in its original terms, legislation in other established trust jurisdictions, in particular the Crown Dependencies of Jersey and Guernsey, has not stood still, possibly because of the greater number of English divorce proceedings that have generated satellite litigation there compared with Cayman.
In Jersey, for example, under the Trusts (Amendment No 5) (Jersey) Law 2011, the definition of “personal relationship” is no longer confined to one “to the settlor” but extends to any relationship conferring rights under foreign law that exist or has existed between a person having such rights and “the settlor or a beneficiary” of the trust. Personal relationship is also defined to include a de facto “arrangement” giving rise to “any rights, obligations or responsibilities analogous to those of parent and child or husband and wife.”
Jersey’s legislation goes further by incorporating specific exclusion of recognition of foreign statutory or non-statutory jurisdiction to vary a trust, and indeed whether the variation is one ordered in a foreign court, arbitration or other tribunal decision with respect to a Jersey trust to the extent that it is inconsistent with amended Article 9 of the Trusts (Jersey) Law. Article 14 of the Trusts (Guernsey) Law 2007 arguably goes further still, at least as respects the impact of foreign court proceedings; Article 14(4) prohibits enforcement or recognition of a foreign court judgment or order affecting a Guernsey trust to the extent that it is inconsistent with Guernsey law or “the Royal Court, for the purposes of protecting the interests of the beneficiaries or in the interests of the proper administration of the trust, so orders.”
These new model provisions, and perhaps especially the last one referred to above, give pause for thought. Should Cayman be following suit and amending its legislation in similar terms? On one level the answer may be thought blindingly obvious; to avoid being seen as lagging behind, and perhaps missing a potential competitive edge when foreign private client advisers survey the range of options open to their clients, Cayman should at least keep pace with developments in other international trust centres. On the other hand, giving the Cayman court a wide discretion over whether or not to enforce a foreign judgment affecting a Cayman trust in terms similar to the provisions of Guernsey law is potentially a recipe for more uncertainty and litigation. Moreover, at least on one view it would not sit easily in the wider context of comity between jurisdictions that share a common base of legal principle and practice, or at least with the realities facing jurisdictions such as Cayman that remain in a symbiotic financial relationship with the UK and the main US financial centres.
These are not considerations that are necessarily easy to reconcile. To a certain extent they have surfaced in the current debate over reform of Cayman’s statutory regime for recognition and enforcement of foreign judgments. Where this relates to trusts, however, we think that the answer is clear.
The present system for enforcement of foreign judgments in Cayman courts is far from comprehensive based as it is primarily on (a) the rather limited scope of the Foreign Judgments Reciprocal Enforcement Law (1996 Revision) and (b) common law principles applied in cases such as Bandone v Sol Properties  CILR 301. There is in fact nothing unusual in this; viewed on a global basis recognition and enforcement of foreign judgments is a patchwork of different laws, conventions and norms - perhaps nowhere better illustrated than in the different US states’ historical approaches to non-US judgments.
The Cayman Islands Law Reform Commission’s proposals for legislative change (by way of proposed amendment of the 1996 law) appear to contemplate the possibility of extending recognition and enforcement of foreign judgments even to those cases where there is no reciprocity of recognition and enforcement as between Cayman and the foreign jurisdiction. Once registered in accordance with proposed statutory criteria, the foreign judgment would have the same status as a judgment of the Grand Court and the burden would lie on the foreign defendant to set it aside.
In the context of Cayman Islands trusts it is difficult to see any possible benefit in or justification for this approach. It is not consistent with the protection afforded by Cayman’s firewall legislation or with developments in other major international trust jurisdictions. Rather than implementing it there would be a great deal to be said for leaving well enough alone.
Shan Warnock-Smith QC is a barrister who provides advisory and litigation services to professional clients in the wealth structuring field. From her bases in London and Cayman, Shan has an international practice, which takes her around the globe to advise and litigate.
Andrew De La Rosa
Andrew De La Rosa has a recognised expertise in cases involving the application of equitable principles and remedies in international disputes, in particular where fiduciary relationships in trust, succession, partnership, corporate governance and investment management spheres are involved. He practices from Cayman and London and has a long-term connection with the Arabian Gulf jurisdictions.