John Gibbons from Harbour International Trust Company in Bermuda discusses recent legislative amendments that will strengthen the jurisdiction's firewall provisions in relation to trust governance.
On August 5th, 2020, the Bermuda parliament passed new legislation[i] strengthening Bermuda’s “firewall” provisions, much to the delight of trust practitioners and other industry professionals. Firewall provisions are aspects of a jurisdiction’s trust law that protect trusts governed by and/or administered under that country’s law from negative interference by foreign courts or foreign laws. This ensures that the assets in the trust will be faithfully guarded and cared for in the manner intended, and this therefore makes trusts in such jurisdictions an excellent, arguably essential tool in wealth planning.
From the perspective of the professional wealth planner, firewall provisions become crucial where a party in another jurisdiction is trying to sue for trust assets in a validly constituted Bermuda trust. The unfortunate target of the lawsuit is your client who has placed/settled assets into a Bermuda trust or is a beneficiary of that trust. This means that the client/settlor/grantor no longer owns these assets legally and has none of the corresponding rights or duties over them. Traditionally this also means they have no control over these assets, though modernly it is permitted (and not uncommon) for them to keep or reserve some limited control or powers, such as directing the investment of the assets. However, the other side argues that the trust should either be broken or disregarded. Despite the trust being legitimate in every way under Bermuda law, a foreign court may agree with your client’s opponents, resulting in an order that the assets are at least fair game in the lawsuit, or even that the other side already has a valid claim over them.
Bermuda is a place with robust and fair laws. Foreign claimants are not automatically disregarded but, as a general rule, their claims against the trust assets must be determined by Bermuda courts using Bermuda laws which are designed to preserve the integrity of the trust. A foreign court might not respect the Bermuda trust, despite it being valid under Bermuda law. In some cases a jurisdiction may not recognise or respect the concept of a trust or be politically hostile to their use. Firewall provisions in Bermuda (and elsewhere) ensure that a trust, or connected persons, will not suffer under an adverse order due to foreign misunderstanding, politics or even corruption.
Firewalls Can Resolve Conflict
Let’s explore firewall provisions in greater depth. In essence, firewalls are special rules to be applied in the complex legal arena of “conflict of laws”, which is the set of rules and norms that decide which law is applied in cases where the laws of more than one jurisdiction are at play, and they conflict. For example, a person may live in a country where their children have a right to a defined share of their estate when they die. However, they own property all over the world, including in places where the law says the deceased can bequeath their property however they want, excluding or including whomever. This may not necessarily give rise to a dispute, but clearly the laws are in conflict. If there were a dispute, it would have to be decided which law applies. This is a very complicated issue, so much that sometimes different laws are applied to different aspects of a dispute. Firewall rules come into play when there is conflict within a certain context. The jurisdiction with the firewall essentially says, “we will apply these firewall rules above all others to decide the conflict”. So, the Bermuda firewall decides:
In the latter case, note that this is not necessarily Bermuda law, since the Bermuda courts may well apply a foreign law if it is relevant. However, the firewall provisions are designed so that foreign law will not be relevant if it is likely to cause harm to the trust. Bermuda has had a firewall for many years. However, firewalls and similar laws are always subject to a kind of game in which creative litigators find new ways to attack them, legislation is enacted to protect against these new attacks, new ways are subsequently found, and so on. The firewall amendments enacted this year aim both to offer more robust protections as part of this never-ending game, and also to “clean up” the legislation from a (somewhat academic) legal standpoint.
The first important change is to section 9. The amendments clarify that the Bermuda Supreme Court has jurisdiction to determine a claim if: the trust document says the Bermuda courts have jurisdiction; if some of the administration is done in Bermuda; if the trustee is in Bermuda; or the trust property is located in Bermuda[ii]. It also notes that under the listed circumstances, the Bermuda courts will have jurisdiction over foreign-law trusts. This creates what you might call a “positive” protection, i.e. that the Bermuda court does have say in these circumstances, allowing a lot of leeway to have a trust dispute adjudicated in Bermuda. Basically, the trust just needs to have a decent connection to Bermuda, and the Bermuda court will have jurisdiction. For good measure, the section adds that no matter if the person being sued is not in Bermuda, nor if the act giving rise to the claim did not happen in Bermuda, the Bermuda court will still have jurisdiction.
Following this, section 10 offers a “negative” protection, in that it specifically excludes the application of foreign law in a number of circumstances. This is, perhaps, the most useful element from a wealth-planning perspective. Section 10 of the new rules excludes foreign law from being applied to questions pertaining to a Bermuda trust in the specific cases of:
The real-world applications of this section are almost obvious. Number one, the issue of death, is designed to defeat forced heirship provisions, where the law says that a certain portion of a person’s estate must go to certain individuals, such as their children. People in English-speaking countries may be surprised to hear this is actually quite common worldwide. This protection against forced heirship allows individuals in places with such laws much greater freedom to dispose of their assets on death how they see fit. It might also help in less concrete cases where someone is suing just because they feel they ought to have been included in someone’s will.
Point two also fights forced heirship but is more targeted at cases of divorce. For example, a foreign court may say that a spouse who puts assets into a Bermuda trust had no right to do so on their own, since the assets were actually common marital property. Since the foreign law is excluded, if Bermuda law disagrees, then the property stays in trust and can’t be considered marital property for the purposes of the divorce settlement.
Number three offers some protection for trust property from creditors. Now, the question of whether property in trust can be used to satisfy creditors is complex and depends on a lot of factors. As we noted above, the basic principle is that once someone has put property into a trust, they no longer own it. If they don’t own it anymore, then it can’t be used to pay that person’s debts, just like if Person A owes Person B, Person B can’t demand payment from a Person C. Therefore, if a creditor is after trust assets, they usually have to argue that the trust is somehow invalid. Bermuda law and the Bermuda courts may indeed be sympathetic to this argument, depending on the case. However, the key is that it is the Bermuda law that will decide. That means that a creditor can’t try the tactic of finding a court or law that they know will find the Bermuda trust invalid, win, and then expect the Bermuda court to help enforce the judgment, since Bermuda law excludes foreign law from having a say.
On the note of the Bermuda courts helping to enforce a foreign judgment, this is specifically dealt with in the final major amendment, section 11: “the court shall not give effect to any foreign order that is inconsistent with section 10”. Now, we have seen how the Bermuda courts have positively established their jurisdiction and negatively excluded the application of foreign law. However, section 10 does not exclude the application of Bermuda law by a foreign court. In fact, if a Bermuda-law trust goes before a foreign court, this is what ought to happen. Under the international legal principle of comity, most respectable courts will respect each other’s decisions, even with regard to their own law. However, as an added layer of protection, this section excludes the application of comity if the order contradicts section 10.
Having seen the improved design of Bermuda’s firewall, and the concept of firewalls in general, you may still ask yourself: just because a small island says that it protects its trusts from negative foreign interference, what is to stop the courts of a larger country from bullying a Bermuda trustee, say, into helping enforce an adverse judgment? In truth, this is a danger. However, it will generally not be a problem. Bermuda respects the rule of law, and so everyone in Bermuda will respect that under the law, the Bermuda courts have jurisdiction, only Bermuda law should be applied, and that adverse foreign judgments should be ignored. Furthermore, trustees and custodians of the assets (such as banks or asset managers) that are organised under the law of Bermuda will be protected by those laws from foreign judgments in these cases and will not be compelled by the Bermuda court to respect them.
The foregoing shows how Bermuda trusts are useful in a number of difficult legal situations, and highly recommended for wealth planning. It should also be noted that these recent amendments are the cutting–edge in the offshore world, and so one of the best defensive tools for protecting family and multi-generational wealth.
[i] Trusts (Special Provisions) Amendment Act 2020
[ii] In this case it should be noted the legislation states the jurisdiction extends only over that particular trust property located in Bermuda.
John Gibbons is a Family Office Specialist at Harbour Trust Company Limited in Bermuda.