Last throw of the dice

The Court of Appeal and the Jersey Royal Court's judgments in the recent case of Mubarak v Mubarik [2008] JCA 196 has finally clarified the circumstances in which the Jersey Court will give effect to an order of the English Family Division purporting to vary or alter a Jersey trust pursuant to the Matrimonial Causes Act 1973.

The factual circumstances surrounding the Mubarak judgment are well known to English matrimonial lawyers and those concerned with Jersey trusts law.

The husband and wife had married in 1983. A Jersey discretionary trust '“ the IMK Family Trust '“ was created in 1997 with both husband and wife as the settlors. They, their three children and any other children or remoter issue of the settlors born thereafter were named as the principal beneficiaries. Under the terms of the trust, Mr Mubarak had the power to add and exclude beneficiaries as well as to appoint and remove trustees and the protector.

The husband and wife ceased cohabitation in March 1998 and at the same time Mr Mubarak revocably excluded his wife as a beneficiary under the trust. He also executed a second letter of wishes signed only by him which was described as a 'clarification' of the earlier letter of wishes, in which he removed any reference to his wife benefiting under the trust.

At a hearing in March 2007, the English Family Division of the High Court purported to vary the terms of the trust under the Matrimonial Causes Act 1973 so as to require the trustees to pay to the wife £4,875,000 owed by Mr Mubarak under an earlier order made in the Family Division.The total amount owing under the 1999 English order was thought to be something in the region of £7.6m at the time of the Royal Court's decision.

To give any force to the English order required a hearing before the Deputy Bailiff of the Royal Court of Jersey. The Deputy Bailiff found that by reason of Article 9(4) and Article 9(1) of the Trusts (Jersey) Law 1984 (as amended) the Royal Court could not enforce a judgment of the Family Division varying or altering a Jersey trust under the provisions of the 1973 Matrimonial Causes Act.

The Deputy Bailiff deliberately distinguished between a variation of the trust (which involved something the trustees had power to do under the trust) and an alteration of the trust (which involved something the trustees did not have power to do).

Where the English Family Division had ordered a variation and not an alteration of the trust, the Jersey Royal Court had discretion to give directions under Article 51 of the 1984 law which would have the effect of achieving the object of the English order. Whether the court would do so would depend upon the interests of the beneficiaries.

Where the English Family Division had ordered an alteration of the trust there was no jurisdiction in the Royal Court to give such directions.

To do so would be to authorise or direct the trustees to act in a manner outside the powers conferred under the Deed of Trust.

In this case, the wife was no longer a beneficiary and therefore unable to benefit from the trust. She was moreover an Excluded Person and was unable to be added as a beneficiary under the terms of the trust.

The English order therefore amounted to something which the trustees did not have power to do under the trust deed. The Royal Court could not purport to direct the trustees to do the very thing specified in the English Court's Order. The Royal Court thus concluded that it did not have jurisdiction to enforce the English order, nor did it have jurisdiction to give directions under Article 51 to the trustees to give effect to the order.

By unexpected means

The case did not end there however. In order to participate in the English proceedings Mr Mubarak had written a letter in 2006 to the trustees consenting to the payment of the lump sum to his wife. The Royal Court found that this letter was Mr Mubarak's consent to the alteration of the trust in the terms suggested by the English order. The wife submitted that, given this 2006 letter, under Article 47 of the law (the Jersey statutory embodiment of the rule in Saunders v Vautier [1841] 49 ER 282) the Royal Court should treat all adult beneficiaries as agreeing to the alteration of the trust in the terms suggested by the English order and thus give its consent on behalf of the potential and existing beneficiaries unable to provide consent. The Royal Court did so, thus enforcing the English order through unexpected means. It was this supposed alteration which was the subject of the Court of Appeal decision and which met with approval by the Court of Appeal (Mubarak v Mubarik [2008] JCA 196).

Although this unusual sequence of events meant that in effect the English order succeeded in what it had set out to do, the rationale behind the Royal Court judgment finally allowed lawyers in England and Jersey to sleep soundly in their beds. The wronged wife had her money (or at least had a judgment which may enable her to finally receive her money) but more importantly, Jersey had drawn a 'line in the sand' in relation to the variation or alteration of Jersey trusts in divorce matters.

Jersey trust lawyers had long been expecting such a judgment '“ the facts in Mubarak had been seen before. High-net-worth individuals using offshore structures for their tax efficiency are not uncommon, and children and wives are often the beneficiaries in such structures. Thus assets are removed from the Inland Revenue's hands, but not necessarily from the divorce courts. Errant husbands were becoming well known to both the English Family Division and the Jersey Royal Court.

Exorbitant assumptions

One of the most well known cases is that of Happy Minwalla. The facts did not paint Mr Minwalla in the best light and the sympathy of the English Family Division was clearly with his wife. So much so that in divorce proceedings, the Family Division found a Jersey trust to be a sham. In coming to this substantive finding, the English Court applied English law and not Jersey law (In the matter of the Esteem Settlement (Abacus (CI) Limited as Trustee [2003] JLR 188). When the English order came before it, the Bailiff of the Royal Court of Jersey stated:

'As a matter of generality, we would regard an assumption of jurisdiction by a foreign court to declare a Jersey trust to be a sham to be exorbitant and we would be reluctant to enforce any judgment based upon such an assumption.' (Bailhache, Bailiff, In re the Fountain Trust [2005] JLR 359 at para 27).

Like Mubarak however, there was a further fact which assisted the wife. The Jersey trustees, although directed by the Jersey Royal Court to remain neutral and to play no part in the argument between husband and wife, had submitted to the English jurisdiction in circumstances in which it was clear that an order or declaration affecting the trust might be made. Given that fact, the Royal Court found that no unfairness arose from holding as a matter of comity that in the particular circumstances the judgment should be enforced against the trustees. The Royal Court specifically stated that it would be a very different situation if the trustees had not submitted to the jurisdiction of the English courts. Principles of comity had been applied before in Jersey to give force to a declaratory judgment when the relevant parties had submitted to the English jurisdiction (Lane v Lane [1985-6] JLR 48). Importantly, these judgments were before the amendment to Article 9(4) of the 1984 law (Trusts (Amendment No 4) (Jersey) Law 2006).

Many Jersey lawyers believed that following the amendment of Article 9 of the 1984 law, principles of comity could no longer apply in these circumstances. Article 9 (1) of the 1984 law provides that variation of a Jersey trust shall be determined solely in accordance with the law of Jersey. Article 9(4) provides that no foreign judgment in respect to a trust shall be enforceable to the extent that it is inconsistent with Article 9. It seemed to follow that a judgment of the Family Division varying a Jersey trust under English law would be unenforceable in Jersey, without the Jersey court coming to its own conclusion on the matter by reason of Article 9(4).

Surprisingly however, Re B Trust [2006] JLR 562 came before the Bailiff the day after the amendment came into force and principles of comity were again relied upon to give force to the English judgment. Following Re B, Article 9(4) seemed to have little force. The most important factor appeared to be whether the trustees had submitted to the English jurisdiction (see Re the H Trust [2006] JLR 280 and further proceedings [2007] JRC 187). In the postscript to this judgment the Bailiff expressed the hope that English courts might in future express judicial restraint before asserting a jurisdiction pursuant to the Matrimonial Causes Act to vary a Jersey trust.

Significantly, the Deputy Bailiff in Mubarak clarified that Re B was decided as a variation of the trust (not an alteration) in circumstances in which the trustees had submitted to the English jurisdiction (IMK Trust [2008] JRC 136 at paragraph 51). Re B therefore falls under the second category of cases identified by the Deputy Bailiff in exercising the jurisdiction under Article 51 of the 1984 law to give directions to trustees. Article 9(4) does not therefore apply because the giving of directions under Article 51 does not amount to an 'enforcement' of the overseas judgment.

A question remains

The Deputy Bailiff has resolved the debate by clarifying that Article 9(4) has force but also by recognising the function of judicial discretion in the giving of directions under Article 51 of the 1984 law, which may have the same effect by the back door. Whether this discretion is exercised will be a matter for the Jersey judiciary, taking into account the interests of the beneficiaries and the stance of the trustees. The question of whether the trustees have submitted to the English jurisdiction will still be important.

Given the Bailiff's comments to the English Family Division, it is unsurprising that the Jersey Royal Court has recently decided that it too does not have jurisdiction to find that a foreign law trust is a sham in Jersey matrimonial proceedings (R v C [2008] JRC 179). The debate in Jersey seems to be at an end, but the question has yet to be decided in the other offshore jurisdictions. Trust lawyers and matrimonial lawyers alike therefore await further postscripts, hopefully not involving Mr Mubarak.