Tried-and-tested principles of construction used to interpret trust settlement

Courts are frequently tasked with interpreting the wishes of a settlor of a trust, long after the settlor's death, and as contained in the trust settlement. Longstanding principles of construction exist to assist with this crucial process.

This was illustrated in the recent decision A v B et al (unreported, 13 February 2020), where the Grand Court of the Cayman Islands construed the power of variation conferred on a trustee of a Cayman Islands governed discretionary trust. Article 5.25 of the trust deed stipulated that -

'The Trustees may, with the consent of the Settlor during his lifetime, at any time and from time to time by instrument in writing, vary, add to, revise or modify, the terms and conditions of this settlement except that no such amendment may be made which either changes any Beneficiary hereunder or alters that [sic] terms of clause (1) of subsection 3.4 of this Settlement.'

Article 3.4 of the settlement, which appeared as an amendment dated 25 June 2001, and which was referenced in article 5.25, stipulated that on the death of the settlor, certain sums would be paid to the settlor's former wife and that subject to this obligation, the trustee should distribute income and capital to the beneficiaries other than the former wife, with a power to amend the relevant governing schedule.

While article 5.25 was clear that the trustee had power to amend the trust deed with the consent of the settlor, the question that arose was whether the provision empowered the trustee to amend the trust deed after the settlor had died. Additionally, a question also arose as to the meaning of the prohibition against an amendment which changes any beneficiary. The trustee sought assistance from the court in the form of an application under section 48 of the Trusts Law (2018 Revision), by which a trustee can apply 'for an opinion, advice, or direction' on any question in respect of the management or administration of the trust assets.

The court was guided by the established principles of construction, in particular:

• • The court should consider the intention of the settlor as expressed. In other words the court must ascertain the meaning of the words actually used.
• • Words in the English language are given their ordinary meaning.
• • The factual matrix should be taken into account.
• • The relevant surrounding circumstances are those which were in existence, or were in the reasonable contemplation of the settlor, when the settlement was made and not future unforeseen circumstances.
• • Evidence of subjective intention is not admissible.
• • The meaning of a document must be ascertained by reading it as a whole. 

Considering the sentence structure of article 5.25 of the trust deed, and the objective inference of the amendment in article 3.4(1), the court found that - looking at the intention of the settlor as expressed in the language of the trust documents, and when one gives words their ordinary meaning, and construes the language of the trust deed as a whole - it was beyond any doubt whatsoever that the power of variation was exercisable after the death of the settlor.

The court also accepted that the prohibition on an amendment which would have the effect of changing any beneficiary, meant that no beneficiary could be added or excluded in exercise of the power of variation. It did not impose a restriction on varying the interest of a beneficiary.

This decision serves as guidance to trustees on the court's application of the tried-and-tested principles of construction. This is also a reminder of the importance of clear and unambiguous drafting, particularly in trust documents where the settlor is often no longer around to provide clarity on their intention.

If you found this blog post interesting, you may also be interested in reading our recent legal update on the judgment in the matter of AA v. BB & Colin Shaw (as amicus curiae) (unreported, 14 February 2020), in which the Honourable Chief Justice Smellie of the Cayman Islands Grand Court restated the test for "category 2" Public Trustee v Cooper applications and commended the trustee's approach to its duty of deliberation when considering how to exercise its discretionary dispositive powers - click here.