Hong Kong court confirms effectiveness of anti-Bartlett clauses

The Hong Kong Court of Final Appeal reversed, on 22 November 2019, the decision of the Court of Appeal that a trustee was in negligent breach of trust for failing to supervise the business of a trust’s underlying company. In doing so, it upheld the supremacy of ‘anti-Bartlett’ provisions contained in the trust deed.

In Zhang Hong Li and Ors v DBS Bank (Hong Kong) Limited and Ors [2019] HKCFA 45, the first appellant, IQ EQ (NTC) Trustees Asia (Jersey) Ltd. (formerly known as DBS Trustee HK (Jersey) Ltd.) was the trustee and held the only share of the second respondent, a company named ‘Wise Lords’, as the sole trust asset. The second appellant, DHJ Management Ltd., was the sole director of Wise Lords. Ji Zhengrong, a settlor and a beneficiary of the trust, was the investment adviser of Wise Lords and directed its investments.

In July and August 2008, during the unfolding global financial crisis, DBS Trustee and DHJ Management gave after-the-event approvals for three transactions entered into by Wise Lords, comprising: an increase in Wise Lords’ credit facilities to USD100 million; purchases of USD83 million worth of AUD; and purchases of three decumulators. As a result of AUD falling sharply against USD, Wise Lords suffered significant losses.

The lower courts in Hong Kong found DBS Trustee liable for grossly negligent breach of trust as trustee and DHJ Management liable for grossly negligent breach of fiduciary duty as director in approving the transactions. As the appellants’ breaches were held to have directly caused loss of the trust assets, they were therefore ordered to pay equitable compensation to the respondents.

The issues on appeal related to the bases on which the courts below found liability against the appellants and ordered them to pay equitable compensation.

The basis on which the courts below found the appellants liable for gross negligence was that they owed a “high level supervisory duty” to the respondents. Jersey trust law applied to the trust subject to the terms of the trust deed. The trust deed contained what are commonly known as ‘anti-Bartlett’ provisions, which relieved the trustee from any duty to interfere with or supervise the business of the trust’s underlying company (Wise Lords), unless the trustee has actual knowledge of dishonesty in the conduct of the business.

The issue was whether, despite the anti-Bartlett provisions, the appellants owed the “high level supervisory duty” as found by the trial judge and Court of Appeal, and whether they had breached such duty.

The Hong Kong Court of Final Appeal held that there was no such duty and no such breach. The existence of such a duty was inconsistent with the anti-Bartlett provisions. Such a duty would require DBS Trustee to query and disapprove of the transactions, which would be interfering with Wise Lords’ business contrary to the terms of the trust deed. There was no actual knowledge of dishonesty that required DBS Trustee to interfere.

In any event, the appellants’ approvals of the transactions did not constitute gross negligence. While the transactions were speculative and risky, the trust teed specifically allowed the taking of such risks. As such, the appellants would still be protected by liability exemption clauses for any acts and omissions short of gross negligence.

After the hearing but before judgment was delivered, the parties notified the Court that they had agreed to settle their dispute. However the Court exercised its discretion to deliver its judgment because there were important issues of law involved and its decision differed from those of the lower courts. Accordingly, if the case had not been settled, the Court would have unanimously allowed the appeal.

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