How to construe contentious trusts - lessons from recent cases

Introduction

As the complexity of families and their wealth structures is increasing, so too is the use of semi-contentious trust applications for remedies like construction declarations, rectification and rescission orders to right trusts which have gone wrong. Global mobility, cross-border assets, and the dynamics of divorce, remarriage and cohabitation create fertile ground for disputes when the meaning of trust documents is unclear. The practical question for settlors, trustees, beneficiaries and their advisors, is how best to anticipate the way trust documents will be interpreted when unforeseen scenarios arise.

In this article we consider the principles applying to the construction of trust documents. We explore three recent cases to demonstrate different contexts where these principles may come into play and how trust drafters can reduce the prospect of beneficiary disputes or third-party attacks on trusts.

The General Rule

In Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (“ICS”) Lord Hoffmann described construction as “the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.” This is the “objective test”.

The application of the objective test is not limited to contracts. When construing a will or a trust, the court finds the meaning of the relevant words in light of (a) the natural and ordinary meaning of those words, (b) the overall purpose of the document, (c) any other provisions of the document, (d) the facts known or assumed by the parties at the time that the document was executed, and (e) common sense. In this process, the court ignores subjective evidence of any party’s intentions.

The “Four Corners” Principle

The four corners principle emphasises the priority given to factors (a), (b) and (c) above. It indicates that the meaning of a written document should be determined primarily from the text within the four corners of the page, without resorting to extrinsic evidence. This principle is rooted in the need for certainty: parties are bound by what they have signed, and the document speaks for itself.

However, courts recognise that language is not always clear or unambiguous. Where the language of a document is ambiguous or produces an absurd result, the courts may look beyond the four corners to the matrix of facts to ascertain the objective meaning.

The Matrix of Facts and Admissible Evidence

In relation to trusts, it has been said that the court needs to sit in the settlor’s armchair and construe the objective meaning of the words in light of the relevant factual matrix. The relevant factual matrix may include the state of their knowledge about financial affairs of the family for example. It would not include declarations made later about the settlor’s subjective intent. In ICS Lord Hoffmann identified this as an important matter of policy. If courts were to admit evidence of what a party privately intended or hoped, the certainty and predictability of written documents would be undermined, and litigation would become mired in self-serving evidence that could arise once a dispute has occurred. Note that this limitation on admissible evidence does not apply in rectification cases.

Application in Practice – Takeaways for settlors, trustees, beneficiaries and advisors

Avoiding fraught trust amendments

The meaning of trust documents can become contentious simply because inconsistent words are used. In SwissIndependent Trustees SA v Sofer and others [2023] EWHC 12 (Ch), a professional trustee asked the High Court to construe provisions of English-law trusts. Following a dispute between Mr Sofer, and the Australian Taxation Office concerning trusts he helped to establish, a settlement was reached which effectively created a tax-free corpus. This corpus of funds was intended to benefit three beneficiary trusts.

As a result of amendments made in 2015, each of the beneficiary trusts contained two different clauses defining the trust corpus in inconsistent ways. The inconsistency was principally due to explanatory words placed in parentheses after one of the definitions. Those words, on the face of it, reduced the tax-free corpus to one-third of its original size under the settlement between Mr Sofer and the ATO. This did not make commercial or fiscal sense. By treating the extra words as inserted in error, and therefore meaningless, the full tax-free corpus was able to be utilised, instead of merely part of it. The court observed that it was usually easier to ignore superfluous words in the construction of a document than it was to write extra words into it. This case demonstrates how making amendments to trust deeds over time can easily produce interpretation problems and so extra consistency checks are required.

Anticipating factual developments

Unexpected factual developments can also put pressure on the interpretation of trust documents. In Marcus v Marcus [2024] EWHC 2086 (Ch) a settlor created a discretionary trust in favour of the settlor’s “children and remoter issue”. The settlor died believing he had two biological children (who would, therefore, be the beneficiaries). However, the High Court found that, on the balance of probabilities, one child was a stepchild rather than a biological child. The High Court had to determine whether the stepchild fell within the definition of the beneficial class.

Considering the surrounding circumstances at the time the trust was created – and acknowledging the stark inequity a narrower reading would produce – the Court held that “children and remoter issue” included a stepchild. That child was therefore entitled to benefit from the trust assets. This type of ambiguity can be avoided by articulating a beneficial class in greater detail. For example, many trusts expressly include stepchildren, adopted children and children whose parentage is established under applicable law (including laws addressing assisted reproduction and surrogacy).

Considering legal trends

Legal nuances and developments can also have a very significant effect on trustees, beneficiaries and their advisors. The New Zealand decision of Cooper v Pinney [2024] NZSC 181 arises from a line of cases concerning the characterisation of trust rights and powers as relationship property (property divisible on the breakdown of a marriage or de facto relationship). The Supreme Court considered whether Mr Pinney’s rights and powers as settlor, discretionary beneficiary and the sole appointor of new trustees, fell within the definition of “property” that may be subject to division under the relationship property regime. The answer to this question turned on whether his powers were personal or fiduciary in nature and required construction of the trust deed.

Looking at the document as a whole, the Supreme Court found that in exercising the power to appoint trustees, Mr Pinney was required to act in good faith, for a proper purpose, rationally and for good reason. These fiduciary constraints meant that Mr Pinney did not have effective control to appoint trust capital and income to himself. His interest in the trust was not property and therefore not susceptible to division. The case demonstrates the importance of taking a clear view on the nature of the powers when creating a trust and making this as clear as possible in the trust instrument. Drafters should keep in mind the implication of these decisions in case relationships should break down, or other contentious situations arise.

Conclusion

Communications between settlors, trustees, beneficiaries and their advisors about the meaning of trust documents is an opportunity to strengthen relationships and it is central to the proper administration of a trust. The cases demonstrate that trust documents will be construed by reference to their text, structure, purpose and factual context, rather than subsequent claims about the settlor’s subjective intention. Therefore, clear drafting and applying a dispute-avoidance lens, are key. Where disputes are unavoidable, trustees and beneficiaries have the ability to apply to the court for remedies, but with advance planning, the scope for such issues will reduce.