Saunders v Vautier where the beneficial class is not closed - the debate goes on...

The Saunders v Vautier principle

As the authors of Lewin on Trusts note, ‘the principle of Saunders v Vautier is not a rule of construction but depends on the fundamental proposition that the beneficiaries are collectively the beneficial proprietors of the fund’.

It is settled law nowadays that the Saunders v Vautier rule also extends to discretionary trusts, at least where the beneficial class is closed. The question of whether the principle can operate where the beneficial class is not closed (for example where the terms of the trust include a power to add or remove beneficiaries) remains a good deal more vexed.

THE Saunders v Vautier rule

This may seem like the kind of technical point which trust lawyers love to obsess over, whilst the rest of the industry gets on with day-to-day administration.  However, it has a number of serious practical consequences. For example, in the case of a discretionary trust with default charitable beneficiaries and a power to add to the beneficial class, the charitable beneficiaries are rarely expected to benefit. However, if a charitable beneficiary is in a position as a matter of law to exercise the rule in Saunders v Vautier, regardless of the fact that the beneficial class is not closed, there is nothing in theory to prevent that charitable beneficiary from doing so immediately after the trust is settled and before any other beneficiaries can be added. In this scenario, the charitable beneficiary scoops the pool and heads off into the distance with the trust property.

The point has now arisen in the context of the long running Orb litigation in England, relating to the complicated financial affairs of Dr Gerald Smith (SFO v Litigation Capital and Others [2021] EWCH 1272). In a lengthy and careful judgment, Mr Justice Foxton has veered into this disputed territory, which he describes as ‘treacherous waters for a commercial judge to navigate’. Although not called upon directly to decide the point (and therefore obiter), Foxton J has given a strong steer that as a matter of English law at least, the power to appoint new beneficiaries to a beneficial class precludes the operation of the rule in Saunders v Vautier, except where the trustee expressly releases that power of appointment. Amongst other considerations, he cites the concern noted above in relation to the potential impact on so-called Red Cross trusts. The wait however goes on for a definitive answer as a matter of English law.

Rusnano Capital appeal in Guernsey

The position in the Channel Islands is in some respects clearer, although not necessarily in a helpful fashion. In Rusnano Capital v Molard [2019] GRC 01, the Guernsey Court of Appeal held that it was possible to terminate a Guernsey discretionary trust under s.53(3) of the Trusts (Guernsey) Law 2007, even where the trust contains a power to add to the beneficial class, but subject to the ultimate discretion of the Court. It is fair to say that this decision came as something of a surprise to many trust lawyers in the Channel Islands, given that section 53 had long been regarded as a mechanism by which the English rule had been introduced into Guernsey law. However, the Court held that the wording of the provision was plain, and that as drafted it appeared to confer upon the beneficiaries of a discretionary trust the power to terminate that trust, even where the beneficial class is not closed.

Given that the wording of the relevant Jersey provision (Article 43(3) of the Trusts (Jersey) Law is virtually identical to its Guernsey counterpart, the Trusts (Guernsey) Law, it seems more than likely that the decision in Rusnano Capital would be followed in Jersey. This is in spite of the fact that there is nothing at all to suggest that the legislatures in Guernsey or in Jersey had in mind such a significant departure from the English law position when framing the relevant legislative provisions, and also in spite of previous authority in Jersey and in Guernsey to the effect that these provisions were intended to reflect the English law principle.

Furthermore, there are arguably good reasons of principle as to why the termination of a trust by way of Saunders v Vautier should not be possible where the beneficial class is not closed. In particular, the rule is fundamentally about the ability of beneficiaries to exercise a collective right or interest as against the trustee. Where a trust contains a power to add beneficiaries, it is difficult to see how the current beneficiaries can be permitted to exercise that right without irretrievably damaging the interests of beneficiaries who might be added in the future.

Saunders v Vautier rule in Jersey & Guernsey

As matters stand, trustees in Jersey and in Guernsey remain at risk of litigation from beneficiaries seeking to bring discretionary trusts to a premature end, with the outcome left to the discretion of the Court. This is hardly a satisfactory position. Hopefully a firm decision of the English court, coupled with amendments to the trust legislation in both of the Channel Islands, will ultimately provide much-needed comfort to trustees in this area.