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In a comforting decision for trustees, the Hong Kong Court of Final Appeal in Zhang Hong Li v DBS Bank and others has found that trustees do not owe a “high level supervisory duty” in respect of an underlying company’s investments, where supervisory duties are excluded under the terms of trust (in what is commonly referred to as an “anti-Bartlett” clause). This case has been keenly discussed across major international private client and trust common law jurisdictions.
The Court of Final Appeal’s judgment overturns earlier decisions in the case which had cast doubt on the scope of anti-Bartlett provisions, a common feature of many trust investment structures. The earlier decision of the Court of First Instance had found that the trustee had been in “serious and flagrant” breach of its duties and should not have approved various investment decisions of its underlying company, and that it owed a “high level supervisory duty” with regard to the purchase of high-risk investment products. This was despite the fact that the investment decisions were made and implemented by the trust’s investment advisor (who was also a settlor of the trust and one of the plaintiffs to the proceedings), and despite a comprehensive “anti-Bartlett” clause (which broadly provided that the trustee was not responsible to supervise the underlying company’s investment decisions).
On appeal from the Court of First Instance, the HK Court of Appeal scrutinised the anti-Bartlett clause and its effectiveness and found that the trustee has a “residual obligation” to monitor the investments of the trust. Thus, the trustee’s obligation could not be limited by the operation of the express provisions of the anti-Bartlett clause contained in the trust deed.
The Court of Final Appeal’s decision will be welcomed by trustees and their professional advisors as the investment structure in the case (broadly illustrated below) is one which is commonly utilised in practice. The structure allows a settlor to direct an investment profile or products of their choice rather than being restricted to the more conservative approach which a professional trustee would likely prefer.
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Zhang Hong Li v DBS Bank: Anti-Bartlett clause protects trustee from exposure to the investment losses of its underlying company