Forfeiture clauses, otherwise known as "hostile beneficiary" clauses or "no-contest" clauses are included in trust deeds with the objective of protecting the trust from attack, and with the deterrent that if the beneficiaries do attack the trust they will be excluded from receiving any benefit under the trust.

If a beneficiary makes a claim against the trust and the trust deed contains a forfeiture clause, the trustees will be concerned at what stage of the proceedings the forfeiture clause becomes operative and the beneficiary ceases to benefit under the trust, whether directly or indirectly.

In the case of AN v Barclays Private Bank & Trust (Cayman) Limited and others[1] the Grand Court in the Cayman Islands considered the validity of such forfeiture clauses, which may have significant implications for trustees. The brief facts of the case are as follows:

The plaintiff was a discretionary beneficiary of two trusts and sought a declaration that the forfeiture clause in each trust was invalid. The beneficiary took action against the trustees and the protection committee to challenge a restructure of shareholdings held by the trustees on the basis of an alleged failure to balance the interests of the beneficiaries fairly.

It was held that whilst a hostile beneficiary clause is designed to meet the settlor's concerns and protect the trust from attack, it has to be construed in light of a trustee's irreducible core duties to act bona fide in the interests of the trust and the beneficiaries[2] and the beneficiaries’ right to enforce the trusts of the settlement.

The court considered the following grounds upon which the forfeiture clause may be set aside:

·         Uncertainty

The beneficiary in this case was seeking to challenge the validity of the trustee's decision and the forfeiture clause in question prohibited contesting the validity of the trust, any transfer of property into the trust and decisions taken by the trustees and/or the protection committee.

The court considered whether one could predict from reading the forfeiture clause what the forfeiting event was. The court concluded that "decisions of the trustees" was too vague and uncertain because the beneficiary would not know which decision, if contested, would result in being excluded as a beneficiary.

·         Repugnancy and Public Policy

The forfeiture clause could not be used to prevent a beneficiary from enforcing the trusts of the settlement and oust the court's jurisdiction to supervise the administration of the trusts. A beneficiary cannot be denied access to court even if the trust deed contains safeguard mechanisms, for example giving the beneficiaries, as a majority, the power to remove the protection committee or a trustee.

The court concluded that the forfeiture clause in this case, read in conjunction with other clauses in the trust deed, must be read by implication as not only allowing successful claims but also "justifiable" claims, which will depend on the circumstances of the case.

The court did not decide on whether the beneficiary's claim was "justifiable" and we are waiting for the trial judge's decision as to whether the claim is "justifiable" and therefore whether she has or will be excluded from benefiting under the trust.

Although this case goes further than previous authorities, the Chief Justice did say that plaintiffs who contest a trust with "their eyes wide open" as to the existence of a forfeiture clause, do so having assumed the risk that they may be excluded as a beneficiary under the trust. Beneficiaries seeking to make a claim will need to seek legal advice on whether their claim is not only likely to be successful but whether it is justifiable.

It remains to be seen how far the courts in the relevant trust jurisdiction will marry the principles of trustees accountability with the threat of exclusion should a beneficiary complain. The "no contest" clause is more used than it has been and it is likely we will see a raft of cases in the future determining the extent of its effectiveness.

[1] [2007] WTLR 565

[2] Armitage v Nurse [1998] Ch 241