A landmark ruling by the Privy Council has significant implications for the trust industry in Bermuda and elsewhere, according to an international law firm.

Bermuda’s ultimate court of appeal in London clarified the powers of the trust protector — a third party appointed in a trust deed to oversee trustees and ensure the trust aligns with the settlor’s wishes.

The Judicial Committee of the Privy Council delivered its landmark judgment in A and others v C and others (also known as Re the X Trusts), an appeal from Bermuda endorsing the “wider role” of a trust protector in the exercise of consent powers.

Overturning rulings made by the Bermuda Supreme Court and Bermuda Court of Appeal, the Privy Council made clear that a trust protector is not only a supervisory check on trustees’ decision-making, but can also exercise discretion, effectively having a role of genuine influence within the trust’s governance structure.

Hannah Tildesley, insolvency and dispute resolution partner and trust litigation specialist at Walkers in Bermuda, said: “For trustees in Bermuda and elsewhere, there is no doubt this judgment raises the bar.

“Major decisions will need to be clearly reasoned, well evidenced and discussed earlier with protectors, who are entitled to question not just how a decision was made but whether it is the right one.”

Shelley White, insolvency and dispute resolution partner and head of the Cayman Islands trust disputes team at Walkers, described the judgment as “a monumental decision for offshore trusts and trust protectors globally”.

“This judgment is a clear signal that trust protectors are not simply there to rubber-stamp trustee decisions,” Ms White said.

“The Privy Council on appeal from the Bermuda Court of Appeal has confirmed that, unless a trust deed says otherwise, protectors should form their own independent view and block decisions they consider inappropriate, even if those decisions are lawful.”

Ms White added that the ruling emphasised the importance of careful drafting.

“If settlors intend a protector's role to be one limited to ‘watchdog’, the trust instrument will need to say so in clear and unequivocal terms,” Ms White added.

“Protectors must still act in good faith, for proper purposes and without conflicts, but those duties do not limit them to checking legality alone. They are entitled, and expected, to exercise their own judgment.”

Lord Briggs and Lord Richards gave the Privy Council judgment, with which Lord Reed, Lord Stephens and Lady Rose agreed.

In a media summary of the judgment, the Privy Council, referring to the question of the protector’s role, pointed out that “in principle, where a legal document gives to one person a power to veto a proposed action by another, the starting point is that the recipient of the power is under no constraint as to how that power of veto is exercised, save perhaps a requirement of good faith.

“If any further constraint is to be identified, it must be derived from some provision, express or implied, in the document conferring the power of veto.”

Bermuda is a popular destination for wealthy families and organisations to base trust structures, partly because of its common law system, which is based on that of England and Wales, and the Privy Council as its ultimate court of appeal.