Zhang v DBS: A better night's sleep for trustees?

When faced with difficult situations, trustees frequently ask themselves (and their lawyers): “What is the scope of our duty?”

The question which has exercised the industry for many years – and caused sleepless nights for trustees – is whether trustees can rely on express provisions in trust deeds limiting their duties, or whether there are residual duties which can never be excluded and which leave trustees open to claims for breach of trust, however tightly drafted the trust deed.

We now have part of the answer. In the eagerly anticipated judgment, Zhang Hong Li and others v DBS Bank (Hong Kong) Limited and others [2019] HKCFA 45, the Hong Kong Court of Final Appeal (the Court) found that the trustee of a Jersey law trust had no high-level supervisory duty in relation to an underlying investment company’s activities given the precise terms of the trust deed, which included extensive “anti-Bartlett” clauses. This article reviews the decision and its implications for trustees.

The use of anti-Bartlett clauses

Anti-Bartlett clauses seek to negate a trustee’s duty to enquire into and supervise the management of a company held by a trust.

The duty was developed by the English High Court in Bartlett v Barclays Bank Trust Co. Ltd (No.1 and No.2) [1980] Ch 515, where it was held that a trustee who is a controlling shareholder should use their shareholding to insist on receiving all the information needed in order to fully evaluate the way the company is being run. If mismanagement is discovered, the trustee should (if they can) take corrective action. The use of anti-Bartlett clauses developed following this case, with interested parties increasingly negotiating such clauses into trust deeds in order to exclude the duty.

The Court’s judgment in Zhang v DBS reverses the earlier judgments of the Hong Kong Court of Appeal and the Court of First Instance. Those lower courts had held that, whilst the anti-Bartlett clauses in question were effective to exclude the obligations to which they referred, the trustee still had a “high-level supervisory duty” which the clauses did not exclude. At the final appellate level, the Court disagreed – and in doing so provided some comfort to trustees in relation to their duties and responsibilities.

Case facts

“An epic saga of greed and great wealth gained and lost”

The dispute arose out of the global financial crisis in 2008. A summary of the background is set out below.

  • The establishment of the investment structure 
    In January 2005, Madam Ji and her husband, Mr Zhang, established a Jersey law trust (the Trust) with DBS’s Hong Kong trust company (the Trustee). They transferred their sole share in their BVI investment company, Wise Lords Limited (Wise Lords), to the Trust. A DBS corporate director (the Director) replaced Madam Ji as the sole director of Wise Lords and Madam Ji was appointed as an investment adviser of Wise Lords, with the Director granting authority to Madam Ji to give investment instructions on Wise Lords' behalf.
  • The extensive anti-Bartlett and exclusion clauses 
    The anti-Bartlett clauses of the Trust deed relieved the Trustee (absent actual knowledge of dishonesty) from any duty to: (i) exercise control, interfere or become involved with the management or conduct of Wise Lords; (ii) supervise directors, officers or other persons; or (iii) seek or obtain information regarding Wise Lords. This was reinforced by the requirement that, unless and until the Trustee had knowledge to the contrary, the Trustee should assume that any information received was accurate and that management and conduct of the business was being carried out correctly (with the Trustee being under no duty to take steps to ascertain whether these assumptions were correct). Further, speculative investments were specifically authorised and the Trustee was relieved from any duty to diversify investments or preserve or enhance the Trust’s value. The Trustee was not to be liable for any loss to Wise Lords or the Trust fund arising from any act or omission of the directors or Madam Ji, even if dishonest, fraudulent or negligent.
  • The letter of wishes 
    Madam Ji signed a letter of wishes providing that during her lifetime, the Trustee “should always consult with her in the first place with regards to all matters and her recommendation should be final".
  • The high-risk strategy 
    Wise Lords made investments through a private banking account at DBS (the Bank). Initially, under Madam Ji’s direction, Wise Lords successfully invested in mutual funds. However, between January 2007 and August 2008, Madam Ji applied for increasing amounts of credit to be extended to Wise Lords to leverage its investment portfolio, increasing its credit facility from USD10m to USD100m, and invested increasingly in foreign exchange transactions. By August 2008, and notwithstanding advice from the Bank that the portfolio should be diversified, Wise Lords' investment portfolio was concentrated (85%) in foreign currency (81% of which was in Australian dollars (AUD)) and the portfolio was leveraged at 272%. When the 2008 financial crisis hit and the value of AUD began to fall, Madam Ji refused to let Wise Lords sell AUD at a loss. Instead, she introduced decumulators in a risky attempt to liquidate some of the AUD holdings at a more favourable rate of exchange.
  • The significant losses 
    Between September 2008 and October 2008, Wise Lords had to sell over AUD60m at a significant loss. By November 2008, Wise Lords, at Madam Ji’s direction, had unwound two of the three decumulators involving termination losses of AUD1.5m and an exchange loss of approximately USD15m.
  • The claims 
    Complaints were first raised against DBS entities in December 2008, claiming losses of USD50m, and leading to the replacement of the Trustee in February 2011. Shortly after its appointment, on 28 February 2011, the new trustee, together with Madam Ji and her husband, commenced proceedings against the (now former) Trustee, the Director, the Bank, a DBS corporate services company (the Corporate Services Company), and a number of individual DBS employees alleging inter alia that the Trustee and/or Director ought not to have approved the increases in the credit facility or the further purchases of the AUD and decumulators.
  • The lower court judgments 
    The Court of First Instance dismissed the claims against the Bank, the Corporate Services Company and the individual employees, but held the Trustee and Director liable for breach of trust and breach of director’s duties, and ordered equitable compensation to the new trustees. The Court of Appeal upheld the Court of First Instance’s decision in all respects.

Can anti-Bartlett provisions shield trustees from liability?

“High-level supervisory duty” versus residual obligations

The Court rejected the analysis of the lower courts that the anti-Bartlett clauses in the Trust deed did not eliminate a “high-level supervisory duty” on the Trustee in respect of Wise Lords, which could not be excluded by the terms of the Trust.

The Court considered that it was unclear from the lower court judgments on what basis they found the Trustee was subject to any such “high-level supervisory duty”.

The Court held that as a matter of law, a residual high-level supervisory duty is “plainly inconsistent with the anti-Bartlett provisions contained in the [T]rust deed”. Parties are perfectly free to exclude liabilities and apportion risk between them. To impose an implied, non-derogable duty on trustees would “…introduce an amorphous and ill-defined basis for undermining a legitimate arrangement consciously adopted by the parties, exposing the trustees to unanticipated risks of liability and sowing confusion as to the extent of their duties”.

As there was no “high-level supervisory duty” there could be no breach of that duty, and hence no breach of trust. The Trustee’s duties were limited by what was set out in the Trust deed, and the scope of the Trustee’s powers were similarly circumscribed.

The Court considered that the imposition of the “high-level supervisory duty” was incorrectly equated by the lower courts with the “residual obligation” identified by both Jersey law experts in the case. The Court considered that, while the anti-Bartlett clauses in question excluded the obligations to which they referred, they expressly preserved an obligation to interfere in cases where the Trustee acquired actual knowledge of dishonesty. This was certainly a residual obligation of the Trustee – but was not the same as a free-standing high-level supervisory duty.

The wider implications of the decision

One of the judges sitting in the Court was Lord Neuberger, the former President of the Supreme Court of the United Kingdom. The case is therefore likely to carry some weight in most common law trust jurisdictions. Further, as the first final appellate judgment considering anti-Bartlett clauses, this case certainly provides helpful guidance for trustees and settlors alike.

However, it would be prudent to be cautious in assessing how much comfort this gives to trustees seeking to rely on anti-Bartlett clauses more generally. In particular:

  • The facts of the case were quite far from standard practice, in particular the level of control exercised by Madame Ji and her behaviour, and the lengths she went to in order to avoid trustee supervision in the terms of the Trust deed.
  • The specific breaches of trust alleged in this case fell squarely within the protection offered by very extensive and bespoke anti-Bartlett clauses. It is not immediately clear what would have happened if, for example, the Trust deed contained much more limited (and far more standard) anti-Bartlett wording, with no specific reference to high risk/speculative investments.
  • Neither the Court nor the lower courts had the opportunity to explore more fully the principles by which the scope of a “residual obligation” preserved by the provisos in the anti-Bartlett clauses should be construed: because the experts substantially agreed on Jersey law, they were not called at trial for cross-examination, and so this issue was not the subject of detailed oral evidence from either expert.
  • This was a Hong Kong court, applying Jersey law. It remains to be seen how a different court, applying a different law, will apply or distinguish this decision.
  • Decisions of other courts appear to allow more room for beneficiaries to challenge the relevance of anti-Bartlett clauses. In Appleby Corporate Services Limited v Citco Trustees (BVI) Limited (2014) 17 ITELR 413, the court had to consider a case where a settlor’s wealth was held partly within a BVI company which was settled into a trust, subject to investment guidelines in an annexe to the trust deed which were subsequently departed from. The BVI court held the trustee liable for investment losses notwithstanding the fact that the terms of the trust included statutory anti-Bartlett provisions, noting that “The fact that Citco had no obligation to involve itself in the management of the Company did not relieve it of the duty to satisfy itself from time to time that nothing untoward was affecting the value of the shares”.

Other important issues raised

Although the question of the anti-Bartlett provisions was a key aspect of the case, the Court also dealt with a number of other important issues:

  • It overturned the lower courts’ decision that, despite the clear wording of the Trust deed, it was a grossly negligent breach of trust for the Trustee to have approved speculative investments. The Court held that the risks of such investments were expressly authorised by the Trust deed and the investments were therefore consistent with the terms of the Trust. Further, Madam Ji had deliberately ignored warnings as to the need for diversification and any approvals given were provided after Wise Lords had effected the transactions.
  • The Court considered the question of liability on the part of the Director, who had delegated investment management to Madame Ji. The Court found that, as with the Trustee, there was no high-level duty on the part of the Director to supervise the activities of Madam Ji. However, it is not clear why the Director was treated in the same way as the Trustee given that directors have direct responsibilities for managing a company’s assets. This question therefore remains unresolved.
  • The Court also considered the rules on equitable compensation for breach of trust. In a claim such as this – where any breach of trust would have involved only a lack of appropriate skill or care (contrasted with, for example, one which involved an element of “infidelity or disloyalty”) – rules of causation, foreseeability and remoteness would have been applied to limit or reduce the Trustee’s exposure to pay compensation, in contrast to the stricter approach adopted by the lower courts. How this would have impacted the compensation payable in practice was, of course, not fully explored.


This case has provided some welcome evolution and clarity in the law on trustees’ duties, particularly when dealing with complex and bespoke trust deeds.

The Court demonstrated a decidedly more trustee-friendly approach than has been apparent from some other recent decisions and paid close attention to the precise wording of the Trust deed. Whilst from a beneficiary’s perspective that may reduce the scope for bringing claims against trustees where losses have occurred, the additional clarity brought by the judgment will benefit all of those involved in managing or benefitting from trusts.

The use of anti-Bartlett clauses will no doubt remain popular for trusts that hold not only investment companies but also trading and operating companies, where the trustee’s potential liability in respect of losses of the underlying business can be significant. If so, in light of this case, trustees can now have greater confidence that protections contained in the terms of the trust deed should apply to limit their powers and duties – and thus their potential liability and beneficiaries’ leverage in relation to potential claims is somewhat reduced. Whether that is a further step on the slippery slope away from equity to a contractual approach to the duties and liabilities of a trustee, or a welcome recognition of commercial reality, depends on the perspective of the reader.

But it is certainly the case that a well-drafted trust deed will always help mitigate risks for a trustee and ensure certainty for all parties. For example, express provisions can be included regarding the retention and replacement of shares in a particular company or to make it clear that the trustee (or companies it holds) will be making high-risk investments and that diversification as an end in itself is not required. This reduces the risk of expensive and time consuming litigation – particularly if the indemnity clause in the trust deed can also be sufficiently widely drawn to mitigate the trustee’s exposure to the maximum extent possible under local law.

The health warning for all concerned, however, is that the position is unlikely ever to be cut-and-dried for trustees and there may be scope for other cases to result in a much less trustee-friendly outcome with slightly different facts and drafting of the trust deed. Trustees will still need to take care in how much freedom they allow investment managers and underlying companies to conduct their affairs without interference from the ultimate owner of the assets.