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Charalambous and Variation of Trusts

Can the Courts alter or vary ante and post nuptial trusts? Sarah Higgins of Charles Russell LLP considers the position in the light of the decision in Charalambous.

Charalambous and Variation of Trusts

Sarah Higgins, Partner Family Law Group, Charles Russell LLP

The case of Charalambous v Charalambous [2004] EWCA 1030 is an important one if advising in a situation where it may be possible to apply for a variation of an ante-nuptial or post-nuptial trust. It considered three main issues. The first was the effect of an exclusive jurisdiction clause. The second was whether it could be argued that Jersey rather than English law should be applied, if the English court did have jurisdiction to vary the trust in question. The third was whether the trust could be varied as a post-nuptial settlement when the parties had been removed as beneficiaries prior to the application to vary.

The Facts of Charalambous
The parties were married in 1984. There were two children aged 12 and 8, who in the Court of Appeal were separately represented by a litigation friend. Before the birth of the second child, the husband's mother created a Jersey settlement known as The Hickory Trust.

The trust was discretionary for the benefit of the Settlor, the parties, their then only child and such other persons as the trustees might subsequently add. The trustees' powers to add or remove persons from the beneficial class were subject to the consent in writing of the trust protector, and the parties were appointed joint protector of the trust during their joint lives. The husband had the power to remove and appoint trustees.

There was an exclusive jurisdiction clause in favour of Jersey which provided that

'this Trust shall be subject to the exclusive jurisdiction of the Royal Courts of the Bailiwick of Jersey which shall be the forum for disputes relating hereto'.

There was also a proper law clause in favour of Jersey:

'this Trust is established under the laws of the Bailiwick of Jersey and the rights of all parties and the construction and effect of each and every provision hereof shall be governed and construed only in accordance with the law of Jersey, which shall be the proper law hereof'.

Although there was a document which apparently seemed to show that in February 2000 the husband suggested that his assets totalled £43 million, by 1 October 2000 bankruptcy petitions were issued against the husband and wife. By a Deed of Appointment and Removal dated 8 January 2001, both the husband and wife ceased to be beneficiaries under the Hickory Trust. In 2002, the marriage broke down and the parties petitioned for divorce. Ancillary relief proceedings commenced in October 2002. There had been continuing ancillary relief proceedings in the Family Division and bankruptcy proceedings in the Chancery Division. The wife amended her financial application form to include an application under s 24 of the Matrimonial Causes Act 1973 for the variation of the Hickory Trust as a post-nuptial settlement.

S.24 provides that on granting a decree of divorce or at any time thereafter, the court may make an order

'varying for the benefit of the parties to the marriage and of the children of the family or either of them any ante-nuptial or post-nuptial settlement ….. made on the parties of the marriage'.

The husband challenged the Court's jurisdiction. He denied that the Hickory Trust was a nuptial settlement and alternatively he relied on the provision of the settlement conferring exclusive jurisdiction on the Jersey Courts and establishing Jersey law as the proper law of the settlement, and the provisions of the Recognition of Trusts Act 1987 importing into English law the provision of The Hague Convention of 1 July 1985 on the law applicable to trusts and on their recognition.

The matter was heard by Mr Justice Wilson in March 2004. He rejected the husband's challenges and granted a declaration that the Court had jurisdiction to vary the Hickory Trust under Section 24(1)(c) of the Matrimonial Causes Act 1973, he refused the husband permission to appeal and gave directions for the further conduct of the proceedings. The husband sought permission to appeal. The Court of Appeal heard the permission to appeal and the appeal was to follow if permission was granted.

The Judgment of Mr Justice Wilson is reported as C v C (Variation of Post-Nuptial Settlement) [2004] EWHC 742 (Fam). The Court of Appeal concluded that Mr Justice Wilson was right to grant the declaration which he did, but reached its conclusion differently.

Exclusive Jurisdiction
The Court of Appeal held that the power to vary the settlement is derived not from the settlement but from the matrimonial regime of the state, and the jurisdiction is the jurisdiction of the matrimonial regime which is dissolving the marriage. Individuals may not elect into or out of a jurisdiction that determines marital status. Neither of the parties had the right to invoke the matrimonial jurisdiction of the Jersey Court. Accordingly, the husband could not argue that the exclusive jurisdiction clause prevented the English court which clearly had jurisdiction to hear the application to vary, from varying the trust. In fact, in this case, the Hickory Trust no longer had Jersey trustees and the trust asset which was the main target of the wife's application was in England.

Conflict of Law
The wife's case on appeal was more extensive than it was before Mr Justice Wilson. She added an additional ground as follows:-

'As a matter of the conflict of laws, the Petitioner's application to vary the Hickory Trust should be determined by reference to the divorce law of England and Wales and not by reference to the Recognition of Trusts Act 1987'.

The Recognition of Trusts Act 1987 introduced into our domestic law The Hague Convention of 1 July 1985 on the law applicable to trusts and on their recognition (the Convention). Article 6 of the Convention provides that a trust shall be governed by the law chosen by the Settlor and Article 8 provides that the law specified by Article 6 shall 'govern the validity of the trust, its construction, its effects and the administration of the trust'. Article 15, however, states that the Convention does not prevent the application of provisions of the law designated by the conflict rules of the forum insofar as those provisions cannot be derogated from by a voluntary act, relating, in particular, to six matters, one of which is 'the personal and proprietary effects of marriage'. Mr Justice Wilson held that English law chooses its own law for dealing with financial applications on divorce and that there can be no derogation from it by voluntary act. It is plain that it is not possible to agree to oust the jurisdiction of the Court.

The husband argued that if the English Court did have jurisdiction, it must apply Jersey law rather than English law. The relevant provision would then be Article 27 of the Matrimonial Causes (Jersey) Law 1949 which confers upon the Court the power to vary or modify any post-nuptial settlement between the parties to the marriage. Section 24 of the Matrimonial Causes Act 1973 confers on the English Court the power to vary 'any ante-nuptial or post-nuptial settlement …. made on the parties of the marriage'. The husband's case would then be that the Hickory Trust was not a settlement made between the parties to the marriage and he would thus argue that the Court did not have the jurisdiction to vary it. The husband argued that the permission to apply English conflict law under Article 15 was confined to the six categories referred to above, and that the 'personal and proprietary effects of marriage' did not include the financial consequences of divorce.

Lord Justice Thorpe was not persuaded that Article 15 is limited to the six specified categories and held that the statutory powers to vary settlements were covered by its general terms as 'provisions of the law designated by the conflicts rules of the forum' referred to above. He also took the view that the reference at Article 15(b) to the 'personal and proprietary effects of marriage' was too imprecise to exclude the statutory power to vary post-nuptial settlements on divorce.

Is the Hickory Trust a Post-nuptial Settlement?
The husband conceded that it was a post-nuptial settlement until the removal of the parties as beneficiaries. For the English Court to vary a settlement, it has to be an ante-nuptial or post-nuptial settlement made on the parties of the marriage. The issue was whether the removal of the parties as beneficiaries prior to the application meant that it was no longer a post-nuptial settlement. Mr Justice Wilson did not accept this argument. He took the view that the Court should reject the introduction of another evasive device. It would be unfair if a spouse could be removed as a beneficiary with financial proceedings in contemplation with the effect of precluding that spouse from the benefit of a variation order. However, Lord Justice Thorpe did not agree that a settlement which was nuptial when made would always remain a post-nuptial settlement capable of variation. It would depend on the facts and circumstances of the individual case. In this case, the facts showed that the nuptial element was not lost by the removal of the parties. They remained joint protector, and could be reinstated to the beneficial class, and the children remained in the beneficial class. The powers of the joint protector were extensive. The consent of the protector was required to distribute or accumulate. In addition, in this case, there was evidence that the husband had in fact benefited by the provision of substantial loans to one of his businesses.

Lady Justice Arden stated that the provision that a post-nuptial settlement must be 'made on the parties to the marriage' constituted a condition which is separate from, and additional to, the requirement to be a post-nuptial settlement. She held that it was clear that the settlement must be a post-nuptial settlement at the time when the Order is made otherwise the section would have referred to former post-nuptial settlements as well. She held that the continuing powers of the wife as joint protector were sufficient to provide the post-nuptial character. These powers would be a sufficient form of continuing provision for her which would bring the settlement within the definition of a settlement referred to by Lord Justice Nicholls in Brooks v Brooks [1996] AC 375 'the disposition must be one which makes some form of continuing provision for both or either of the parties to a marriage, with or without provision for their children'.

Variation of trusts is a developing area of the law. The result in this case prevented the husband from avoiding the jurisdiction of the English court to vary the settlement by using technical arguments. The court still had to go on to make an order to dispose of the wife's financial claims with the obligation under s 25 of the Matrimonial Causes Act to make a fair order in all the circumstances of the case, but with the ability to make as part of the order a variation of trust. The fact that it had the jurisdiction to vary a trust did not mean that it had to exercise its discretion to do so, but the court would not be limited in the exercise of its discretion by the inability to consider the variation of trust.

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