Trusts: The Proper Purpose Rule (challenging Trustee Decisions)

The proper purpose rule (sometimes called fraud on a power) is a mechanism that restrains the exercise of trustee or fiduciary decisions in certain circumstances.  The question is, looking at the schema of a trust as a whole, the exercise of the power being challenged is consistent with the purpose for which it is given.  In turn, this requires consideration of the intentions of the donor of the power (usually the settlor).  If a power has not been exercised consistent with the purpose for which it is given, it may be possible to challenge the exercise of that power (or purported exercise).

In Kain v Hutton, the Supreme Court noted that an appointment of a beneficiary which secures a benefit for a non-object is not for that reason alone a fraud on the power. The focus should rather be on whether the purpose of the appointment was truly to benefit an object. If that is so, it does not matter that a non-object also obtains a benefit.[1]

In Wong v Burt, the Court of Appeal said the following:[2]

The central principle is that if the power is exercised with the intention of benefiting some non-object of the discretionary power, whether that person is the person exercising it, or anybody else for that matter, the exercise is void. If, on the other hand, there is no such improper intention even although the exercise does in fact benefit a non-object, it is valid.

Section 27 of the Trusts Act 2019 states that “[a] trustee must exercise the trustee’s powers for a proper purpose”.  This is a modern manifestation of a much more ancient rule.  In Vatcher v Paull, Lord Parker put the rule as applying where “the power has been exercised for a purpose, or with an intention, beyond the scope of or not justified by the instrument creating the power”.[3]

Recently the proper purpose rule, so-termed, has received detailed consideration by the Privy Council in Grand View Private Trust Co Limited v Wong.[4]  That case centred on a Bermudan irrevocable discretionary trust worth some USD 500,000,000.  The trustee there sought to exclude all members of the family that comprised the beneficiary class, appoint a purpose trust as the beneficiary, and simultaneously appoint the entire fund to the purpose trust.  While these powers were intra vires the scope of the available powers, they were not within the proper purpose of the trust.  The purpose is ascertained by the express and implied terms of the instrument, and the circumstances of execution and settlement.[5]

In New Zealand, the proper purpose rule was recently considered by the Supreme Court in Cooper v Pinney.[6]  In that case the Supreme Court affirmed that “]t]he starting point is that any power must be exercised for a proper purpose by reference to the terms on which it was conferred and the intentions of the donor.  The proper purpose rule applies whether the power is fiduciary or not”.[7]

If you have questions about the exercise of trustee powers (or intended exercise) please reach out and we will be able to assist.

[1]             Kain v Hutton [2008] 3 NZLR 589 (SC) at [47], [49] and [50].  See too C Kelly, G Kelly, C MacKnezie and K Lawrence Garrow & Kelly Law of Trusts and Trustees (8th ed, LexisNexis, online ed, 2022) at [19.48]-[19.56].

[2]             Wong v Burt [2005] 1 NZLR 91 (CA).

[3]             Vatcher v Paull [1915] AC 372 at 378.

[4]             Grand View Private Trust Co Limited v Wong [2022] UKPC 47.  See too Eclairs Group Limited v JKX Oil & Gas plc [2015] UKSC 71, [2015] Bus LR 1395 at [15] and [30].

[5]             See for example British Airways plc v Airways Pension Scheme Trustee Limited [2018] EWCA 1533, [2018] Pens LR 19 at [70] and [101]-[102].

[6]             Cooper v Pinney [2024] NZSC 181.

[7]             At [108] (footnotes omitted).