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||Neutral Citation Number:  EWHC 268 (Ch)
||Case No: HC 10C00412
IN THE HIGH COURT OF JUSTICE
||Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
B e f o r e :
THE HON MRS JUSTICE ASPLIN DBE
|| FORESTER MAURICE LABROUCHE
||- and -
||MARKUS ALBERT FREY
THE ESTATE OF HUGO ALBERT FREY
SOLEDAD CABEZA DE VACA Y LEIGHTON
Simon Taube QC, Marcus Staff & Adam Cloherty
(instructed by Charles Russell Speechlys LLP) for the Claimant
Emily Campbell & Simon Atkinson (instructed by Payne Hicks Beach)
for the 1st & 2nd Defendants
Michael Furness QC & Tiffany Scott (instructed by Boodle Hatfield LLP)
for the 3rd Defendant
4th Defendant not attending
Hearing dates: 30 October, 2 - 6, 9 - 13, 16 - 19, 23 - 27 and 30 November
and 1-3, 7 - 11, 16 and 17 December 2015
HTML VERSION OF JUDGMENT
Crown Copyright ©
Mrs Justice Asplin DBE :
- The claims in this matter, brought by Forester Maurice Labrouche ("Forester") all relate to alleged breaches of the trusts of the will of his grandmother, Olga Martin Montis ("Olga"). Having inherited a considerable fortune from her first husband, Olga died on 8 February 1980 aged 90, domiciled in Switzerland, leaving a last will dated 9 May 1974 which is in English and is governed by English Law ("Olga's Will"). The relevant background to this matter is extremely complex. In order to understand the nature of the claims being made and the defences to them, it is necessary to set it out in some detail.
(i) The Will Trusts and Trustees
- Under Olga's Will the late Dr Hugo Frey ("Hugo") a partner in Swiss law firm Niederer Kraft & Frey ("NKF") who had been Olga's professional adviser since the 1950s, was appointed as executor and a trustee of the will trusts. Hugo died on 26 January 2005 and his estate is named as the second defendant in these proceedings. Under Olga's Will, in addition to Hugo, Olga's daughter Soledad Cabeza de Vaca y Leighton ("Soledad") the third defendant in these proceedings and Olga's third and last husband, Isidro Martin Montis ("Isidro") were appointed as trustees of the will trusts.
- Isidro died in 1991 and was replaced as a trustee by Hugo's son Dr Markus Frey ("Markus") the first defendant in these proceedings. Thereafter, both Soledad and Hugo retired as trustees in 1998, (Soledad having been thought to have already resigned and retired in 1994) at which point another partner in NKF, Dr Meister, was appointed. He remained a trustee until his death in 2009. Markus who commenced work at NKF in 1989 and worked with his father on the affairs of the Martin-Montis family amongst other things, was also Hugo's special executor limited to Olga's estate. He remained a trustee until November 2011. Throughout his time as trustee, Markus was also a member of the governing council of the fourth defendant, the Newin Foundation ("Newin Foundation"). Newin Foundation is a stiftung or foundation, which was established under the law of Liechtenstein in November 1995, having been converted from an anstalt or establishment. The anstalt also established under the law of Liechtenstein, was created in 1957 ("Newin Establishment"). The circumstances in which Newin Foundation was established, its purpose and governance are matters which are in dispute and to which I shall return. Newin Foundation was not represented before me and is content to abide by the outcome of the trial.
- Olga's Will contained a number of trusts and dispositions. The trustees from time to time of Olga's Will (the "Trustees") held 60% of Olga's residuary estate as to two thirds on trust for Isidro ("Trust Isidro") and one third on trust for Soledad ("Trust Soledad") for life. Soledad had a reversionary life interest in Trust Isidro, which upon Isidro's death became a protected life interest. Soledad was also entitled to 20% of Olga's residuary estate absolutely, which was distributed to her between 1983 and 1984. Forester is entitled to a vested interest in 75% of the 60% share of Olga's residuary estate in which Soledad now has a protected life interest. Forester was further entitled to a vested interest in 75% of 20% of Olga's residuary estate contingent on attaining the age of 40. That interest was re-settled by Forester under the terms of a settlement dated 7 August 1989 (the "FML Settlement") the first trustees of which were Isidro, Soledad and Hugo. From 1991 to 1999, the trustees of the FML Settlement were Markus, Soledad and Hugo (although Dr Meister took over from Hugo in 1998). In early 1999, at the request of Forester, Marc Bonnant and Philippe Grumbach were appointed as trustees and the new trustees appointed the entirety of the FML Settlement to Forester in March 1999.
(ii) The Newin Establishment
- In 1957, shortly after Olga moved from the United States of America to live in Switzerland, having taken advice from Hugo, she transferred valuable assets to Newin Establishment which had been established by Hugo for that purpose. It is not in dispute that according to the laws of Liechtenstein, the founder's rights in the Newin Establishment allow the holder of those rights to direct how its assets should be dealt with and how distributions are made, and enable the holder to control the composition of the board of the establishment (the "Founder's Rights"). It is also not disputed that Olga became the holder of the Founder's Rights having had them assigned to her by Hugo shortly after the Newin Establishment was set up.
- Until 1972, whenever the statutes or bye-laws of the Newin Establishment needed to be amended, Olga would assign the Founder's Rights to Hugo, who would exercise the rights in order to effect the amendment and then re-assign them to her. This changed in 1972 when Hugo assigned the Founder's Rights to Interhold AG (a financial services company of which Hugo was the major shareholder and of which Markus also became a shareholder) ("Interhold") subject to a fiduciary agreement entered into between Hugo and Interhold which is expressed to be governed by Swiss law ("the 1972 Fiduciary Agreement"). On 25 January 1980, very shortly before Olga's death, a further fiduciary agreement was executed between Interhold and Hugo ("the 1980 Fiduciary Agreement") as a result of which amongst other things, Hugo had the right to have the Founder's Rights assigned to him immediately upon request, rather than Olga.
- It is in dispute in these proceedings whether the Founder's Rights in the Newin Establishment or the right to call for them and exercise them/ the right to revoke any contrary instructions given to Hugo, formed part of Olga's estate at her death in February 1980. The conversion of Newin Establishment into Newin Foundation was effected by Interhold in 1995. It is said that as a result, the Founder's Rights were extinguished. Whether the conversion from establishment to foundation was a breach of trust and the effects of that conversion are in dispute and are at the heart of this matter.
- Forester contends that:
(i) the distributions paid out of Newin Foundation and its subsidiaries between 1999 and 2001, including fees and administration expenses and distributions and all assets of Newin are and were held on trust for the Trustees;
(ii) in making distributions to Soledad from Newin Foundation, the Trustees overpaid her and are in breach of trust for failing to ensure that only net income was distributed to income beneficiaries, and further, for failing to account properly for receipts from corporate entities of which they held controlling investments, as between the interests of the income and capital beneficiaries;
(iii) Markus and Hugo received unauthorised and excessive trustee remuneration out of trust funds and failed to account to the capital beneficiaries for benefits or profits which they or associated companies received as a result of their trusteeship;
(iv) Hugo and Markus received undisclosed payments referred to as "retrocessions" as a result of their ownership of a company ZT Zurich Trust AG ("ZT") in the form of payments by two Swiss banks which held trust monies for which they have failed to account;
(v) Markus, Hugo and Soledad acted in breach of trust as a result of the manner in which the proceeds of sale of a property known as Plum Bay House were divided between capital and income;
(vi) Forester is entitled to the costs attributable to that part of the claim which related to the removal of Markus as sole trustee of Olga's Will Trusts, Markus having retired after the proceedings were commenced;
(vii) In addition to a number of declarations and other immediate relief, there should be an order made by the Court for a common account, an account on the basis of wilful default and an inquiry into breaches of trust that are not yet known by Forester and the Court.
- Markus and Hugo's estate counterclaim for remuneration insofar as they are deprived of it as a result of Forester's claims, which they should have fairly been paid on the basis that the trust has been receiving the benefit of professional trustee services for many years.
The Sources of the Evidence
- As the relationship between Olga and Hugo began when she came to Europe from the United States of America in the mid 1950s and her inheritance planning took place over a long period from that time through until her death in 1980 and in the light of the fact that not only she but also Hugo are dead, a large part of the relevant background and direct evidence in this matter is contained solely in the documents. They form part of the archive material kept by Hugo's professional practice, NKF and the papers which were retained by Mr Derek Taylor, ("Mr Taylor") the English solicitor who advised Hugo on the English aspects of Olga's inheritance planning who died in 2003. The archive material contains not only copies of the documents which were actually executed but a large number of file notes written by Hugo in which he considers the various problems faced by his clients and the possible solutions. There were no documents containing express records of client instructions before the court. In the circumstances and as a result of the fact that there was no oral evidence as to instructions given, although it was possible to seek to test some of the matters which arise from the documents in cross examination with Markus, for the most part, the court is asked to draw inferences from the documentation itself.
Witnesses of Fact
- Despite the considerable length of the trial there were only three witnesses of fact. The first was the Claimant, Forester. He gave evidence through an interpreter. Forester's evidence was barely audible at times and he often stated that he could not remember and/or that he had not understood the circumstances about which he was being asked. I found him to be a very unsatisfactory witness who was evasive. Markus was the second witness of fact. I found him for the most part to be a careful, measured and straightforward witness who sought to answer the questions put to him to the best of his recollection. I accept his evidence. Soledad was the third witness of fact. She is an elderly lady who is not in the best of health. She also gave evidence for the most part, through an interpreter although on occasion she answered directly in English. Unfortunately, her evidence was very unsatisfactory. Having confirmed that the contents of her witness statements were true, she was cross examined for the most part about dealings with a company known as Tricor of which she denied any knowledge. Thereafter, she appeared to become very confused and denied that she had seen her witness statements before. After an adjournment, the following day, she confirmed the content of her witness statement again but was not cross examined further. Her counsel, Mr Furness offered to withdraw her witness statement but it seemed to me that it was too late to adopt such a course. In any event, the gist of her evidence appeared to be that she trusted Hugo and Markus and had signed whatever they considered appropriate and had not been aware of the details of the trust affairs. Little if any weight was placed upon Soldedad's evidence on behalf of Markus, Hugo's estate and Soledad herself and I place little weight upon it.
- There were three experts as to Liechtenstein law: Professor Francesco Schurr who amongst other things is a Professor of Law and head of Company, Foundation and Trust Law at the University of Liechtenstein, Vaduz on behalf of Forester; Dr Andreas Schurti who amongst other things is Senior Partner at Walch & Schurti Attorneys at Law Ltd, Liechtenstein, a Member of the Liechtenstein bar whose expertise is in Liechtenstein law on express trusts, declarations of trust and revocability on behalf of Markus and Hugo's estate; and Mr Thomas Nigg who is a member of the Liechtenstein bar and a partner of Batliner, Gasser Rechtsanwalte, on behalf of Soledad. I found each of them to be a careful and truthful witness who did his best to assist the court.
- There were also three experts in relation to Swiss Law: Professor Xavier Oberson, who amongst other things is a Professor in Swiss and International Tax Law at the University of Geneva, a member of the Geneva Bar and a member of the International Fiscal Association on behalf of Forester; Mr Daniel Hochstrasser, Senior Partner of Bar & Karrer in Zurich since 2011 and a member of the Swiss bar, on behalf of Markus and Hugo's estate; and Dr Manuel Liatowitsch a partner of Schellenberg Wittmer Ltd on behalf of Soledad.
- The experts as to tax were: Professor Oberson on behalf of Forester; Dr Stephan Pfenninger a partner at Tax Partner AG on behalf of Hugo's estate and Markus. In addition, the experts in relation to issue estoppel/res judicata were Dr Liatowitsch and Maitre Bernard Lachenal, a partner of Meyerlustenberger Lachenal, and head of its arbitration and litigation team on behalf of Forester.
- Forester's expert as to trustee and asset management fees was Mr Simon Jennings, a chartered accountant and partner of Rawlinson & Hunter and his expert as to holding the balance between capital and income and the level of income paid to Soledad was Mr Stuart Davies, a director of LJ Athene Investment Advisors Ltd. Mr Graham Harrison, a specialist in financial engineering gave evidence on behalf of Hugo's estate and Markus both as to the balance between income and capital and as to the level and reasonableness of remuneration.
The Relevant Facts in more detail
Olga's move to Europe Estate planning
- It appears from the correspondence that Hugo started to provide Olga with tax and estate planning advice from around August 1955. The first mention made of the use of a Swiss or Liechtenstein establishment or foundation was in a letter of 11 August 1955 and arose in the context of seeking to reduce the incidence of American income and estate taxes upon Olga's fortune. In that regard, Hugo stated amongst other things that: he could "arrange for you practically to keep control of the portion of your fortune which you would have given to the Swiss Stiftung or the Liechtenstein Stiftung [establishment] or Anstalt [foundation]"; and that investments in a Swiss or Liechtenstein entity would remain under her "exclusive control" and of which she would be the exclusive beneficiary during her lifetime and of which her husband and descendants would be the owners after her death, subject to rules which she could set up. In the penultimate paragraph of the document reference was made to the strategy also having the advantage "of rendering the succession to the estate very simple" whilst protecting the owners from estate duty.
- In a further letter from Hugo to Mr Hubachek who had had control of the administration of Olga's affairs in the United States of America, Hugo advocated setting up an establishment or corporation in Liechtenstein. He stated that by no means should Olga directly own the fortune and that if later she should take up residence or domicile in France she would enter the country "without apparent direct control of her fortune." He went on to comment that:
"The control lies at any rate entirely in the hands of the person who owns the "founder rights" . . . The person who owns the "founder rights" this is our client until she dies and after her death Isidro and his brother can at any moment recall a member of the board and replace it by somebody else."
- In an undated letter which from the context appears to have been written by Hugo to Mr Hubachek in mid to late November 1956, Hugo stated that a Liechtenstein establishment would have the effect of "insulating our friends from the French" and pointed out that it would be relatively difficult to apply the principle of "beneficial ownership." He went on to comment that the use of such an entity gave the "best opportunity to hide the assets in question." In relation to whether Isidro should be on the board of such an entity, he commented that he agreed that the family should always have a direct influence not only on the investment policy, but also on all the other details of administration, but that it could be achieved through the "complete control of the rights to appoint and withdraw the members of the board."
- In a further letter of 24 November 1956 from Hugo to Mr Hubachek, Hugo commented that:
"All the assets should be put into a separate legal entity (establishment) in the Principality of Liechtenstein. Mrs Martin-Montis will be beneficiary of this establishment, and in a very confidential way through the "founders rights" she keeps the entire control over this establishment as long as she lives and after her death the persons indicated by her will within a restricted frame exercise these rights."
He went on to comment that he particularly liked such a structure because "Mrs Martin Montis can change her testamentary plan as long as she lives." Thereafter, he produced the first drafts of the statutes and bye-laws and sent a translation of them to Mr Hubachek enclosed with a letter of 4 December 1956. Further, in a letter of 6 December 1956 to Mr Hubachek, Hugo stated:
"Mrs Martin Montis knows that she can change the bylaws freely and without restrictions as long as she lives, but that the by-laws cannot be changed with regard to their testamentary dispositions after her death."
- Hugo established the Newin Establishment in or about January 1957 and as a result, was the first holder of the Founder's Rights. The first statutes of the Newin Establishment, provided at Article 5 that "the capital, returns on it and eventual net profits of the establishment accrue to the founder or his legal successor" and amongst other things, that the "designation of the original beneficiaries as well as their legal successors in the by-laws can be revocable or irrevocable." The organs of the establishment were named at Article 7 as the founder, the board of directors and the controller and at Article 8 the "founder or his legal successor or successors" were described as "the highest organ of the establishment" to whom the following powers were reserved:
"(a) appointment and removal of the Board of Directors, the auditor and the beneficiaries;
(b) modifications of statutes and issuance and modifications of by-laws;
(c) Distribution of net profits
(d) Liquidation and dissolution of the establishment."
- Further, the by-laws of the Newin Establishment, promulgated on 23 January 1957 provided at Article 1 that the entire assets and earnings of Newin Establishment shall accrue to Olga during her lifetime, by Article 2 that certain sums should be distributed to Isidro, Soledad and the Olga Martin Montis Family Foundation established in Switzerland and by Article 3 that the remainder should be divided into three equal portions and administered under the headings, "Portion Isidro", "Portion Soledad" and "Portion Alfonso". The Articles went on to include detailed provisions in relation to the administration of each portion. Article 6 provided that the bye-laws could only be revoked or amended by the Founder or his legal successors and Article 9 was in the following form:
"It is expressly established that as of the time of the death of Mrs Olga Martin-Montis the Founder or the legal successors to the Founder shall no longer be permitted to rescind or amend the provision of the present Bye-Laws regarding the beneficiaries, ie. all provisions of Arts 2, 3, 4 and 9 of the present Bye-Laws. From the time of the death of Mrs Olga Martin Montis onwards the only remaining irrevocable rights of the Founder and his legal successors shall thus be as follows:
(a) appointment and dismissal of members of the Administrative Board and the auditors;
(b) Amendments to the Statutes and the Bye-Laws insofar as Arts 2, 3, 4 and 9 of the present Bye-laws remain in force mutatis mutandis following such amendments."
The Newin Establishment having been established by Hugo, he transferred the Founders' Rights to Olga by an assignment dated 24 January 1957.
- Shortly after its creation, a Liechtenstein company, Finanzierungs-und Handels AG ("F&H") was transferred to Newin Establishment as its wholly owned subsidiary and became the investment vehicle for part of Olga's wealth. In 1962, a Swiss company known as Soltega AG ("Soltega") was set up. Its shares were held by F&H as fiduciary or nominee for Newin Establishment. Initially, it held an apartment in Paris used by Olga but after the apartment was sold, Soltega continued to hold a portfolio of securities until its liquidation in 2005.
- To return to the chronology of events, after the death of her son, Alfonso, in May 1957, Olga wished to move from St. Moritz to Lausanne. As a result, Hugo began correspondence with the tax authorities in the Canton of Vaud and in a letter of 8 June 1957, without mentioning names, explained that a large portion of Olga's wealth was invested in the Newin Establishment but that both she and Isidro did not have any influence over its administration. He made no mention of the Founder's Rights and went on to explain that at the date of Olga's death the majority of the assets would remain invested in the Newin Establishment and be administered by the same persons currently responsible. Shortly afterwards in a letter dated 16 July 1957 from Hugo to Mr Hubachek, Hugo expressed concerns about the move to Lausanne, explaining that the Canton in which St Moritz is situated had accepted that the fortune in the Newin Establishment did not form part of Olga's estate and that consequently no estate taxes would be payable upon it. He went on however, to explain that the Canton of Vaud was likely to include those assets within Olga's estate for the purposes of estate duty and that a family member could seek a share under the forced heirship provisions.
- As a result, Hugo stated that it would be necessary for Olga to execute an additional last will governed by English law in order to protect the Newin Establishment. A draft will was produced by Mr Taylor, the English solicitor consulted by Hugo, in October 1957. In further correspondence between Hugo and Mr Taylor dated 3 December 1957, Hugo stated amongst other things that he was willing to act gratuitously as an executor because at the same time he was a trustee and a director of a corporation, he wanted to make quite sure that the testamentary plans in the trust deeds statutes and bye-laws of the respective trusts and stiftungen [foundations] could not be attacked by the heirs and that it was one of the principal aims of the last will that "these trusts and establishments and all alterations of them should be covered by a last will which provides for the application of the English Law."
- In the meantime, in order to enable Hugo to effect the first changes to the Newin Establishment bye-laws to take account of the death of Olga's son Alfonso, Olga assigned the Founder's Rights to Hugo who subsequently transferred them back to Olga by an assignment dated 17 July 1957, after the changes had been made. The bye-laws were also amended in July 1958 in order to include Blaze Kim Cabeza de Vaca y Leighton ("Kim") as a beneficiary. In the same way on that occasion, the Founder's Rights were assigned by Olga to Hugo in order to effect the change and then transferred back.
- In the letter which Hugo wrote to the tax authorities in the Canton of Vaud on 3 September 1957, Olga having decided to take up residence there, he explained that Olga was the beneficiary of the Newin Establishment, the provisions of which would become irrevocable on her death and the management of which was independent from her. By its letter of 31 December 1957, the Department of Finance of the Canton of Vaud confirmed Olga and Isidro's tax status and amongst other things, that the capital in the Liechtenstein institution would not come into play for the purposes of "transfer duties in the event of an inheritance" "given their complete separation from the assets of the interested parties . .".
- Further in a letter dated 10 January 1958 from Hugo to Mr Hubachek, Hugo stated that Olga's will would contain the same principal clauses as the testamentary plan in the bye-laws of the Establishment and as a result, the heirs would have no interest in attacking the Establishment. In response by letter of 1 June 1958 Mr Taylor set out his understanding of the strategy. He stated that it was not the intention that any property should actually pass under the will because the bulk of the assets had been disposed of under various trusts. Instead, the will was intended as "a longstop in the event of any challenge being made to the trusts . . . under the Swiss law of compulsory portion." He went on to add that therefore, the will would operate only upon non-trust property and that the various trusts would remain in operation after Olga's death, "unaffected by the will."
1961 Fee Agreement
- At a meeting of the board of directors of Newin Establishment on 19 January 1961, the board approved the appointment of Hugo as director and manager of Newin and set out the manner in which he was to be remunerated both in that capacity and at the same time as "trustee and executor of the testamentary plan contained in the bye laws of Newin Establishment." It stated that Hugo was entitled to the greater of the sums calculated under Methods A and B the first being calculated on the basis of 4% of all gross income including capital gains and the second on the basis of 1/5th of 1% of the average principal value of the property held or administered by the Newin Establishment. Such fees were stated to include all advisory fees for the management and investment of property of Newin. It was also stated that on Olga's death Hugo would be remunerated in accordance with rates set for the Zurich Bar in relation to last wills, subject to a cap. The provisions concerning fees contained in the minute of the meeting on 19 January 1961 have become known as the "1961 Fee Agreement".
- Thereafter, in September 1964 Olga expressed the wish to have a single will which would cover her entire estate. In a memorandum of 14 September 1964, Hugo recorded that "as to the possible submission of E to one sole last will" that he would have to discuss it with the tax authorities in Vaud because under the present set up, Newin was to "a certain extent exempt from Swiss estate taxes." Thereafter, in a letter of 8 January 1965 to Mr Taylor, Hugo stated that the new last will should confirm the testamentary plan contained in the bye-laws of Newin. In a further letter of 7 May 1965 to Mr Taylor, amongst other things, Hugo explained that:
"the whole fortune of Mrs Martin Montis with the exception of the Liechtenstein Establishment, would at the moment of her death fall into the estate. As you know, the provisions concerning the Liechtenstein Establishment are in agreement with the directions of the last will which has been worded by you. On principle, the estate would be fully disclosed to all authorities, whereas the Liechtenstein entity would, if possible continue to not be disclosed. The applicable principles of succession and the administration would, however, be the same for the disclosed estate as well as for the possibly not disclosed Liechtenstein entity."
- Thereafter, in July 1967 in a letter to Olga, Hugo stated that he would hold all assets received from her American trust on trust pursuant to the provisions of her will. In fact, Olga's Will was executed on 23 September 1967. All previous wills were revoked and by clause 3, English law was stated to apply. The provisions as to the residuary estate contained in clause 9 were as follows:
"My trustees shall hold my residuary estate upon trust:
a) as to two-fifths thereof upon trust to pay the income thereof to my husband Isidro for his life and subject thereto upon the trusts declared in the next succeeding sub-clause hereof;
b) as to a further two-fifths thereof upon trust to pay income thereof to my daughter Soledad for her life on protective trusts;
c) subject to the trusts declared in the two preceding sub-clauses hereof upon trust as to the whole of my residuary estate for such of my grandchildren, namely Andrea Olga Helen Maria de la Soledad Cabeza de Vaca y McDaniel (born the 8th February 1951), Forester Maurice Labrouche (born 28th December 1951), Frank Jay Labrouche (born 30 September 1953), Antonio Alfonso Cabeza de Vaca y McDaniel (born 29th March 1954), and the said Blaze Kim Cabeza de Vaca y Leighton, as shall attain the age of thirty-five years in equal shares if more than one absolutely, Provided nevertheless that if any such grandchildren shall die in my lifetime or after my death without having attained a vested interest but leaving issue such of the issue of such grandchildren as shall attain the age of thirty-five years before the appointed day hereinafter defined or be living on that day shall take absolutely in equal shares per stirpes if more than one the share which such grandchild would have taken had he or she survived me and attained a vested interest, but save as so provided the share of any such grandchild which shall not vest shall accrue to the shares or share of the others or other."
Accordingly, the provisions concerning the residuary estate were different from those contained in the articles of the Newin Establishment. Rather enigmatically, in a letter to Mr Taylor of 8 February 1968, Hugo commented that he was preparing amendments to the byelaws of Newin "and the question of whether the whole fortune of Newin will have to fall into the estate will soon be dealt with."
1972 Fiduciary Agreement and changes to Byelaws
- On 4 January 1972, Hugo in his capacity as the founder of Newin Establishment assigned all rights held as founder whether under the byelaws or by law to Interhold. The following day the 1972 Fiduciary Agreement was executed, the relevant provisions of which are:
"1) Interhold AG is holding as a fiduciary for Dr. Hugo A. Frey (the latter acting as trustee of Mrs. Olga Martin-Montis) the founder's rights of NEWIN Establishment, in Vaduz.
2) Interhold AG recognizes that Mrs. Olga Martin-Montis is the beneficial owner of the founder's rights of Newin Establishment. Mrs. Olga Martin-Montis and in her place, Dr. Hugo A. Frey, as her trustee, have the right to the full control of the founder's rights of Newin Establishment. Interhold AG commits itself to assign these founder's rights immediately on request to Mrs. Olga Martin-Montis or to Dr. Hugo A. Frey or to a third party designated by these two persons or by one of them.
3) Interhold AG commits itself to exercise these founder's rights according to the instructions given to it by Mrs. Olga Martin-Montis and/or Dr. Hugo A. Frey, as trustee of Mrs. Olga Martin-Montis.
6) After the decease of Mrs. Olga Martin-Montis and/or Dr. Hugo A. Frey, this Fiduciary Agreement will continue with the executors of the testamentary plan designated by Mrs. Olga Martin-Montis.
. . . .
Swiss Law is applicable"
- A further discussion about the form of Olga's new will followed. A letter of 1 April 1974 from Hugo to Mr Taylor sets out some of the thinking including Olga's wish to remove provision for her grandchildren Antonio and Andrea partly on the basis that they were already receiving trust income in the light of the early death of their father, Alfonso. There is no mention of Newin Establishment in the letter. In fact, the byelaws of Newin Establishment were amended (the 5th Amendment) by Interhold on 25 September 1975. The relevant provisions are as follows:
The entire assets of the establishment and its proceeds shall accrue without exception to the following beneficiary for as long as she lives:
Ms Olga Martin-Montis, Lausanne.
On the death of the aforementioned beneficiary, Ms Olga Martin-Montis, the assets of the establishment and their proceeds are governed by the testamentary dispositions of Ms Olga Martin-Montis.
Should Ms Olga Martin-Montis be the holder of the founder's rights of NEWIN Anstalt, Vaduz, at the time of her death, these founder's rights shall pass to the executor designated by her.
It is explicitly provided that from the moment of death of Ms Olga Martin-Montis the holder of the founder's rights or its legal successors can no longer repeal or amend the provisions of these by-laws, i.e. articles 2, 3, 4, 5, 6, 7 and 8 of these by-laws. From the moment of death of Ms Olga Martin-Montis, the holder of the founder's rights or its legal successors therefore irrevocably retain only the following rights:
a) appointment and dismissal of the members of the board of directors and the control organ
b) amendment of articles and amendment of by-laws, provided that through such amendments the articles 2 to 8 of the present by-laws remain essentially in force."
- Thereafter, a number of codicils to Olga's Will were executed. During the preparation for a codicil to be executed whilst Olga was in London in May 1977, in a letter from Hugo to Mr Taylor of 25 May 1977, Hugo mentioned that "during the last months" Olga's eyes had "weakened very much." He went on to state that she had "difficulties in reading" but could sign her name. Therefore, as a matter of practicality he asked if the draft could be read to her in the presence of the witnesses. She was 87 at the time. I should also mention that during 1977 two of Olga's grandchildren, Jay and Kim died.
- In March 1978, Hugo was involved in negotiations with the tax authorities in the Canton of Vaud in relation to the manner in which Olga's estate passing under her Will would be treated on her death. In a letter dated 30 March 1978 the tax authorities stated that the trusts contained in the will would only be ignored in the sense that the beneficiaries would be treated as entitled and tax charged at the appropriate rates, if the tax authorities were informed in full of all assets and relevant transactions. By a letter of 3 April 1978 Hugo agreed to the condition and sought to clarify that the disclosure requirement did not apply to the trusts in the United States of America and the Principality of Liechtenstein which "follow independent rules." He went on to state "These conditions will apply to the estate that is covered in the will, of which you received a copy." The tax authority's reply of 18 May 1978 was as follows:
"Will of Ms. Olga MARTIN-Montis, Lausanne-Ouchy
On 30 March we informed you that, in view of the specific features of the case, we were prepared to ignore the existence of the trust Ms. Olga Martin-Montis wishes to create through the provisions of her will.
On the death of your client, we would therefore tax the beneficiaries of the trust at the rate corresponding to their relationship with Ms. Olga Martin-Montis, on the following conditions:
- that we have knowledge of all the deceased's assets by inventory and details of the assets are to be allocated to the trust;
- that detailed accounts concerning all assets and income from the trust are submitted to us annually;
- that the testatrix's daughter, grandchildren and husband admit in writing that they are owners.
Following our letter of 30 March you asked us the following questions:
- could the fact that the inventory of the estate informs the Vaud tax authorities of all income and wealth of Ms. Olga Martin-Montis, and the heirs' recognition of direct ownership of these assets, prevent the heirs from opting for taxation on spending or certain elements of income and wealth rather than ordinary taxation on income and wealth?
- do the conditions listed in our letter of 30 March relate only to the estate covered by the will, of which a copy was sent to us, or do they also concern the trusts already in existence in the United States and the Principality of Liechtenstein and for which other arrangements have been made by your client [?]
We have made the following determinations:
With respect to special tax:
Persons domiciled in the canton or staying there for more than ninety consecutive days, who do not have Swiss nationality and who do not and have not exercised any paid activity in Switzerland, can ask to pay, instead of tax on income and wealth, a special tax calculated on the basis of the spending corresponding to their lifestyle. The income determined in this way must reach at least five times the rental value of their accommodation or one and a half times the full board price for persons residing at a hotel or guest house. Tax calculated on spending should not be lower than the taxes calculated on the gross amount of certain elements of wealth and income available to the taxpayer as owner or usufructuary. If the heirs meet the conditions stated hereinabove, it will be possible for them to choose the special tax, and the fact that the tax authorities are aware of their income and wealth makes no difference.
The conditions contained in our letter of 30 March are not automatically applicable to the trusts already in existence in the United States and in the Principality of Liechtenstein. All of their income and wealth, and their statutes, must however be notified to the tax authorities on the death of your client. The inventory of the estate does indeed include all of the deceased's assets, whatever the nature or location thereof. Depending on their statutes, these assets will or will not be subject to inheritance tax.
It is clear that the foregoing is only applicable as things stand and as long as the statutes of the trusts or the provisions of your client's will are not changed.
- On 16 May 1978, the bye-laws of Newin Establishment had been amended for the sixth time. The relevant parts of the amendment were in the following form:
The entire assets of the establishment and its proceeds shall accrue without exception to the following beneficiary for as long as she lives:
Ms Olga Martin-Montis
On the death of the aforementioned beneficiary, Ms Olga Martin-Montis, the entire assets of the establishment shall be divided into four parts. A first part, designated "A" shall be allocated to a fifth of the assets of the establishment, a second part, designated "B", a further fifth of the assets of the establishment, a third part, designated "C", another two fifths of the assets of the establishment, and a fourth part, designated "D", the remaining fifth of the assets of the establishment.
On the death of Ms Olga Martin-Montis, Part "A" (one fifth of the assets of the establishment) accrues without exception to Ms Soledad Cabeza de Vaca, Marquise de Moratalla, Lausanne, in respect of both assets and proceeds.
From Part "B" (one fifth of the assets of the establishment), Ms Soledad Cabeza de Vaca, Marquise de Moratalla, receives all proceeds for the duration of her lifetime, with the express provision that this interest in the proceeds must not and cannot be pledged as collateral nor encumbered in any other way. On the death of Ms Soledad Cabeza de Vaca, Marquise de Moratalla, this Part "B" shall fall to Part "D" in respect of both assets and proceeds.
From Part "C" (two fifths of the assets of the establishment), on the death of Ms Olga Martin-Montis Mr Isidro Martin-Montis, Lausanne, receives all proceeds for as long as he lives, and on his death Ms Soledad Cabeza de Vaca, Marquise de Moratalla, Lausanne, receives all proceeds for as long as she lives. These proceeds cannot and must not be pledged as collateral or encumbered in any other way. On the death of Ms Soledad Cabeza de Vaca, Marquise de Moratella, this Part "C" shall fall to Part "D" in respect of both assets and proceeds.
The remaining Part "D" (one fifth of the assets of the establishment) shall be divided into a Part "DA", consisting of three quarters of Part "D", a Part "DB" consisting of one eighth of Part "D", and the remaining Part "DC", consisting of one eighth of Part "D".
a) From Part "DA", Forester Maurice Labrouche, Lausanne, receives until he attains the age of 40 that part of the proceeds which he requires, according to the full discretion of the board of directors of NEWIN Anstalt, in order to lead a meaningful but not luxurious life. Upon attaining the age of 40 the entire part "DA" shall accrue without exception to said Forester Maurice Labrouche in respect of both assets and proceeds.
Should Forester Maurice Labrouche die before Ms Olga Martin-Montis or should he die before attaining the age of 40, this part "DA" shall accrue to the descendants of Forester Maurice Labrouche in equal parts per stirpes. Should there be no descendants of Forester Maurice Labrouche, this part accrues to Part "DC" (Olga Martin-Montis family foundation).
b) From Part "DB" Andrea Olga Helen Maria de la Soledad Cabeza de Vaca y McDaniel and Antonio Alfonso Cabeza de Vaca y McDaniel receive in equal parts until they attain the age of 40 those proceeds which they require, according to the full discretion of the board of directors of Newin Anstalt, to lead a meaningful but not luxurious life. Upon attaining the age of 40 the entire part "DB" shall accrue without exception to said Andrea and Antonio in equal parts in respect of both assets and proceeds. Should Andrea and / or Antonio die before Ms Olga Martin-Montis or should they die before attaining the age of 40, their part "DB" shall accrue to their descendants in equal parts per stirpes. Should there be no descendants of Andrea or Antonio, their share of Part "DB" accrues to Part "DC" (Olga Martin-Montis family foundation).
c) On the death of Ms Olga Martin-Montis, the remaining Part "DC" shall accrue without exception to Olga Martin-Montis family foundation, Vaduz."
- Shortly before Olga's death in February 1980, the 1980 Fiduciary Agreement was executed. The relevant clauses are in the following form:
"1) Interhold AG is holding as a fiduciary for Mr Hugo A Frey the founder's rights of NEWIN Establishment, in Vaduz.
2) Interhold AG recognises that Mr. Hugo A. Frey is the beneficial owner of the founder's rights of Newin Establishment. Mr. Hugo A. Frey has the right to the full control of the founder's rights of Newin Establishment. Interhold AG commits itself to assign these founder's rights immediately on request to Mr. Hugo A. Frey or to a third party designated by him.
3) Interhold AG commits itself to exercise the founder's rights accordingly to the instruction given to it by Mr Hugo A Frey.
6) After the decease of Mr. Hugo A. Frey, this Fiduciary Agreement will continue with his successor to be designated by him."
Swiss Law is applicable."
- Some six days later, on 31 January 1980, further changes were made to the bye-laws of Newin Establishment. This seventh amendment is headed "Supplementary Rules" and unlike its predecessors does not refer to earlier versions of the byelaws or refer to itself as an amendment, (the "1980 Byelaws"). The contents of Article 1 are substantially different from what went before but the remainder being articles 2 7 are in much the same form as the previous version contained in the 6th Amendment. Article 1 is in the following form:
The beneficiary of the Newin Anstalt is Mrs Olga Martin-Montis for the duration of her life. The Board of Trustees is required to make support payments to said beneficiary from the income from the assets of the Anstalt and if necessary from the assets of the Anstalt themselves in order to maintain the customary standard of living of the beneficiary. However, such support payments are only to be made to the extent that the income of the beneficiary from other sources is insufficient to provide for her customary standard of living."
- The changes to the bye-laws had been preceded by a file note of 24 January 1980 written by Hugo (the "1980 File Note"). It records:
"1. The by-laws dated 16 May 1978 shall be cancelled in a separate resolution by the holder of the founder's preference rights.
2. In a further resolution the founder shall adopt new by-laws without reference to the previous by-laws. In these new by-laws article 1 is to be re-worded as follows:
The lifetime beneficiary of Newin Anstalt is Ms Olga Martin-Montis, Lausanne. The Board of Directors shall provide benefits to this beneficiary for the maintenance of her customary standard of living at the expense of the proceeds from the assets of the Anstalt themselves. However, such benefits shall only be provided to the extent that the income of the beneficiary from the other sources is insufficient to cover the costs of her customary standard of living.
Articles 2 etc. remain unchanged.
3. The Newin Anstalt shall later be converted to a Stiftung. The procedure for the change shall be discussed with Dr. Ospelt immediately.
HAF 24 January 1980"
- Markus says that he believes that his father either met with Olga around this time or spoke to her on the telephone, although he has no actual recollection of his father telling him that he did so. He says that he believes that Olga directed his father to do as he did and that his father always followed her instructions and did exactly what she wanted. Mr Taube QC on behalf of Forester says in response that it is surprising if that were the case that the 1980 File Note makes no reference to any specific meeting or other contact with Olga, only mentions conversion to a Stiftung later and in fact, the conversion did not occur for a further fifteen years.
- Olga died on 8 February 1980 aged 90 and was survived by her widower Isidro. In his witness statement Forester says that during the last two years of her life, Olga suffered from Alzheimer's disease. In fact, the case as originally pleaded stated that she had suffered from Parkinson's disease and was subsequently amended to refer to dementia. In cross examination Forester stated that rather than the final two years of her life, this had been the state of affairs in the last two months of 1979 and until Olga's death in February 1980. He described her difficulties as more serious than memory problems adding that she had a problem with awareness generally and that although he was not a doctor he thought she had Alzheimer's disease because he had seen it in films. He accepted however, that Olga had had a good head for business, had been a good judge of character and he thought that both she and Isidro had trusted Hugo. He also accepted that he had no knowledge of what Olga's instructions to Hugo may have been from time to time and that he never discussed business with her unlike Hugo.
- I am unable to accept Forester's evidence as to Olga's mental state shortly before she died. I found that evidence to be very unsatisfactory. Without there being any medical evidence either available to the court, or it seems to Forester at the time, he first signed a statement of truth in which it was alleged that Olga had suffered from Parkinson's disease and then amended the pleading to refer instead to Alzheimer's disease, his knowledge of which came from films, hardly a reliable source. In addition, there is no documentary or other evidence to support Forester's assertion, the only reference to Olga's physical and mental state being to her failing eyesight. I also take into account that in cross examination Forester abandoned the case in the Re-Re-Re-Amended Particulars of Claim that Olga had suffered from Alzheimer's Disease for two years in favour of a period from the last two months of 1979. As a result of the unsatisfactory nature of the oral evidence itself and the fact that it is not supported by any of the vast number of documents available to the parties and to which the court was referred, or by any other oral evidence, I am unable to accept Forester's evidence in this regard. In any event, it is not alleged that Olga lacked mental capacity and there is a presumption in favour of capacity.
- To return to the chronology of events, on 17 March 1980 Andrea and Antonio were both informed by letter from Hugo that they were beneficiaries under trusts set out in Olga's last will. No mention was made of the Newin Establishment. However, its most recent statutes were disclosed to the tax authorities in the Canton of Vaud under cover of a letter of 10 April 1980. The version of the statutes enclosed did not include the date or the official attestation which appears on the last page. In opening it was suggested that Hugo may have had an improper or dishonest motive in relation to the form of the statutes but this was not pursued in closing. In any event, in cross examination, Markus stated that his father was unsure about the way in which the tax authorities would treat Newin Establishment. He added that even a foundation might be treated as transparent and it depended on the case.
- In any event, the following day, 11 April 1980, Hugo wrote both to Credit Suisse and Clariden Bank requesting each bank divide the assets of Newin Establishment in their possession on the basis of a valuation as at 8 February 1980 and transfer them to further accounts in the name of Interhold being: 20% for the benefit of sub-account Soledad; 20% to sub-account Trust Soledad; 40% to sub-account Trust Isidro; 15% to sub-account Trust Forester; 1.25% to sub-account Trust Andrea; 1.25% to sub-account Trust Antonio; and 2.5% to the account of the Olga Martin Montis family foundation. The account was then to be closed. It is not in dispute that the total amount divided or distributed in this way amounted to $45.2m and represented the assets of Newin but for F&H and Soltega and that the distributions were subsequently ratified by Newin. On the same day, Hugo also sent letters to Credit Suisse requiring a distribution of the monies in the "ANS account" in the name of Interhold which had held monies in the direct ownership of Olga to be dealt with in the same way. The amount distributed from that account was in the region of $25m. Around the same time, on 18 and 25 April 1980 respectively, Hugo wrote to Antonio and to Forester but in neither case made any mention of the Newin Establishment.
- Thereafter, by a resolution dated 30 April 1980 the board of Newin Establishment unanimously resolved that the shares of F&H should be held "for the account of and to the risk of: Soledad 400 shares; Trust Soledad 400 shares; Trust Isidro 800 shares; Trust Forester 300 shares; Trust Andrea 25 shares; Trust Antonio 25 shares and the Olga Martin Montis Stiftung 50 shares" (the "1980 Resolution"). The allocation of the shares mirrored the interests of each of the individuals and trusts in the residuary estate of Olga. However, a letter from Hugo to Interhold dated 13 August 1980 states as follows:
"Estate Olga Martin-Montis /Newin
The founder's rights and the beneficiaries' rights must be distributed according to the will. The shares of Finanzierungs-und Handels AG remain the property of Newin. Newin should have assets at least equal in value to its capital. The capital of CHF 20,000,000.- may need to be reduced.
If possible, Newin should distribute the profit annually. To that end, Finanzierungs-und Handels AG must pay yearly dividends.
This is subject to any further instructions which may become necessary due to US taxes which could be received from Hubachek in late summer.
HAF, 12. August 1980"
Mr Taube on behalf of Forester says that that letter is consistent with Hugo having thought that he held the Founder's Rights as executor to distribute the assets of Newin in accordance with Olga's Will. In this regard, Miss Campbell submits that a literal translation of the original German is "to be divided per will" and should be understood as shorthand for the actual legal position, namely that the Newin Bye-laws mirrored the beneficial interests under Olga's Will and were to be divided in the same way.
- Hugo sent a final inventory in relation to Olga's estate to the tax authorities in Lausanne on 25 September 1980 but did not include any reference to Newin or the value of its assets. He later commented to Mr Hubachek that he had been successful in excluding the "whole pool of Newin" from inheritance tax in Lausanne. It is also clear from a letter which Hugo wrote to Mr Hubachek on 20 October 1980 that Newin continued to exist, controlled 100% of F&H and Soltega and that it was intended that Antonio and Andrea would have a share in it. In a yet further letter to Mr Hubachek of 23 October 1980, Hugo stated that the Andrea Trust and the Antonio Trust were each entitled to 1.25% of Olga's residuary estate. He went on:
"Accordingly, these two trusts are also owning 1.25% of Newin Establishment Finanzierungs und Handels AG and Soltega."
Mr Taube places emphasis upon the use of "accordingly" in support of the conclusion that Hugo considered the Newin assets to form part of the residuary estate. Miss Campbell on the other hand says that Mr Taube seeks to place too much weight on a single word in the light of the fact that it also supports Markus and Hugo's case. She submits that in the light of the fact that the beneficial interests in Newin mirrored those under Olga's Will Trusts, and since the accounts of Trust Andrea and Trust Antonio had been set up to receive payments from both the estate and Newin, Hugo's statement can be construed as shorthand for the fact that Andrea and Antonio had the same rights and proportional interests under both the residuary estate and Newin. Hugo then suggested that in order to avoid the tax complications he had set out, Trust Isidro, Trust Soledad and Trust Forester should purchase the interests in Newin Establishment and the two companies held by Trusts Andrea and Antonio. He also mentioned that they would also purchase the similar interests of the OMM Foundation (the "Newin Adjustment"). At the same time, in a letter also dated 23 October 1980, Hugo asked Forester to agree to certain payments from his trust and added: "I am of course at your disposal for further information."
- On a subsequent draft agreement relating to the proposed purchase, Hugo noted in manuscript that he could have distributed in this way as "executor" but that he preferred to have the agreement of Andrea and Antonio. Thereafter, in a letter to the beneficiaries of the residuary estate of 5 December 1980, Hugo described matters in the following way:
"This is to inform you that I shall in my capacity of the executor of the last will of the late Olga Martin-Montis direct that in the course of the distribution of the assets of the estate the shares in NEWIN Establishment and in the investments controlled by this establishment will be attributed to the heirs who are residents in Europe and that the heirs who are residents of the United States of America will be compensated by the attribution of other assets of the estate. This method of distribution of the assets is applied in consideration of the interests of the heirs in as much as the investment policy and the fiscal aspects of the residents of the US differ substantially from the policy and the fiscal aspects of the heirs who are residents of Switzerland. . ."
Mr Taube QC says that such an approach is consistent with Hugo holding and exercising the Founder's Rights qua executor. Miss Campbell on the other hand points out that the language used is imprecise. She says that there were no "shares" in Newin or purchase by "heirs" resident in Europe and that a margin of appreciation must be afforded to Hugo whose first language was not English. Subsequently on 29 January 1981, the distributions were ratified by means of a resolution by Interhold. The document itself is headed "Founding resolution" and in the body of the resolution Interhold is described as acting in the capacity of "the holder of the founder's preference rights of Newin." The withdrawal of parts DB and DC under article 6 of the bye-laws as beneficiaries was also noted. This reflected the fact that the interests of Trust Andrea and Trust Antonio in Newin had been bought out.
- A note in Hugo's handwriting of 16 April 1981, records that it was intended that Isidro, Soledad and Forester pay tax in Lausanne by way of "forfait" the level of which was to be determined after the submission of tax returns. Hugo went on to note under a heading "Transparency" that full tax would be payable by Isidro, Soledad and Forester on the trusts but only on Swiss assets, $ and DM accounts at Swiss banks but not on "fiduciary investments". He went on to note that there was "transparency through Newin, but not through Soltega." In a further hand written note of 3 September 1981, Hugo recorded that nothing should be disclosed in relation to Newin and "Fi" (a reference to F&H). In a subsequent letter to the auditors of Newin Establishment dated 15 September 1981, Hugo stated that Soltega "indirectly belongs to the estate of Olga." Whilst Mr Taube says that this is consistent with Soltega not being freestanding from the residuary estate, Miss Campbell submits that too much should not be made of informal language and that the German could just as easily be translated as "wealth" as "estate."
- Meanwhile, on 31 August 1981 the 1980 Resolution concerning the allocation of shares in F&H was declared null and void and the following day a further resolution was passed allocating the shares as to 420 shares for Soledad, 420 to Trust Soledad, 845 to Trust Isidro and 315 to Trust Forester (the "1981 Resolution").
- Having produced a schedule headed "reconciliation of distribution of estate of Olga Martin Montis" which amongst other things recorded distributions totalling $45 million odd from Newin Establishment having been credited to the various trusts of the will of Olga, on 29 June 1982, Hugo wrote to Mr Hubachek in relation to the position of Trust Andrea and Trust Antonio. He stated that the trusts were no longer interested in the Newin Establishment and went on to state that in his capacity as executor he had not attributed any share in Newin Establishment to Andrea and Antonio but that they had received the equivalent of their shares in Newin. Thereafter, in a file note dated 12 August 1982, Hugo reiterated that each of Trust Isidro, Trust Soledad, Trust Forester and Soledad herself had a share in Newin but that only the profit paid out from Newin would be subject to Swiss property tax. He went on to note that the trusts should if possible obtain income in the sense of interest and dividends because the beneficiaries are not entitled to capital gains. He also recorded another solution namely that:
"Another solution: Newin, i.e. Finanzierungs- und Handels AG, concentrates on US shares. The resulting capital gains can be paid to Finanzierungs- und Handels AG as dividends and so flows as income to the trusts (income which can be paid out to the beneficiaries). Therefore Finanzierungs- und Handels AG for US shares and also for other shares (with chances of price gains).
Drawback: Finanzierungs- und Handels AG dividends are subject to coupon tax which cannot be reclaimed by Newin. (However, only 4%)."
This was reiterated in a note of the following day in which Hugo also noted that the shares in Soltega were held in trust by F&H for Newin and that it might be advisable to distribute the Soltega shares later to Trust Soledad, Trust Isidro and Trust Forester or to sell them.
- On 18 May 1983 new statutes for Newin Establishment were promulgated. The main changes were at Articles 5 and 7 as follows:
The capital, returns on it and possible net profits of the Establishment accrue to the beneficiaries. The designation of the beneficiaries can be made in By-Laws: this nomination of beneficiaries can be revocable or irrevocable.
Certificates concerning the rights of the founder or his legal successor respectively or the beneficiaries are not issued.
. . .
The highest organ of the Establishment is the founder or his legal successor respectively. With respect to the following matters, the power of the decision is reserved to the founder or his legal successor respectively:
a) Appointment and removal of the Board of Directors, the fixing of the authorization to sign of the members of the Board of Directors,
b) Appointment of the beneficiaries and fixation of their rights,
c) Modification of Statutes and issuance and modification of By-Laws,
d) Liquidation and dissolution of the Establishment.
The legal successor of the founder may derive his rights from inheritance, or the founder may by means of a written declaration of assignment transfer his rights and duties acquired by the foundation of said establishment. The founder or his legal successor respectively may appoint in By-Laws the legal successors of the holders of the founder's rights.
The beneficiaries may be designated in the Bye-Laws as holders of the founder's rights.
If the founder's rights are exercised by several persons, resolutions will be passed and elections will be carried out by the majority of the holders of the founder's rights."
- Thereafter, having received a written request from Hugo, the auditors produced an audit report "on the statement of account of the executor Dr H. A. Frey . . on the estate of the late Mrs Olga Martin Montis as of 31 December 1982." The report stated that it had been requested by Hugo as the executor in relation to the accounting records of Interhold "for the purpose of establishing whether the distribution of those assets had been effected in accordance with the said will and its codicils." The assets included the "Newin Establishment" with investments in F&H and Soltega and the report went on to confirm that the net assets of those listed had been "duly transferred to the beneficiaries in full conformity" with Olga's Will.
- In a note made by Hugo dated 28 October 1983, he stated that since 1980/1981 all legacies had been paid and the distributions to Soledad outright and to the Trusts had been executed "to a great extent". He went on to state that the distributions had been made "to a great part out of "Newin Establishment" which was "originally formed immediately after the change of domicile of OMM from the US to Switzerland in order to hide a substantial part of OMM's fortune from foreign (and mainly French) tax authorities." He also recorded that when Olga took up residence in Lausanne it was agreed with the Swiss tax authorities that the value in Newin would not be subject to inheritance tax in the Canton of Vaud on Olga's death. Having stated that the heirs, Isidro, Soledad and Forester were foreigners and had never acted as professionals in Switzerland, he went on:
Since they therefore could attain a very favourable tax treatment in Switzerland it was decided to distribute the assets of Newin to a great extent and to leave only a much reduced fortune in this shelter-entity. The principal assets could therefore be managed directly through the Trust as provided for by the last will of OMM."
He went on to record Soledad's tax case in France and both her position and that of Forester and Isidro in relation to tax in Switzerland.
- In a file note of the same date, Hugo recorded:
"2. The inherited assets are divided into personal assets and rights in the trust, which are subject to English trust law. They also have rights in the Newin Anstalt, which in turn controls subsidiary companies (Finanzierungs- und Handels AG as well as Soltega AG).
3. The Olga Martin-Montis Stiftung, Vaduz, is a genuine family foundation in Liechtenstein, and distributions from this foundation may only be made in a case of emergency. It is therefore entirely independent of the heirs and not to be attributed to the heirs.
5. Full consideration was given to the question whether the Newin Anstalt [Establishment], which today owns assets in the amount of approximately 20 million Francs, should be replenished, i.e. brought up to the same level of assets that existed prior to the distributions. The procedure would be complicated, because the "foreigners", i.e. the Olga Martin-Montis Stiftung, the Andrea Trust, and the Antonio Trust were bought out. In addition, Soledad has a claim to 20% of Newin "outright", i.e. an unlimited claim to the capital and the proceeds. The entire repatriation has been planned and calculated (see attached note dated 27 October 1983).
However, the benefits of such repatriation are questionable. If Soledad was subject to regular taxation, the distributions from Newin to Soledad would have to be declared in Lausanne for tax purposes. It is very likely that her rights in Newin Anstalt would also be subject to the cantonal wealth tax in Lausanne. Should Soledad lose her tax status in France, the assets invested in Newin would thus possibly need to become visible in the tax returns or in the assessments of the Swiss tax authorities, and the relevant documents could be requested from France.
Without regular taxation in Lausanne, however, it is very likely that Soledad will eventually lose the French tax status, because according to the new agreement the Swiss tax authorities would then not be able to defend her.
9. For safety reasons the trusts for all three heirs should be split into two trusts each. Each trust will be held as a separate bank. Such separation for safety reasons was already used while Olga Martin-Montis was still alive (part OMM and part ANS). The proceeds from one trust would flow to the SKA in Lausanne. The proceeds from the other trust would flow into an Anstalt with the characteristics of a foundation. It is also conceivable that the trust be changed into a foundation which would be managed according to the rules of an English Trust."
Mr Taube submits in the context of the note as a whole including the concern about transparency for the purposes of taxation that the suggestion that the trusts be changed into a foundation was with a view to rendering them opaque for tax purposes.
- A memorandum of the previous day, 27 October 1983, headed "OMM/Taxes" sets out in some detail amongst other things, the means by which the assets of Newin Establishment might be replenished, the interests of Trust Andrea, Trust Antonio and the OMM having been bought out. Thereafter, by a resolution of Newin of 31 December 1983, 25% of the value of the assets of Newin being $13.106m was distributed, 21% to Soledad, 2.25% to Trust Isidro, 1% to Trust Soledad and 0.75% to Trust Forester.
- On the same day, the Board of management of Newin resolved "to hold the shares" in F&H "for account and risk of" 1,067 shares for Trust Isidro, 533 shares for Trust Soledad and 400 shares for Trust Forester (the "1983 Resolution"). Thereafter, in the internal records in relation to Trusts Forester, Isidro and Soledad as at 31 December 1983 an entry "Participation in Newin" appears and reference is made to the relevant percentage attributable to Isidro, Soledad and Forester respectively which is the same as that which appears in Article 2 of the 1984 byelaws.
- On 18 May 1984 the Founder's Rights were exercised by Interhold in order to create new byelaws for Newin Establishment. They were in the following form:
"Under the terms of the Articles 5, 7 and 12 of the Articles of Association of ESTABLISHMENT NEWIN, Vaduz, the holder of the founder rights of ESTABLISHMENT NEWIN, the company INTERHOLD AG . . . stipulates the following Additional Articles of Association:
The beneficiaries of ESTABLISHMENT NEWIN are the legal entities/persons mentioned in the following articles in accordance with the regulations stipulated in the following articles.
First of all the total assets of the Establishment are to be divided into three parts as follows:
Part A corresponding to 53 1/3% (fifty-three and a third per cent) of the total assets of ESTABLISHMENT NEWIN
Part B corresponding to 26 2/3% (twenty-six and two thirds per cent) of the total assets of ESTABLISHMENT NEWIN
Part C corresponding to 20% (twenty per cent) of the total assets of ESTABLISHMENT NEWIN
A Part D is planned for the allocation of shares coming from Parts A, B and C mentioned above.
All the fruits which Part A (53 1/3% of the assets of the Establishment) produces revert entirely and during his lifetime to Mr Isidro Martin-Montis, Lausanne, and after his death to Mrs Soledad Cabeza de Vaca, Marquise of Moratalla, Lausanne, during her lifetime. These fruits cannot and must not be pledged or be withdrawn through a declaration of bankruptcy. After the deaths of Mr Isidro Martin-Montis and Mrs Soledad Cabeza de Vaca, Marchioness of Moratella, this Part A, with regard to the assets of the Establishment and the fruits which it produces is to be distributed as follows: three quarters to Part C and one quarter to Part D.
All the fruits of Part B (26 2/3% of the assets of the Establishment) produces revert entirely and during her lifetime to Mrs Soledad Cabeza de Vaca, Marquise of Moratalla, Lausanne, and after her death to Mr Isidro Martin-Montis, Lausanne, during his lifetime. These fruits cannot and must not be pledged nor withdrawn through a declaration of bankruptcy. After the death of Mrs Soledad Cabeza de Vaca, Marchioness of Moratalla, and Mr Isidro Martin-Montis, this Part B, with regard to the assets of the Establishment and the fruits which it produces, must be distributed as follows: three quarters to Part C and one quarter to Part D.
Of Part C (initially 20% of the assets of the Establishment) Mr Forester Maurice Labrouche, Lausanne, will receive until he has reached the age of 40 the portion of the fruits that the Executive Board of ESTABLISHMENT NEWIN considers necessary for him to have an adequate standard of living, but not luxurious. As soon as he reaches the age of 40, all of Part C, with regard to the assets of the Establishment and the fruits which it produces, is to be distributed to Mr Forester Maurice Labrouche as mentioned above.
If Mr Forester Maurice Labrouche dies before reaching the age of 40, part C will pass to his descendants, by stock and in equal shares, as soon as they reach the age of 25. Until they have reached the age of 25 the Executive Board of ESTABLISHMENT NEWIN is required to use the fruits coming from the shares of each minor beneficiary to ensure a good education and an adequate standard of living for him.
If Mr Forester Maurice Labrouche dies, without leaving descendants, all of Part C will revert to Part D.
Part D will be divided into a Part DX of a quarter of Part D, a Part DY of a quarter of Part D and a Part DZ of half of Part D.
Of Part DX Mrs Andrea Portago, New York, will receive until she has reached the age of 40 the portion of the fruits that the Executive Board of ESTABLISHMENT NEWIN considers necessary for her to have an adequate standard of living, but not luxurious. As soon as she reaches the age of 40, all Part DX, with regard to the assets of the Establishment and the fruits which it produces, is to be distributed to Mrs Andrea Portago as mentioned above.
If Mrs Andrea Portago dies before reaching the age of 40, Part DX will pass to her descendants, by stock and in equal shares, as soon as they reach the age of 25. Until they have reached the age of 25 the Executive Board of ESTABLISHMENT NEWIN is required to use the fruits deriving from the shares of each minor beneficiary to ensure a good education and an adequate standard of living from him.
If Mrs Andrea Portago dies, without leaving descendants, all Part DX will revert to Part DY. If there should be no beneficiaries of Part DY, Part DX will revert to Part DZ.
Of Part DY Mr Anthony Portago, Espanola, will receive until he has reached the age of 40 the portion of the fruits that the Executive Board of ESTABLISHMENT NEWIN considers necessary for him to have an adequate standard of living, but not luxurious. As soon as he reaches the age of 40, all Part DY, with regard to the assets of the Establishment and the fruits which it produces, is to be distributed to Mr Anthony Portago as mentioned above.
If Mr Anthony Portago dies before reaching the age of 40, Part DY will pass to his descendants, by stock and in equal shares, as soon as they reach the age of 25. Until they have reached the age of 25 the Executive Board of ESTABLISHMENT NEWIN is required to use the fruits deriving from the shares of each minor beneficiary to ensure a good education and an adequate standard of living for him.
If Mr Anthony Portago dies before reaching the age of 40, without leaving descendants, all Part DY will revert to Part DX. If there should be no beneficiaries of Part DX, Part DY will revert to Part DZ.
Part DZ, with regard to the assets of the Establishment and the fruits which it produces, will revert to the Foundation Olga Martin/Montis in Vaduz.
Zurich, May 18th, 1984
The holder of the founder rights: INTERHOLD AG"
Internal memoranda 1988-1989
- Thereafter, a file note produced by Hugo and dated 23 June 1988 records a meeting with Soledad in London. Amongst other things, it states: "increase of "revenue". Therefore switch from low yield shares into bonds. Lower capital gains, higher yields." Shortly afterwards on 1 November 1988, Hugo and Mr Ospelt in their capacity as the board of directors of Newin made a resolution to distribute $288,000, 53 1/3 % to Trust Isidro, 26 2/3 % to Trust Soledad and 20% to Trust Forester. In this regard, Mr Taube points out that this is the first distribution from Newin since 1984 and it comes shortly after Soledad has requested more funds. He also submits that if Newin were in fact freestanding and were not controlled by the holder of the Founder's Rights, the distributions should have been described as an exercise of discretion by the Newin Board and have been directed straight to the beneficiaries themselves. Instead of which dividends upon F&H shares were paid straight to the respective trust accounts which Mr Taube submits is consistent with the shares in F&H being held directly for the will trusts.
- Mr Taube also submits that this is consistent with a lengthy memorandum dated 25 October 1988 which contained an overview of Martin Montis affairs prepared by Hugo for the benefit of Markus who joined NKF in 1989. The memorandum was headed in Markus's handwriting "the Bible". It records amongst other things:
Olga Martin-Montis, Spanish and English passport, was domiciled in Lausanne, died in Lausanne on 8 February 1980.
Wife of Isidro Martin-Montis, Spanish passport, domiciled in Lausanne.
According to Olga's last will new European trusts were created, which are subject to English trust law.
The trustees are Isidro, Soledad and HAF.
The executor of Olga's estate is HAF, successor Markus Frey.
The adviser on matters of English trust law is Derek Taylor . . .
According to English trust law, the beneficiaries are only entitled to receive dividends and interest (but not capital gains). That is why we also hold the Fi (Finanzierungs- und Handels AG in Vaduz), the Soltega AG in Zug, and the Newin-Anstalt, Vaduz, which was originally founded as a managing company. These companies can make capital gains and subsequently distribute them as dividends into the trusts.
The trustee fees are paid according to the arrangement originally made for the Newin Anstalt, which is based on the principles of Illinois trust law as stated by Frank Hubachek, senior. These principles were documented in a protocol by the Board of Directors of Newin Anstalt dated 19 January 1961. This arrangement was maintained after Olga's death.
Isidro has a paternal position, which is recognised by the other family members. They all listen to him. . . Isidro is a very reasonable and good client.
Soledad (Sol) is clever, with a keen intellectual grasp, can be very generous in large matters and small-minded in small matters. She spends a lot of money on horse breeding and on her friends. From Olga she received assets "outright" (ie. at her free disposal), which she is fast using up. Then things will become more difficult, because she will only receive trust income. The authoritative source is Olga's last will, which clearly prescribes that only income is to be distributed. Currently $100,000.00 are transferred to her by SKA Zurich every month, and every now and then there are also substantial additional transfers. She spends a lot of time at the stud farm in Bayonne and was once involved in French tax proceedings, which I won with the assistance of Monsieur Roy (Paris). The French tax authorities tried to declare her domiciled in France. She travels a lot, because she is a Spanish bridge champion. . .
Forester Labrouche is a pleasant, passive bachelor. . . He receives almost the entire trust income. Perhaps he also puts some money aside. He is easy and pleasant to engage with.
All legal and administrative matters for the family are taken care of by me. Although according to the trustee rules I could charge additional legal fees for legal endeavours in the proper sense (e.g. tax proceedings), I have never done so
The entire assets are deposited with SKA, Zurich, and with Clariden Bank, Zurich, and are invested according to my instructions
Until now I have been fairly successful in so far as the trust assets have substantially increased since 1980 (death of Olga), even in the crash year of 1987. I have always followed a cautious, rather conservative policy. Since the family lives in Europe, I have always invested part of the income in Switzerland, the FRG, and the Netherlands. Also in terms of currencies, I have always distributed into dollars, Swiss franc, and florin. The accounts are kept in dollar.
The distributions from the trusts go into the family foundation Argna (Isidro), Rosca (Sol), and Porschar (Forester) as well as the account "Maisons". The transfers into the personal accounts with Credit Suisse, Lausanne, are made from the foundations, with Interhold as an intermediary.
Mr Taube points out that otherwise, the memorandum makes no reference at all to Newin or to F&H and asks the court to draw the inference that the fortune was seen as being held in the will trusts, the specifically named foundations, such as the OMM Foundation which was intended for emergencies and the US trusts.
- In a further briefing document headed "Briefing by Dad" and dated 6 January 1989, Markus recorded that Soledad had a very costly lifestyle. It went on to deal with the tax position of each of the beneficiaries including Soledad in relation to whom further concerns were expressed in relation to her position or potential position with the French tax authorities. Having noted that each of the beneficiaries benefit from the "forfait" in Switzerland and that they pay full tax on their entire income from Swiss sources as well as income for which a double taxation agreement is used, the note went on:
"As a "side effect" this approach is the consequence that today the full extent of assets is no longer declared (particularly the US trusts), which could have a positive impact in the future. One should probably rather work towards having the assets "disappear". This is because already now arrangements need to be made in view of what would need to be done in case of a negative outcome of the upcoming tax affair for us.
Dad has always clearly expressed to all involved that neither he nor any other members of his office would knowingly give any false declarations. However, in the light of the upcoming problems the question arises whether Sol (for example as an "ignorant lay person") might be prepared to make incorrect declarations, although we do not want to incite her to do so (or only with extreme caution)."
- In this regard, Mr Taube emphasises the repeated concerns about the French tax authorities in relation to Soledad, the statement about working towards the assets disappearing and the fact that there is no reference in the note to Newin as a separate entity. He says once again that this is consistent with Newin being viewed as part of the Will Trusts and only separate as a matter of form. In cross examination, Markus said that the reference to assets "disappearing" was more a desire that they did not attract attention. He also added with some force that his father would not have been involved in submitting false declarations to the tax authorities but that his concern had been that they would look through the trusts and Newin. Markus also added that his father considered himself to be under a duty to Olga to preserve and safeguard her vast wealth for her children and grandchildren as a result of a combination of morality, instructions, mandates and wishes and that the duty continued after her death.
The FML Settlement
- To return to the chronology of events, in August 1989, Forester's interest in Trust Forester to which he was to become absolutely entitled on his 40th birthday on 28 December 1991, was re-settled by him on the terms of the FML Settlement. In fact, discussions about the re-settlement began in or about March 1987. In a letter from Hugo to Mr Taylor of 19 March 1987 Hugo mentions having met recently with Soledad, Isidro, Forester and Mr Hubachek in Gstaad when "on principle it was decided that the Trusts in favour of Forester Labrouche . . . should be extended beyond the age of 40 years." Hugo went on:
"... Forester is now about 37 years old and he is not interested in managing his fortune. He would be willing to have the Trusts continue as long as he lives. He would after attaining the age of 40 years be entitled to the full revenue
On 15 July 1987, Hugo had written to Forester in English referring to "our meeting in Gstaad where we discussed the possible prolongation of the European Trust in your favour" and enclosing a draft settlement. He went on to explain the effect of the draft in the following terms:
"Through this document you would agree to the continuation of the present Trust during your life and after your death to one quarter to your possible spouse and three quarters to your children, if any. If you should die without spouse and without children, the Trust funds would go to your mother or, after her death, to persons whom you might through deed revocable or irrevocable or by will appoint."
Hugo's assessment is also consistent with the evidence of Markus who reiterated in cross examination that Forester did not care about Trust Forester, FML or Part C, was not interested in having capital directly and did not want to manage his own funds.
- In his witness statement, Forester says that he was not present at any of the meetings concerning the proposed re-settlement and was not party to any decisions taken in relation to the proposed re-settlement. However, in cross examination he accepted that although he did not remember the meeting in Gstaad to which Hugo had referred, everything was possible and that he might have attended and been willing to deal with Trust Forester in the way Hugo had explained. He was unable to say whether Hugo's assessment that he was unwilling to manage his fortune had been true at the time. It seems to me that in the light of Forester's acceptance that he may have attended the meeting and the content of Hugo's correspondence, it is more likely than not that he was present at the meeting in Gstaad.
- On 11 May 1987 Mr Taylor had met with Hugo at the Dorchester Hotel in London in order to discuss the matter and his file note records amongst other things that Forester's share of the estate was worth between $2 and 3 million and $10 15m if his reversionary interests were taken into account. The schedules produced at the time, revealed however, that his interests totalled around US$44m. The lower values were passed on to a Mr Andrew Dixon who was appointed to provide Forester with independent advice in relation to the proposed re-settlement.
- On or around 7 August 1989 Forester travelled to London and was met at the airport by Hugo who took him to a rented room in a hotel not far away. In his witness statement, Forester states that he knew that the meeting concerned what should happen when he turned 40 and with him paying much less tax. He states that he had no objection to doing what was asked of him but that he now thinks that his grandfather, Isidro cannot have been aware of the effects of the FML Settlement which was executed that day. In cross examination, Forester was shown recital [D] to the FML Settlement which provides that the Settlor, namely Forester, "wishes to make this Settlement after careful explanation of the proposals for the Settlement and its operation in restricting his power to dispose of his own property." In response, he said that he did not remember too well, that he knew he wanted to execute the FML Settlement and had been told that it was for tax reasons which he did not understand but that he had not realised that the effect of the FML Settlement was to "block" his entitlement to capital. However, he also accepted that he was happy for his assets to be managed for him, that he trusted Isidro and that it was not until after Isidro's death by which time he had attained 40 that he wanted to have control. He also stated nevertheless, that Isidro was not aware that the effect of the FML Settlement would be to "block" Forester from capital. However, when it was pointed out that Isidro was a trustee of the FML Settlement, he stated that Isidro would not have executed the settlement if he had not understood it.
- In any event, Forester says that he was at the meeting for less than half an hour, signed what he was asked to sign and was content to do so because Hugo had said that as a result he would pay less tax but that he did not have a private conversation with anyone on that occasion and denies having been independently advised by Andrew Dixon. He goes on to add that if Andrew Dixon had told him that he did not have to make the FML Settlement and if he had not done so he would have been able to take control of his assets at 40 he would have asked questions because he was very interested in controlling his own assets and that he would not have wanted Soledad to be his trustee.
- Andrew Dixon, an English solicitor, specialising in English trust law, made a statement dated 15 November 2001 in which he explained his involvement in the execution of the FML Settlement. I should add that he did not give evidence at the trial and therefore, was not subject to cross examination. Amongst other things, in his statement he records that he explained the draft settlement line by line and clause by clause, pausing periodically to ensure that Forester understood it fully and that it conformed with and carried out his wishes. The statement goes on at paragraphs 6.6 and 6.7 as follows:
"6.6 I remember explaining in particular and more than once to Forester that:-
6.6.1 he was under no obligation whatsoever to enter into the Settlement;
6.6.2 if he did not enter into it he would become entitled to substantial assets personally when he reached the age of forty;
6.6.3 if he made the Settlement he would be entrusting his inheritance under the Will to trustees for as long as they deemed fit;
6.6.4 although the Settlement included power for the trustees to advance capital to him, he had no control over the trustees at all; and
6.6.5 that the power of appointing new trustees was vested in Hugo Frey or his personal representatives so that he was continuing to entrust Hugo Frey with the governance and conduct of his financial affairs arising from under the Will.
6.7 My recollections of Forester's conduct and reaction are:
6.7.1 his English was excellent;
6.7.2 I was impressed how he appeared fully to absorb and understand what was going on and, in particular, the complex provisions of Olga's Will;
6.7.3 he appeared surprised at all the apparent formalities that were being undertaken for his protection. "
The statement goes on to record Forester taking part in a discussion about the possible need to amend clause 3(2) of the draft Settlement to take account of recent changes in the provision for surviving spouses under Swiss law and at 6.13 records that Mr Taylor and Hugo offered to leave the room to enable Mr Dixon and Forester to talk privately but that Forester had stated that it was not necessary and that he did not want to prolong the meeting unnecessarily.
- Despite having stated in his witness statement that even if Mr Dixon was at the meeting, which he could not recall, Mr Dixon did not explain the settlement and advise, in cross examination, Forester said that he may have been advised but he did not understand properly, that it was possible that Mr Dixon went through the draft line by line but that he did not remember well and that he thought it was all about tax. He accepted however, that the matters set out at 6.6.1 and 6.6.2 were simple to understand although he maintained that he did not understand them at the time. Mr Dixon also stated that Forester's English was very good, something which Forester denied and added that his English was "middling". He accepted nevertheless that he had received the letter from Hugo of 15 July 1987 which contained details of the proposed new settlement which he understood. Forester also accepted that it was possible that the statement contained Mr Dixon's honest recollection and that despite mentioning that Hugo and Markus must have asked Mr Dixon to make the statement, he was not able to say that he had done so in order to favour the Drs Frey.
Forester and financial matters
- As I have already mentioned, Isidro died on 26 June 1991. He left $5m to Forester. The legacy is referred to in a letter dated 8 August 1991, from Hugo to Forester which is written in English in which Hugo suggests that they meet. In his witness statement Forester says that he did not receive the monies and only discovered in 1998 that it had been paid into the Porschar Foundation. He adds that he did not know why the Porschar Foundation had been set up. In fact, that Foundation had been established in 1984, the total assets and income of which were Forester's during his lifetime, the Articles of Association having been signed and each page initialled by Forester himself. In cross examination he accepted that he knew that it existed but maintained that he was not sure that it was a vehicle to look after his money. He also accepted that by Article 7 he had power to alter the terms of the Foundation and that when it was set up he had known that it was solely for his benefit. In addition, he accepted that he did not arrange a meeting with Hugo and Markus. However, he denied having received either trust accounts or the accounts of Porschar on an annual basis and stated that he may have been shown them on two or three occasions at NKF offices in Zurich, signed them and handed them back.
- It is Forester's evidence that in relation to all financial matters, he was kept in the dark and was dissuaded from asking questions. He accepted that although he lived with his grandparents and with Isidro until his death in 1991, he did not discuss financial affairs with them. He says that he would have liked to have asked more questions but was afraid to do so. In cross examination, however, he was unable to give any example of when he might have wanted to do so or of any particular occasion upon which Hugo stopped him asking questions as he said he had. He accepted that they didn't really stop him from asking questions, but that he could see that Hugo did not want to discuss matters with him and he did not ask. He also accepted that he was not afraid of Markus but that he did not know whom to contact. He also accepted that he had asked many questions since 1997 when he first got to know his wife.
- In addition, he also accepted that although he had stated in his witness statement that his monthly allowance should have been much higher than it was, that it had been Olga's wish that the Trustees should decide on the level of his income until he was 40 and that accordingly he had no basis upon which to complain. He added that during the period from Olga's death until that of Isidro, a period of over eleven years, his grandfather had looked after everything and that he had been happy to leave it to him because his grandfather protected him. He also accepted that he was living a very pleasant life at the time. Contrary to the evidence of Markus, Forester denies that trust accounts were left at the Villa Carlotta each year.
- I am unable to accept Forester's evidence. He was not able to give any example of intimidating behaviour or unpleasantness towards him on the part of Hugo, nor any specific occasion upon which he had been stopped from asking the questions he wanted to put. In this regard, I also take account of the fact in correspondence, for example on 23 October 1980, Hugo had stated that he was available to provide further information. Further, I found Forester's evidence in relation to the execution of the FML Settlement and his knowledge of trust matters to be unsatisfactory. Despite the fact that Mr Dixon was not available for cross examination and his statement was made for purposes other than this trial, it seems to me that on the balance of probabilities, it is most unlikely that a solicitor would give a false account of his involvement in such an important meeting and would do so in such detail. In fact, in cross examination, Forester did not suggest that Mr Dixon's account was untrue.
- I also found Forester's evidence in relation to Porschar to be very unsatisfactory. In the light of the fact that he initialled each page of the document, I am unable to accept that he was wholly unaware of its terms including the fact that the assets were his during his lifetime and that he was able to amend them at any time. In addition, given Forester's evidence that he was happy to leave matters to Isidro who protected his interests, I am unable to accept his evidence that despite the fact that Isidro was a trustee of the FML Settlement and was present at the meeting in Gstaad, he could not have understood the effect of the settlement.
- In this regard, I also take account of the fact that Forester also accepted that he had commenced proceedings in Zurich on the basis that the true will of Isidro had been in his favour but had been suppressed. The claim was made on the basis of a statement in which it was stated that Isidro had left the Villa Carlotta, the ski lodge in Gstaad and part of the furnishings of the Villa to Forester. In fact, Forester accepted that the maker of the statement had been successfully prosecuted for perjury. Despite the conviction he continued with the claim which was dismissed by the Zurich court. The court also found that Forester had violated the principle of good faith and acted frivolously in filing a complaint regarding attempted instigation to false testimony. He also initiated criminal proceedings against Markus and Soledad which were dismissed.
1990 and events following the death of Isidro
- By March 1990, Hugo had had to write to Soledad to tell her that the monies which she inherited directly from her mother would soon be entirely depleted and that she was using all the revenue for both the European and the US trusts as well. He pointed out that she was only entitled to "revenue" under the trusts, suggested she sold some investments and stated that he had "started to shift the assets of [your] Trust from shares into bonds, thus obtaining a higher yield." In fact, in the period from 1989 to 1991 loans were made from both Trust Soledad and Trust Isidro to Soledad and a file note of 29 August 1991 records that the debts to Trust Isidro and Trust Soledad were to be repaid as quickly as possible.
- After the death of Isidro on 26 June 1991, Markus was appointed as a trustee of the trusts contained in Olga's Will and of the FML Settlement, in place of Isidro. Thereafter, on 23 October 1991, he was appointed to the Board of F&H. Shortly, thereafter, on 28 December 1991, Forester attained the age of 40. On 10 June 1992 Markus became a member of the board of Interhold and on 17 September 1992 he became a member of the board of Newin. In cross examination, Markus accepted that at around this time he must have looked at the statutes and byelaws of Newin which he regarded as much like a foundation, despite the fact that it was still an establishment at that stage. He said that he did not think about the Founder's Rights because it was obvious that the Board had control.
- The trust accounts for Trust Isidro both for the year ended 31 December 1990 and 1991 reveal distributions of dividends from F&H to the Trust bank accounts. At the same time, the accounts of Newin for the year ended 31 December 1991 do not record dividends from F&H as dividends in the hands of Newin. Mr Taube submits that if Newin were considered to be the beneficial owner of the shares, the dividends would have been recorded as such in Newin's accounts and that the failure to do so is consistent with Newin holding the shares for the respective trusts, subject to the 1983 Resolution.
Plum Bay House
- On 24 April 1992, Hugo and Soledad as trustees of Trust Isidro resolved to invest capital in acquiring the shares in a French company, SCI Soltin, which in turn purchased a property in the French West Indies, named Plum Bay House, in May of that year. In her witness statement, Soledad states that she used the house on a few occasions but that it was rented out for a long period. It was sold by SCI Soltin in July 2001 at less than its purchase price, the net proceeds of which were equivalent to US $791,578 plus a small retention.
- To return to the chronology of relevant events, by 21 September 1994, a file note reveals that Hugo and Markus were intending to share the fees in relation to the "OMM Trusts, Stiftung, Fi etc" equally. Thereafter, on 16 December 1994, Soledad tendered her written resignation as a trustee of Olga's Will Trusts. It is not in dispute that the resignation was legally ineffective but it is equally not in dispute that all concerned believed it to have been effective at the time. In cross examination, Markus accepted that prior to Isidro's death in 1991 both he and Soledad took part in decision making as trustees but had relied upon Hugo and latterly Soledad relied upon Markus as professionals until Soledad's purported resignation in 1994. Thereafter, she was merely consulted.
The Newin Conversion
- On 10 November 1995, by a resolution of Interhold as holder of the Founder's Rights, the Newin Establishment was converted into a Foundation, the Foundation Council of which was formed of Hugo, Markus and Georg Kieber. The relevant statutes of the Foundation were in the following form:
The foundation has the purpose of making distributions to cover the costs of upbringing, education, set up and/or support and assistance of members of certain families in accordance with additional articles of association to be issued in future.
The foundation is authorised to conclude all legal transactions which promote the achievement of its purpose. The operation of a commercial operation, however, is not permissible.
Subject to the external constraints in accordance with article 3 and 4, imposed by the foundation purpose, the use of the foundation will be determined by the foundation council at its free discretion from the returns of the foundation property or from the foundation property itself for the beneficiaries indicated in the additional articles of association, such that the time, place, nature and extent of the ground will be at the exclusive and free discretion of the foundation council. The rights of a foundation donee (beneficiary) in relation to the foundation and the exercise of these rights or the amounts allocated by the foundation to a foundation beneficiary, but not yet assigned, are free and may not be withdrawn from the beneficiaries either through execution, bankruptcy of probate proceedings.
The benefit conferred by the foundation is absolutely specific to the person and may not without the unanimous agreement of the foundation council be sold, pledged or assigned.
V. Administration of the foundation
The supreme organ of the foundation is a foundation council consisting of at least two (2) members.
The foundation council has the right to add its members by unanimous decision and to appoint new members.
In the event of the prevention of the nonconclusion of an election the foundation council will be determined by the senior partner of the law firm Niederer Kraft & Frey, Bahnhofstrasse 13, CH-8001 Zurich. The members of the foundation council are entitled to sign on the behalf of the foundation. The right of signature is stipulated for the first time by the founder of the establishment document.
Each member of the foundation council, if he becomes unable to take action, dies or leaves the foundation council, or for other reasons, may appoint a successor. The appointment of a successor requires the unanimous agreement of the foundation council.
The foundation council is the supreme organ of the foundation. It administers the foundation independently and represents it with regard to the beneficiaries and third parties. Subject to the fourth paragraph of article 6 the foundation council will arrange for the rights of signature. The foundation council exercises all further powers granted to it by the articles of association and the law and takes all the measures required for the achievement of the foundation purpose and for the administration and preservation of the foundation assets on sound business principles and at its free discretion.
The foundation council is authorised to make changes to the articles of association if the character of a genuine foundation and the principles set out in the articles of association and any additional articles of association regarding the foundation purpose are thereby changed.
The foundation council can transfer the exercise of powers to third parties and appoint authorised persons.
In the context of the foundation purpose and any additional articles of association the foundation council decides completely freely at its exclusive and free discretion as to the use of the revenues of the foundation property and the foundation property itself.
The persons qualifying as beneficiaries have no ownership, disposal, intervention or auditing rights to the foundation property or to its revenues, either directly or indirectly, nor concerning the administration or the use of the foundation property and its revenues nor the payment of contributions or maintenance.
The beneficiaries do not have any actionable entitlements against the foundation and have no legal claim to the dissolution of the foundation. The right is reserved for the beneficiaries to bring an action against the members of the foundation council for breach of obligation or failure to comply with the articles of association or additional articles of association.
A condition for the distribution of contributions or maintenance to a beneficiary is that such payments not subject to confiscation or blocking measures.
If a beneficiary is in an emergency situation the foundation council may, at its free discretion, make a distribution despite the above restriction.
All payments to beneficiaries are excluded from any ownership or entitlement community and from legal or contractual, conjugal administrative or representation rights, and the distributions and payments made to or in favour of the beneficiary concerned are absolutely specific to the person.
- Markus' evidence was that at the time Founder's Rights were considered to have an "economic" and an "administrative" component, that when Newin Establishment was set up in the 1950s they were considered administrative but that the position had become unclear by the mid 1990s, each case turning on its own facts. There was also an increase in compliance issues at the time and it was considered that a shadow hung over such structures. As a result, he says that the establishment fell out of favour as a vehicle for private wealth planning and the foundation became increasingly popular. He says that many establishments were reviewed with a view to closing them down or converting them, that he had many on his desk and that the conversions took place in order to make them easier to explain to third parties. He says that his father asked him to carry out the conversion shortly before he retired as partner of NKF in 1995 and that he used a standard in house precedent for the statutes which had been developed over time with input from Liechtenstein lawyers. He said that he did not give the Founder's Rights a thought and that either his father had discussed the matter with Olga or it was in her best interests. He added that there was no effect upon the beneficial interests, the byelaws remaining the same and that thereafter, they were fixed. After Hugo retired as a partner of NKF, he continued as a consultant. Prior to his retirement he received fees payable under the 1961 Fee Agreement which it is alleged had been calculated by reference to capital gains as yet unrealised. It is not in dispute that Hugo regarded Markus as his successor and that Markus stepped into his father's shoes as he wound down his involvement in his practice.
- Although Soledad states in her witness statement that the conversion was explained to her and that she was told that it would make no difference to her and that she believes that Forester was also informed, Markus stated in cross examination that he had no recollection of having done so but that his father may have done.
ZT and Retrocessions
- In March 1996, ZT was formed. Markus was the President and Hugo was a member of the Board and of which until 2000, Hugo and or Markus held 99.6% of the shares. Markus explained that asset management had traditionally been carried out by the attorney instructed on behalf of a family. However, both asset management and the attendant regulatory issues had become more complicated. As a result, ZT was set up in order to provide a more sophisticated service and to take advantage of the benefit of pooling assets in order to increase negotiating power with the custodian banks and reduce their fees for the benefit of clients. All clients of ZT had similar agreements. Each of Trust Isidro, Trust Soledad and Trust Forester entered into a management agreement with ZT for the purposes of investment management in the context of which it is said that "retrocessions" were paid.
- ZT had an agreement with Clariden Bank of which Markus was a director and one with Credit Suisse in Zurich. The first agreement was executed between ZT and Clariden Bank in November 1996 and was subsequently replaced by similar documents with both Clariden Bank and Credit Suisse in early 2000. Markus stated in cross examination that it was the banks which put forward the agreements. The preamble to the 1996 agreement with Clariden Bank stated:
"ZT Zurich Trust AG has already introduced various customers to Clariden Bank and is willing to introduce further customers in the future. The Clariden Bank declares itself willing to grant the ZT Zurich Trust AG a pro-rated share for the relationships it holds with existing customers and for new introductions in the future."
Further, at Article 1 a 50% reduction on all commissions for all account and deposit relationships in relation to present and future customers was agreed and by Article 2 it was agreed that ZT would receive a pro rated share of 20% of all management and administration fees debited in relation to customers and future customers directly or indirectly introduced by ZT. The further agreement with Clariden executed in early 2000 contained a preamble in much the same form. It went on:
"In light of this, the parties now agree as follows:
1. CB undertakes to compensate ZT for successful agency work if a business relationship is established between CB and the client introduced by ZT. The nature of the compensation is described in Paragraph 15 below.
CB shall grant to clients already arranged by ZT (cf. Annex 1) and newly arranged clients a 30% or 50% reduction in the commission charged by CB in accordance with its currently valid scale; this reduction arrangement shall also apply to the margins of CB for currency and derivatives transactions. No reduction shall be allowed on any commission, fees, charges etc. of third-party banks and brokers; such expenses shall be passed on in full to the client.
ZT shall be entitled to a proportional share of:
- 30% in the event of a reduction for the client of 30% of the applicable scale of charges of CB;
- 20% in the event of a reduction for the client of 50% of the applicable scale of charges of CB,
based on the transaction commission, management fees or administration charges earned in respect of the clients introduced by ZT, calculated according to the CB client profitability, with the exception of CB investment funds, for which the scale for agents shall be applied. Said share shall be based on the average volumes at the end of each quarter as follows:
- for money market funds 50BP
Subject to the application of standard rates, CB shall grant to ZT a proportional share of 1/8% points on interest margins for loans.
The proportional shares shall be calculated at the end of December and June of each calendar year and shall be credited to ZT within 60 days of the relevant year-end or the end of June."
The agreement reached with Credit Suisse in early 2000 is in a slightly different form. ZT was defined as "Independent Asset Manager" ("IAM") and went on:
"The IAM acts as a professional manager of the assets and bank balances of its clients; it is a member of the following self-regulatory organisations as defined by the Federal Anti-Money Laundering Act:
The IAM and the Bank intend jointly to expand their businesses.
In the course of this cooperation, the Bank shall offer to the IAM and the joint clients all the services which it offers in its capacity as a securities deposit bank, as well as those services which it provides additionally in accordance with separate agreements.
The details of the cooperation between the Bank and the IAM are set forth in the present agreement, which establishes the reciprocal rights and obligations.
Article 2 Delegated Verification of Client Identity
The Bank authorises the IAM to undertake to verify the identity of its contractual counterparts on behalf of the Bank.
. . .
The IAM undertakes to carry out the verification of the identity of the clients . . . .
Article 4 Obligations of the IAM
. . .
The IAM undertakes in particular to establish the origin of the assets managed by the IAM and deposited with the Bank. . . .
Article 5 Financial Targets / Remuneration
The existing volume of business and the business development plan presented by the IAM form the basis for calculation of the remuneration to be received by the IAM. If the agreed targets are not met, the remuneration shall be adjusted after prior consultation.
The retrocession rates, the basis for calculation of the retrocession and the payment dates are set forth in Annex 1. ..."
In cross examination, Markus stated that ZT carried out administrative tasks for the banks in question and that ZT took half of the fees previously paid to Hugo and Markus, Markus being conscious that the new arrangement should not lead to a greater fee burden for the client. Markus also stated that he was conscious that there was no power to delegate and had control over the asset managers. He also accepted that ZT as agent had obtained "retrocessions" from the banks which he viewed as usual practice in Switzerland. As soon as he became aware that under English law, a trustee should account for such benefits, he immediately did so, in the form of providing details of the sums received.
Forester had become engaged to his wife Stephanie in August 1997 and it was from that point that enquiries were made about his wealth, the way in which it was held and the way in which it had been handled over the years. In his witness statement, Forester says that Markus and Soledad tried to dissuade him from marrying Stephanie and that they were upset by the questions which he and Stephanie had begun to ask. However, in cross examination he accepted that this was not completely true and that the pressure had related to separation of property rather than the marriage per se.
By a letter dated 26 June 1998 from Forester's newly appointed lawyers, Hugo and Markus were informed that Marc Bonnant was to replace them as trustees in relation to the Porschar Foundation, Fola Stiftung, the FML Settlement and Trust Forester and that Forester wanted Mr Bonnant to represent him in the Newin Foundation. As a result, Dr Meister replaced Hugo and Soledad in Trusts Isidro and Trust Soledad in October 1998, Hugo retired from the FML Settlement on 17 December 1998, having already retired from the board of Newin Foundation and F&H on 8 December and 2 November of that year respectively.
Further, by a deed of appointment and retirement dated 20 October 1998 in relation to Olga's Will Trusts, Soledad's retirement as a trustee in December 1994 was confirmed, Hugo retired and both were expressly indemnified, Dr Meister was appointed and by clause 3, the basis of the trustees' remuneration was confirmed in the following manner:
"Confirmation of remuneration of trustees"
Without prejudice to the generality of clause 3(f) of the Will, the Continuing Trustee and the New Trustee confirm that their annual fees for acting as trustees of the Will will continue to be the same as those charged by the Retiring Trustees and the Continuing Trustee, namely the larger of the amounts resulting from four percent of all gross annual income including capital gains (Method A) or one-fifth of one percent of the average trust property under administration during the year for which the fees are due (Method B)."
In this regard, Mr Taube submits that the addition of such a clause is consistent with Hugo and Markus being aware of doubt as to the manner of their remuneration. He also points out that the trustees of Olga's will trust had no power to grant themselves remuneration other than that provided for under the Will.
Thereafter, by a deed of 5 February 1999, signed by Forester in the presence of his lawyer, Mr Frederic Marti, Forester released and discharged Hugo, Markus, Soleded and Dr Meister and their respective estates from "all actions, proceedings, claims, demands or accounts whatsoever";
"1. For and account of the assets of the Forester Trust or the administration of them or the conversion sale application accumulation or investment of them or any of them;
2. for or in respect of the rents profits income or accumulations of income of the assets of the Forester Trust or any of them; and
3. for or in respect of any matter or thing at any time done omitted or neglected by the Former Trustees in relation to any of the above matters."
(the "Deed of Release")
"Forester Trust" being defined for this purpose as the settlement made by Forester on 7 August 1989, (being the FML Settlement) and the Will of Olga (but limited to the Settlor's Share as defined in the Settlement). In cross examination, Forester said that he did not remember the Deed of Release well and did not understand it. Shortly thereafter, Hugo, Markus and Soledad retired as trustees in relation to the FML Settlement and were replaced by Marc Bonnant and Philippe Grumbach. Thereafter, on 3 March 1999, the entire assets of the FML Settlement were appointed to Forester.
Forester's lawyers then requested that the assets attributable to Part C of Newin Foundation be distributed to him and by a resolution of 7 September 1998 the Foundation Council comprising Hugo, Markus and Georg Keiber, resolved to distribute the entirety of Part C representing 20% of the net assets of Newin to Forester. It was also noted that he remained a contingent beneficiary in relation to parts A and B. $8.34m was distributed to him on 18 September 1999. In fact, during 1999, three distributions were made to Forester from Newin of $6,508,405.68, $315,860.66 and $231,242.68 respectively. On 21 December 1999, the Newin Foundation resolved to distribute $231,242.69 (described as accumulated income in relation to Parts A and B) to Soledad.
In this regard, Mr Taube submits that under article 6 of the 1984 Byelaws, Forester became absolutely entitled in relation to Part C on attaining 40. He says that the court should infer from the fact that between 1991 and the conversion of the Newin Establishment into a Foundation in 1995, there was no power to withhold the capital of Part C from Forester after he attained 40 but that nevertheless, there was a failure to distribute Part C to Forester on 28 December 1991 when he attained 40 or shortly thereafter, that his interest in Newin was viewed as an interest through Trust Forester and its derivative, the FML Settlement, under which he did not have an immediate right to income and capital. In this regard, Markus stated in cross examination that distributions from Newin were paid into the income accounts of the respective trusts because he and his father viewed them as being at the free disposal of the beneficiaries themselves.
By a letter of 20 April 1999 from Markus to Forester's lawyer, Maitre Bonnant, Markus set out details in relation to the manner in which fees had been calculated and retrocessions paid to ZT. Although the letter was headed "Olga Martin-Montis Foundation, Vaduz ("OMMF")" it was explained in the body of the letter that fees had been computed on the same basis in relation to all of the legal structures which had been chosen by Olga. The explanation in relation to ZT and retrocessions were in general terms.
In June 1999, advice had been sought from leading counsel in relation to the position of the Trustees. Amongst other things the question of whether fees should have been taken solely from income was considered and counsel advised that Soledad take independent advice. Having done so, her solicitors wrote to those acting on behalf of the trustees reserving their position in relation to whether some of the fees related to work done on behalf of individuals, whether it should all have been charged to income and whether it should have been charged pursuant to the 1961 Fee Agreement. Thereafter, from 2001, fees were attributed as to 50% to income and 50% to the capital account of the will trusts.
In December 1999, however, Forester commenced proceedings in Lausanne against Hugo and Markus in relation to the administration of Olga's estate and the will trusts. The action was struck out in 2000 having been commenced in a court without jurisdiction to hear the matter. It was at this stage, that Markus obtained his father's files in relation to the Martin Montis family from NKF's archives and also obtained what remained of Mr Taylor's papers relating to his involvement with Martin Montis family affairs.
Around this time in a letter dated 18 February 2000, the auditors, Curator commented that
In the audit report of 12 September 1983 (written in English) regarding the estate of Ms Olga Martin-Montis ("OMM") the Curator Auditing confirmed that as per 31 December 1982 the amount of USD 88,824,968.16 has been transferred to the beneficiaries in accordance with the last will of Ms OMM of 9 May 1974 and the related codicil, and that the remainder in the amount of USD 752,260.49 has not yet been distributed.
In principle, we also only retain working papers from 1989 onwards. With regards to the estate of Ms OMM, however, we have kept and archived a special dossier. On the basis of this dossier we found that until 31 December 1982 on the one hand USD 76,023,600.81 (USD 70, 860.013.50 + USD 5,163,587.31) were distributed in the form of securities and "cash", and that on the other hand the above-mentioned amount of USD 752,260.49 still remained undistributed until 31 December 1984, but was then also distributed, together with the net receipt of USD 168,385.93, which had taken place in the meantime, i.e. a total amount of USD 920,646.42. . . .
The difference of USD 12,049,106.86 (USD 88,824,986.16 . /. USD 76,023,600.81 ./. USD 752,260.49) represents the value Newin Establishment after the distribution of 8 February 1980, which formed the basis for the calculation of the shares of Trust Andrea, Trust Antonio and OMM-Stiftung as per 30 June 1981.
These three shares amount to a total of 5% of USD 12,049,106.86 = USD 602,455.35 plus interest in the amount of USD 79,808.60, in total USD 682,263.95 (see Attachment I), which were bought for Trust Andrea, Trust Antonio and OMM-Foundation and until 31 December 1982 declared as "Participation" (see Attachment II) by:
Trust Soledad USD 136,933.99 20%
Rubrik Soledad USD 136,933.98 20%
Trust Isidro USD 305,695.19 45%
Trust Forester USD 102,700.79 15%
Total USD 682,263.95 100%
The four Trusts/Rubrik above are beneficiaries of the remaining share in the assets of Newin Establishment in the amount of USD 11,446,651.51 (USD 12,049,106.86 ./. USD 602,455.35). This amount is therefore not a distribution.
Mr Taube submitted that this reflects the fact that the Newin assets were part of the Trusts. However, the accounts for Trust Soledad at the time, also produced by Curator do not include reference to the Founder's Rights or to assets of Newin. In cross examination, Markus stated that on occasion, Hugo used references to Trust Isidro or Soledad as shorthand for income for life.
The Newin Distributions
During 2000, distributions were made from Newin to Soledad of $15,360,000 and $497,790.87 respectively. A further $5,568,000 and $133,353.85 were distributed to her in 2001. It was Markus' evidence that once the distribution of Part C to Forester had been effected Soledad called for cash to be distributed to her. She required him to look at the financial statements for Newin which revealed undistributed income. He was extremely concerned about the position, discussed it with his co-trustee and partner, Dr Meister and took the advice of a Liechtenstein lawyer before making any further distributions to Soledad.
Markus' evidence was that throughout he had been concerned to safeguard the overall assets for the family and he had looked at those assets in their totality, that he had been concerned to preserve diversification and to balance growth and risk. He had also been concerned to produce as much income as was reasonable. He also accepted that the purpose of F&H and Soltega was to enable the distribution of capital gains as income to the tenants for life of Trusts Soleded and Isidro.
More about Plum Bay House
As I have already mentioned, Plum Bay House was sold at a loss by SCI Soltin in July 2001. In the accounts for Trust Isidro for the year ended 2001, the participation in SCI Soltin was revalued down to US $1,027,046.82, the original purchase price. Thereafter, the proceeds were held in the company's deposit account and it is Markus' unchallenged evidence that they were invested on the money markets. As at 31 August 2008, the account balance for SCI Soltin was US $1,922,993. SCI Soltin had been put into liquidation in 2005 but as a result of the need for French tax clearance, the process was not completed until 31 March 2008. Markus and his fellow trustee, Dr Meister decided that US $1,027,046.82 should be credited to the trust capital account and US $611,692.19 to the income account on the basis that the return on the capital was all income. Markus stated therefore that despite the fact that the property was sold at a loss, the capital of the trust fund was fully reconstituted and any loss together with the cost of maintaining the house and the holding structure was borne by income to which Soledad was entitled. In this regard, Forester contends that the proceeds should have been attributed to capital alone and the apportionment between capital and income was in breach of trust.
More about the foreign proceedings
As I have already mentioned, proceedings had been commenced by Forester in Lausanne in December 1999 but were the subject of a successful strike out application on behalf of Hugo and Markus. Further proceedings were commenced by Forester in Zurich in 2003 against Hugo and thereafter, Hugo's estate, Markus, Soledad, NFK, fourteen individual partners of NFK, Interhold, ZT and Curator, the organisation which provided accounting services to the trusts. The judgment of the District Court in Zurich was given on 24 October 2006, Hugo having died on 26 January 2005. Forester's appeal from the decision of the District Court was also dismissed. Forester also commenced proceedings in Liechtenstein in November 2006 against Hugo's estate, Markus and Soledad amongst others. Subsequently Forester's appeal against decision of the Liechstenstein court of Justice was withdrawn. Criminal proceedings were also commenced against Markus, Hugo and Soledad in Zurich.
As the findings in the Zurich proceedings are relied upon here, I will set out their nature and content in a little more detail. In Zurich, Forester sought damages of CHF 98 million plus interest at 5% in part based primarily on tort and secondly, in contract or reliance based liability. The claims against Hugo and Markus in tort were based upon article 41 Swiss Code of Obligations, in contract as executor and wealth manager and a reliance based liability. The claim against Soledad was based in tort. In summary, he claimed that: the legal structure put in place was unnecessary and generated expensive fees for the benefit of Hugo; Soledad did not want him to inherit anything from Olga; the Newin Establishment had been transformed into a Foundation without him being consulted or informed; he did not know about the capital accumulated in the Newin Establishment; Soledad was only entitled to receive income as opposed to capital gains; and that all in all, the damages were as a result of the inappropriate wealth management and suppression of later wills made by Isidro that were more favourable to Forester. In a rejoinder it was made clear that the claims were based on three sets of facts namely, the Newin Distributions, the suppression of a will of Isidro and wealth mismanagement. Forester explained that he had suffered loss as a result of undue distributions for which Markus was directly liable as a member of the council of Newin Foundation.
The Zurich court found against Forester's claims. In summary, it held that the Newin Foundation could be recognised in Switzerland but that the result would be the same any event; Forester could not claim to have suffered direct damage because his interest in relation to Parts A and B of the Newin Foundation was only an expectation until the death of Soledad. Accordingly, he lacked standing to claim under Liechtenstein law; assuming that he had standing, the distributions made to Soledad from capital gains were "Fruits" and accordingly, the members of the Council were not liable. There was no reference to English trust law or expressly to the Founder's Rights.
Expert evidence - Liechtenstein Law
In their joint statement Professor Dr. Schurr, Dr. Schurti and Mr Nigg agree on numerous issues. First, in their opinion, a Liechtenstein establishment can be categorised as "foundation like" or "corporation like". In the former, typically there is no holder of the founder's rights and the sole organ of the establishment is the board of directors which is bound to follow the instructions of the founder. In an establishment which is "corporation like" the holder of the founder's rights is the decision making body who can influence its destiny and purpose. However, the experts disagree about the nature of the Newin Establishment, Professor Dr. Schurr being of the opinion that it was more "corporation like" and Dr Schurti and Mr Nigg being of the opinion that it was more "foundation like".
Secondly, the three experts agree that founder's rights in a Liechtenstein establishment are important and include the ability to make statutes and byelaws, appoint the board and liquidate the establishment itself. It is also agreed that they can consist of organisational and proprietary elements and that the value of those rights could be described as the value of the net assets of the establishment less the costs and expenses required for its dissolution and liquidation. However, the experts disagree about how founder's rights were viewed in or before 1980. Professor Schurr says that even at that stage they were considered to comprise two elements and that there was a case to that effect. He says that the fiduciary founder in the sense of the professional who sets up an establishment may have the technical ability to exercise the founder's rights but it is the economic founder, in the sense of the individual who puts money into the establishment who has the legal authority to exercise the rights even when they are held by the fiduciary founder. Dr Schurti and Mr Nigg on the other hand say that the position all depends upon what has been agreed and would be enforceable under the law of obligations.
On the face of their reports and their joint statement the Liechtenstein law experts appeared to disagree about whether despite the fact that the Founder's Rights in Newin had been held subject to the 1972 Fiduciary Agreement and thereafter under the 1980 Fiduciary Agreement, they fell within Olga's residuary estate on her death. Professor Schurr drew a distinction between economic and beneficial rights which Dr Schurti and Mr Nigg say is not acknowledged in Liechtenstein law. However, having expressed that opinion in writing, in cross examination, Professor Schurr clarified his position. He stated that he too agreed that it was the personal right to call for the Founder's Rights which remained vested in Olga and fell into her estate rather than the rights themselves.
He also clarified that he agreed with Mr Nigg that under Liechtenstein law it is possible to have a contractual mandate which would have enabled Hugo to deal with the assets of Newin both before and after Olga's death and oblige him to continue the operation of Newin after her death for the benefit of third parties and to convert it into a foundation in order to fulfil his fiduciary duties. He also accepted that Mr Nigg was correct that such an agreement can confer a discretion upon the holder, that most agreements of that kind do so and that the discretion can be exercised after the death of the principal. It is not in dispute that the content of a mandate agreement is a question of fact. Professor Schurr also agreed that Liechtenstein law was flexible and that the parties could agree what they liked without any need for formality. Although Dr Schurti also agrees with Mr Nigg that it is possible to have a contractual mandate with the consequences described and whilst accepting that it all depends upon what the parties agreed, his preferred analysis is that a Liechtenstein trust arose once Olga divested herself of the power to give further instructions in relation to Newin Establishment and that it would be possible for such a trust to become irrevocable on Olga's death.
Mr Nigg terms such a mandate contract a real contract for the benefit of third parties which can be enforced by a third party against the fiduciary. He also points out that the revocation of such a contract requires the agreement of the third party if he has already obtained the direct right against the fiduciary. Professor Schurr does not disagree with the legal analysis but points out that the intention of the parties is unclear in this case. In cross examination, Mr Nigg stated that if the beneficiaries were altered by means of an alteration of the byelaws, the first beneficiaries would be able to sue the fiduciary under the real contract. He says that the beneficiaries at the date of Olga's death would have the right to enforce Olga's instructions in order to fulfil the intentions set out in the byelaws at her death. On his analysis the right to call for the founder's rights as against Hugo ceased on Olga's death.
Contrary to the opinions of Dr Schurti and Mr Nigg, Professor Schurr also says that in his opinion, the 1983 Resolution of Newin amounted to an express trust under Liechtenstein law, which typically would be irrevocable, despite the fact that the 1980 Resolution and the 1981 Resolution had been in similar form and were revoked. In cross examination he stated that the 1983 Resolution can be treated as of a different nature because it was the last. In this regard, he also accepts that the Board of Newin Establishment would not have had power to declare a trust and that the holder of the founder's rights was the only competent body or person to take such a step and he assumed that the decision had been ratified. He added that as Hugo signed the 1983 resolution he assumed that he had ratified it as bearer of the founder's rights, even though they were held, in fact, by Interhold. In Dr Schurti's opinion, on the other hand, although the 1983 Resolution might in principle have amounted to a trust: in the light of the 1980 Resolution and 1981 Resolution, he doubts the mutual intention to create a trust; as a result of Article 907 Liechtenstein Persons and Companies Act, unless expressly stated otherwise, trusts are irrevocable which is inconsistent with the 1980, the 1981 and the 1983 Resolutions being in a very similar form; and the Newin Establishment did not have power to create a trust. He reiterated in cross examination that in his view, the proposition that the 1983 Resolution amounted to a declaration of trust would "never fly" in a Liechtenstein court. Both he and Mr Nigg agree that the wording "on account of risk" is not consistent with a trust or the intention to create one. Dr Schurti also confirmed in cross examination that it is a requirement of Liechtenstein law that a trust must be registered or the documents deposited, neither of which occurred in this case. He also pointed out that had Newin contained no other assets and had the 1983 Resolution amounted to a declaration of trust, all further byelaws would have been of no purpose and irrelevant. Mr Nigg also added in cross examination that he did not find it plausible that Hugo as a lawyer would have intended to create a Liechtenstein trust by this means.
Lastly, Mr Nigg and Dr Schurti agree that Forester's position after the conversion of Newin from an establishment into a foundation was stronger. They say that there is very little discretion to change the beneficiaries in a foundation and Mr Nigg added that he would not advise an amendment.
Expert evidence - Swiss law
- mandate/fiduciary agreements
Professor Oberson, Dr Manuel Liatowitsch and Mr Daniel Hochstrasser produced experts' reports in relation to the Swiss law aspects of this matter and were cross examined. They agreed that any oral fiduciary agreement between Olga and Hugo would have complemented the 1972 and thereafter the 1980 Fiduciary Agreements and that there was no need for the mandate or fiduciary agreement to take any particular form. In addition, Professor Oberson accepted in cross examination that such an agreement could be inferred from unambiguous conduct. It was agreed that the 1972 Fiduciary Agreement should be termed a fiduciary agreement because it was not only a contract for services but also included the transfer of property in relation to which the fiduciary became the beneficial owner.
Professor Oberson accepted that the reference in clause 2 to "beneficial owner" was intended to signify the fact that Olga would have a claim against Hugo and that Hugo was under a duty to act for her benefit, the term in the sense of proprietary ownership being unknown in Swiss law. He also stated in cross examination that the reference to "executors" in clause 6 was curious and it was likely not to be a reference to executors in the English sense although the position was not clear. He added that he agreed with Mr Hochstrasser that after the 1980 Agreement there was a chain of fiduciary relationships although in his opinion, Hugo had merely delegated his functions as fiduciary to Interhold, something with which Mr Hochstrasser did not agree. However, with regard to Mr Hochstrasser's opinion that the fiduciary becomes the full owner of the property entrusted to him, the Professor stated that in any event, Olga would have had a right to instruct Interhold despite not being mentioned in the 1980 Fiduciary Agreement, as a result of article 399(3) Swiss Code of Obligations, something with which Mr Hochstrasser agrees but which Dr Liatowitsch had not considered.
It is not in dispute that under article 405 of the Swiss Code of Obligations, unless agreed upon to the contrary or it can be implied, a mandate agreement terminates on death. In Mr Hochstrasser's opinion when considering whether an express or implied agreement that a fiduciary agreement should continue after the death of the promisor, the Swiss court would consider the relevant circumstances as reflected in contemporaneous documents. Both the Professor and Mr Hochstrasser also accept that a mandate/fiduciary agreement which continues after death can exclude the rights of the heirs, although the Professor considered such a contract to be sophisticated and rare.
The Professor also accepted that the content of the 1978 and 1980 Byelaws which contain elaborate provisions to take effect after Olga's death are a strong indicator that it was intended that the fiduciary agreement between Olga and Hugo would also continue after her death. He also accepted that a fiduciary can be given an element of discretion subject always to the best interests of the principal. Lastly in this regard, in cross examination, Professor Oberson confirmed that he agrees with Mr Hochstrasser that if the fiduciary agreement continued after death, the identity of the owner of the right to vary or revoke instructions under the fiduciary agreement which had vested in Olga until her death would be determined in accordance with English law because that law governed her estate. Mr Hochstrasser also considers that Swiss law does not impose a duty on the heirs to revoke instructions given under a fiduciary contract during the lifetime of the deceased.
Dr Liatowitsch on the other hand describes a contract which is for the benefit of third parties under which the third parties are able to enforce the performance of the contract against the promisor or agent as a qualified contract for the benefit of third parties under article 112(2) of the Swiss Civil Code. He accepts that it is necessary to prove the intention of the original contracting parties, in this case Olga and Hugo, that the contract should be enforceable by the third parties. However, if such an intention is proved, it is his opinion that Olga's right to control the Founder's Rights could have been held by Hugo for someone other than her executors, in other words, for the beneficiaries of Newin. He says that although such a contract may be sophisticated, in his experience it is not rare.
Furthermore, Dr Liatowitsch says that as a result of Article 112(3) Swiss Code under a qualified contract for the benefit of third parties, the parties to the contract can modify or revoke the beneficiary clause until the third party has notified the promisor of his intention to exercise his rights. He accepts that the way in which article 112(3) interacts with the right of the principal to terminate the contract at any time under article 404(1) has yet to be decided. He says therefore, that it is possible that if the agreement between Hugo and Olga should be characterised as a qualified contract for the benefit of a third party with a third party beneficiary clause which became irrevocable before or upon the death of Olga, the ability to enforce the contract could have survived Olga's death for the benefit of the beneficiaries of Newin Establishment. In cross examination, he also stated there is Swiss Federal Supreme Court authority to the effect that such a transaction would not qualify as a donation on death which would be required to conform to various formalities, if the donor had not reserved the right to revoke the third party beneficiary clause. The authority was concerned with the practice of establishing a savings book in the name of a third party, for example, a godchild. On the death of the person who established the savings account, the question was whether the heirs could require the bank to pay the balance to them. The court held that: the rights under article 112(3) Swiss Code of Obligations did not automatically transfer to the heirs; and if the promisor fails to revoke the benefit during his lifetime, one must conclude that the right of revocation was waived in the event of his death in the absence of an order to the contrary. Dr Liatowitsch said, in relation to the capacity to control rights relating to such a bank account:
"[U]nless there is specific reservation regarding the revocability [of a particular banking contract] then there is an assumption that upon death it becomes irrevocable, and I remember now, they said because they said it would be arbitrary to leave this decision to the heirs
Although he had not considered the decision himself for the purposes of his report, Mr Hochstrasser accepted that Dr Liatowitsch's summary was fair. A short synopsis/commentary which appeared in the Praxis unpublished report journal was produced to the court after the cross examination had taken place.
In fact, the following proposition was set out in the Joint Report and commented upon as follows:
"As a matter of Swiss law, is it possible that the contract between Hugo Frey and Olga falls to be characterised as [a] qualified contract for the benefit of a third party and that the ability to enforce the contract between Hugo Frey and Olga therefore survived Olga's death for the benefit of the beneficiaries of Newin Establishment and did not devolve to her personal representatives or legal heirs as her successors.
Dr Liatowitsch and Mr Hochstrasser both agreed that is a possible analysis whilst Professor Oberson stated: "I agree that Swiss law allows for contracts to be made for the benefit of a third party (art. 112 Swiss code of obligations)".
In cross-examination Professor Oberson agreed that there are circumstances in Swiss law in which a mandate agreement can give rights to third parties in respect of the property which is subject to the agreement provided it is in accordance with the intention of the parties and that it was possible under Swiss law that if principal and agent agree irrevocably that property will be used for the benefit of a third party and if the benefit is conferred on the third party immediately the contract is concluded, the contract would survive the death of the principal, would be enforceable by the third party, and would not devolve on the heirs.
It is convenient at this stage to set out the relevant parts of Articles 112, 399, 404 and 405 Swiss Code of Obligations to which reference has been made. They are as follows:
1. A person who, acting in his own name, has entered into a contract whereby performance is due to a third party is entitled to compel performance for the benefit of the said third party.
2. The third party of his legal successors have the right to compel performance where that was the intention of the contracting parties or is the customary practice.
3. In this case, the obligee may no longer release the obligor from his obligation once the third party has notified the obligor of his intention to exercise that right.
. . .
1. An agent who has delegated the business entrusted to him to a third party without authority is liable for the latter's action as if they were his own.
2. Where such delegation was authorised, he is liable only for any failure to act with due diligence when selecting and instructing the third party.
3. In both cases, [if the agent has delegated business entrusted to him to a third party with or without the principal's permission] the principal may directly enforce claims held by the agent against such third party."
. . .
1. The agency contract may be revoked or terminated at any time by either party.
1 Unless otherwise agreed or implied by the nature of the agency business, the agency contract ends on
death ... of the principal or the agent.
2. However, where termination of the agency contract jeopardises the principal's interests, the agent, his heir or his representative is obliged to continue conducting the agency business until such time as the principal, his heir or his representative is able to conduct it himself."
In his report, Mr Hochstrasser makes clear that retrocessions are not prohibited under Swiss law and have been usual and customary practice in the financial services industry. He points out that the first decision of the Swiss Federal Supreme Court dealing with the limitations and preconditions with regard to what was and is a widely followed practice was only issued in March 2006 and it provoked considerable reaction and comment in Switzerland and abroad even as late as 2015. He says that it was considered to be a landmark decision. It was in a decision in August 2011 that the Swiss Supreme Court considered and ruled on whether it was possible to waive the right to an account in relation to retrocessions in advance. In Mr Hochstrasser's opinion therefore, until 2006 no one thought that there was anything wrong with receiving and retaining retrocessions and a waiver was considered customary. He did not agree that the Swiss Supreme Court case in 1986 referred to by Professor Oberson in his report which he described as having found that such arrangements are subject to the rules that govern mandate agreements was known and maintained that the issue had not become live until 2005/6. In fact, he suggested that Professor Oberson was trying to attach the wisdom of 2005/6 to 1986. Professor Oberson had referred to a 1984 decision which was concerned with restitution and to the 1986 decision which he says specifically included retrocessions, upon which he was not challenged in cross examination. In any event, Mr Hochstrasser said that if he had been asked to advise prior to 2006, he would have been uncertain as to the answer and would have researched the point but that the answer was not clear.
- Res judicata
Dr Liatowitsch wrote a separate report about the nature of the doctrine of res judicata in Swiss Law. The issue was also addressed by Maitre Lachenal on behalf of Forester. It is agreed that there is no principle of issue estoppel known to Swiss law and that the question of whether a matter can be brought before a Swiss court for a second time is governed by the principle of res judicata. In Dr Liatowitsch's opinion, the Swiss Federal Supreme Court has consistently considered that res judicata applies where there are identical parties and identical subject matter. Maitre Lachenal takes a slightly wider view. He says that the doctrine encompasses the "formelle Rechtskraft" on the one hand and the "materielle Rechtskraft" on the other. He describes the former as a decision being final and not subject to challenge and the latter as comprising four parts namely: the new claim is the same as that already judged; the parties are the same as in the previous action; the facts of the case are the same; and the previous decision is in force.
Dr Liatowitsch says that the proceedings in Zurich were the same because they had the same subject matter, namely payments made from Newin. He says that although the court decided that Forester did not have standing to bring the claim it also rejected the claims that the payments were unlawful and in doing so took account of what was before them and could have been before them. He says that it is sufficient from a Swiss law perspective that Forester knew about the founder's rights and could have made a claim in that regard, even though he did not do so. He also says that if the result of seeking relief which requires loss to the trust fund to be made good is that Forester ultimately obtains that money which he says was wrongly distributed to Soledad, the subject matter of the actions is the same, although he accepted it might go to capacity. Maitre Lachenal on the other hand says that this is different because in Zurich the claim was made in a personal capacity. He also says that the facts are different because there was no mention of founder's rights in the Zurich proceedings.
- Inheritance Tax
In this regard, Professor Oberson made a separate report in relation to Inheritance Tax in the Swiss Canton of Vaud on behalf of Forester and Mr Pfenninger submitted a report on behalf of Markus and Hugo's estate. It is not in dispute that inheritance tax is charged in the Canton of Vaud by virtue of article 11 of the Swiss Code on the acquisition by succession of moveables. A trigger for such a charge is the death of an individual domiciled in the canton. There is also no dispute that Olga was so domiciled and therefore, as a result Inheritance tax would be charged upon all of her moveables worldwide which were acquired by succession. It was also not in dispute that in this case, succession was governed by English law and therefore, turned upon whether the moveables fell into Olga's estate to be dealt with under her will and that inheritance tax was not paid on the assets held by Newin Establishment at the date of her death.
In cross examination, the Professor agreed that if the Defendants' analysis were correct and the Founder's Rights did not fall into Olga's residuary estate, inheritance tax would not be charged upon the value of those rights because there would be no transaction by way of succession. He also accepted that there were no Swiss cases in this area which related to anstalts. Mr Pfenninger on the other hand agreed that if the right to call for the founder's rights or to instruct the holder of those rights did fall within the estate and there was a clear legal claim, it would be included in the estate for tax purposes.
The Professor also referred to the principle of "Durchgriff" which might be translated as transparency. Where there is tax evasion, the courts have pierced the corporate veil and attributed profits to the economic owner. He says that there is a Supreme Court case in which the assets of a Liechtenstein foundation were taxed in the hands of the founder, the entity having been created solely for tax purposes. In fact, in cross examination, the Professor accepted that the case in question referred to a Swiss family foundation. He was unable to confirm that there is no reported case on Durchgriff having been applied in the case of inheritance tax. The Professor also stated in his report that where a founder retained control of an anstalt by appointing himself as the sole beneficiary for life in the byelaws or by retaining the founder's rights, the assets would not be excluded from his estate. However, in cross examination he accepted that there are a series of relevant indicia, of which the status as sole beneficiary is one and that the paper written in 2003 upon which he relies in his report does not contain an authoritative statement of the law in or around 1980. He also accepted that for the purposes of the application of "Durchgriff" the legal structure in question must be both subject to the control of the taxpayer and created solely or mainly for tax purposes. He stated that Durchgriff ought to have been apparent to a reasonable tax adviser.
Mr Pfenninger also made clear that from the documentation he had seen, he inferred that Hugo had disclosed all relevant material to the tax authorities in Vaud and as a result of that disclosure and discussions that the authorities were satisfied that Newin and the founder's rights fell outside the estate.
Expert Evidence - Fees and Accounts
Messrs Simon Jennings, Stuart Davies and Graham Harrison gave expert evidence in relation to the accounts produced, the balance between income and capital adopted and the fees charged by Hugo, Markus and ZT.
Mr Jennings on behalf of Forester stated in his written evidence that he considered Method A under the 1961 Fee Agreement to be inappropriate. Both he and Mr Harrison stated that they considered Method B to be more typical. They also concluded that there was evidence to enable them to conclude that Method A was used as the basis for trustee remuneration but neither of them was able to verify that the actual charges levied were exactly in line with Method A for each and every year. They also agreed that an exceptional fee had been charged when Hugo retired but they could not agree whether credit had been given for it subsequently. They also agreed that until 2002, trustee fees were set entirely against income and thereafter, were split equally between income and capital.
In cross examination Mr Jennings accepted that Method B in the 1961 Fee Agreement was a relatively normal way of determining fees which were related to investment return which was indirectly related to the fund itself. He also accepted that the better of method A or B formula produced the same result until returns were at 5% per annum and then favoured Method A and as a result, rewarded returns above 5%. He also agreed that time cost basis was not the norm in Switzerland before 2005 and that before that date an ad valorem basis for fees was the norm. He also confirmed that the fees charged were not outrageous or excessive and that in fact, they could have been doubled and remained within acceptable parameters.
Mr Harrison on the other hand considers that the total fees which averaged 0.92% per annum over the period 1985 2008 were reasonable. In fact, he said that they were amazingly reasonable. He also pointed out that although trustee fees and administration fees were not split before 1996, he had understood that ZT's administration fees were taken out of the trustee fees and were not in addition to them.
However, Mr Jennings says that reasonableness of fees depends not only upon their level but also upon the competence of the professionals concerned and that the accounts produced failed to distinguish properly between income and capital, in certain financial statements differing sums appeared for distributions, he did not believe that proper accounting principles were applied in relation to costs and expenses and there was no power to delegate to ZT. Mr Harrison demurs and pointed out that competency and transparency are matters which are determined after the event and that in any event, he considers that there is an element of hindsight and the application of 2015 standards to an earlier time particularly in relation to ZT.
In relation to the performance of the funds and the balance between income and capital, Mr Davies considered each of the trusts and legal entities separately whereas Mr Harrison considered them and their performance as a whole. In cross examination Mr Davies stated that even if the beneficiaries were the same, nonetheless, they were separate entities and portfolios with separate targets and investment strategies and should be treated as such.
Mr Harrison is of the opinion that the balance between income and capital is more a matter of judgment than accounting rules and that as a basic rule of thumb if the real value of the assets concerned are maintained, the interests of the tenant for life are not being favoured because the purchasing power of the assets is being maintained. On the other hand, Mr Davies denies any such rule of thumb. In order to determine what a reasonable level of income might have been, Mr Davies constructed a range of bespoke benchmarks based on asset allocations of 50:50 fixed income to equity, and 60:40 fixed income to equity, with the bias in favour of fixed income despite the fact that no criticism is made of portfolio selection.
Further, Mr Harrison came to the conclusion that the real value of the capital aggregated over the various structures was preserved in the period from 1984 2001 by reference to US inflation rates and in fact, shows a gain. He considered the US dollar to be the functional currency for the various entities and was of the opinion that one could not obey two currency masters. He added that the US dollar is the international currency of account and that for large fortunes such as that of Olga it is the default option for the purposes of valuation. He also noted that international fortunes are also in general, spent internationally.
Having seen his result, Mr Davies produced a further report using Swiss inflation rates over the period which reveals a loss. In cross examination, Mr Davies accepted that it was reasonable to use either inflation rate and it was impossible to say which was correct but that in his view one could potentially look to Swiss inflation because the capital beneficiary lived there. He accepted however, that there were periods when one produced better results than the other and that the various trusts were all denominated in US dollars and that the values in the accounts were shown in dollars.
In cross examination, Mr Harrison also stated that there was some confusion between a balance of interests between the tenant for life and the capital beneficiary and a balance between income production and capital preservation or growth. He said for example, that gains can be characterised as income or capital without difficulty. He also pointed out that in his experience many tenant for life structures hold companies. If the return is good steps are then taken to maintain the balance between the tenant for life and the remainderman. He added that between 1980 and 2000 when determining what was reasonable and fair, a reasonable trustee would have taken into account many factors including past investment performance whereas after 2000 such a trustee might also have taken capital growth into account.
Conduct of the Claim
Before turning to the issues, it is necessary to consider the way in which the claim has been conducted. This is because Miss Campbell submits on behalf of Hugo's estate and Markus that the conduct amounts to an abuse of process, that Forester should not be able to maintain certain claims which she says are new and unpleaded and put her client at a disadvantage and that the conduct of the matter should be taken into consideration when viewing the claim as a whole and whether Forester has satisfied the burden on him to prove his case. She says that the conduct of the Claimant should also be seen in the light of the application which I dealt with on the nineteenth day of the trial which was made by Mr Furness on behalf of Soledad. That related to what were termed unpleaded issues in relation to a company called Tricor SA and alleged overpayments of income paid to Soledad and referred to in Mr Taube's written opening. I decided that reliance could not be placed on those matters either as breaches of trust or examples of wilful default, or as factors to be taken into consideration in determining the exercise of the court's discretion as to whether to order a common account, unless they were pleaded. I gave a judgment to that effect.
The matters to which Miss Campbell draws my attention in particular are: the fact that the allegation of dishonest motive for continuing the existence of Newin Establishment after the death of Olga in 1980 until its conversion into a Foundation in 1995 on the part of Hugo has been abandoned in closing; and allied to it, the fact that Forester no longer pursues the allegation that there was a breach of trust in 1980 and thereafter until 1995 in failing to collect in the assets of Newin Establishment and submit them to the Will Trusts.
She says that this has left a vacuum in Forester's case, that further information would have been sought in relation to the period from 1980 to 1995 and that in fact, Forester's present position with regard to the 1980 1995 period is inconsistent with the claim that the 1983 Resolution amounts to an express trust. She also submits that had the claim been put on this footing earlier, she would have wanted to explore with the Swiss legal experts whether it would be possible to revoke instructions which had been implemented for fifteen years by exercise of the "Claim Right". She says that this is but one example and that there are other propositions which have not been put to the witnesses.
Furthermore, she submits that: the way in which the case was put in the pleadings, which was based upon dishonesty and misconduct by Hugo in continuing Newin after 1980 must be assumed to have been included otherwise than in good faith, was an abuse and should be borne in mind when considering the merits of the claims; and that the new way in which the claims are put has no merit, something which would have been taken into consideration if an application to amend had been made.
Miss Campbell referred me to Summers v Fairclough Homes  1 WLR 2004 at ,  and . The Supreme Court held that the court has power to strike out a statement of case on the grounds of abuse of process at any stage, but that it would only do so at the end of a trial in very exceptional circumstances and that the court would only do so if it were satisfied that "the party's abuse of process was such that he had thereby forfeited the right to have his claim determined." Miss Campbell says that I should not strike out the substantive claim without giving it detailed consideration but that the conduct here has been sufficiently serious and that the only fair outcome is the dismissal or striking out of the Newin related claims. She also says that if one considers the chaotic state of the claim one should consider carefully whether Forester has satisfied the burden of proof before considering any of the defences.
I should mention that no application to amend was made or intimated. In fact, it has been suggested that the case as put is within the pleading as it stands and at times it has been denied that there is any change intended. In any event, Mr Taube stated in closing and it has been confirmed in two further notes dated 9 and 10 December 2015 respectively that Forester has abandoned two elements of his case. The first is the allegation that Hugo allowed Newin to continue to exist after the death of Olga as a result of a dishonest motive to continue to accrue fees. The position is stated to have changed as a result of the evidence at trial. Miss Campbell questions that reason.
In my judgment, despite the considerable shift in Forester's case, the circumstances are not sufficiently exceptional to warrant striking out the claim or the Newin claims as Miss Campbell terms them. In fact, they form not only a large part of the case but also its bedrock and in my judgment it would not be appropriate to seek to carve them out. The same kind of vacuum would be created as the one of which Miss Campbell complains. It seems to me that given the complexity and length of this trial, the vast amount of documentation before the court and the lengthy and complex pleadings which in the case of the Particulars of Claim were amended as recently as August of this year, it would be wrong not to deal with the entirety of this matter on the merits. However, when considering the merits, I shall also take into account Miss Campbell's submissions about the state of Forester's case and that Miss Campbell might have wished to cross examine witnesses on a different basis and to adduce additional or slightly different evidence had the elements of Forester's claim been abandoned at an earlier stage.
The first, and central issue concerns the Founder's Rights in the Newin Establishment and the way in which they were dealt with. If those rights or the ability to call for them did not fall within Olga's estate at the date of her death, for the most part, the other issues but for Issue 4, fall away. The way in which this first issue has been framed is as follows: As a matter of English law and/or Swiss law and/or Liechtenstein law, were the Founder's Rights of Newin Establishment (or the right to call for restitution of the Founder's Rights) property in Olga's estate and its residue? In order to determine this issue, it is agreed that the following sub-issues arise:
(1) What was the nature of the relationship between Olga, Hugo and Interhold by the time of the execution of the 1980 Fiduciary Agreement? In particular
(a) Did Olga's relationship with Hugo in relation to the Founder's Rights rest in an oral fiduciary/mandate contract ("the Mandate Agreement")?
(b) Did Interhold (which actually held the Founder's Rights) hold them on bare trust under English law for the benefit of Olga and did Hugo obtain that benefit as Olga's executor (and trustee)?
(c) Did the trustees of Olga's Trust (Hugo in particular) account for the Founder's Rights as though these were held on the trusts of Olga's Trust?
(2) What were the instructions given by Olga during her lifetime to Hugo and/or Interhold regarding the Founder's Rights and/or the conversion of Newin Establishment into a foundation?
(3) Did Olga's ability to revoke or vary her instructions to Hugo terminate at the latest on Olga's death so that such ability did not pass to her personal representatives?
(4) To the extent that any right to revoke and vary instructions continued by operation of law, was Hugo as Olga's personal representative and trustee of Olga's Trust bound not to exercise such a right pursuant to equitable principles of English law?
Founder's Rights or Claim Rights?
It is not in dispute that under Article 7 of each of the versions of the statutes of Newin the holder of the Founder's Rights was the supreme organ, and had the right to make and revoke statutes and by laws, to control the composition of the board and to wind up Newin. Further, it is not disputed that under the law of Liechtenstein the rights of the founder were valuable economic rights equal to the net value of Newin's assets and that they were assignable, heritable and marketable property.
In fact, during the trial and in the closing on behalf of Forester, both written and oral, despite the slight disagreement between the Liechtenstein legal experts about "technical ability" as against "legal entitlement", it was accepted that the Founder's Rights themselves were held by Interhold at the date of Olga's death and that the real question raised by Issue 1 related to the right to call for those rights and to instruct Interhold and/or Hugo to exercise them in accordance with Olga's wishes. These were referred to by Mr Taube as the Claim Rights. In fact, during the hearing the claim evolved considerably. In the end all of the parties agreed that the real question relates to the terms and effect of any oral agreement between Olga and Hugo which defined Olga's rights to control the Founder's Rights and in addition, whether any right to revoke instructions given to Hugo fell into the residuary estate on Olga's death. It was the evidence of Dr Schurti which I understand is also not in dispute and which in any event, I accept, that such Claim Rights have the equivalent economic value as the Founder's Rights themselves.
The nature and effect of the Claim Rights
What was the nature of the Claim Rights between Olga and Hugo/Interhold immediately prior to her death? This question is itself comprised of three facets: the terms of the agreement between Olga and Hugo; the proper law of that agreement; and the legal effect of that agreement in accordance with its proper law.
First, it does not appear to be in dispute that it may be inferred that Hugo's apparent intentions evidenced his discussions and arrangements with Olga and that Hugo's subsequent conduct can be relied upon as evidence of the parties' intentions at the time: Chartbrook Ltd v Persimmon Homes Ltd  UKHL 38,  1 AC 1101 at  per Lord Hoffman and Gallaher Ltd v Gallaher Pensions Ltd  EWHC 42 (Ch),  Pens LR 103.
Mr Taube does not put forward a positive case as to whether there was an agreement between Hugo and Olga immediately before Olga's death and if there was one, what form it took. He now submits that it is common ground that if Swiss Law applies in the period between 1957 and the execution of the 1972 Fiduciary Agreement in January 1972, each time the Founder's Rights were transferred by Olga to Hugo, he held them as her fiduciary subject to Olga's Claim Rights. He says that thereafter, until Olga's death in 1980, Professor Oberson and Mr Hochstrasser agree that as far as Swiss law is concerned, whatever the terms of the 1972 and 1980 Fiduciary Agreements, either as a result of the oral mandate/fiduciary contract between Olga and Hugo or as a result of article 399(3) Swiss Code of Obligations, Olga continued to hold the Claim Rights as against Hugo and/or Interhold. As a result, Mr Taube says that Olga retained the right to terminate the fiduciary/mandate agreements and recover the Founder's Rights.
Mr Taube also says that as at Olga's death, Professor Oberson and Mr Hochstrasser agreed in principle that Olga's heir or successor would stand in Olga's shoes as regards the fiduciary/ mandate agreements. They also accepted that in the light of her Will which was subject to English Law and that Swiss law would recognise this "professio iuris", that heir or successor would be her English executor. They were also in broad agreement that if the fiduciary/ mandate agreement survived Olga's death, Interhold would have been obliged to restore the Founder's Rights to the executor had it been requested to do so and that the executor could have amended or revoked Olga's fiduciary / mandate contracts.
Mr Taube submits therefore, that whatever the agreement between Hugo and Olga immediately before her death, on Olga's death the Claim Rights vested in her executor and will trustees, who were bound to exercise them in the best interest of the beneficiaries of the Will trusts. He says therefore, that they were entitled and indeed, were bound to revoke any instructions which Olga might have given to Hugo before her death where they considered this was in the best interests of the trust beneficiaries. He says that this is the default position and that the onus is on the Defendants to prove on the balance of probabilities that there was a binding and effective agreement between Olga and Hugo that before her death the Claim Rights became the asset of another and did not fall into the residuary estate.
In this regard, he pointed to the advice given to Olga by Hugo by letter in 1957 in which emphasis was placed upon Olga having exclusive control over Newin Establishment. Mr Taube says that there is nothing to suggest that Olga intended to give up that control. He also says that the subsequent events are all consistent with Newin having been treated and seen as an asset of the estate. He places emphasis upon the letters from Hugo to Clariden Bank and Credit Suisse dated 11 April 1980 by which he gave instructions to transfer a total of around $45m from Newin Establishment to accounts in the name of Interhold to hold for the various will trusts and thereafter, for the accounts to be closed. He submits that this is inconsistent with keeping Newin separate from the estate. He also points out that the experts in Liechtenstein law, Dr Schurti and Mr Nigg agreed that such a distribution could not have been justified under the Byelaws of Newin Establishment at that stage and could only have been justified as an exercise of the Founder's Rights. In fact, on 29 or 30 January 1981, Interhold acting on Hugo's instructions formally exercised the Founder's Rights to ratify the transfers.
In addition, Mr Taube referred me to Hugo's file note dated 13 August 1980, in which he stated: "The Newin - founder's - and beneficial rights are to be divided according to the Will". Mr Taube says that this is also consistent with the way in which the "Newin Adjustment" was dealt with. He points out that in Hugo's letter dated 5 December 1980 he stated that he was acting in his capacity as executor when directing that:
in the course of the distribution of the assets of the estate the shares in [NE] and in the investments controlled by this establishment will be attributed to the heirs who are resident in Europe . . ."
Further, Mr Taube relies upon Hugo's two notes on investment policy dated 12 and 13 August 1982 in which he stated:-
"Newin and [its subsidiary F&H], particularly the latter, can concentrate on growth items. The resulting profit is distributed as dividend and so comes into the trusts as income".
Mr Taube says that this is evidence that Hugo viewed the dividends from Newin and F&H as payable to the trustees of the Will as a result of the Claim Rights/Founder's Rights owned by the trustees. Furthermore, he says that this is consistent with the way in which dividend distributions from F&H were dealt with. They were paid direct into the income accounts of Trust Isidro, Trust Soledad and Trust Forester. In the same way, he draws attention to the balance sheets of Trust Isidro, Trust Soledad and Trust Forester for the year ended 1982 in which their shares of Newin Establishment, which had been purchased from the US Beneficiaries and OMM Foundation, are shown as "participations". Mr Taube also points to Hugo's file note dated 28 October 1983 at paragraph 6 to which I have referred above. Hugo stated amongst other things that: it was decided to distribute the assets of Newin to a great extent and to leave only a much reduced fortune in the shelter entity
The principal assets could therefore be managed directly through the trust as provided by the last will of Olga."
Mr Taube submits therefore, that Hugo's conduct is entirely consistent with Hugo, in his capacity as executor, exercising the Claim Rights vis ΰ vis Newin Establishment and the estate in what he genuinely considered to be the best interests of the beneficiaries of Olga's Will Trusts and that Forester's case does not require any inference that Hugo was "on a frolic of his own". He says that this is consistent with a possible desire to continue to use Newin as a shelter entity in the light of Soledad's potential difficulties with the French tax authorities and Markus' answer in cross examination that one of the purposes of the Newin, F&H and Soltega was to enable capital gains from those entities to be distributed to the income beneficiaries of the trusts.
This way of putting the case arose for the first time in written closings and is contrary to Forester's Re-Re-Re- Amended Particulars of Claim in which it is alleged that Hugo continued Newin Establishment after 1980 with the dishonest motive of generating additional fees and acted in breach of trust in not collecting in its assets. Subsequently it was confirmed in a further written note produced on the 22nd day of the trial, that Forester was indeed abandoning the allegations of dishonest motive attributed to Hugo, the claim that in breach of trust he had failed to dissolve Newin Establishment and submit the assets to the estate in 1980 or shortly thereafter, and the claim that Hugo and Markus were not entitled to fees based on the 1961 Fee Agreement in relation to Newin Establishment, F&H and Soltega from 1980 to 1995, at least on the basis of a duty to dissolve. It also seems that the allegations/implications contained in Mr Taube's written and oral opening to the effect that the form of the 1980 Byelaws was as a result of an improper motive of Hugo's to mislead the relevant tax authorities, is no longer pursued.
In any event, Mr Taube also submits that although he accepts that Olga's Will had been a subsidiary to Newin Establishment and a necessary element to deter forced heirship claims, its terms being a mirror image of the beneficial provisions in the byelaws, the terms of those byelaws being intended to govern the devolution of Newin assets, things changed fundamentally after the 1960s when Olga's US trusts were revoked and approximately $19m was sent to Europe to be held in accounts for the benefit of Olga. He says therefore, that thereafter, there were considerable assets outside Newin and by the time of the 1974 Will, its terms did not reflect the byelaws. Furthermore, he draws attention to the 1975 Byelaws, executed at a time when Olga had stated that she wanted a single will to deal with all her affairs, which provide at Article 2 that the assets are to be governed by the "testamentary dispositions" and at Article 8 that Article 2 was not revocable on Olga's death. He says therefore, that by 1975, it was the Will which governed Newin and not vice versa.
Furthermore, in relation to the 1978 Byelaws, Mr Taube draws attention to the fact that they do not state that they are irrevocable on death and that the Swiss law experts stated that in principle, if the Claim Rights fell into the estate they would enable the executor/trustees to revoke the beneficial provisions of the byelaws. Whilst not expressly submitting that the 1978 Byelaws were a sham, Mr Taube did submit that the great change that they brought about might have arisen from a concern to make Newin appear separate from the estate for tax purposes.
Further, he says that there is no evidence to support a case that Olga gave instructions to Hugo to deal with the Founder's Rights/Claim Rights so that they did not fall into the estate or that she gave them up. He also emphasises that such an agreement would have had to have been reached before her death in order to avoid being a testamentary disposition which was invalid under Swiss law as a result of a lack of the correct form and if in fact, she gave them up during her lifetime, Dr Pfenninger's evidence is that Swiss gift tax should have been paid.
In addition, he says that no support can be gained for the contention that Olga gave up the Claim Rights before her death from the 1980 Byelaws themselves. They were revocable by the holder of the Claim Rights/Founder's Rights after Olga's death. Mr Taube says that it would have been consistent with the intention that the rights did not fall into the estate, if they had contained an express provision to the effect that they were irrevocable as in previous versions. He also says that the form of the 1980 Fiduciary Agreement is contrary to such an agreement because as a result of article 399(3) Swiss Code of Obligations, Olga retained the Claim Rights. He says therefore, that if it had been intended to give those rights away, it would have been natural to put the agreement in writing. This he says is all the more so given the value of those rights at that stage. They were worth in excess of $50m. He also says that the 1980 File Note is not a record of instructions at all and that Olga's mental frailty before her death, as he termed it, militates against such instructions and in particular, instructions of a sophisticated kind to benefit third parties.
On the other hand, Miss Campbell on behalf of Hugo's estate and Markus says that whether it is the Founder's Rights or the Claim Rights with which one is concerned, neither fell into Olga's residuary estate on her death in 1980. In relation to the Claim Rights, she says that they are a personal right which terminated at the latest on Olga's death pursuant to the terms of the mandate/fiduciary agreements and/or by operation of law. She submits that the termination of the Claim Rights arose as a result of instructions which she says it can be inferred that Olga gave to Hugo in or around January 1980. She says that those instructions are evidenced by the 1980 File Note and by the actions of Hugo after Olga's death. As a result, she submits that no right to call for restitution of the Founder's Rights passed to Olga's personal representative.
In the alternative, Miss Campbell submits that if she is wrong and a right to revoke and/or vary the instructions which Olga had given to Hugo continued by operation of the governing law of the oral Fiduciary/Mandate Agreement notwithstanding what she says was Olga's intention that it should not do so, then as a matter of English law equity would fix on Hugo's conscience so that he could not call for the Founder's Rights to be collected into Olga's estate since that was contrary to the agreement he had made with Olga during her lifetime as to the future management of Newin.
Miss Campbell's submissions in more detail are that the only property if any that can have devolved to Hugo as executor is a personal right, under article 404 of the Swiss Code of Obligations, to terminate the mandate agreement, and therefore the instructions which she submits Olga had given to him about how to deal with Newin after her death. She submits that it is clear that the agreement between Olga and Hugo was governed by Swiss law. The Swiss Experts' evidence is that both a mandate agreement and the instructions pursuant to it can last beyond death and that there is no immediate revocation of the instruction. However, pursuant to Article 404 of the Swiss Code of Obligations there is a statutory right to terminate a mandate agreement, which potentially devolves to the heirs, which here means the executor. She describes this in effect, as an ability to countermand Olga's instructions to Hugo in a way she did not intend.
Miss Campbell submits therefore, that if such a statutory right did devolve upon Hugo unintentionally, he would have been prevented from exercising it and therefore, nullifying Olga's intentions by virtue of the principle in Ottaway v Norman  1 Ch 698. In that case, the testator devised his house to a Miss Hodges intending that she should dispose of the property in her will to specific individuals. He communicated his intention to her and she agreed to it. After the testator's death, Miss Hodges changed her will in a way which did not reflect the intention. On her death, the plaintiffs sought a declaration that the property was held on trust for them. Miss Campbell submits that despite the fact that a beneficial interest was not transferred to Hugo, the same principles apply because if her version of the facts is correct, Olga's instructions/intentions had been communicated to him and he had accepted them.
She also referred me to Catchpole v Trustees of the Alitalia Airlines Pension Scheme & Anor  PLR 387, a case in which it was held that trustees of a pension scheme were bound by an estoppel by representation having given incorrect information about death benefits to a member upon which reliance was placed. Warren J concluded at  that it would be unconscionable for the Trustees to deny the claim despite the fact that it would impact adversely on the interests of other members. Miss Campbell submits that the position is analogous here. She says that Forester's rights were always subject to the estoppel which arose. She referred me to two further cases, the first of which is unreported and is Fielden v Christie-Miller & Ors  EWHC 87 (Ch). She relies upon paragraph 38 and 39 of the judgment of Sir William Blackburne for the proposition that if the ingredients of an estoppel are present they are not nullified by the fact that the representation has been made by trustees holding for the benefit of others. The second is a Privy Council case, Kelly & Ors v Fraser  1 AC 450. Amongst other things it was held that the trustees of a salaried pension plan were estopped from relying on the fact that they had not approved the transfer in of funds from another scheme on his behalf, as a result of a letter of acknowledgement written by a member of staff and the subsequent benefit statements which were issued, the business having been organised in such a way that the employee without authority was held out as the person who was to communicate whether transfers had been approved.
Miss Campbell submits therefore, that it matters not whether the equity is framed in terms of an estoppel, an express or a constructive trust. The effect in this case is that any right which may have devolved on Hugo in his capacity as executor by virtue of Article 404 cannot be exercised by him but was held for the benefit of the beneficiaries of Newin. Mr Taube on the other hand, says that the secret trust principles in Ottaway v Norman can have no application in the circumstances of this case. They apply, he says, where an individual receives property beneficially on the faith of a promise to the testator to deal with it for the benefit of a third party, whereas any rights acquired by Hugo pursuant to Olga's Will were acquired in his capacity as an executor. Furthermore, he says that Miss Campbell's analysis relies upon inference upon inference and that it is essential that there be someone to enforce the obligation. He points out that estoppel is not pleaded and adds that any such estoppel would be in Olga's favour and therefore, Hugo as her executor would be both obligor and obligee.
In relation to the documentation itself, Miss Campbell points out that in the same way as the 1980 Byelaws, the beneficial provisions in the 1978 Byelaws which would govern if the 1980 Byelaws were for some reason invalid, were materially in the same form and contain provisions intended to have effect after the death of Olga.
Given that Forester has abandoned a claim that Hugo was on "a frolic of his own" in 1980, Miss Campbell says that the alternatives are either that he was following instructions or that he mistook those instructions and that the former is more likely than not. She also prays in aid the presumption of regularity and the inherent unlikelihood of dishonesty on Hugo's part, which in any event, is no longer pursued. Miss Campbell submits that Forester's case in this regard is now incoherent. At paragraph 5 of the Claimant's Further Note on Pleadings it is stated that what if any instructions were given to Hugo in relation to the Founder's Rights/Claim Right is not part of Forester's case and arises only out of the Defences. It goes on to state that Forester's case is that Hugo's duties in relation to the Founder's Rights/Claim Right are a legal consequence of the fact that they fell into the estate and Hugo was an executor and trustee of Olga's Will. However, Miss Campbell says that as the defence is denied in the Reply, it is incumbent on Forester to have a position in relation to instructions, given that it appears to be common ground that there was an oral fiduciary mandate agreement between Olga and Hugo during Olga's lifetime.
She submits therefore, that the ready inference to be drawn from Hugo's conduct is that he was authorised. She says that what Hugo did is all consistent with those instructions. He kept Newin separate, did not treat the Founder's Rights/Claim Rights as an asset of the Will Trusts and Swiss Inheritance Tax was not paid on Newin assets. This is also consistent with the trust accounts and inventories and the form of the 1978 and 1980 Byelaws both of which are drafted on the premise that they will continue after Olga's death. She submits that the proprietary element of the Founder's Rights, namely the ability to alter the beneficial provisions ceased on Olga's death as a result of the joint effect of the statutes and byelaws of Newin, as overlaid by the extrinsic contractual arrangements in the form of the mandate agreements. She also emphasises that Forester appears to accept that from around 1967 until 1975 Olga intended to keep the assets of Newin separate from her estate. She also points out that although that appears to have been countermanded by the 1975 Byelaws, they were themselves overridden by the 1978 Byelaws which Forester does not seek to impeach and which are drafted on the basis of a separate regime. If Olga had wanted Newin to be part of her estate she could easily have done it through the byelaws but in fact, did the opposite.
She also submitted that by analogy, the treatment of the Founder's Rights may have been the same as a general power of appointment over property which nevertheless comes to an end on the death of the donor of that power. There is no automatic conclusion that because the Claim Right was in the hands of Olga at the date of her death that it passed to her heirs. In this regard she referred me to Dr Liatowitsch's evidence in cross examination about a decision of the Swiss Federal Supreme Court, of which a short synopsis/commentary appeared in the Praxis unpublished report journal which was produced to the court. Miss Campbell says that it applies by analogy here and that one must conclude that the right of revocation was waived on Olga's death. She submits that there is no factual background which tends to suggest that Olga would have wanted the Claim Right to pass to anyone else and that Markus' description in cross examination of the Newin Establishment being foundation like is consistent with the Claim Right having been extinguished on Olga's death.
Miss Campbell submits that this is also consistent with the inheritance tax position. Professor Oberson accepted that inheritance tax would be due if the Founder's Rights had fallen into the estate and not due if they did not and that a reasonable adviser would have known that to be the case. She says that the inference can be drawn that Hugo would have known that the structure adopted had tax advantages. Further, she submits that the principle of "Durchgriff" referred to by Professor Oberson which enables the tax authorities in effect, to pierce the corporate veil, would only apply to Newin if it had been established mainly or wholly for the purposes of avoiding tax. There is no allegation to that effect.
She also relies upon the fact that it was Markus' evidence that it was his understanding based upon his discussions with his father that there was never any issue of Newin Establishment forming part of the Will Trusts. She also says that little if any weight should be attached to the arguments set out in a supplemental pleading which was filed in the Zurich proceedings and dated 30 November 2005, which suggest that it was accepted that Newin fell into the estate. She points out that Hugo had died in January of that year and had lacked mental capacity for some time before his death.
Soledad's position in relation to whether the Founder's Rights or the Claim Rights fell into Olga's residuary estate is slightly different. Mr Furness submits that there was a mandate governed either by Liechtenstein law or Swiss law or an English law trust in favour of third parties, namely the beneficiaries of Newin, which became irrevocable (at the latest) on the death of Olga. Although not pleaded, in the alternative, Soledad also supports Markus and Hugo's alternative case.
Mr Furness rejects the suggestion that the onus falls upon the Defendants to show that the Claim Rights did not fall into the residuary estate. He emphasises that the claim is Forester's, that he must prove his pleaded case that Olga retained full control over the Founder's Rights at the date of her death, that the Claim Rights passed to her executor and that Hugo was well aware of this. If Soledad is able to demonstrate another arrangement equally or more plausible, then Forester must fail.
Mr Furness submits that there is no reason or justification for assuming any misconduct on the part of Hugo in relation to the 1980 transactions but on the contrary one must proceed on the basis that he was acting on instructions and would have ensured that the estate and trust administration were carried on in a manner consistent with his understanding of the correct legal position. Mr Furness submits that it is necessary to consider the terms of the arrangements between Olga and Hugo in the light of the relationship between them and what is said to have been Hugo's motivation from 1980 onwards. First, there is no dispute that Hugo was Olga's trusted adviser and that during Olga's lifetime and after her death and until his death, eleven years later, Isidro also trusted Hugo implicitly. Furthermore, Forester accepted in cross examination that Olga was a good judge of character and had a good head for business matters. In this regard, I also accept the evidence of Markus given in cross examination in relation to his father, to the effect that he (Markus) did not believe that his father would ever have done anything which was not proper, not within his instructions or otherwise than in the best interests of his clients.
He also points out that Forester's pleaded case that Hugo continued Newin after Olga's death in order to benefit himself has been abandoned and that it appears that the different case set out in the written opening on behalf of Forester is also not pursued. That was that the 1980 Byelaws and the 1980 Fiduciary Agreement were mere window dressing designed to disguise from the tax authorities in the Canton of Vaud the full extent of Olga's rights and powers in respect of the Founder's Rights over Newin Establishment. Further, it is no longer alleged that Hugo was acting on a "frolic of his own" but it is said was acting in what he believed to be the best interests of his client.
Mr Furness says that it is necessary to look at the events of early 1980 in that light. He drew attention to the fact that the 1972 Fiduciary Agreement which mentioned Olga was expressly revoked and that the 1980 Fiduciary Agreement makes no mention of her. He postulated two theories: first that in fact, the 1980 changes were window dressing for the tax authorities in the light of the fact that Olga's life was drawing to a close; and secondly, that in fact, Olga intended to divest herself of the Newin assets and the Claim Rights. Mr Furness submits that the express revocation of the 1972 Fiduciary Agreement and the change in article 1 in the 1980 Byelaws are both consistent with having been in accordance with Olga's wishes. He accepted nevertheless, that tax issues might well have been one of the motivating factors but that there was no reason to infer that the actions were mere window dressing rather than being genuine. Olga was 90 years of age and immensely wealthy without reference to the Newin assets. She may have wished to divest herself of Newin completely and pass it on.
He also pointed out that it is now said on behalf of Forester that had Olga done so, gift tax would have been payable in Switzerland of a similar magnitude to that which would have been charged had the Claim Rights remained in the estate. However, there is nothing in the relevant experts' reports in relation to a transfer of the Founder's Rights by way of gift and in fact, the issue only arose in the cross examination of Dr Pfenninger by Mr Taube and then not directly in answer to a question about Founder's Rights.
He also points out that there is nothing surprising in the fact that the arrangement was not written down, given the lengthy relationship of trust between Hugo and Olga. Furthermore, he submits that if one accepts that Hugo was not on a frolic of his own, as a consequence the 1980 byelaws referred to in the 1980 File Note, must have been a result of instructions received and one should infer that the reference to a prospective conversion was also as a result of instructions. Mr Furness also points out that even if the 1980 File Note only records Hugo's thoughts, it indicates that he thought conversion to be a possibility. If he considered the Founder's Rights to be a valuable asset of the estate he would have known that such a conversion was contrary to his instructions.
In relation to the $45m distribution, Mr Furness submits that Hugo must have considered that he had a discretion within his instructions to carry out the exercise. His note of 28 October 1983 reveals that he considered that the heirs who were resident in Switzerland could obtain considerable tax advantages were Newin assets distributed to a "great extent" leaving a reduced amount in the "shelter entity" and that the consideration he gave later to repatriating the assets to Newin is consistent with it being a separate entity.
Mr Furness submits that Hugo used terms such as "trust" and "executor" loosely in correspondence and in the Newin byelaws and that the most reliable guide can be found in the audited trust accounts which for the entire period from Olga's death in 1980 until the Newin Conversion in 1995 neither show the Founder's Rights/Claim Rights as an asset or record Newin's assets as assets of the Will Trusts. He submits that the same is true of the documentation produced for the purposes of the "Newin Adjustment", which make no reference to a share in Founder's Rights or Claim Rights and record adjustments on the basis of what would have been the Portago and OMM share in Newin. The agreement dated 2 December 1980, signed by Isidro, Soledad and Forester to purchase the "interests" of the Portagos in Newin, F&H and Soltega also makes no reference of Founder's Rights or Claim Rights. He also draws attention to the fact that the ratification of distributions and acknowledgement of the Newin Adjustment of 29 January 1981 refers to the "teile" or parts of Newin which he submits is consistent with Newin being a separate entity with its own assets and beneficiaries.
He reminded me that the Newin Adjustment was designed to address the position of Newin from the US tax perspective and if it had been believed to be part of the same structure as Olga's Will Trusts through the ownership of the Founder's Rights/Claim Rights, the US tax issues which it was designed to resolve would have remained. He also points out that in the 1980s distributions from Newin were paid straight to trust income accounts and were separately itemised. Mr Furness submits that this indicates that Newin was separate from the assets of Olga's Will Trusts albeit as Markus explained in cross examination, payments were made into the sub-fund bank accounts.
Mr Furness accepts that if Olga retained full control of the Founder's Rights at the date of her death, that right must have passed into her estate, regardless of whether the agreement between Olga and Hugo was governed by Liechtenstein, Swiss or English law (subject to Hugo and Markus' argument based on Ottaway v Norman). However, if there was an agreement to benefit the beneficiaries of Newin then Forester has the onus of proving that Olga retained control over the Founder's Rights, or at least an enforceable right of revocation of the agreement under which they were held, up to and beyond her death under the proper law.
He points out that it is agreed by all parties that if the relationship between Olga and Hugo was governed by Liechtenstein law, the relationship would take the form of a fiduciary mandate contract which may either terminate on death or, can continue after death if that is the intention of the parties. Although there was some disagreement between the experts about whether Olga would have retained some element of proprietary right against Hugo or Interhold it was agreed that what really mattered was the terms of the mandate contract, not theoretical issues. It is not in dispute that the Liechtenstein experts agreed that under Liechtenstein law it is possible to conclude a mandate contract for the benefit of third parties which could not be terminated, revoked or amended by Olga's heirs. Such a benefit could be made enforceable by the third parties if that was the intention of the promisor and promisee and the contract could enable the fiduciary to convert an establishment into a foundation if appropriate in order to fulfil fiduciary duties.
He also reminded me that the position is not dissimilar in Swiss law. The Swiss law experts agreed that the relationship between Olga and Hugo, if governed by Swiss law would be termed a fiduciary mandate contract and that Dr Liatowitsch also considered that (subject to the facts) the arrangement could amount to a contract for the benefit of third parties which would become irrevocable on death with which Mr Hochstrasser agreed and Professor Oberson did not entirely disagree.
Mr Furness points out that it would also have been possible for Olga to declare a trust of the benefit of Hugo's rights under the 1980 Fiduciary Agreement with Interhold on the terms of the beneficial provisions of the Newin bye-laws with the effect that Hugo would hold the benefit of the founder's rights on trusts equivalent to those beneficial provisions.
What was the agreement between Hugo and Olga immediately prior to her death?
In my judgment in the light of the fact that it is no longer alleged that Hugo was on a "frolic of his own", that he was acting dishonestly or improperly, I agree with Miss Campbell first that it is appropriate to approach this question from the standpoint of a presumption of regularity. Even if reliance were not placed on that presumption, despite a plethora of documents, there is nothing whatever upon which to found any doubt as to Hugo's integrity. In addition, I accept Markus' evidence that he did not believe that his father would have done anything which was not proper, within his instructions or otherwise that in the best interests of his clients. As a result, I agree with Miss Campbell that in the circumstances, the alternatives are either that Hugo was following his instructions in 1980 or that he misunderstood them. It seems to me on the basis of all the evidence that the former is more likely than not.
In this regard, I also take account of: the fact that Hugo had been Olga's trusted adviser for many decades and that it was accepted by Forester that his grandmother was a good judge of character and had a head for business; there is nothing to suggest that Isidro did not take the same view; Isidro made no complaint about Hugo's management of affairs either in 1980 or for the following eleven years until his death in 1991; and that Forester himself trusted Isidro and considered that his grandfather looked after Forester's financial affairs.
In addition, I agree with Miss Campbell that Hugo's apparent intentions are more likely than not to evidence his discussions and agreement with Olga and with Miss Campbell and Messrs Taube and Furness for that matter, that it is permissible to look not only to the 1980 documentation itself but also to subsequent conduct when seeking to determine the nature of the agreement or arrangement in place immediately before Olga's death.
Further, I do not consider that there is anything to be inferred from the fact that despite the fact that the arrangement between Olga and Hugo which existed at the date of her death concerned very considerable sums of money, it was not reduced to writing. In coming to this conclusion, I have taken into account: the close and very lengthy relationship between Olga and Hugo; the perceived need for a high degree of privacy which is evident from Hugo's internal memoranda and pervaded all their dealings; and the fact that the details of their arrangements over the decades had for the most part been oral.
I should add that in the light of the 1980 Byelaws, the express revocation of the 1978 Byelaws and the 1980 File Note, I do not consider that it is sufficient for Forester not to put forward a case in relation to the arrangement immediately prior to the death, but merely to seek to rely upon what was described as a default position, that all rights held by Olga would have fallen into the residuary estate and to seek to place the onus on the Defendants to prove what the position was. It seems to me that having abandoned the allegation of a "frolic of his own" or dishonest misconduct on the part of Hugo and it seems, the allegation that the 1980 documentation was merely window dressing for the purposes of avoiding tax, it behoved Forester to put forward a positive case. To put the matter another way, I agree with Mr Furness that the onus is on Forester as claimant to prove that the Claim Rights fell into Olga's residuary estate and that his position having abandoned numerous facets of his claim is at least hollow.
Before turning to the terms of the arrangement or agreement, I should also mention that I have already decided that I am unable to accept Forester's evidence as to the severity of the impairment of Olga's mental state in January 1980. In any event, in the light of the fact that it was not pleaded nor alleged that Olga lacked capacity, it remains unclear to me what effect that evidence was intended to create and what consequence it is alleged would have ensued, especially in the light of the fact that the allegation that Hugo was acting on a "frolic of his own" was abandoned. In any event, the evidence did Forester no credit.
What were the terms of the arrangement or agreement between Olga and Hugo immediately before her death? In the light of all of the surrounding circumstances to which I have referred taken together with the fact that the beneficial provisions contained in the 1978 Byelaws which were very similar to those in the 1980 version, but for Olga's interest, were expressly revoked in favour of the 1980 version, the content of the 1980 Fiduciary Agreement which makes no mention whatever of Olga but contains numerous express references to Hugo's control over the Founder's Rights and Hugo's subsequent conduct, it seems to me that given her considerable age and frailty and her very considerable wealth, it can readily be inferred that Olga intended to divest herself of all assets and rights in relation to Newin Establishment including the right to revoke her instructions.
In this regard, I also take into account that Professor Oberson accepted that the elaborate beneficial provisions of the 1980 Byelaws were a strong indicator that it was intended that the fiduciary agreement between Olga and Hugo would continue after her death. In addition, it seems to me that had it been intended that the Newin assets should fall into the residuary estate, or that there should be an ability in Hugo as Olga's chosen executor, to revoke the arrangements, it would have rendered the inclusion of the very detailed beneficial provisions all but purposeless and would have placed Hugo in a position where his duties conflicted.
Further, it does not seem to me that the failure to include an express provision dealing with the transfer of what have been called the Claim Rights is itself indicative of or raises an inference that it is more likely than not that that right was retained by Olga at the date of her death. Given the very close relationship between Olga and Hugo and the omission of all but the mention of Olga in Article 1 of the 1980 Byelaws, it seems to me that the form of the 1980 Fiduciary Agreement taken together with the elaborate form of the 1980 Byelaws, viewed in the context of the fact that Olga was nearing the end of her life and in the light of the subsequent conduct, it can be inferred that she intended to divest herself of all rights including any Claim Rights. Although it is accepted that tax may have been a motivating factor, as I have already mentioned, the allegation that the 1980 documentation was window dressing designed to avoid Swiss Inheritance tax is no longer pursued with any vigour, if at all. In fact, it is inconsistent with Mr Taube's final position that the Trustees were entitled to continue the Newin entities after 1980. In the circumstances, it seems to me that there would have been no purpose in going to such lengths to set out detailed beneficial provisions if it were intended that the right to revoke them and the agreement between Hugo and Olga was to fall into the estate.
Further, although the 1980 File Note, like all the other internal memoranda to which I was referred, makes no mention of express instructions, in my judgment, in the light of presumption of regularity, the matters to which I have already referred and the abandonment of the allegation of a "frolic" or impropriety of any kind, its contents should be construed at least as a product of and not inconsistent with instructions. Therefore, on the balance of probabilities, it can be inferred that the instructions which Olga gave were sufficiently wide to include the possibility of a conversion to a foundation in the future. Further, in my judgment, the fact that such a conversion was within Hugo's legitimate contemplation and therefore, for the reasons I have mentioned, was within the ambit of his instructions is entirely consistent with an agreement between Olga and Hugo that Hugo should have a wide discretion but should administer Newin for the benefit of its beneficiaries as an entity entirely separate from the residuary estate and that the instructions should not be revoked.
In my judgment, such a conclusion is not undermined either by Mr Taube's submission that this amounts to inference on inference or by the fact that the Newin Conversion did not take place for some fifteen years. First, I do not consider that this is inference on inference. In my judgment, the 1980 File Note is one of the many subsequent documents upon which it is permissible to rely when seeking to determine the nature of the instructions and such reliance does not amount to double inference. Secondly, in my judgment, the fact that no steps were taken to effect a conversion for a considerable time does not affect the content of the instruction or arrangement itself the breadth of which is evidenced by the 1980 File Note. If I am wrong about the nature of the 1980 File Note and it only amounts to some jottings, in the light of the fact that there is no evidence upon which to found a claim that Hugo was acting improperly, it indicates that he considered a conversion to be a possibility and within those instructions. In addition, I do not consider that such a conclusion is undermined by the fact that the 1980 Byelaws were not irrevocable. The same was true of the 1978 version. In my judgment the factor is neutral.
Further, in this regard, I do not consider that any assistance can be gained from the content of the correspondence written to Olga by Hugo in the 1950s about control over an establishment or foundation. It seems to me that by the stage that the 1978 and 1980 Byelaws and the 1980 Fiduciary Agreement were executed that correspondence was completely out of date. If I am wrong about that, it seems to me that the correspondence does not assist Forester's case. Although Hugo must be substituted for Isidro, the correspondence with Mr Hubachek in 1956 is consistent with an agreement that Newin Establishment be administered after Olga's death by those whom she appointed to do so. In addition, the early correspondence makes clear that Hugo was aware of the importance of the Founder's Rights and the way in which they should be dealt with after Olga's death. It seems to me that the 1980 Fiduciary Agreement, the effect of which on its face is to divest Olga of rights in relation to Newin Establishment by vesting them in Hugo and any successor designated by him, should be construed in that light. Hugo took care to ensure that there would be no doubt that the Founder's Rights were under his control. This is also consistent with Hugo's explanation of the intended position on Olga's death given to Mr Taylor in his letter of 7 May 1958. He stated expressly that the whole fortune would fall into the estate "with the exception of the Liechtenstein Establishment."
Equally, it seems to me that even if the reference to "testamentary dispositions" in the 1975 byelaws should be construed as a reference solely to the will trusts which on the basis of the expert evidence is far from clear, those provisions were entirely superseded by not only the 1980 but also the 1978 Byelaws and therefore, are irrelevant. There is no suggestion that Olga was not fully capable of giving instructions in 1978. In the light of the revocation of the 1975 Bye-laws, I do not consider that on the balance of probabilities anything can be inferred in relation to alleged dominance of the will trusts over Newin Establishment.
I should add in relation to the 1978 Byelaws that even if it were alleged that they too were window dressing for the purposes of tax which does not now appear to be the case, they precede the letter from the tax authorities in Vaud and therefore, their content cannot have been driven solely by the response to Hugo's question as to whether the assets in Newin Establishment would be subject to Swiss inheritance tax, contained in a letter dated 18 May 1978.
What of the correspondence and actions taken after Olga's death? In my judgment despite what appear on the face of it to be some inconsistencies, it seems to me that overall, the subsequent acts and documentation are consistent with not only an arrangement between Olga and Hugo which required or allowed for Newin to be kept separate from the residuary estate and the terms of the Will Trusts but also that it was agreed or intended that Hugo should have discretion to deal with Newin and its assets outside the residuary estate in the way which he thought best in the interests of the beneficiaries of Newin and that his fiduciary mandate should not be countermanded.
First and perhaps most importantly in this regard, what of the $45m being a very large proportion of the assets of Newin Establishment transferred to the Will Trusts in April 1980? On the face of it, taken in isolation, such a step could be consistent with Newin being treated as within the Will Trust and/or is not inconsistent with Mr Taube's final position in closing that it was perfectly open to Hugo to retain Newin Establishment as a shelter entity after 1980. In my judgment, however, when the transfer is viewed in the light of the other matters to which I shall refer, it is equally consistent with Hugo having been furnished with a wide discretion by Olga.
In this regard I take into account the fact that the final inventory in relation to Olga's estate produced to the tax authorities in Lausanne in September 1980 makes no reference to Newin or the value of its assets. Secondly, I agree with Mr Furness and Miss Campbell that the way in which the Newin Adjustment was made is an example of conduct consistent with Newin Establishment and all rights in relation to it being entirely separate from the residuary estate and Will Trusts, despite the reference in Hugo's letter of 5 December 1980 to himself in his capacity as executor. The documentation produced in relation to the Newin Adjustment is concerned with shares in Newin and makes no reference to Claim Rights or Founder's Rights. This is consistent with the agreement of 2 December 1980 signed by Isidro, Soledad and Forester by which they purchased the "interests" of the Portagos in Newin, F&H and Soltega and the ratification of distributions and acknowledgment of the Newin Adjustment dated 29 January 1981 which refers to the "teile" or parts of Newin. In this regard I also take account of one of the purposes of the Newin Adjustment which was to avoid certain US tax complications for the Portagos. If, in fact, it was considered that the Newin Establishment was nevertheless part of the residuary estate and accordingly, the will trusts as a result of the Claim Right, the Newin Adjustment would not have been effective to resolve the tax issues it was carefully designed to counteract.
Such a separation and independent existence in all respects is also consistent with Hugo's memorandum of 1983 in which he ponders whether to reconstitute the funds of Newin Establishment. This is also consistent with the audited accounts which for the entire period from 1980 until the Newin Conversion in 1995 neither record Newin's assets or the Claim Rights/Founder's Rights as an assets of the Will Trusts. It seems to me that given Hugo's specialist knowledge and expertise, previous reference to Founder's Rights and the way in which the 1980 Fiduciary Agreement is drafted taken together with a presumption of regularity and the lack of any allegation of impropriety, that one can infer on the balance of probabilities that such rights did not fall into the residuary estate. I should add that in this regard I also take into account Markus' evidence that his father would not have done anything professionally improper.
I also agree that in correspondence and internal memoranda, Hugo appears to have used terms such as "trust" and "executor" quite loosely. Such a use in a general rather than technical sense is consistent with the use of the phrase "executor of the testamentary plan contained in the byelaws of Newin Establishment" in the 1961 Fee Agreement, the early Byelaws, the use of the phrase "the executors of the testamentary plan" and the term "beneficial owner" in the 1972 Fiduciary Agreement. The expert evidence was to the effect that neither the term "executor" nor "beneficial owner" was likely to have been used in the English law sense.
I also agree that the use of "Trust Isidro", "Trust Soledad" and "Trust Forester" is consistent with a straightforward shorthand, given that the "teile" in Newin Establishment mirrored the beneficial interests under the Will Trusts and until 2000, as Hugo explained to Markus in the document headed "the Bible", distributions were made through the trust bank accounts and on to each individual's personal foundation. In this regard, I also take into account the fact that English was not Hugo's first language and many of the documents have been translated. It seems to me that if such imprecision crept into a formal document such as the 1972 Fiduciary Agreement, on the balance of probabilities, it is more likely than not to have crept into internal memoranda and correspondence.
As Miss Campbell points out this is also consistent with the Inheritance Tax position. I agree that in the light of Hugo's specialist knowledge in relation to wealth planning and tax affairs, it can be inferred that he would have known that the structure which it is inferred was agreed had tax advantages. Professor Oberson accepted that inheritance tax would have been payable had the Founder's Rights had fallen into the estate. It was not paid. I also agree with Miss Campbell that there is nothing to suggest that the principle of "Durchgriff" by which the tax authorities would be entitled to look through the corporate veil of Newin Establishment could be applied to Newin. Furthermore, I consider the submissions made in relation to gift tax which it is said would have been payable had the Claim Rights been disposed of by Olga by way of gift to Hugo as a result of the alleged oral agreement or arrangement, to be inconclusive. The matter was only raised with Dr Pfenninger in cross examination and then not directly in relation to Founder's/Claim Rights. None of the other tax experts had an opportunity either to consider it or to comment upon Dr Pfenninger's answers in the witness box.
I also take into account (although I do not place great weight up it) that it is accepted that Isidro was involved in affairs concerning the family wealth, that Forester considered that at least after Olga's death Isidro protected him and looked after his financial affairs, but that no complaint whatever was made by Isidro as to Hugo's management of Newin Establishment or the estate. It seems to me that it is more likely than not that Isidro would have complained in the remaining 11 years of his life after Olga's death had he considered that the premise upon which Forester's claim is built to be correct.
Lastly, my conclusion in this regard is also consistent with my conclusions in relation to Issue 4 both as to the effect of the 1983 Resolution and the use of the phrases "Trust Isidro", "Trust Soledad" and "Trust Forester" in that document and its predecessors. Had the shares in F&H been held on trust for Olga's Will Trusts, it might have been some indication that Newin Establishment and its entities were intended to have fallen into the residuary estate.
What is the proper law of the agreement between Olga and Hugo and what effect did the agreement have?
The applicable principles of private international law by which the proper law of the arrangements between Olga and Hugo are to be determined are not in dispute. As all of the fiduciary mandate contracts in question were made before the Rome Convention took effect on 1 April 1991, the common law rules apply. Under the common law, the process is undertaken in accordance with the principles of the conflict of laws of the forum, namely England. In order to determine the issue it is necessary to: characterise the relevant issue itself; select the rule of conflict of laws which lays down a connecting factor for that issue; and identify the system of law which is tied by that connecting factor to that issue. The overall aim is to identify the most appropriate law to govern a particular issue. See Mance LJ §§ 26-27 in Raiffeisen Zentral Bank Oesterreich v Five Star Trading  QB 825. There is also no dispute that the relevant rules of private international law are the English common law rules on the proper law of contracts. In the absence of an express choice of law the proper law will be (a) that which can be inferred as the parties' intention as to the proper law on a common sense basis (i.e. having regard to nature of the contract and the general circumstances of the case) or, if no such intention can be inferred, (b) that of the system with which objectively viewed the contract has its "closest and most real connection": Dicey & Morris on The Conflict of Laws 11th edn. (1987), rules 180(2) (p. 1182) and 180(3) (p. 1190).
Applying the principles to which I have already referred, in my judgment the oral agreement or arrangement between Olga and Hugo at the date of her death in 1980 was also governed by Swiss law. It seems to me that on a common sense basis, having regard to the nature of the contract and the general circumstances, including the fact that the 1972 and the 1980 Fiduciary Agreements are expressed to be governed by Swiss law, that Hugo and Olga were resident in Switzerland and Hugo was a Swiss lawyer, that Swiss law has the closest and most real connection with their oral agreement. I come to this conclusion despite the fact that the Newin Establishment was established and the Founder's Rights in relation to it arise under Liechtenstein law.
What effect does that have upon the arrangement itself? In this regard, I agree with Miss Campbell that the expert evidence is to the effect that as a result of the arrangement between Hugo and Olga, the fiduciary mandate agreement between Olga and Hugo and the instructions given to Hugo were not immediately revoked by Olga's death. In fact, all of the Swiss legal experts agreed that such a fiduciary agreement was capable of continuing after death and could exclude the rights of the heirs. In any event, I also accept the evidence of Dr Liatowitsch and Mr Hochstrasser in the Joint Expert's Report with which as to its essential elements Professor Oberson agreed in cross examination, that under Swiss law such a contract could be characterised as a qualified contract for the benefit of third parties and that the ability to enforce it survived Olga's death for the benefit of the beneficiaries of Newin Establishment and did not devolve on her personal representatives. In the light of my conclusions as to the oral agreement itself, it seems to me that either the agreement continued after Olga's death and excluded the right of the heirs or to the extent that it is different in any way, it was a qualified contract for the purposes of Swiss law.
It is not necessary therefore, to consider the position had the right to revoke the fiduciary mandate agreement fallen into the estate and upon Hugo as executor, as a result of article 404 of the Swiss Code of Obligations. In any event, I should add that I do not consider that the doctrine of secret trusts with which Ottaway v Norman is concerned, is apt for use in such a situation and an analysis based upon estoppel which was not pleaded, would also have suffered from difficulties.
In my judgment therefore, Forester has failed to prove that on the balance of probabilities either that the Newin Establishment was intended to form part of the residuary estate or that at the date of her death Olga retained the right to control the Founder's Rights in Newin/terminate the fiduciary mandate agreement with Hugo and therefore, that that right which the experts have also analysed as a right to revoke the fiduciary mandate agreement between Olga and Hugo was retained by Olga. As Mr Furness put it, the alternative analysis is at least equally if not more likely and therefore, Forester's claim fails.
Issues 2, 3 and 5
It is accepted that it is only if Issue 1 is answered in the affirmative that Issues 2, 3 and 5 arise. Furthermore, as I have already mentioned in closing Mr Taube abandoned that part of the claim relating to an alleged duty to dissolve Newin Establishment, F&H and Soltega prior to its conversion in 1995. As a result, issue 3 has become redundant in any event. Issues 2, 3 and 5 are/were as follows:
"2. Duty to collect assets: Did Hugo breach his duty to collect and/or realise the Founder's Rights for the benefit of Olga's estate and Olga's Trust? If so, did this cause loss to the trust fund of Olga's Trust?
3. Duty to dissolve: Were the trustees of Olga's Trust (Hugo and Soledad) under a duty to dissolve the entities in the Newin nexus so that the trustees would hold the assets directly? If so, are the trustees liable to compensate the trust fund with taxes and costs paid in consequence of the failure to dissolve?
. . .
5. The Newin Conversion:
(1) Did Hugo and/or Markus and/or Soledad breach their duties by causing or allowing Interhold AG to exercise the Founder's Rights to carry the Newin Conversion into effect? If so -
(2) Did this amount to an unauthorised disposal of trust property or a breach (of the duty of care)? If so-
(3) Has Newin Foundation held all of its assets from time-to-time from the date of the Newin Conversion (10 November 1995) on constructive trust for the trustees of Olga's Trust? If so-
(4) Was any loss caused to the trust fund of Olga's Trust by the Newin Conversion?
(5) Were the Newin Distributions unlawful judged by the English law of trusts as being excessive distributions (in whole or in part) to Soledad as income beneficiary of Olga's Trust?
(6) However, is Forester prevented from raising the issue about the legality of the Newin Distributions and/or from claiming that Soledad is liable to account as trustee alternatively as constructive trustee for part of all of the Newin Distributions by the doctrine of issue estoppel on the basis of the contents of the Zurich judgment?"
Issues 2 and 3
In relation to Issue 2 it will already be apparent for the reasons set out, that in my judgment, Hugo did not breach his duty to collect and/or realise the Founder's Rights for the benefit of Olga's estate and Olga's Trust. Further, as I have already mentioned, the claim relating to Issue 3 is no longer pursued.
In the light of my conclusions, therefore, Issue 5 also does not arise. Sub-issues (1) - (5) should all be answered in the negative and it is not necessary to consider issue estoppel under sub-issue (6). However, for the sake of completeness, I will set out the lengthy submissions which were made and my conclusions had this issue and the sub-issues remained live
Breach of trust as a result of the Newin Conversion?
The Liechtenstein experts all agreed that the Newin Conversion on 10 November 1995 destroyed the Founder's Rights in Newin Establishment. Therefore, if the Claim Right had been held as an asset of Olga's estate, the effect of the Newin Conversion would have been that the trustees of Olga's Will would have ceased to have held a valuable asset in the form of the Claim Rights. Mr Taube also submits that Forester's position would have been prejudiced as a beneficiary of Trust Isidro and Trust Soledad under Olga's Will. It was said that he no longer had a marketable fixed interest in remainder in the Claim Rights/Founder's Rights in Newin Establishment. Instead, he was a discretionary beneficiary under the statutes and byelaws of Newin Foundation. Mr Nigg said that this was an open question whereas Dr Schurr's evidence was that it was clear. However, they both stated that Forester's position might be stronger.
Despite the fact that it is pleaded as wilful default, Mr Taube appears to have abandoned that claim and now submits that this was an active breach of trust by the trustees of Olga's Will. He says that if the trustees take steps to destroy a trust asset, their actions amount to an active breach of trust. Trustees are strictly liable for such active breaches of trust. He says that the evidence indicates that it was Hugo and Markus as trustees who took the initiative to instruct Interhold to convert Newin and in fact, Markus accepted that they took the decision. Mr Taube also submitted that the evidence was clear that Soledad (who unbeknown to all, including her professional co-trustees, Hugo and Markus, remained a trustee, despite her attempt to resign) effectively admitted that she assented to the Newin Conversion. He said that she said that Markus and Hugo had consulted her and she indicated to them that she had no objection to it. Mr Taube submits that it is inconceivable that the destruction of the Founder's Rights would have occurred without Soledad's assent and that she was party to the Newin Conversion in the same way as the other trustees. In this regard, although it is not pleaded, he also relies upon the fact that she was a trustee of the FML Settlement at the time.
It was not until Mr Taube's oral closing that it was made clear that it is no longer alleged that Soledad's alleged breach amounted to a wilful default but that it is now said that despite not being mentioned in the written closing, that Soledad actively participated in the breach of trust. Even if the Newin Conversion amounted to a breach of trust, Mr Furness on behalf of Soledad says that she neither actively caused nor passively allowed Interhold to exercise the Founder's Rights in order to carry out the Newin Conversion and therefore, cannot be liable.
Mr Furness submits that this is fundamentally different from an allegation of wilful default in relation to which it would also have been necessary to prove that Soledad and for that matter, Hugo and Markus had failed to act as a prudent trustee and that the new assertion that it was inconceivable that the conversion would have gone ahead without what was described as Soledad's assent was not put to Markus. He also says that even if Forester is successful in proving an active breach it does not entitle him to what has been called a "roving commission" on the taking of an account. Furthermore, he relies upon Markus' evidence that he does not recall speaking to Soledad about it and would have carried out the Conversion in any event, that he did not seek her approval, the fact that at the time, everyone was under the impression that Soledad had retired as a trustee.
I should add that Mr Furness took me to Lewin on Trusts at §39.048 and 049, Re Tebbs  1 WLR 924, Bartlett v Barclays Bank Trust co Ltd (No 2)  Ch 515, Meehan v Glazier Holdings Property Ltd  NSWCA 22 and Grace v Grace  NSWSC 976 in relation to the difference between an active breach of trust and an example of wilful default and the consequences. In fact, it seems to me that the distinction, the requisites necessary for proving the different types of breach and the consequences of those different types of breach are not in dispute. The difference in the nature of the breach itself is encapsulated in the judgment of Brightman J (as he then was) in Bartlett v Barclays' Bank (No 2) at 546C in the following manner:
"Wilful default by a trustee
means a passive breach of trust, an omission by a trustee to do something which, as a prudent trustee, he ought to have done - as distinct from an active breach of trust, that is to say, doing something which the trustee ought not to have done."
In relation to wilful default therefore, it is not in dispute that it is necessary to prove that the trustee caused loss to the trust by omitting to do something which as a prudent trustee he ought to have done. Mr Furness says that there is no evidence or pleading in relation to a failure to satisfy the standard of a prudent trustee in relation to the Newin Conversion and further, that there is no evidence to support the contention that Soledad participated in the decision which form the foundation for an allegation of an active breach of trust. He says that there is no basis for the assertion that a trustee meeting must be inferred to have taken place, especially as no one thought Soledad was a trustee at the time. Secondly, he says that a mere failure by Soledad to object cannot be characterised as an active breach of trust. Furthermore, he says that she could not have been expected to appreciate the consequences of the conversion, especially as it would seem that even after the present analysis had been identified by Withers in 2002, Forester despite all the high quality advice he has received did not raise the matter in the Zurich proceedings and has done so only latterly here.
- Section 30 Trustee Act 1925
In part perhaps because of the very late change of direction in relation to the nature of the breach and the confusion caused, Mr Furness took care also to refer to section 30(1) Trustee Act 1925 and submits that Soledad cannot be liable in relation to the Newin Conversion, effected by an agent who had receipt of the Founder's Rights, unless there was "conscious and wilful misconduct" on her part. Section 30 is in the following form:
"(1) A trustee shall be chargeable only for money and securities actually received by him notwithstanding his signing any receipt for the sake of conformity, and shall be answerable and accountable only for his own acts, receipts, neglects, or defaults, and not for those of any other trustee, nor for any banker, broker, or other person with whom any trust money or securities may be deposited, nor for the insufficiency or deficiency of any securities, nor for any other loss, unless the same happens through his own wilful default."
He submits therefore, that it is clear that a trustee is only accountable for his own receipts and as a result of section 30 the receipt by the trustee's agent is not the trustee's receipt for accounting purposes. He is only liable in that regard if the loss occurs because of the trustee's wilful default. He points out that there is no attempt to make Soledad vicariously liable for the acts of Interhold as agent and that a claim based on wilful default is no longer pursued.
In fact, Mr Taube says that section 30 on its true construction, does not apply to active breaches of trust which is what he alleges was committed by Soledad in this instance. He relies upon Re Vickery  1 Ch 572 at 583 which was a case of a passive breach of trust by an executor in which the plaintiff's claim was for an account on the footing of wilful default. Maugham J pointed out that the provisions of section 30 Trustee Act 1925 were derived from 19th century legislation, and section 30 fell to be construed narrowly:-
"I have now to consider s. 30, sub-s. 1, of the Trustee Act, 1925, a section which replaces s. 24 of the Trustee Act, 1893, which in its turn re-enacted Lord Cranworth's Act, s. 31. It is in the following terms: [His Lordship read the sub-section, and continued:] Reliance has been placed on the words concluding the sub-section "nor for any other loss, unless the same happens through his own wilful default." To avoid misconception I wish to say that, having regard to the numerous decisions since the enactment of Lord Cranworth's Act in relation to the liability of trustees for innocent breaches of trust, it is impossible now to hold that the words "for any other loss" are quite general, with the result that no trustee is ever liable for breach of trust unless the breach is occasioned by his own wilful default. In my opinion the words are confined to losses for which it is sought to make the trustee liable occasioned by his signing receipts for the sake of conformity or by reason of the wrongful acts or defaults of another trustee or of an agent with whom trust money or securities have been deposited, or for the insufficiency or deficiency of securities or some other analogous loss. It may be noted that if the phrase is not so limited it is difficult to see how there could have been any need for s. 3 of the Judicial Trustee Act, 1896, now re-enacted as s. 61 of the Trustee Act, 1925, or for s. 29 of that Act; nor would it be possible to explain the numerous cases before 1896 where trustees were made liable for honest mistakes either of construction or fact: see, for example, Learoyd v. Whiteley (1); National Trustees Co. of Australasia v. General Finance Co. of Australasia (2), and cases there cited."
Mr Taube says that a similar point was made in the Court of Appeal in Re Windsor Steam Coal Company (1901) Ltd  1 Ch 151. There a company's liquidator, of his own volition and without seeking the sanction of the court or the shareholders, compromised a claim against the company by one of its agents for the sum of £15,000, and he paid that sum to the agent. The agent's claim turned out to be worthless. The Court of Appeal upheld the judge's conclusion that the liquidator was liable and rejected the liquidator's reliance on s. 30 Trustee Act 1925. Lawrence LJ said (at p. 166):-
"Sect. 30 was not intended to absolve a trustee from liability for paying trust funds in his hands or under his control to the wrong person. A trustee is always liable for the due application of trust funds received by him, and is accountable for all his own receipts; under the ordinary account he can only discharge himself by showing that he has paid the trust fund to the right person. The question whether he has acted honestly does not seem to me to enter into the question of his liability where he has received moneys which he has himself disbursed to the wrong person. The question whether the trust fund has suffered any "other loss" within the meaning of the latter part of the section through the wilful default of the trustee does not seem to me to be a question which the Court has to consider, when dealing with the disbursement by a trustee of trust funds actually come to his own hands. In many cases a trustee may honestly and under competent advice pay expenses out of and distribute trust money; but when an account is taken at the instance of the beneficiary, he will be charged, as still being in his hands, with any trust money which he cannot prove to have been properly disbursed by him; and that is the position of the appellant here, if he be a trustee. There is no question, in my opinion, here of wilful default at all."
Mr Furness agrees. He says that section 30 is designed to protect a trustee from the acts and defaults of his agent, save to the extent he has some personal responsibility but it is not intended to be a general "let-out", requiring wilful default to be shown where the trustee has actually received the assets himself. In this case, he submits that the Founder's Rights which is the property said to have been destroyed, was vested in Interhold as agent and therefore, to make the trustee liable it is necessary to prove an act of default on the part of the trustee which is causative of the loss. He accepts however, that allowing a third party to destroy or damage a trust asset by neglect is a classic example of wilful default and referred me to Bartlett & Ors v Barclays Bank Trust Co Ltd (No 2)  1 Ch 515 in which Brightman J as he then was held that the bank as trustee had failed to act as a prudent man of business to safeguard its investment and had wrongfully and in breach of trust neglected to ensure it received adequate information. Mr Furness says that there is no question of automatic liability if in that case the shares had become worthless. It was necessary to show that they had failed to meet the "prudent man of business" test.
In this case he says that although the Founder's Rights were destroyed by Interhold, the mandate agreement which was the asset held by the trustees remains intact and in the hands of the trustees. It has been rendered valueless and just as in the Bartlett case, if the trustees are to be made liable for that, it must be shown that it arises as a result of their wilful default or that they themselves are guilty of an active breach of trust.
- Section 61 Trustee Act 1925
If he is wrong about all that Mr Furness prays section 61 Trustee Act 1925 in aid. In fact, both Mr Furness and Miss Campbell seek to rely upon section 61 in relation to the Newin Conversion and Distributions and in Miss Campbell's case in relation to the fees and retrocessions. In any event, it is convenient to set it out here. It is in the following form:
"If it appears to the Court that a trustee ... is or may be personally liable for any breach of trust ... but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the Court in the matter in which he committed such breach, then the Court may relieve him either wholly or partly from personal liability for the same."
Mr Furness says that it was entirely reasonable of Soledad to rely upon Markus and Hugo given the highly technical nature of the issue which has taken much time and high quality legal analysis to tease out.
It is not in dispute that relief under section 61 is discretionary and depends upon the particular circumstances. It is necessary for the trustee to show that the trustee acted both reasonably and honestly. In relation to reasonableness, the court will take into account what the prudent man of business would have done. In addition, the court must decide whether the trustee ought fairly to be excused.
Mr Furness draws attention to the following factors: Soledad was a lay trustee, unremunerated and acting alongside one, and later two, professional trustees, both of whom professed expertise in the administration of trusts; Hugo had been her mother's confidential adviser and close friend for many years and was someone in whom her mother had always had complete trust and confidence. He was also the repository of relevant detailed information; the claims in relation to the Founder's Rights are very technical; at the date of the Newin Conversion Soledad reasonably believed that she had previously resigned as a trustee; she also acted honestly throughout and her honesty is not challenged by Forester. In the circumstances she ought fairly to be excused personal liability.
In relation to Mr Taube's submission that where a lay trustee seeks to blame professional co-trustees the appropriate course is to seek a contribution or indemnity rather than invoke section 61: Bergliter v Cohen  EWHC 123 (Ch). Mr Furness points out that the observations are obiter and that there is no absolute rule. Lastly, he says that any benefit which arose from the Conversion is indirect, and should not prevent Soledad from being fairly excused.
Miss Campbell makes the same points in relation to section 61. In relation to both Hugo and Markus she says that they honestly and reasonably believed that the issue of the Conversion and the Distributions to which I refer below were matters of Liechtenstein law, and that this lengthy and what she describes as Byzantine analysis which has led to the claim based on destruction of the Founder's Rights could not reasonably have been known. Further, on behalf of Markus she says that it was reasonable that he should rely upon his father who was aware of all of the facts. Further, she adds that on Forester's new case, English law would not have applied to the distributions because it is conceded that it was permissible to allow Newin to run on as a shelter entity.
Mr Taube on the other hand is highly critical of Markus. He points out that he accepted in cross examination that he would have consulted the document referred to as "the Bible" which Mr Taube says contains no references to Newin being a separate entity and that Markus' evidence was evasive and implausible in relation to payments straight to trust bank accounts and his response that he was not good on accounts despite being a director Clariden bank. He also drew attention to Markus' evidence that he would have read the statutes and bye laws of Newin and had done so by 1992. In that context, Mr Taube says that his evidence that he never thought about the Founder's Rights or grasped their significance is he says incredible especially for a lawyer. He also drew attention to the fact that Markus took no advice as to Liechtenstein law before the Newin Conversion.
First, as it is accepted that Hugo and Markus made the decision to convert Newin Establishment into a foundation and expressly instructed Interhold to take the necessary steps, it seems to me that despite the fact that the steps were physically taken by their agent, it cannot be said that they did not themselves actively take the step and therefore, if it were a breach of trust, it would have been an active breach on their part. It is analogous to a trustee picking up the telephone and telling the curator of a picture holding it on the trustee's behalf, to destroy it. I do not understand Miss Campbell to demur from this, although she submits that Hugo and Markus and Markus in particular, would be entitled to seek to rely upon section 61, to which I will return.
In relation to Soledad, however, the position is more complex. Had it been necessary, I would have decided that the evidence was insufficient from which to conclude that Soledad had been guilty of an active breach of trust in relation to the Newin Conversion. As Mr Furness points out there is no evidence of a meeting of trustees at which Soledad was present, or from which a meeting could be inferred. Further, in my judgment the fact that it is not disputed that in 1995 Hugo, Markus and Soledad all believed, inaccurately as it turns out, that Soledad had ceased to be a trustee of the Will Trusts the previous year, militates against such a meeting having taken place and against any inference that her consent was sought or given. In my judgment, in the circumstances, Soledad's evidence that she had been consulted and had indicated that she did not object having asked whether it affected her, is insufficient to amount to an active breach of trust. It seems to me that that is very far from a positive assent. In my judgment, there is no basis for Mr Taube's submission that it was inconceivable that the destruction of the Founder's Rights would have occurred without Soledad's assent. In this regard I have taken into account, the fact that she was not considered to be a trustee of the Will Trusts any longer and I accept Markus' evidence that Newin Establishment was considered to be foundation like and no particular thought was given to the Founder's Rights at this stage. Furthermore, I do not consider that Mr Taube's reliance in closing submissions upon Soledad's continued position as a trustee of the FML Settlement takes him any further. It seems to me on the balance of probabilities that it is not more likely than not that she would have been asked to assent in that capacity.
Had I concluded that Soledad had been guilty of an active breach of trust in relation to the destruction of the Founder's Rights because in the same way as Hugo and Markus she had expressly instructed Interhold in its capacity Will Trustees' agent to destroy those rights which were vested in Interhold, or had positively assented to that course of action, I would also have concluded that section 30 Trustee Act 1925 was of no assistance to her. The action would have been hers. However, if the loss of the Founder's Rights had arisen purely as a result of the act of Interhold as agent, which had possession of the Founder's Rights, then it seems to me that as a result of section 30 it would have been necessary to prove that Soledad was in wilful default in order to render her liable, in relation to which there is neither a pleaded case nor evidence.
The next question which would have arisen would have been whether any of Hugo, Markus and Soledad could have sought to rely upon section 61 Trustee Act 1925. Did each of them act honestly and reasonably and in addition, ought they fairly to be excused? First, it seems to me that in relation to the Conversion and the Distributions, all of those requirements are met in relation to Soledad. I agree with Mr Furness that there is no evidence to suggest that she acted other than honestly and that in the circumstances, it was reasonable of her to rely upon two lawyers both of whom were intimately aware of the details concerning the Newin Establishment and her mother's fortune in general, one of whom, had been her mother's trusted adviser for decades before her death. In my judgment, her conduct would have been all the more reasonable given the highly technical nature of the analysis surrounding the Founder's Rights and the Claim Rights, something which Forester himself despite much high quality legal assistance has not pursued until now. I would also have exercised the court's discretion on the basis that in all the circumstances, it seems to me that Soledad ought fairly to have been excused. I would not have been deterred from such a conclusion by Bergliter v Cohen, Morritt VC's conclusions having been obiter.
What of Markus and Hugo? In relation to the Newin Conversion, if it had been necessary, I would have decided that both Markus and Hugo should have been granted relief under section 61. Despite Mr Taube's submissions in relation to Markus' evidence in cross examination, there is nothing to support any suggestion that either Markus or Hugo were not honest in this as well as other matters. Furthermore, in my judgment, despite their position as Swiss lawyers specialising in international estate and wealth management, in my judgment it was not unreasonable that neither of them appreciated the nature of the case in relation to the Founder's Rights and the Claim Rights which is now put forward and has been the subject of lengthy expert opinion and argument. Neither in the case of Markus is it unreasonable that he relied upon his father's extensive knowledge of the relevant matters. Had it been necessary I would also have found that they ought fairly to have been excused.
Newin Distributions unlawful and excessive?
It was not in issue that if the Newin Conversion is a breach of trust and loss was suffered, the relevant legal principles are contained in AIB Group (UK) Plc v Redler  QB 1503. The point which divided the parties was whether, had on Forester's analysis the Founder's Rights been retained by the trustees of Olga's Will Trust, would or could the Newin Distributions to Soledad in 2000 and 2001 have occurred in any event. If that were the case, no loss would have flowed from the alleged breach of trust. It is Forester's case that the court must approach the issue on the footing that the trustees of Olga's Will would have exercised control of the Founder's Rights reasonably and fairly, taking account of the duty to hold the balance fairly and reasonably between life tenant and remaindermen. I have to say that I agree.
As Olga's Will Trustees did not make the decision to make the Newin Distributions, Mr Taube says the matter should be considered from a "Public Trustee v Cooper standpoint". In other words, he says that the court must form its own judgment as to the fair and reasonable level of distributions that could have been made from the Newin entities to Soledad as the income beneficiary if Olga's Trustees had retained the Founder's Rights and procured their exercise to ensure that the balance was held properly between the interests of the income and capital beneficiaries. If he is wrong about that, he submits nevertheless, that no reasonable trustee in the position of the trustees of Olga's Will would in 2000 and 2001 have procured or permitted the distribution to the life tenant of substantially all the retained profits of F&H and Soltega, which represented both the accumulated income and realised capital gains from the investments of F&H and Soltega.
Mr Taube says that the evidence shows that the portfolios of Trust Isidro and Trust Soledad were at all times invested with an emphasis on fixed interest investments (bonds and deposits) so as to enhance income for the life tenants; whereas the Newin portfolios of investments, especially F&H, were invested with a greater emphasis on investments intended to achieve capital growth, in particular equities, something to which Mr Harrison draws attention in his first report. $16m odd of the $17.2m retained earnings in F&H were distributed to Soledad in 2000 and a further $5.8m was distributed to her the following year from retained earnings of $5.99m which in fact caused an overall loss of $467,722. $1.3m was distributed to her from Soltega in 2000 from $1.47m and $330,000 from 402,082 in 2001 causing an overall deficit of $348,456. Mr Taube submits that in these circumstances any reasonable trustee, who was properly informed about the duty to hold the balance fairly, should and would have recognized that the capital gains and appreciation from the investments of F&H and Soltega were intended to provide capital returns for the benefit of capital, not income returns for the benefit of Soledad as the life tenant of the trusts.
In this regard, Miss Campbell referred me to a passage in Lewin on Trusts at §25-031 and 032 at which a passage in Bouch v Sproule (1885) 29 ChD 635 at 653 per Fry LJ is set out. He held that where trustees hold shares in a company what is paid by a company as dividend goes to the tenant for life and what is paid by the company to the shareholder as capital, or appropriated as an increase of the capital stock in the concern, enures to the benefit of all who are interested in the capital. The position where trustees themselves control the company is explored at §25-055 058 of Lewin. In particular at §25-056 and 57 the position of a company incorporated by trustees for the convenience of managing investments as opposed to companies incorporated by the settlor the shares of which are subsequently settled are contrasted in the following way:
"25-056 Where it is the trustee who has incorporated the company as a convenience in the management of investments, our view is that the trustee is bound to distribute all receipts of the company which would have been treated as income if the investments had been held directly and is neither bound nor entitled to distribute receipts which would then have been treated as capital. English authority is lacking but there is a decision elsewhere to that effect, which is surely correct. A power to incorporate a company cannot have been intended to effect a substantial alteration in the rights of the beneficiaries;
25-057 Where it is the settlor who incorporated the company, subsequently settling the shares, then in the absence of express provision the intention to be imputed to him may well be that the trustee should be able to decide on the level of income distributed to the life tenant; a fortiori if the company is not simply a vehicle for investment but is a trading company. A provision that the trustee is not required to compel the payment of dividends would confirm such an intention. Where, however, the terms of the trust require minimum annual distributions to be made to income beneficiaries determined by reference to the total return of trust assets, the trustees may cause a company controlled by them to pay sufficient income to them to enable those distributions to be made."
Miss Campbell submits therefore, that as both Soltega and F&H were incorporated in Olga's lifetime and at her behest, their corporate veils should be respected and there is no reason why gains should not have been converted into income subject to the duty to keep a balance between capital and income.
In that regard she says that the duty to hold a balance is part and parcel of the duty to act impartially between different classes of beneficiary but that this does not equate with a duty upon trustees to exercise their discretion on all occasions in such a way as to produce equal benefits of equal value to all beneficiaries: Cowan v Scargill  Ch 270, 286-287 per Sir Robert Megarry V-C; Edge v Pensions Ombudsman  Ch 512 at 533 to 534 per Sir Richard Scott V-C and Lewin on Trusts (19 ed) paras 25-112 to 25-113. She also referred me to Nestle v National Westminster Bank plc  WTLR 785, per Hoffmann J, for the proposition that there is no duty to "inflation proof" the fund. Staughton LJ took the same view in the Court of Appeal ( 1 WLR 1260 at 1274):-
"Of course it is not a breach of trust to invest the trust in such a manner that its real value is not maintained. At times that will be impossible, and at others it will require extraordinary skill or luck."
However, if it were necessary to compare the value of the trust fund with an inflationary measure for the purposes of assessing liability or quantum, Miss Campbell suggests that a logical start date would be 1984 being date by which the administration of the estate had been completed and the Will Trusts commenced and should finish in December 2001 after the last Distribution. She submits that events after that time are irrelevant but if they should be taken into account one would need to look to 2015 rather that 2010 which is the date used by Mr Davies on behalf of Forester, apparently because of the extent of the data available to him. Equally, she says that for this purpose the Newin entities should be aggregated with the trust fund of the Will Trusts because that is the premise upon which the claim is founded. Mr Davies however appeared to think that there were separate entities with different beneficiaries and different assets although he accepted that the correct approach was ultimately a legal matter.
In addition she relies upon Mr Harrison's expert evidence that over the period from December 1984 when the administration of the estate was completed, to December 2001, immediately after the Newin Distributions had been made, the real value of Trust Isidro plus Trust Soledad and the Newin entities increased by around 8%, even after the Newin Distributions using a US dollar measure of inflation; the balance between income and capital was kept reasonably; the risk profile was not designed to favour either the life tenant or the remainderman; and the Newin Distributions in 2000 and 2001 represented a reasonable distribution. She says therefore, that the real value of the fund was preserved which is more than is required of trustees.
Further, in this regard, Miss Campbell points out that any point that might be being taken that the Newin Distributions were unreasonable if one applies a Swiss measure of inflation to the fund and the preservation of its value over the relevant period, goes nowhere. Mr Davies on behalf of Forester, in cross examination was very tentative in relation to a US dollar or Swiss measure and accepted that the US dollar measure would be reasonable. Furthermore, he also accepted that to target Swiss Francs rather than US dollar inflation would have had to have been taken into account in the design of the investment strategy itself, and that he was not sure whether the portfolio was suitable. She submits therefore, that it is clear that necessarily thought was given to capital and the capital beneficiary. Further, to the extent that the Newin Distributions included undistributed income within F&H and Soltega she says that it was perfectly permissible because trustees have the power when there is a real corporate veil in a subsidiary to convert income into capital, and vice versa. In any event, she relies upon Mr Harrison's firm evidence that income is converted into capital and vice versa all the time through ordinary investment decisions, such as selling bonds, or shares before or after a dividend has been declared.
Miss Campbell submits therefore, that if Markus was mistaken and the Newin entities were held on trust for Olga's Will Trusts and as a result, English law applied, he would have taken advice as to English law about the distributions, would have been advised that they could be made and in the light of the fact that his evidence is that he discussed them with Dr Meister who was happy to go ahead, the Newin Distributions would have been made in any event. Further, in the light of Mr Harrison's evidence, Forester cannot maintain that no reasonable trustee could have made the Newin Distributions. She also notes that Forester's change of position that Newin remained a separate shelter does him no favours in this regard. She says that if that were the case, Liechtenstein law would have applied to the Newin Distributions under which they were entirely permissible as confirmed in the Zurich proceedings.
Mr Furness agrees with Miss Campbell that if Forester is correct and Newin's assets are held on trust for Olga's Will Trusts whether under an express or a constructive trust, the only loss which could be attributed to the Newin Conversion is wrongful payments out from Newin in the intervening period which would not have happened but for the conversion, in other words, distributions to the extent that they can be shown to have been made in breach of the duty to balance income and capital interests. He goes on to rely upon Markus' evidence in cross examination that the Newin Conversion made no difference to the Newin Distributions. Mr Furness submits therefore, that any losses incurred by reason of the Newin Distributions would have occurred regardless of Soledad's alleged active breach of trust in relation to the Newin Conversion and accordingly, the "but for" test is not satisfied.
However, if Newin does not hold its assets on constructive trust for the Will Trusts, he says that there can be no liability on Olga's Trustees for the Newin Distributions because they are not the beneficial owners of Newin's assets. In addition, in the light of the evidence that they would have been paid and incurred regardless of the Conversion, if they were properly paid or incurred, then again no loss can be attributed to the Newin Conversion in respect of them.
Further, in the light of the fact that the claim that Newin Establishment should have been wound up in 1980 or shortly thereafter has been abandoned and Markus' evidence in cross examination that Liechtenstein law in relation to "fruits" is the same in relation to both an establishment and a foundation, that the conversion had no impact on his thinking in relation to the Distributions and the finding in the Zurich proceedings that the payments to Soledad amounted to "fruits' for the purposes of Liechtenstein law, the payments which were made properly under its constitution must be unimpeachable.
Lastly, Mr Furness points out that there is no suggestion in Forester's pleadings that the trustees breached their duty to hold a balance between capital and income during the period in which Soledad was a trustee and the experts' reports were not directed to the period from 1980 to 1998. In addition, Mr Davies agreed in cross examination that it was not appropriate to draw inferences from the conclusions in his report relating to other periods.
First, I agree with Mr Taube that if this question arises, it must be approached on the basis that Olga's Trustees would have exercised control of the Founder's Rights through the Claim Rights, reasonably and fairly taking into account the duty to hold a balance between life tenant and remaindermen. It goes without saying therefore, that the claim only arises if, contrary to my decision, Newin Foundation and the Newin entities were held on trust for the Will Trusts. Contrary to my findings, assuming that that is the case, however, I disagree with Mr Taube about the test to be applied, although I doubt that on the facts of this case it makes any difference. Mr Taube says that as the decision was made by the board of Newin and not Olga's Trustees, the court must come to its own judgment as to the level of distribution which were fair and reasonable to have been made in the circumstances rather than determining whether reasonable trustees could have made the Newin Distributions, albeit that he says that they could not have done so.
It seems to me that in the light of the fact that the claim is based upon the Newin entities being held on trust for the Will Trusts and the duty on the trustees to maintain the balance between capital and income, the test to be applied ought also to be that which is applicable to those trustees. I should add that I consider that to be the case, even though Mr Taube has abandoned the claim that Olga's Trustees should have collected in the assets of Newin and its entities. Despite the fact that his final position was that the Newin entities could legitimately have remained separate, it seems to me that upon the basis that they were held on trust for the Will Trusts, even if Liechtenstein law applied to the distributions when made, the duty overall to maintain the balance between capital and income arose under English law and therefore, the question is whether reasonable trustees considering the matter as a whole, could have made the Newin Distributions. In order to establish liability it would also be necessary to show that distributions in breach of the duty to balance income and capital interests would have been made which would not have happened but for the Conversion.
In this regard, I should say that I prefer the evidence of Mr Harrison to that of Mr Davies. Mr Harrison adopted a period from the commencement of the Will Trusts to immediately after the last main distribution to Soledad in December 2001, which it seems to me, as a matter of logic, is an appropriate period to have chosen. He also aggregated the Newin entities with the remainder of the assets of the Will Trust because that is the basis of the claim made by Forester. It seems once again that in the circumstances, such an approach is more appropriate than that adopted by Mr Davies. Belatedly, Mr Davies also suggested that a Swiss Franc measures of inflation could be applied to the trust fund which would have the effect of making the Newin Distributions appear unreasonable. In this regard, it is clear from the judgment of Staughton LJ that trustees are not required to maintain the real value of the trust fund at all. Therefore, it can hardly be of relevance whether a Swiss Franc or a US dollar measure of inflation is applied. In any event, Mr Davies himself accepted in cross examination that adopting a US dollar measure would have been reasonable. Using that measure, it was Mr Harrison's evidence which I accept, that the trust fund had increased in value by around 8% from 1984 to December 2001, the balance which was kept between income and capital was reasonable and that the Newin Distributions were themselves reasonable. On the basis, therefore, of Mr Harrison's evidence, in my judgment, Forester's claim in relation to the Newin Distributions must also fail. Further, in relation to Soledad, there is no evidence at all that during the period when she was a trustee that there was any failure properly to balance the interests of capital and income. In addition, in my judgment, given Markus' evidence that the Newin Conversion made no difference in relation to the Newin Distributions, the "but for" test would not have been satisfied. On the other hand, as Mr Furness points out, on the basis of Mr Taube's final position that Hugo was entitled to maintain the Newin entities, it is arguable that Liechtenstein law would have applied to the Distributions, the result of which would be that they were properly made.
As I have accepted the expert evidence that the balance between income and capital which was kept across all of the trust fund for this purpose including the Newin entities was reasonable and that the Newin Distributions themselves were reasonable from an English trust law perspective, it is not necessary also to consider whether the element of capital gains in the dividends declared by F&H and Soltega which became the Newin Distributions had the effect of rendering them improper or excessive.
In any event, I should add that I consider the position of Soltega and F&H to be a hybrid. It seems to me that they do not fit neatly within the category of companies established by a settlor who subsequently settles the shares in question or the category of companies established purely for the convenience of trustees which are considered at §25-056 and 25-057 of Lewin on Trusts. Both companies were incorporated during Olga's lifetime, Soltega being incorporated originally by Newin to facilitate the purchase of a property in Paris for Olga's use and F&H to hold investments for Newin.
However, in my judgment, in the light of the fact that: Olga as sole beneficiary of Newin Establishment received income from F&H and Soltega including capital gains for around two decades; she had full control of Newin Establishment whether as direct holder of the Founder's Rights or of the Claim Rights for most of that period until shortly before her death; and she gave instructions as to the detailed provisions concerning the beneficiaries of Newin after her death, the position is akin to that which would arise had Olga settled the shares in F&H and Soltega herself. It seems to me that in the circumstances, even if Newin and as a result, F&H and Soltega were held on trust for the Will Trusts, an intention should be imputed to Olga that the Trustees through the governing body of Newin should be able to decide on the level of "proceeds" distributed to the life tenant. Such a conclusion is also consistent with Forester's final position that the Trustees were entitled to continue the existence of Newin Establishment after 1980, the corollary of which must be that Liechtenstein law continued to apply at least to the level/make up of the Newin Distributions. It is not disputed that under Liechtenstein law, the Newin Distributions were not improper.
Further, had it been necessary, I would have come to the conclusion that Markus acted honestly and reasonably in relation to the Newin Distributions and ought fairly to be excused. He took detailed advice from a Liechtenstein lawyer before making the Newin Distributions, in the reasonable belief that it was Liechtenstein law which was relevant and there is nothing to suggest that he behaved in a way that was other than honest. Accordingly, had any liability arisen I would have been willing to grant relief under section 61 Trustee Act 1925.
Issue estoppel in relation to the Newin Distributions?
In the circumstances, the defence of issue estoppel becomes a remote prospect. In any event, Mr Furness on behalf of Soledad submitted that Forester is estopped from raising a claim for a declaration against her as a trustee or alternatively a constructive trustee for all or part of the Newin Distributions. In the Re-Re-Re-Amended Particulars of Claim Forester seeks to reserve the right to contend after an accounting exercise has taken place that there has been a wrongful distribution of the value of capital from Olga's Trust and/or that excessive sums have been distributed to Soledad as income beneficiary and also to seek an order that as an overpaid beneficiary she should reconstitute the capital of the funds of Olga's Will Trusts.
Mr Furness submits that the judgment arising from the Zurich proceedings, determined finally and conclusively and for all purposes, as between Soledad, Markus and Hugo on the one hand and Forester on the other hand, that the Newin Distributions made to Soledad between 1999 to 2001 were lawfully made; and that as between Forester and Soledad, Soledad is not liable to account for those payments.
Mr Furness accepts that he must show: first as a matter of English law, that there was a decision on the merits and that an issue which was part of the essential reasoning of the Zurich court is also at stake in these proceedings. He accepts that the Zurich court did not consider the breach of trust claim but he submits that nevertheless from an English law perspective it was an issue which was determined; and secondly that the Zurich judgment was final and binding on the merits under Swiss law.
It is not in dispute that issue estoppel arises where an issue of fact or law raised in later proceedings between the same parties contradicts the determination of an ultimate issue fundamental to an earlier decision, subject to a "special circumstances" exception. Mr Furness submits that a decision will create an issue estoppel if it determines an issue in a cause of action as an essential step in its reasoning. In addition he says that where the decision necessarily involves a judicial determination of some issue of law or fact because it could not have been legitimately or rationally pronounced without determining or assuming a particular answer, the determination though not expressed is an integral part of the decision which gives rise to an issue estoppel by implication: Hoystead v Taxation Commissioner  AC 155, PC. Further, if a foreign court is recognised in English private international law as a court of competent jurisdiction, an issue estoppel can arise as a result of its judgment: The Sennar  1 WLR 490, HL per Lord Diplock.
Hoystead v Taxation Commissioner was a tax case from Australia concerning deductions from income in relation to jointly owned property and whether six joint owners were each entitled to a deductions or only one between them. The issue was whether they had original shares for the purposes of the relevant legislation and therefore, entitled to deduction each. It was determined that they did have original shares and therefore were each entitled to a deduction. The following year, the Revenue sought to take the point that they were not joint owners which they had essentially conceded on the first occasion and was implicit in the questions which were determined, the precise issue not having been adjudicated upon. The Privy Council held that the Revenue were estopped from taking the point. At 165:
"In the opinion of their Lordships it is settled, first, that the admission of a fact fundamental to the decision arrived at cannot be withdrawn and a fresh litigation started, with a view of obtaining another judgment upon a different assumption of fact; secondly, the same principle applies not only to an erroneous admission of a fundamental fact, but to an erroneous assumption as to the legal quality of that fact. Parties are not permitted to begin fresh litigations because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the Court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted, and there is abundant authority reiterating that principle. Thirdly, the same principle -- namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken."
Mr Furness says that the principle applies here because: Forester alleges in these proceedings that the Trustees failed to hold a proper balance between capital and income because the dividends paid from Newin to Soledad were accounted for as capital or income without regard to their proper status under English trust law and contained a large element of capital which should not have been distributed to Soledad; Forester claimed in the Zurich Proceedings that Newin had made excessive distributions to Soledad, approximately $16.4 million having been "unlawfully" paid to her, capital having been distributed to her under the Newin constitution and Liechtenstein law; and the issues were tried in Zurich and determined in Soledad's favour.
Mr Furness accepts that the allegation was put on the basis that it was a breach of Newin's constitution to make the payments rather than the breach of trust which is now alleged. However, he points out that as Forester himself pleads at paragraph 111(1) Re-Re-Re-Amended Particulars of Claim, the issue of whether or not Newin should have classified dividends it received as capital or income and if so to what extent was tried in the Zurich proceedings and was determined in Soledad's favour.
He also points out that although the Zurich court decided that Forester had no standing to bring the claim, it did not decline jurisdiction. Instead he says that it gave two parallel or alternative bases for its decision to dismiss the Newin claims stating "even if a different approach is adopted the outcome could not be different". He says that the court dealt comprehensively with the merits of the allegation that capital had been distributed to Soledad, who was only entitled to income and found Forester's claim to be unmeritorious, having regard to the civil law concept of the "fruits" of a usufruct. However, he accepts that the claim in tort/unjust enrichment against Soledad was not specifically addressed in the Zurich Judgment, having fallen away once the claim that the distributions themselves were unlawful had been dismissed.
As a result, Mr Furness submits that having brought and lost the claim on the basis that there was no trust, there was an implicit acceptance that there was no trust in play here. It is not open to Forester now to come up with a new legal or factual analysis or a combination of the two, in order to run essentially the same case. Furthermore, he says that the decision of the Zurich court is final and binding. He pointed out that Dr Liatowitsch and Me Lachenal agreed that it is important to look not only at the requested remedy and relief sought in each set of proceedings but also at the underlying factual events and that Dr Liatowitsch considered the underlying factual events to be the same. He also took the view that although the decisive question when looking at the (narrower) issue of "ultra petita" was whether the relief granted was covered by the prayer for relief, when considering res judicata looks in addition, at the underlying facts of the case. The Zurich court applied Liechtenstein law as to "fruits" and the English law trust claim merely applies a different legal test to the same facts. Mr Furness also reminded me that Dr Liatowitsch took the view in particular that the doctrine of iura novit curia meant that the court should be taken to have decided any issues of law which fell to be decided in the course of determining the relief, and so given the fact that there was an alternative legal analysis here, the Swiss court should be assumed to have dealt with that, even though, in fact, of course, it did not. Mr Furness accepted however, that Maitre Laschenal took a narrower view and laid emphasis on the importance of the correspondence of the remedy which he said was different because the claim was for payment directly to Forester. He was also concerned that Forester was not suing in the same capacity as before.
Mr Furness says that the problem does not arise because Forester is suing in a personal capacity in both proceedings despite the fact that he seeks to reconstitute the fund under English trust law and that I should prefer the evidence of Dr Liatowitsch in this regard and in relation to the binding effect of the Zurich judgment. His evidence was that the effect of the principles of res judicata and iura novit curia is that the scope of the binding effect of the final decision relates to all the legal grounds to which the events underlying the case give rise.
Mr Taube on behalf of Forester agrees as to the elements necessary for issue estoppel. However, he submits that the essential elements of this claim were not adjudicated upon or essential to the Zurich proceedings. He also submits that there is no evidence before this court as to the rules of pleading and other procedural matters in Switzerland and that therefore, it is impossible to conclude that there was an identity of issues.
This is another issue which it is unnecessary for me to decide. However, for the sake of completeness I should record that: I do not consider that the fact that the issue of a breach of English trust law was not considered in Zurich is determinative; but the essential elements of the claim as presently formulated, namely the balance between capital and income were not considered directly in Zurich despite the fact that what was categorised as excessive distributions containing capital were considered in the context of the civil law concept of the fruits of a usufruct. It seems to me that although the essential elements of the two claims are closely associated the expert evidence is insufficiently clear to determine that exactly the same essential elements were adjudicated upon or were an integral part of that decision in the "Hoystead" sense; further, and in any event, I prefer the evidence of Maitre Lachenal over that of Dr Liatowitsch. Maitre Lachenal took a narrow view and laid emphasis on the correspondence of the remedy sought. Accordingly, I am not in a position to determine whether in fact, issue estoppel applies in this case.
Remedies (and related processes) arising from alleged breach of trust as a result of the Newin Conversion
It is Forester's case that as a result of the Newin Conversion and the destruction of the Founder's Rights being trust property, Newin Foundation held those assets on a constructive trust for the trustees of Olga's Will Trusts. Mr Taube says that this is because the value previously represented by the Founder's Rights in Newin Establishment and Olga's Trustees' proprietary interest in the Founder's Rights can be traced into the value of the assets held by Newin Foundation. In this regard, he referred me to Foskett v McKeown  1 AC 102 and to the explanation at 127B-D of the speech of Lord Millett of following and tracing. Tracing which is the principle upon which Mr Taube relies is described by Lord Millett as " . . . the process of identifying a new asset as the substitute for the old." I was also referred in particular the following passages per Lord Millett at 127B, 128B-D and D-F and 129F:
"Following is the process of following the same asset as it moves from hand to hand. Tracing is the process of identifying a new asset as the substitute for the old. Where one asset is exchanged for another, a Claimant can elect whether to follow the original asset into the hands of the new owner or to trace its value into the new asset in the hands of the same owner.",
We also speak of tracing one asset into another, but this too is inaccurate. The original asset still exists in the hands of the new owner, or it may have become untraceable. The claimant claims the new asset because it was acquired in whole or in part with the original asset. What he traces, therefore, is not the physical asset itself but the value inherent in it.
Tracing is thus neither a claim not a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. Tracing is also distinct from claiming. It identifies the traceable proceeds of the Claimant's property. It enables the Claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. But it does not affect or establish his claim.
[The process] identifies the traceable proceeds of the claimant's property. It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim".
Conversely, a plaintiff who brings an action like the present must show that the defendant is in receipt of property which belongs beneficially to him or its traceable proceeds, but he need not show that the defendant has been enriched by its receipt. He may, for example, have paid full value for the property, but he is still required to disgorge it if he received it with notice of the plaintiff's interest."
It is not in dispute that: tracing involves a process of attribution, not causation and that the law deems one asset to represent another, usually through the identification of "transactional links"; and that the focus is on attributing the value in one asset to the value in another. Mr Taube says therefore, that the question is whether one can attribute the value of the trust property being the Founder's Rights in the assets of the Newin Foundation and that the court is required to adopt a "sensible commercial view" and to look at the transaction overall and not at the strict order in which associated events occur: Federal Republic of Brazil v Durant International Corporation  UKPC 35 at  and . Further, the Privy Council the judgment of which was given by Lord Toulson, held at  that in order to trace:
"The claimant has to establish a coordination between the depletion of the trust fund and the acquisition of the asset which is the subject of the tracing claim, looking at the whole transaction, such as to warrant the court attributing the value of the interest acquired to the misuse of the trust fund. This is likely to depend on inference from the proved facts, particularly since in many cases the testimony of the trustee, if available, will be of little value."
Mr Taube submits that the holder of the Founder's Rights was the "supreme organ" of Newin Establishment, with full control over its assets. They were valuable property equal to the net assets of Newin itself and that the same must be true of Hugo's and Olga's Trustees' Claim Right, being a right to obtain the Founder's Rights. Those rights were extinguished on the Newin Conversion along with the absolute rights to and over Newin Establishment's assets, which thereafter were held or acquired by Newin Foundation absolutely, freed and discharged of the Founder's Rights. As a result, Mr Taube submits that on any "sensible" or "commercial" view of the transaction as a whole, the value previously represented by the Founder's Rights was represented in the assets acquired by Newin Foundation. Further, there is no question here of Newin Foundation being a bona fide purchaser for value of the trust property without notice, nor is such a defence advanced.
Mr Taube is supported in this by Miss Campbell. She says that the Founder's Rights are analogous to a general power of appointment the effect of which would be to render the beneficial interests in a trust fund of nominal value because they could be revocable. Once the power is revoked, the interests regain their true value and in effect, the value in the power is transferred to the interests themselves. Miss Campbell says that the same is true here. Once the Founder's Rights are destroyed, their value which the experts agreed was the same as the net value of the assets of Newin, floods into the beneficial interests under the Foundation. She submits therefore that one can trace the value of the Founder's Rights into Newin.
Mr Furness on the other hand says that tracing is not available in the circumstances of this case and that a constructive trust should not be imposed over the assets of Newin Foundation whether as a remedy to give effect to a successful tracing exercise or as a remedy for knowing receipt. He emphasises that the exercise of tracing involves the defendant "acquiring" or "receiving" property or the value of property which in law "represents" or "may be taken to represent" the original property as a result of a transaction which gives rise to the "transactional links" to which Lord Millett referred in Foskett v McKeown at 128B or at least a process which results in the defendant holding a "substitute" or "different" asset into which the value of the original asset can be traced. However, he submits that it does not enable someone whose assets are destroyed to trace into assets already owned by another party. He says that the Founder's Rights were destroyed but there was no transfer of any kind between Interhold or the trustees or Newin Establishment on the one hand and Newin Foundation on the other. This he says is fatal to the argument that a tracing exercise can be carried out.
He says that in fact, the decision in the Federal Republic of Brazil case is entirely consistent with this. It arose from a fraud in which various payments were made into and out of the bank accounts of companies with which they were associated, the timing of which were not always simultaneous. It was held nevertheless that it was possible to trace the value of the assets through the bank accounts in those particular circumstances. The relevant passages are as follows:
"17. The appellants' twin arguments have a common and simple logical parentage. The doctrine of tracing involves rules by which to determine whether one form of property interest is properly to be regarded as substituted for another. It is therefore necessary to begin with the original property interest and study what has become of it. If it has ceased to exist, it cannot metamorphose into a later property interest. Ex nihilo nihil fit: nothing comes from nothing. If the money in a bank account has dwindled from £1,000 to £1, only the remaining £1 is capable of being substituted by something else; the £999 has ceased to exist. This explains "the lowest intermediate balance" principle. Similarly, a property interest cannot turn into (or provide a substitute for) something which the holder already has; the later acquisition cannot be the source of the earlier. This explains the "no backward tracing" principle. The two are in a sense opposite sides of the same coin.
33. More particularly the respondents submit, as Professor Smith argues, that money used to pay a debt can in principle be traced into whatever was acquired in return for the debt. That is a very broad proposition and it would take the doctrine of tracing far beyond its limits in the case law to date. As a statement of general application, the Board would reject it. The courts should be very cautious before expanding equitable proprietary remedies in a way which may have an adverse effect on other innocent parties. If a trustee on the verge of bankruptcy uses trust funds to pay off an unsecured creditor to whom he is personally indebted, in the absence of special circumstances it is hard to see why the beneficiaries' claim should take precedence over those of the general body of unsecured creditors.
38. The development of increasingly sophisticated and elaborate methods of money laundering, often involving a web of credits and debits between intermediaries, makes it particularly important that a court should not allow a camouflage of interconnected transactions to obscure its vision of their true overall purpose and effect. If the court is satisfied that the various steps are part of a coordinated scheme, it should not matter that, either as a deliberate part of the choreography or possibly because of the incidents of the banking system, a debit appears in the bank account of an intermediary before a reciprocal credit entry. The Board agrees with Sir Richard Scott V-C's observation in Foskett v McKeown that the availability of equitable remedies ought to depend on the substance of the transaction in question and not upon the strict order in which associated events occur.
40. The Board therefore rejects the argument that there can never be backward tracing, or that the court can never trace the value of an asset whose proceeds are paid into an overdrawn account. . ."
Mr Furness submits therefore that the decision in the Durant case turns on its particular facts. However, he says that the Privy Council made clear at  that in order to extend the tracing remedy beyond its orthodox scope the Court must be satisfied that "the various steps are part of a co-ordinated scheme" so that the fact that a debit appears in a bank account before a reciprocal credit entry should not be permitted to obscure the true transaction. He says that this is quite clearly not the case here and that furthermore, there is no "transaction" at all, still less any "transactional links" which form a "co-ordinated scheme" designed to camouflage the substance of the exchanges taking place. In this regard, he emphasises the Privy Council's warning at  about being cautious about expanding equitable proprietary remedies in a way which may have adverse effects on innocent parties. He says therefore, that it is clear that the attempt to trace into the assets of Newin Foundation must fail and he points out that in any event, it was accepted in oral opening that Forester has failed even to attempt to "identify the traceable proceeds of" the original property which was the Founder's Rights.
In relation to Mr Taube's analogy of paying off a mortgage and as a result he says, increasing the value of a property, Mr Furness submits that it is entirely inapposite because the payment of a mortgage debt does not create a right to trace into the property itself. The remedy is subrogation. Mr Furness also rejects the analogy with an option over land. He drew my attention to the following matters:
(i) The original trust property being the Founder's Rights were never transferred to Newin Foundation. As they were extinguished on the Newin Conversion, Newin Foundation cannot have received them or any property representing them and they were not transformed into another form of property. Therefore, there was thus never any receipt by Newin of trust property (or its substitute).
(ii) In fact, if any property was transferred to Newin Foundation, it was the underlying assets of Newin Establishment which were not themselves held as part of the trust fund of Olga's Trust which is accepted by Forester since he alleges that it was a breach of trust to fail to exercise the Founder's Rights to transfer the assets of Newin Establishment to the trustees of Olga's Trust. Accordingly, there was never any receipt by Newin of trust property (or its substitute).
(iii) Newin Foundation did not receive any assets from Newin Establishment at all because the Newin Conversion was effected by the alteration of the legal status of Newin. It did not involve a liquidation or dissolution of Newin Establishment. The same legal person therefore, continued to own the assets throughout. Furthermore, Miss Campbell's analogy with a power of appointment is not apposite given that the beneficial interests in Newin were owned all along in just the same way. All that occurred was a change in the constitutional provisions governing Newin. There was no evidence before the court as to the effect of the destruction of the Founder's Rights upon the value of the beneficial interests in Newin and it was Forester's position in closing that his interest in Newin was unmarketable. In any event there is nothing to suggest that Saunders v Vautier applies to the beneficial interests in a foundation in order to support the argument that one could trace from the beneficial interests to the assets themselves.
(iv) Any proprietary interest that Olga's Trustees had in the Founder's Rights cannot be traced into the Newin assets because (a) the Founder's Rights were not transformed into a new or different asset held by Newin as a substitute for the original asset, and/or mixed with Newin's assets; and (b) except in circumstances which are irrelevant in this case, a claimant cannot trace into assets that were already in the hands of the defendant when the misappropriation occurred.
(v) In any event, even if there had been a transfer of assets upon the Newin Conversion, nonetheless the value of those assets remained the same before and after the conversion. In fact, the value of the rights of the beneficiaries under the bye-laws of Newin may have been enhanced by the destruction of the Founder's Rights.
(vi) In relation to the knowing receipt claim, assuming that Newin dealt with its assets inconsistently with the trusts of Olga's Trust at the time of the Newin Distributions, it was not unconscionable for it to do so. The Council of Newin Foundation would not at the time of the Newin Conversion or at any time prior to the issue of these proceedings have had sufficient knowledge of the legal position, as it is now alleged to be by Forester, so as to render any dealings with its assets unconscionable.
Mr Furness submits therefore, that there can be no tracing and therefore, no constructive trust imposed as a result. Furthermore, Newin cannot be personally liable to account as a constructive trustee unless it is proved to have been in knowing receipt of trust assets. He says that in order to be liable for knowing receipt, the recipient must have knowledge that the assets received by him are traceable to a breach of trust or fiduciary duty and the recipient's state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt BCCI Ltd v Akindele  Ch 437 at 448E, 455D-E. Mr Furness points out that no attempt has been made to establish that the Council of Newin Foundation knew: that the Founder's Rights were valuable assets; that the right to control them via Interhold was trust property; and that the destruction of the Founder's Rights amounted to a breach of trust which led to Newin Foundation coming to hold its assets subject to the equitable interest of the beneficiaries or trustees of Olga's Trust. On the contrary, Markus' evidence was that he did not consider the Newin Conversion to be an event of any significance. Equally, in order to render Soledad liable it would be necessary to prove that she knew of the breach of trust when she received the Distributions or at any time before they were dissipated: Agip (Africa) Ltd v Jackson  1 Ch 265 at 290 per Millett J. It seems that Mr Taube accepts that any imposition of personal liability as a result of a constructive trust is premature.
Had it been necessary, I would have decided that the destruction of the Founder's Rights did not entitle Forester to trace into the assets of Newin Foundation. I agree with Mr Furness that there was no transaction, transactional links or steps in a co-ordinated scheme in this case which could form the basis of such a remedy. It seems to me that taking a sensible commercial view, Newin Foundation neither acquired nor received property or the value of property which can be taken to represent the Founder's Rights. The Founder's Rights were merely extinguished and there is no evidence that they were transformed into another type of property in Newin's hands. The same assets continued to be held throughout by a body whose constitutional provisions were altered, the beneficial interests in those assets also remaining the same. There is no evidence before the court to the effect that the value of the beneficial interests or the underlying assets of Newin itself were increased or in any way affected by the destruction of the Founder's Rights. For example, there is nothing before the court to support a submission that the value of the Founder's Rights "flooded back" into the assets of Newin once the rights were extinguished.
To put the matter another way, in my judgment, any proprietary element in the Founder's Rights cannot be traced into either Newin's assets or beneficial interests because there is no evidence that that proprietary element, if any, was transferred or transformed into a different asset held by Newin. The Founder's Rights merely ceased to exist. It seems clear from the analysis contained in the judgment of Lord Toulson in the Privy Council in the Federal Republic of Brazil case and the approach adopted in the House of Lords in Foskett v McKeown, that Forester must be able to establish a coordination between the destruction of the Founder's Rights and the acquisition of an asset by Newin Foundation which looking at the whole transaction would warrant the court attributing the value of the interest acquired to the misuse of the trust asset, being the Founder's Rights. In my judgment, he cannot do so. The assets were already in the hands of Newin Establishment and remained the same before and after the Conversion. Even if there were a transfer of assets from Newin Establishment to Newin Foundation which does not appear to have been the case on the facts, there is no evidence that the value of the assets was enhanced as a result of the Founder's Rights having been extinguished.
I do not consider that Mr Taube's analogy with the effect of the termination of an option over land is apposite and even if it had been, it does not seem to me that a right to trace into the land in question would have arisen. Miss Campbell's analogy with a general power of appointment may be a slightly closer analogy but in my judgment, it takes the matter no further. In this case, the beneficial interests in Newin remained the same throughout and as I have already said, there is no evidence as to any effect on their value as a result of the Founder's Rights having been extinguished.
Accordingly, in my judgment, all other things having been determined in his favour, Forester would not have been able to seek to trace the Founder's Rights into the assets of Newin Foundation nor would a constructive trust have been imposed as a result. No attempt was made to develop a claim based upon knowing receipt of trust assets and therefore, I will not address it here.
Mr Taube on behalf of Forester contends that Issue 4 arises in any event. It is in the following form: Has Newin Establishment (until 1995) and Newin Foundation (since 1995) held its entire interest in the shares of F&H AG on trust absolutely under Liechtenstein law for the trustees of Olga's Trust since 31 December 1983? Was this also true of the shares of Soltega AG before it was liquidated?"
This claim is one of an express trust which is intended to be independent of the other claims. It is alleged that as a result of the 1983 Resolution the Board of Newin declared that it would hold its interest in all the bearer shares of F&H for the sub-trusts of Olga's Trust in the shares 53.33% for Trust Isidro, 26.66% for Trust Soledad and 20% for Trust Forester. It is said on behalf of the Defendants that this claim sits very uncomfortably with the new case which emerged in closing, namely that there was no duty to collect in the Newin entities before 1995 and that in fact, they were used perfectly properly as a shelter until that date. Miss Campbell submits that this leaves the express trust claim, which is alleged to have arisen in 1983, somewhat at sea.
In any event, both the 1980 Resolution and the 1981 Resolution were in the same form as the 1983 Resolution albeit that the percentages were different. They referred to Newin holding the F&H shares "for the account and risk of" Trust Isidro, Trust Soledad and Trust Forester. The 1980 Resolution set out proportions which reflect the 1980 bye-laws and also reflected the position as at Olga's death. Under the 1981 Resolution the shares of Andrea and Antonio Portago and the OMM Foundation were omitted and the other interests in Newin were increased proportionately. This reflected the Newin Adjustment and the passing of the 8th bye-laws on 26 August 1981 giving effect to the Newin Adjustment under which the shares of the Portagos and OMM Foundation had been bought out by the remaining beneficiaries. The 1981 Resolution was expressly declared null and void by a further and separate resolution of the Board of Newin dated 31 December 1983.
In the Amended Reply it is pleaded that when Hugo signed the 1983 Resolution he was expressing his will as Founder, the Founder's Rights being held by Interhold to his order, that Newin Establishment would instruct Interhold henceforth to hold the bearer shares in F&H on trust in the proportions set out in the 1983 Resolution and at the instant in which the trust, Interhold had notice as to for whom it should hold the shares because Hugo was a member of its board. It is also pleaded that the trust was revocable until the Founder's Rights were destroyed in 1995.
It is not in dispute that if the 1983 Resolution is a trust, its governing law would be that of Liechtenstein and that its effect turns on the expert evidence as to Liechtenstein law. Mr Taube submits that the terms of the 1983 Resolution should be construed as an express declaration of trust under Liechtenstein law and that it is clear from the use of the phrase "for account and risk of" in relation to the shares and the reference to Trust Soledad, Trust Forester and Trust Isidro that it is such a declaration and that there is certainty both of subject matter and object. He also relies upon the evidence of Professor Schurr.
In fact, the experts do not disagree about the requirements for a valid trust under Liechtenstein law. They are as one might expect, certainty of object, subject and intention. In addition, they agree that to create a valid declaration of trust under Liechtenstein law it is necessary that the declaration was made or ratified by Interhold as the holder of the founder's rights and Professor Schurr and Mr Nigg agreed that it could not be a declaration that the settlor henceforth holds property on trust, but had to be a direction to the intended trustee henceforth to hold property on trust. Professor Schurr concluded therefore, that Interhold was the trustee and that Newin could not be. However, the pleaded case is that Newin is the trustee.
In Mr Nigg's opinion, the language of the 1983 Resolution is more appropriate for a mandate contract. Dr Schurti pointed out that the 1983 Resolution is in the same form as the 1980 and 1981 Resolutions, both of which were revoked but like the 1983 Resolution do not contain an express revocation clause. Dr Schurti says that a Liechtenstein trust is irrevocable without such an express clause and that therefore, given that all of the resolutions are in the same form, they cannot be trusts because the earlier versions were revoked. In response, it was Professor Schurr's opinion that the 1983 Resolution was different in nature because it was the law and he suggested that the earlier resolutions could have been trusts but were revoked by means of the Saunders v Vautier principle.
In this regard, Mr Furness submits that there was no certainty of intention in respect of the 1983 Resolution. He says that in the context of the previous three resolutions (including the express resolution revoking the 1981 Resolution), on its true construction the 1983 Resolution was not a declaration of trust but a document of exactly the same nature as those which preceded it, namely an administrative document recording a new factual position regarding the shares of the beneficiaries of Newin in its assets. The 1983 Resolution reflected the fact that Soledad had by that date been paid her absolute share of the assets of Newin in accordance with the bye-laws.
He also draws attention to the fact that in his letter of instruction Professor Schurr was asked to assume that references to "Trust Isidro" and the other trusts were references to the sub-funds of Olga's Trust rather than references to the shares under the byelaws of Newin and Professor Schurr had not formed his own considered opinion on the subject. Mr Furness submits however that this was highly unlikely. As Markus stated in cross examination, each of the sub-funds of Olga's Trust had bank accounts in its own name and received payments into the income account from Newin on behalf of each of the beneficiaries of Newin, as well as payments from the sub-trusts of Olga's Trust. Mr Furness submits that in circumstances where Newin was administered by Hugo alongside Olga's Trust, the use of the expression "Trust Isidro" and the other trusts in this way when dealing with shares in Newin would be natural and could easily have been used as an administrative short-hand for the shares or "teile" of the particular beneficiaries in Newin which are expressed in the bye-laws to be Parts A, B etc. He also points to examples of Hugo using the word "trust" or "trustee" in a loose sense and that the expressions "Trust Isidro" and "Trust Soledad" are not expressions used in Olga's Will, but were adopted by Hugo, a Swiss lawyer, for his own purposes in administering all Olga's assets on behalf of others after her death.
Mr Furness also drew attention to the fact that both Mr Nigg on behalf of Soledad and Dr Schurti on behalf of Markus were of the opinion that the argument for an express trust was not one that was at all likely to succeed before a Liechtenstein Court. In addition, Mr Furness asks rhetorically, if Newin had intended to create a trust by the 1983 Resolution why did it not simply say so? Especially as Hugo was a lawyer who for the most part, documented transactions. Furthermore, Mr Furness reminded me that Professor Schurr on behalf of Forester accepted in the expert joint statement that from a practical point of view there is hardly any explanation why the Board of Newin would have established a trust, a factor which Miss Campbell submits is relevant to the construction of the 1983 Resolution.
Furthermore, the experts all agreed that under Liechtenstein statute a declaration of trust would be irrevocable unless there was an express power of revocation. Mr Furness drew my attention to the fact that despite Forester's pleaded case, in cross examination and in the Joint Report, Professor Schurr took the view that: it was likely that the 1983 Resolution created an irrevocable trust from the outset, as it was the last in the line of resolutions of this sort; therefore it was to be treated as being different from those which preceded it; and that the earlier resolutions might also have been irrevocable declarations of trust, but were subsequently revoked by way of a Saunders v Vautier type agreement. Mr Furness observed that it is not clear why or how the case of Saunders v Vautier would apply in relation to the 1980 and 1981 Resolutions here, as there is no suggestion that Olga's Trustees, as the beneficiaries under the supposed Newin trust, were involved in the decision to revoke either of them. In the light of the expert evidence as a whole, I prefer the evidence of Dr Schurti and Mr Nigg over that of Professor Schurr. I found his reasons why the 1983 Resolution was irrevocable, his explanation of whether he considered the 1983 Resolution to be an act of the Founder rather than the Board as a matter of construction, or whether he had just assumed it and his reliance upon Saunders v Vautier, coupled with his concession that there was no obvious explanation as to why a trust would have been established, to be less than convincing.
Lastly, in this regard, Mr Furness submitted that at no point after the 1983 Resolution did Newin ever conduct itself as if it had created a trust of the shares in F&H. He says that such a conclusion is inconsistent with an amendment to the bye-laws effected on 18 May 1984 which brought the terms of the bye-laws into line with the terms of the 1983 Resolution which would have been irrelevant to the extent that Newin held its assets for a third party. Furthermore, no trust accounts were ever created nor was there any reference to ownership of F&H shares in the accounts for the sub-funds of Olga's Trust but on the contrary, the F&H shares continued to be shown as assets in the accounts of Newin. He also points out that the Newin Conversion itself would in part at least have been pointless, if in fact, Newin / Interhold held the relevant assets on trust for others.
Both Mr Furness and Miss Campbell pointed to the evidence of Professor Schurr on behalf of Forester that a settlor cannot declare himself to be a trustee of property in his ownership and to the different position taken in the Amended Reply in which it is alleged that when Hugo signed the 1983 Resolution he was expressing his will as founder that Newin would instruct Interhold henceforth to hold the F&H shares on trust, is a long way from the content of the 1983 Resolution itself, and for that matter, from the 1981 and 1980 Resolutions. Furthermore, there is no support in any of the documents disclosed for an allegation that by these resolutions Newin was directing Interhold to hold the bearer shares as trustee for the sub-funds of Olga's Trust. Furthermore, if Forester is right, and Interhold was intended by the 1983 Resolution to be the trustee of the shares of F&H for the sub-funds of Olga's Trust, then there would plainly be no express trust of which Newin is now itself trustee. Newin would simply be settlor and would have no liability as trustee in these proceedings. The purported trustee, Interhold, is not of course a party to these proceedings.
Mr Furness also points out that it was common ground amongst the experts that the Board of Newin would not itself have had the power to declare an express trust over the shares of F&H. The act of the Board would need to have been ratified by the holder of the Founder's Rights, namely Interhold. There is no evidence that such ratification took place or that by the 1983 Resolution Interhold was, through Hugo, ratifying the resolution made by Newin; still less for the pleaded proposition that when Hugo signed the 1983 Resolution he was expressing his will as founder that Newin would instruct Interhold to hold the F&H shares on trust. Mr Furness submits that by contrast, when the founder's rights were exercised to undertake or ratify a significant act Hugo was generally careful to document that the act was undertaken in the exercise of the founder's rights.
I agree with Mr Furness that the claim that the 1983 Resolution amounts to an express declaration of trust must be dismissed. It seems to me that in the light of the fact that it was in the same form as the 1980 and 1981 Resolutions (both of which were revoked, the second itself by a formal resolution) and the expert evidence that Liechtenstein trusts are irrevocable unless an express power of revocation is reserved, the 1983 Resolution cannot have been an express declaration of trust. I found Professor Schurr's suggestion as to the application of Saunders v Vautier to the 1980 and 1981 Resolutions unconvincing. In any event, there was no evidence that the necessary requirements in order to apply such a principle existed.
My conclusion is consistent with all of the other matters to which Mr Furness has referred. First, given the use to which Hugo put the expressions "Trust Isidro", "Trust Forester" and "Trust Soleded" and his general use of the term trust and trustee, it seems to me that little if any support can be gained from the use of those phrases in the 1983 Resolution. Secondly, each of the resolutions mirrors the beneficial interests in Newin Establishment which were current at the time and are explicable on that basis. By contrast there is no ready explanation for why a trust of the F&H shares should have been declared at that stage. Thirdly, Newin did not conduct itself as if a trust had been declared. There were not trust accounts and F&H shares continued to be shown in the accounts of Newin. Fourthly, it seems to me that the position adopted in the Amended Reply in order to avoid the consequence that a settlor cannot declare himself a trustee of property in his ownership, is convoluted, is not reflected in the terms of the 1983 Resolution itself, nor is it reflected in any of the other documentation before the court. Lastly, the Board of Newin would not have had power to declare such a trust.
Issues 6 - 10
Issues 6 -10 are concerned with the level of fees received by Hugo and Markus and the alleged retrocessions also received by them in their various capacities as trustees. The Issues as agreed are as follows:
(1) Was Forester aware of and/or did he consent to or acquiesce in the payment of so-called "retrocessions"? If not -
(2) Must Hugo and Markus account for the retrocessions received by ZT as trust receipts of Olga's Trust? If so-
(3) Should the repaid retrocessions be paid to the trustees of Olga's Trust with compound interest?
7. Trustee fees:
(1) Were the professional trustees of Olga's Trust or of the FML Settlement (specifically Hugo and/or Markus) authorised to charge fees according to the formulae in the 1961 Newin Fees Agreement?
(2) Are Hugo and/or Markus under a duty to account for fees paid to the various ZT entities (in particular ZT)?
(3) Were the fees charged by the trustees "usual" within the terms of clause 3(f) of Olga's Will?
(4) Is Forester's standing limited until 2001 to Trust Forester and, thereafter, must he show that the fees in fact charged to capital exceeded the fees which ought to have been charged to capital in accordance with English trust law?
8. Do Hugo and Markus have a defence of laches on the question of trustee fees?
9. Did Soledad breach her duties as trustee for having omitted to prevent the professional trustees (specifically Hugo and Markus) from charging fees (a) to Olga's Trust on the wrong basis? (b) to the FML Settlement?
10. Does Soledad have a defence based on limitation to the claims against her in relation to fees taken from the FML Settlement?"
It is most convenient to deal with fees first and then turn back to retrocessions.
Issues 7 and 9 - Fees
Forester now seeks a common account of all fees paid to the trustees and other associated companies out of the trust fund. He also seeks a declaration that the trustees were not entitled to charge on the basis of the 1961 Fee Agreement because the fees were not "usual professional or other charges for business done by [a trustee] or his firm in relation to Olga's Trust within the meaning of Clause 3(f) of Olga's Will". The claim proceeds on the basis that all of the Newin entities fell within Olga's Will Trusts. If such a declaration were made, on taking the common account Forester would be able to falsify the fees that were charged at the expense of the trust funds and the onus would be on Markus and the estate of Hugo to show why the fees were usual and reasonable. It is submitted therefore, that the expert evidence in so far as it shows that the total fees for administration, trustees and bank charges were not excessive is irrelevant. Mr Taube points out that clause 3(f) was a standard clause and that there is nothing in the 1961 Fee Agreement to suggest that it was intended to operate after death.
When exercising the discretion whether to order a common account, Mr Taube urges me to take into account: that the fees were not "usual"; the financial statements provided were not accounts in the English form; the financial statements down to the financial year ended 1996 do not break down the administration fees between trustees fees and other matters, albeit that this is not pleaded; Markus and Hugo appear to have paid Hugo a substantial sum upon his retirement in 1995 related to the unrealized capital gains of the various funds; and if Markus failed to account for retrocessions this adds to the concern about potential benefits received by other entities associated or connected with Markus and Hugo.
Miss Campbell on behalf of Markus and Hugo's estate submits however, that the phrase "usual professional and other charges for business done by [a trustee] or his firm" in clause 3(f) of Olga's Will should be interpreted in relation to Hugo and persons connected with him as a reference to the charging formula Method A in the 1961 Fee Agreement. Miss Campbell pointed out that the formula had been used across the board in relation, for example, to the Newin entities, the OMM Foundation and the ANS accounts for about twenty years before Olga's death. She asks rhetorically, "How else did Olga think Hugo was going to charge for asset management services after she died?" Mr Furness reminds me that the question of what the words mean must be viewed from "the testator's armchair": Williams on Wills 10th ed Vol 1 paragraph 57.15. In this regard, he points out that Olga made her will in Switzerland, appointed a Swiss executor, and knew perfectly well that her trusts would be run by Hugo and his firm. In such circumstances, he says that the clause must be taken to refer to charging which was "usual" by Swiss standards (at least while the trusts were being administered from Switzerland). Mr Jennings, Forester's expert stated in cross examination that an ad valorem basis of charging would have been a basis which Swiss trustees would have been "quite generally accustomed to". Mr Furness says that the question is therefore whether a rate of charging by reference to income and realised gains can also be brought within the scope of "usual professional and other charges". As to this, he says that it is significant that at the time she made her will in 1972, Olga was perfectly familiar with the 1961 basis of charging, which was being applied to Newin. Like Miss Campbell, Mr Furness submits therefore, that Olga could hardly have intended that Hugo should scrap the 1961 basis in favour of some quite different one as soon as she died, both for her personal estate and for Newin as well.
Further, Miss Campbell points out that Mr Jennings accepted that an ad valorem charge would be normal for asset management services and that one would expect the remuneration provision in Olga's Will to cover asset management fees. Further, he accepted that in the real world, the Method A formula operated in a similar way to an ad valorem formula in that they produce outcomes in the same range. Accordingly, Miss Campbell submits that the Method A formula in the 1961 Fee Agreement was "usual" even disregarding the history of Olga's relationship with Hugo and emphasises that it is common ground that the amount of fees was not excessive.
As to the reasonableness of the fees, all but Mr Jennings agreed that they were reasonable. Mr Jennings however, accepted in cross examination that they were not excessive. Mr Jennings' concerns about the reasonableness were on two bases. The first was as to what might be termed "short termism" and the second was as to transparency. He also had concerns about the use of Method A as opposed to Method B in the 1961 Fee Agreement.
Miss Campbell submits that as to the first Method A simply permitted (rather than required) fees on capital gains to be charged only on realised ones and therefore, did not encourage short termism. She also reminded me that Mr Jennings accepted that an ad valorem formula would be normal and that Method A operated in a similar way to an ad valorem formula and produced outcomes in the same range. As to transparency, it is submitted that it is an attempt to impose 2015 standards onto the events of years ago. Mr Jennings himself accepted that transparency had become more prevalent since 2005. Further, and in any event, Miss Campbell submits that where a will provides that a trustee may charge his "usual" fee, and the fee charged is his usual fee, there is no separate legal requirement that the formula of that fee rather than its amount be reasonable.
As to the fee sharing which took place between Hugo and Markus on the one hand and ZT on the other, Miss Campbell points out that pursuant to section 23 Trustee Act 1925 and section 12 and 14 Trustee Act 2000, the trustees had power to delegate. She also pointed out that Forester has given no indication of how it is suggested that any liability should be attributed to her individual clients.
Lastly, Mr Furness emphasised that the onus is on Forester to show, on a proper interpretation of a charging clause made 40 years ago in another country, that the method of charging adopted by the trustees over 30 years of trust administration, which the experts agreed has produced a reasonable level of fees is wholly unauthorised. That is a heavy burden to discharge, and Forester has failed to overcome it.
As to the incidence of the fees themselves, in relation to Trust Isidro and Trust Soledad, the accounts reveal that until 2001, fees were deducted solely from income and not capital. From 2001, they were apportioned 50/50 between capital and income. Mr Jennings points out in his report that this would have "disadvantaged the life tenants of Trust Isidro and Trust Soledad, to the benefit of the claimant as remainderman of the sub-funds" and therefore, was to Forester's advantage. Mr Furness submits therefore, that as a capital beneficiary, Forester has no claim at all in relation to fees until 2001 and then only in relation to part. However, in relation to that part, he says first that in the light of the expert evidence that the fees charged were reasonable and it is not clear what loss was allegedly suffered in any event.
Further, Mr Furness points out that the accounts for Newin, F&H and Soltega also show that fees and expenses were again debited to income and that as a result, Forester can only have a claim in relation to this element of the fees if, in fact, the distributions to Soledad were improper. Further, in the light of the fact that the claim that Hugo was in breach of duty in failing to dissolve Newin Establishment, F&H and Soltega prior to 1995 had been abandoned, Mr Furness, says that Forester's position in relation to fees is incoherent. During oral closings on the 23rd day of the trial it was explained in a further note on the pleadings that:
"C is not pursuing a claim that Hugo was in breach of a duty to dissolve NE, F&H and Soltega prior to 1995. Accordingly, C is not pursuing a claim that Hugo and Markus were not entitled to charge fees to NE, F&H and Soltega on the basis of the 1961 Minute by reason only of a failure to comply with the duty to dissolve. However, C's case is that NE, F&H and Soltega were components in the value of the trust estate and that therefore fees should have been charged in respect of that value only at the trust level
Mr Furness says that if it is accepted that it was permissible to keep Newin Establishment and its subsidiaries running, there can be no logical complaint about continuing to remunerate the administrators under the 1961 Fee Agreement.
Lastly, he points out that in this regard, Forester's claim has changed once again. It was pleaded that Soledad had failed to prevent the charging of excessive or improper fees by her two professional co-trustees. In order to have a claim against Soledad in relation to fees on that basis, Forester would also have to prove that she had been in breach of the duty of ordinary prudence in failing to stop the payment of unauthorised fees. However, the pleadings contain no particulars of what it is alleged a trustee with an ordinary degree of prudence ought to have known or done. On the contrary, he points out that both Mr Jennings and Mr Harrison considered the fees to be reasonable, a fee basis based on the level of income and realised gains is not itself unreasonable and the fees being charged were considered appropriate by Hugo, an experienced professional in whom Olga placed considerable trust which was known to Soledad. Mr Furness also adds that as the evidence before the court is that the fees charged were reasonable, the onus is on Forester to show what loss was suffered.
Mr Furness says that that case has been abandoned very late in the day and it is merely alleged that a common account should be granted pursuant to the principle in AG v Cocke without any allegation at this stage that the fees or any of them were improper. Mr Furness submits that this approach is unacceptable and referred me to Smith v Armitage (1883) 24 ChD 727 per Denman J. In that case allegations of wilful default and improper conduct were made but at the trial the plaintiff merely asked for an ordinary administration decree. Denman J held at 728-9 that although there was a discretion to postpone inquiring into the conduct of the trustees and that it is not necessary to decide all the issues at once:
it would be competent to the Court if it saw good reason to try the case in part, and to adjourn it in part. But I think it would require a very strong case to make it do so; and that the hearing is the proper time to dispose of questions of the kind, and it is the proper time at which allegations of fraud should be disposed of. I think that except in the strongest case, and for the strongest reasons, the Court ought not to allow parties to come with such allegations with no evidence to support them, and then to ask the Court to refer questions such as these for disposal by the Chief Clerk, or in any other way."
Mr Furness says therefore, that a finding should be made in his client's favour that she is not in breach.
The Deed of Release
In relation both to the claim against Markus and Hugo's estate and that against Soledad, the Deed of Release is also relied upon. Mr Taube submits that the onus is on the Defendants to prove that Forester had the requisite knowledge of the claims which he was allegedly releasing. Furthermore, he points out that in any event, it can only relate to matters which occurred before it was executed. Therefore, he says that it cannot operate in relation to the retrocession payments, the Newin Distributions in 2000-2001, the destruction of the Claim Right or the Plum Bay distributions. As to fees, he points out that the financial statements for the year ended 1997 failed to identify trustees' fees or break down administration fees and so Forester would have had no idea of the magnitude of the fees or the special "bonus" awarded to Hugo on his retirement. In any event, he says that it was only intended to relate to the FML Settlement having arisen out of a desire to replace the trustees.
In cross examination, Forester when challenged about whether he understood its effect, agreed that he had signed the Deed of Release and that it had been countersigned by his Geneva lawyer and merely added that he did not remember the document very well. Markus' evidence was that the fees appeared in the annual accounts which he says were left at the Villa Carlotta and that Forester was fully informed about the trustee fees by a letter dated 27 July 1998 to Martin Bukhardt of Lenz & Staehelih, Forester's lawyers at the time. Forester also signed documents setting out the fees for Trust Forester, although his evidence was that he merely signed them and thought they related to tax. Furthermore, Miss Campbell says that the principle of laches and/or acquiescence applies because Forester signed off on the fees over a long period and in cross examination accepted that he had been aware of the 1961 Fee Agreement from around 1998/9.
In relation to the claim against Soledad, Mr Furness also points out that it is for Forester to show why an ordinarily prudent trustee would have realised that the fees were unauthorised, and put a stop to them. On the contrary, he points out that both Mr Jennings and Mr Harrison were of the view that the overall level of fees was reasonable, Mr Harrison going as far as to say that they were "amazingly reasonable" and that therefore, there was no reason for an ordinarily prudent trustee to be concerned that the fees were too high, and enquire into why that should be. Secondly, he points out that a fee basis based on the level of income and realised gains is not of itself an unreasonable basis for charging and thirdly, that the fees being charged were clearly considered appropriate by Hugo, who was an experienced professional, whom Olga had clearly trusted implicitly, as Soledad well knew.
Lastly, Mr Furness points out that it is necessary to show loss flowing from a breach of trust. However, he says that the fact that the experts agree that the overall level of fees was reasonable means that it must be assumed that even if Soledad had challenged the fees, an alternative, ad valorem basis would have been instituted in relation to which there is no reason to suppose that it would have resulted in lower charges.
In the light of the fact that I have found that the Newin entities were not part of Olga's Will Trusts or held on trust for those trusts, this issue is only relevant in relation to fees charged in relation to those assets which were within the Will Trusts in any event, and perhaps to that element of the "bonus" paid to Hugo on his retirement which could be said to be attributable to those assets. This was an amount paid on retirement calculated as if certain gains had been realised.
Further, given that Forester now accepts that it was permissible for Hugo and Markus to have kept Newin and its subsidiaries as separate entities, it seems to me that there is no merit in a claim that nevertheless, the administrators of those entities should have been remunerated on a basis other than that in the 1961 Fee Agreement.
In any event, were the fees, "usual" and were they "reasonable" within the terms of clause 3(f) of Olga's Will? First, it seems clear to me that although clause 3(f) may have been in standard form, it must nevertheless be construed from the armchair of the testatrix in question. In my judgment, it is relevant that Olga was a Swiss resident and appointed Hugo, a Swiss lawyer and expert in international wealth management as her executor and that she not only expected but fully intended that he and his firm would be responsible for the management of her affairs after her death. She was also very familiar with the way in which Hugo charged, the 1961 Fee Agreement having been in place for more than a decade by the time she made her Will. It seems to me therefore, that viewed from Olga's armchair, "usual" fees would have been those which were usual by Swiss standards and in particular, those which Hugo already charged for the services undertaken. Such a conclusion is supported by the fact that Mr Jennings, Forester's expert accepted that: an ad valorem charge would be normal for asset management services; that one would expect the charging clause in Olga's Will to cover asset management fees; and that Swiss trustees would have been generally accustomed to charging on an ad valorem basis.
In my judgment, the fees were also reasonable, a conclusion reached by the experts other than Mr Jennings who nevertheless accepted that they were not excessive. In any event, it seems to me that the concerns raised by Mr Jennings in this regard, including his concerns about Method A are not relevant. The first concern was as to transparency which it seems to me does not go to the issue of whether the extent of the fees was reasonable and in any event, is an attempt to apply more modern standards to an earlier time. The second was "short termism". It too does not affect the conclusion that the extent of the fees was reasonable. The third was as to competency. I have to say that although the quality of the service provided may have some bearing on what would be a reasonable fee I agree with Mr Harrison that to some extent that it is determined after the event and that in any event, other than the way in which fees were recorded, there is no complaint about the quality of the service provided. Lastly, in the light of the evidence of all of the experts that the fees were very if not extraordinarily reasonable, and that Method A produced outcomes in the same range as Method B, it seems to me that nothing comes of a distinction between the methods.
Although the issue of delegation to ZT was not pursued with any vigour in closing, I should add that I agree with Miss Campbell that to the extent that the administration fell within the Will Trusts, as a result of a combination of section 23 Trustee Act 1925 and sections 12 and 14 of the Trustee Act 2000, Olga's Trustees were entitled to authorise ZT to carry out functions as their agent on such terms as to remuneration as they determined. Therefore, I can see nothing intrinsically wrong in the fee sharing which took place between Hugo and Markus on the one hand and ZT on the other.
Had I reached a different conclusion, I would nevertheless, have refused to exercise the court's discretion to order a common account in this regard against Soledad. It seems to me that the circumstances are similar to those considered by Denman J in Smith v Armitage. The allegation of wilful default in failing to prevent the charging of excessive or improper fees was not pursued despite the fact that Soledad had prepared to meet such a claim and Forester seeks to reserve his position to take up the issues later.
Further, and in any event, in my judgment, Forester is bound by the terms of the Deed of Release which was not only signed by him but also by his Geneva lawyer. In fact, in cross examination Forester did not confirm his evidence that he had not understood the document. I found his evidence that he could not recall it less than convincing. Once this is coupled with the fact that it was also signed by his lawyer, it seems to me that his claim that he did not understand it is unsustainable. However, it seems to me that the Deed of Release can only relate to the FML Settlement and the "Settlor's Share" of the Will Trusts as defined, to which it was intended to relate and to fees charged before the date on which it was executed.
Issue 8 - Laches
Further and in addition, in my judgment, the claim for fees is subject to the doctrine of laches/acquiescence. In my judgment, Forester's evidence that he did not understand the contents of the many documents he signed in which the fees were referred to, is highly implausible. In cross examination he added that: "They just showed me that and got me to sign it because of taxation. They always said that to me." I have already rejected his evidence that he was too frightened to ask questions. Furthermore, it seems to me that the manner in which fees were charged in relation to all of the legal entities used to hold Olga's assets was explained in the letter of 20 April 1999 to Forester's Geneva attorney. In the circumstances, therefore, in my judgment on the balance of probabilities, he had the knowledge and the means of obtaining detailed knowledge of the fees over a long period and certainly back to 1999 if not 1983. In those circumstances, I consider that it is too late to contend that the fees were improper.
Issue 10 Limitation in relation to fees from the FML Settlement
It was conceded at the commencement of Mr Taube's oral closing that in fact, even if a breach of trust was committed by Soledad in relation to the fees from the FML Settlement, that she would be entitled to rely upon the Limitation Act 1980. It is unnecessary therefore, to consider this issue further.
Issue 6 - Retrocessions
Mr Taube says that the position in this regard is clear. It is not now in dispute that retrocessions or commissions were received by ZT, both from Clariden Bank and Credit Suisse over the period from 1997 to 2010. Furthermore, it is not in dispute that during that period ZT was acting as the agent of the Trustees of Olga's Will Trusts and on behalf of the Newin entities in providing asset management services. Further, Mr Taube submits that on the true construction of the retrocessions agreements Clariden and Credit Suisse were paying the retrocessions to ZT in order to keep the existing business of ZT's principals, being Olga's Trustees and the Newin entities amongst others. Therefore, it is said that as a result of the equitable "no conflict", "no profit" and "fair dealing" rules ZT as agent should have held the payments for the benefit of its principals who in turn should have held them for the benefit of Olga's Trusts and that Hugo's estate and Markus must account to Olga's Will Trust for the amounts received and provide equitable compensation together with compound interest.
It seems that over the period approximately SwFr 3.1m has been received, of which SwFr 2.3m was in respect of trust as opposed to Newin assets. Further, it is not in dispute that until 2000, a combination of Hugo and/or Markus owned 99.6% of the shares in ZT and thereafter, Markus' shareholding in ZT's holding company was reduced but at all times, his family owned the majority of the shares and he was a director and president of ZT. However, there was no evidence before the court as to the amounts received by Markus whether by way of distributions from ZT or in the form of director's remuneration.
Mr Taube drew attention to the preamble and article 2 of the first agreement with Clariden Bank of 13 November 1996 and pointed out that reference is made to a pro-rated share of business and not to any share of responsibilities or provision of services by ZT to the bank to which Markus referred in his evidence. The second agreement of 4 February 2000 has the same preamble although reference is also made to "agency work". Mr Taube also drew my attention to article 4 of the agreement with Credit Suisse of 4 January 2000 which is in much the same form.
Furthermore, Mr Taube submits that trustees cannot avoid having to account simply by arranging for the commissions to be paid to a wholly owned or associated company. In this regard, he referred me to Snell's Equity 33rd ed at §§ 7-018 where the "no conflict" rule is explained and the point is made that:
"The rule is not avoided by the fiduciary arranging a transaction through a third party if there is an "understanding or agreement in honour, or in any other shape with the effect that the third party is in fact acting on behalf of the fiduciary."
In addition to the principles of English law, Mr Taube also referred me to Professor Oberson's evidence in relation to Swiss law. He pointed out that where ZT was acting as investment manager under a mandate agreement with the trustees, article 400(1) of the Swiss Code obliged ZT to account for, and return, the retrocessions to its principals. Article 400(1) provides that:
"The agent is obliged at the principal's request, which may be made at any time, to give an account of his agency activities and to return anything received for whatever reason as a result of such activities".
Markus accepted that by the time of the Zurich Proceedings, at the latest, he was aware of the Swiss law obligation of the agent to account and says that he provided relevant details at that stage.
Further, Mr Taube submits that even if the banks paid the commissions in part for administrative services by way of the provision of "know your client information" Markus would still have been subject to a conflict of interest and duty. He also adds that even if as Markus claims, the arrangements between ZT and the banks of which he knew and approved were a way of reducing bank charges for ZT's clients, it is irrelevant. In any event, he says that Markus' claim is not borne out by the financial statements of Trust Isidro and Trust Soledad for the years ending after 1996, the average annual banking charges in the period 1997-2001 being significantly higher than in the period 1991- 1995.
Equally, Mr Taube says that Mr Hochstrasser's evidence that it was common practice in Switzerland for banks to pay retrocessions to "asset managers" down to 2005 is irrelevant as matter of trust law. He points out that Hugo and Markus were both lawyers and that Markus appeared in cross examination to be aware of the principles of article 400(1) Swiss Code. Further, Professor Oberson was not challenged in cross examination in particular that since 1986 the Swiss Supreme Court has confirmed that retrocessions and similar arrangements (a) are subject to the rules governing mandate agreements, and accordingly (b) are subject to the duty in Article 400(1) of the Swiss Code of Obligations to account to the principal for them.
Mr Taube submits therefore, that the trustees have failed to collect in the retrocessions from ZT and their breach amounts to wilful default. As a result, if the court exercises its discretion he says he is entitled to "roving commission" on the taking of an account.
Miss Campbell on behalf of Markus and the estate of Hugo submits however, that Professor Oberson's evidence in relation to retrocessions under Swiss law have no relevance to a claim based on English trust law. She also submits that Forester takes a contradictory approach to the corporate veil seeking to pierce it when objecting to the receipt of retrocessions by ZT, yet relying upon it as an objection to the delegation of functions to ZT. She points out that ZT is not a party to these proceedings and therefore, unless one ignores the corporate veil altogether, this court is not in a position to determine ZT's rights. She also submits that the arrangement achieved through ZT was in fact, very beneficial, enabling ZT to negotiate a 30%/50% reduction in the custodian bank fee, part of which was then re-allowed to ZT in recognition of the assumption of Know Your Client/ compliance services, an arrangement substantially for Forester's benefit.
Lastly, she submits that there is no authority to suggest that the rule against profits applies to profits received by corporations in which trustees are interested and it is doubtful that it does: Lewin on Trusts (19 ed), §20-96. In any event, she submits that in the circumstances, the "principal" is the trustees of Olga's Will trusts and as a result, the reference to "firm" in the wording of the charging clause in clause 3(f) of the Last Will is apt to include the trustee's private company: Re Orwell's Will Trusts  1 WLR 1337 at 1341 C-E, per Vinelott J. Further, it makes no difference whether the trustee receives money from the company which comprises remuneration and commission, which the company was entitled to charge and be paid: Re Orwell, ibid, at 1341 F-G. Markus and the estate of Hugo contend therefore, that ZT was entitled to be remunerated and it can make no difference that remuneration was subsequently received by Hugo and/or Markus. Mr Taube on the other hand submits that the issue in the Orwell case related to fees of a company being raised and paid out of the trust fund. He says that such a decision based on a standard charging clause cannot be extended to cover commission paid by third parties for directing the trust's business to that third party.
Miss Campbell also says that it is clear that Markus did not conceal retrocessions, as a fair reading of his letter to Forester's Geneva attorney dated 20 April 1999 reveals. Further, in cross examination, Forester stated that he first learned of the "retrocessions" after his marriage in 1998 but did not know in what year. Miss Campbell submits therefore, that it is too late to bring these claims, something to which I shall refer below. She also says that her clients are entitled to rely upon section 61 Trustee Act 1925 in this regard. However, Mr Taube was very critical of Markus and pointed to documentation in the Zurich proceedings in which it was denied that retrocessions had been paid or taken by Markus or Hugo. He also submits that Markus was extraordinarily evasive in cross examination in this regard and was not a frank and truthful witness.
In the light of the fact that I have decided that the Newin entities did not form part of Olga's Will Trusts whether directly or as a result of the Claim Rights, in my judgment it follows that any retrocessions which have been paid which relate directly to the value of and or management of assets owned by those entities, cannot form part of any successful claim under this head.
What if any part of the retrocessions which relates to the assets of Olga's Will Trusts? In my judgment, despite the fact that the Retrocession Agreements refer to various administrative tasks being completed by ZT on behalf of both Clariden and Credit Suisse, the preambles and clauses under which the mechanism for payment of the retrocessions is set out state that the payments related to the level of business and the maintenance of that business. In such circumstances, it seems to me that despite the fact that such arrangements may have been the norm in Zurich and may have been beneficial to the trust, from an English trust law perspective, if the payments had been received by the trustees themselves and arose as a result of the placing or retention of trust business, there would be no doubt but that they had placed themselves in a position in which their duties and their interests were in conflict and that they would be liable to account for them, subject to any argument as to an allowance for skill and expenses. I should add that in this regard, I agree with Miss Campbell that the position should be judged under English and not Swiss law.
What of the fact that the payments were received by ZT and not by the trustees personally? First, I do not consider that the extract from Snell's Equity to which Mr Taube referred me is directly relevant. There is no suggestion here that Markus was seeking to avoid the conflict by making an arrangement with a third party. On the contrary, the Trustees had delegated functions to ZT as agent. In that capacity ZT received part of the fees which would otherwise have been payable to Hugo and Markus and retrocessions in addition. It seems to me therefore, that ZT cannot be treated as if it were entirely transparent because it was a third party interposed in the manner considered in Snell. However, it was appointed as the agent of the Trustees and as result, it owed a fiduciary duty to the Trustees and was liable to account to them as its principal in respect of the monies received, subject to any entitlement to costs and expenses. It seems to me therefore, that as a matter of first principle, the Trustees were entitled to recover those sums from ZT as agent. Whether in fact, this amounts to an instance of wilful default on the part of the Trustees in failing to take such steps, is another matter. Mr Taube did not address the additional issue necessary to make good a claim in wilful default, namely whether in the circumstances, the ordinary prudent trustee would have taken such steps.
Despite the fact that there was no evidence before the court of sums received, I should also address the arguments in relation to sums allegedly received by Markus and Hugo by way of remuneration as directors of ZT or as a result of their shareholding in ZT as opposed to the payments made to ZT itself. If there were such evidence, what would be position be? Although Re Orwell is not directly in point, it is of some assistance in this regard. As Mr Taube points out that case was concerned with whether an individual who was appointed under a will as the testatrix's literary executor and who was also a director and substantial shareholder of a private company carrying on business as literary agents was entitled to be remunerated under the charging clause in the will, whether the company was entitled to charge and if it did so, whether the individual would be bound to account to the trustees for any part of the director's fees, remuneration and customary commissions he might receive from the company as a result. In that case, it was held at 1341 F-G that the principle that a trustee must account for any benefit obtained as a result of his position as trustee did not apply where:
"the only nexus between the benefit or remuneration received by a trustee from a company and the trust estate is that the income of the company comprises remuneration and commission which, if I am right on the first two questions, the company was entitled to charge and be paid."
Vinelott J had held that the charges and commissions fell within the charging clause in the will. However, the precise source of the commissions is unclear from the report. In this case, I agree with Mr Taube that the retrocessions were payments from third parties of a wholly different nature from fees and as a result, they did not fall within clause 3(f) of Olga's Will which authorised a professional trustee to charge and be paid "all usual professional and other charges for all business done by him or his firm." It seems to me that Re Orwell can be distinguished on the basis that the will in that case contained express provisions in relation to the literary agent and that the justification in relation to commissions and their precise nature is not made clear. As I have already said, in my judgment, in this case, the retrocessions were profits received as a result of ZT's position with regard to the trust.
In any event, since Forester's evidence was that he had known about the retrocessions since a time after his marriage in 1998 which he was unable to pinpoint and the letter of 20 April 1999 to Forester's Geneva attorney makes mention of them, in general terms, albeit under the heading of the "OMMF", it seems to me that it is too late to bring these claims. Furthermore, I would also have granted relief under section 61 Trustee Act 1925. First, in this regard, I accept Mr Hochstrasser's evidence that these payments were the norm in Zurich and that it was not until 2006 that concern was raised about them and that even in 2011, he would have researched the point and remained uncertain, which I accept. I prefer this evidence to that of Professor Oberson who referred to a 1986 decision in relation to retrocessions of which Mr Hochstrasser did not seem to be aware. In the circumstances, therefore, it seems to me that Markus behaved reasonably in relation to the retrocessions. Furthermore, I consider that he behaved honestly and ought fairly to be excused. This is despite the initial denial in relation to receipt of retrocessions which it seems to me can be explained on the basis that the receipts were those of ZT.
I should add at this stage, that if and to the extent that any fees and retrocessions were wrongfully charged and retained and were not subject to an available defence, I would allow Miss Campbell's clients' counterclaim for reasonable fees for the work done over the decades. She points out that it was Mr Harrison's evidence that the fees which were charged including the retrocessions were reasonable and it was Mr Jennings' evidence that fees in accordance with Method B under the 1961 Fee Agreement were reasonable. The claim however, is for the entirety of what was actually charged and retained. Miss Campbell also points out that it is not now suggested that Hugo had any improper motive and in cross examination, Markus made clear that if fees and retrocessions were in breach of trust it was unintentional. Miss Campbell says therefore, that her clients had clean hands. It seems to me that in the light of the evidence that the level of fees even including the retrocessions and what became known as Hugo's bonus were reasonable, I would have allowed the counterclaim in full. In this regard, I prefer the evidence of Mr Harrison to that of Mr Jennings in relation to charges under Method A as opposed to Method B.
Issue 11 Plum Bay House
Issue 11 is formulated in the following way:
"(1) Did the trustees of Olga's trust (specifically Markus) pay capital to the income beneficiary (viz., the proceeds of sale of Plum Bay House) and thereby cause a loss to capital?
(2) Did the trustees of Olga's Trust fail to invest capital on commercial terms in acquiring Plum Bay House and omitting to let it out at a commercial rate?"
Mr Taube submits that on ordinary trust principles, the proceeds of the liquidation of SCI Soltin should have been attributed to capital and he referred me to Sinclair v Lee  Ch 497. It does not appear that a claim in relation to investing capital in the house on less than commercial terms is pursued. In fact, no questions were put to Markus in cross examination in relation to the treatment of the liquidation of SCI Soltin at all.
Miss Campbell's position in relation to this is quite simple. She says that SCI Soltin was set up purely as a matter of administrative convenience by the trustees and as a result of the passages from Lewin on Trusts to which she referred me, the company should be treated as wholly transparent. She says therefore, that the proceeds of Plum Bay House were income in the hands of the company and should continue to be treated as such. She says therefore, that there is nothing of which to complain. Mr Taube on the other hand retorts that the passage in Lewin on Trusts is not concerned with the question of whether as a matter of trust law, once the distribution has been made by the company it should be treated as capital or income. He commented that having looked at the case referred to in the footnotes at §25-056, JW v Morgan Trust Company of the Bahamas Ltd (2001-02) 4 ITELR 541, Bah SC, he was able to submit that it was one in which the tenant for life had complained that income but not capital gains had been distributed to her. He says therefore, that what the learned editors of Lewin on Trusts were concerned with was the prior question, which is where trustees have a discretion as to what level of income to pay and whether to distribute by way of dividend so it is income in the hands of a life tenant or to liquidate so the funds come back as capital into the trust fund, the trustees have to exercise the duty to hold the balance fairly.
In this regard, Mr Furness submits on behalf of Soledad that in any event, she had ceased to be trustee some ten years before SCI Soltin was put into liquidation and therefore, had nothing to do with the decision as to how to allocate the proceeds between income and capital. I have to say that in that regard I agree.
There is no dispute but that SCI Soltin was incorporated by the Trustees as a matter of convenience in order to purchase and hold Plum Bay House. It was a French company. However, I have neither heard submissions in relation to the significance of French law in this respect nor is there evidence in that regard before the court. I shall proceed on the basis of the submissions, namely that the question is one of English law in the light of the fact that there is no dispute but that Trust Isidro is governed by English law and that the treatment of proceeds was a matter of trust accounting.
Sinclair v Lee was a case in which a testatrix had left her holding of shares in ICI plc on trust for her husband for life with remainder to her son absolutely. ICI plc proposed a demerger under which shareholders in addition to their existing shares would receive fully paid up shares in a new company to be allotted in satisfaction of a dividend to be declared by ICI. The trustees were concerned as to whether the dividend should be treated as capital or income. Sir Donald Nicholls VC held at 514B that in the circumstances, to view the transaction as a distribution of profits akin to a dividend in specie and hence income would be "to exalt company form over commercial substance". He went on at 514C:
"In the last analysis, the rationale underlying the general principles enunciated in Hill's case  AC 720 is an endeavour by the law to give effect to the assumed intention of the testator or settlor in respect of a particular distribution to shareholders. When the inflexible application of these principles would produce a result manifestly inconsistent with the presumed intention of the testator or settlor, the court should not be required to apply them slavishly. In origin they were guidelines."
In Hill's case itself an Australian company had sold its assets and ceased to carry on business. It distributed the proceeds as a dividend described as a distribution of capital assets prior to winding up. The Judicial Committee of the Privy Council held that the distribution was income and Lord Russell of Killowen set out a number of principles at 731 including the proposition that a limited company not in liquidation can make no payments by way of return of capital to its shareholders.
In this case, there is no evidence to the effect that as in Hill's case, the Trustees received a dividend from SCI Soltin before the winding up. As I understand it the sums apportioned in the accounts of Trust Isidro arose purely on the liquidation of SCI Soltin, and prima facie, therefore, would be classified in English law as a return of capital. Further, although I agree with Miss Campbell that it appears that SCI Soltin was set up purely as vehicle for the convenience of the Trustees and that in principle therefore, one should look to the characterisation of the sums in the hands of the company, I disagree that they were income. It seems to me from an English law perspective, that the proceeds of the sale of Plum Bay House at least, must have been capital rather than income. The fact that those monies were placed on the money markets and that the completion of the liquidation was a lengthy process, does not seem to me to make any difference. Further, in my judgment, although Mr Taube relied upon it, this is not a case akin to that under consideration in Sinclair v Lee. In that case the testatrix had settled shares and the application of the accepted guidelines would have been inconsistent with her presumed intention. Here, SCI Soltin was merely a convenient device for the Trustees. Therefore, in my judgment, the entirety of the proceeds should have been attributed to capital and the Trustees including Markus were in breach of trust in failing to do so.
Although I have dealt with the issue of whether tracing is available, I will address the further question of the remedies which are available and the declarations if any, which should be made once further oral submissions have been made. I should add however, that it seems to me at present, given my conclusions there are no grounds for an account with a roving commission. Further, it does not seem to me that it is useful to consider the question of compound interest. Further, given the form of my judgment, it is necessary to hear further submissions before determining the issue in relation to the costs of removal of Markus as a trustee.
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