With high-profile trust and estates disputes providing a rich diet to private client specialists for some time, City firms have recently made the push to get in on the act.
If the mass retreat of City firms from private client work in the 1980s and 1990s looked like folly when Mishcon de Reya, Forsters and others began to leverage their practices with commercial success during the recession, it looks like even more of a mistake today. With trusts and estates at the heart of some of the biggest global disputes currently, firms with significant commercial litigation practices have taken note.
Linklaters caught the eye in March by bolstering its private client practice with the hire of Peter Golden from Forsters as its head of trusts. At the time of the hire, the firm’s head of corporate Matthew Middleditch said: ‘I am excited about the breath of fresh air he will bring to the trusts practice.’
Such a hire would have seemed out of step even five years ago when the majority of the City’s elite considered private client work to be outside their core strategy and not profitable enough. But attitudes have shifted and trusts and estates litigation now provides a consistent flow of challenging and often high-value cases, not least because of the expanding global class of ultra-high-net-worth individuals that use these structures to manage their wealth.
Targeting wealth
The use of trusts earned even greater prominence earlier this year following the data leak from Panama firm Mossack Fonseca, which connected some of the world’s largest law firms with the offshore trusts of some of the world’s most high-profile and wealthy individuals.
Courting fatigue: ADR in trusts and estates disputes
Given the sensitive nature of many trusts and estates disputes, it is natural that litigants would prefer details were kept private. Despite this, the use of alternative dispute resolution (ADR) methods has gained limited traction. Taylor Wessing’s Emma Jordan admits there is always an attempt at mediation and settlement but ultimately litigation is the de facto course of action for most parties.
David Stewart, chief executive at Olswang until 2014, is now a partner at Griffiths & Partners on the small Caribbean archipelago of Turks and Caicos. Stewart worked there for a year in the early 1990s and ended up buying and refurbishing a ramshackle house some ten years later. Returning to Turks and Caicos last year, he is now focused on international disputes and building the firm’s offshore practice, often working alongside firms in the Cayman Islands and BVI, as well as acting as an arbitrator and mediator.
Stewart believes mediation can be an important way of settling trusts disputes, as long as it is employed at the right time when battle lines are drawn: ‘Often you see fatigue setting in, due to the costs, time, the witness statements and interference of the litigation in day-to-day life,’ he says. ‘At that time, it is worth considering an alternative way of resolving the dispute.’
Arbitration, on the other hand, is rare in trusts and estates disputes despite the advantages of its confidentiality. It is still viewed as an expensive option for parties to a dispute and tribunals are viewed as too unpredictable and slow in issuing interlocutory awards. Given that trusts are often located offshore, arbitration can appear logistically problematic and expensive due to the main arbitration centres being onshore. Most major offshore trust jurisdictions have well-developed legal systems, often based on English law, which are backed by sophisticated courts and judges, yet few are regarded as being mature arbitration centres. For now, trusts disputes remain most likely to filter through the courts.
With more divorces, rising property prices and an ageing population there is a further abundance of trusts and estates disputes cases. Charles Lloyd, head of trust and probate litigation at Macfarlanes, says: ‘It is without doubt clear that private individuals are more and more willing to involve the courts in resolving their family disputes, that the values involved are increasing and that trustees are asking us more frequently to help protect them in relation to their decision-making.’
‘Private individuals are more willing to involve the courts in resolving their family disputes and the values involved are increasing.’
Charles Lloyd, Macfarlanes
Litigation generally may benefit from an economic downturn but trusts and estates litigation is more of a constant thanks to the increasing willingness of individuals to challenge the structures that control dynastic wealth. Farrer & Co partner Jeremy Gordon says: ‘There was a huge accumulation of private wealth in the 1980s, 1990s and 2000s and we are now dealing with the next generation, the passing of the figurehead or the settlor. Tensions obviously arise when wealth passes down to the next generation and this tension can also be fuelled by the effects of the financial crisis and concerns over the performance of trust assets.’
The globalisation of private wealth, with the rising affluence in regions such as Russia, the Middle East and Far East, has also made trusts and estates litigation an international practice (see box, ‘Flowers on the Fulham Road – the Pugachev dispute’). Withers, one of London’s leading contentious trust and probate firms, has four dedicated partners in London, as well as partners and counsel in Milan, Hong Kong, Singapore, San Diego, Los Angeles and Connecticut.
Mark Keenan, a trusts and succession disputes partner at Mishcon de Reya, says that the firm’s practice has become intrinsically global: ‘Twenty years ago, London litigators were only really doing domestic/offshore trust litigation involving UK-based entrepreneurs. They were UK clients rather than someone from Dubai, Qatar or Saudi Arabia; your client base is global now. We have Kuwaiti clients and even a Yemeni client. Ten to 15 years ago, that work wasn’t there.’
Gordon sees significant growth from Asia too: ‘We have seen enormous growth in the last seven to eight years and across many different jurisdictions. We see the Asian market with the wealth accumulated there and people looking to offshore trusts as a sophisticated way of dealing with their wealth.’
Quantum and the super-rich
Press interest in family breakdown and inheritance disputes has only served to heighten awareness among potential litigants. The public and their lawyers have become aware that no matter how well these trust arrangements are structured, they are not beyond challenge. An appeal in the long-running Ilott v Mitson case, which will be heard in the Supreme Court in December, is one high-profile example to hit the headlines, raising questions over the ability of a parent to disinherit a child and the possibility that charities may lose out to offspring challenging the terms of a will.
‘Litigation is unpleasant and can be expensive, and it can be a whole lot more unpleasant when you are litigating against your sister.’
Geoffrey Kertesz, Bircham Dyson Bell
Similarly trusts are continually facing pressure and scrutiny from beneficiaries. Keenan says: ‘It is very difficult now to achieve absolute secrecy, which a lot of clients often want for legitimate reasons. The armoury that a litigator now has across different jurisdictions is pretty significant. The overall desire for transparency and openness makes it tougher for those advising on structures and how wealth should be held.’
The performance of trust assets has also come under greater scrutiny with beneficiaries more willing to litigate against trustees, whether they manage the assets directly or through an investment company.
‘Beneficiaries are better educated about their rights and they are more active in flexing their muscles,’ comments Gordon. ‘Disclosure is now sought in a way that would have been barely contemplated 20 years ago. We’ve also seen the increase in Inheritance (Provision for Family and Dependants) Act 1975 cases thanks to surging land values.’
Keenan adds: ‘People are just becoming more aware of their right to challenge other family members, executors or trustees than was the case ten years ago.’
‘Twenty years ago, London litigators were only doing domestic/offshore trust litigation involving UK-based entrepreneurs. Your client base is global now.’
Mark Keenan, Mishcon de Reya
The rising availability of litigation funding in trusts and estates disputes is enabling more claimants to launch cases. Novitas and Therium Capital Management are known to be especially active in this area.
Therium co-founder Neil Purslow says the funder is active in cases for trustees and against trustees. He suggests there is an especially compelling case for trustees to look at funding in a dispute for ‘risk transfer’ purposes, protecting the trustees’ legal position and the fund from the financial risk of litigation.
The size, quantum and complexity of many trusts and estates disputes explains the mounting interest from litigation funders and the fact that a growing number of City firms are entering or re-investing the private client market. Linklaters’ hire of Golden may have grabbed many of the headlines, but many other firms are intensifying their efforts in trusts and estates disputes.
In November 2015 Taylor Wessing hired Emma Jordan from Wragge Lawrence Graham & Co, now Gowling WLG, as its head of contentious trusts. Jordan, an English barrister and Jersey advocate, strengthened an already substantial department that forms part of Taylor Wessing’s private wealth division, which is one of the four main international industry groups of the firm.
‘Beneficiaries are better educated about their rights and more active in flexing their muscles. Disclosure is now sought in a way that would have been barely contemplated 20 years ago.’
Jeremy Gordon, Farrer
Many active in trusts-related work now recognise growing interest from within the wider profession. Jonathan Speck, managing partner of offshore firm Mourant Ozannes, believes that attitudes have shifted: ‘The explosion of private wealth has caused a lot of lawyers to rethink decisions in the past to not do private client work. Private wealth work has changed substantially; it is much more encompassing than simply drafting trusts and wills and so forth.’
The composition of a large trust or estate case will typically include multiple litigants with contrasting interests. Jordan believes that this can be mystifying to the general litigator and pre-action disclosure in trusts cases can be especially challenging. ‘Beneficiaries and trustees are not like normal commercial parties,’ she says.
Paul Hewitt, a partner in the contentious trusts and succession team at Withers, says a private client’s motivation can be very different to those in the commercial sector: ‘In a commercial dispute you do have hostility but the parties are primarily interested in a commercial outcome. I’m not suggesting that they don’t lose their heads, but by and large litigation is seen as part of your commercial activity and you pursue litigation to make more money or to offset losses.’ He adds that emotions such as grief and family antagonism can cloud judgement in a trust or estate dispute, and lawyers must be attuned to and empathise with the client.
‘The super-wealthy have so many gatekeepers and getting eyeball-to-eyeball with the real client can be a challenge.’
Jonathan Speck, Mourant Ozannes
Geoffrey Kertesz, head of the will and trust disputes team at Bircham Dyson Bell, believes that these cases represent an inimitable challenge every time: ‘You have the complexity of litigation and then there is the massive overlay of being an adviser to an individual, a family or a charity. You are not advising the general counsel of a FTSE 100 company. Litigation is unpleasant and can be expensive, and it can be a whole lot more unpleasant when you are litigating against your sister.’
Acting for the ultra-wealthy class also poses another major challenge to lawyers, according to Speck: ‘One of the challenges for lawyers is getting access to the ultimate client. The super-wealthy have so many gatekeepers and getting eyeball-to-eyeball with the real client can be a challenge.’
Speck says he is frequently faced with intermediaries and becomes concerned that facts may be intentionally distorted by intermediates for their own interests.
Despite so many of the trusts under dispute being registered offshore and so much private wealth held by individuals in Asia, Russia and the Middle East, Gordon is confident that City firms will continue to have a pivotal role in major trusts disputes: ‘It makes good sense to have a London law firm that has the experience, expertise and resources to support the local lawyers in handling these cases.’
Kertesz – an American – concedes that London’s status is unassailable: ‘London law firms excel at co-ordinating approaches between jurisdictions. The English exported trust law around the world and we are in a unique position to work with the Channel Islands, the Caribbean and the Far East.’
For a long time the private client specialists in London have taken advantage of City firms’ preference to chase high-stakes commercial litigation for banks or major corporates. Now they have to cope with the considerable resources of international firms going after their expensive lunches. LB
Flowers on the Fulham Road: the Pugachev dispute
In February Sergei Pugachev, a Russian oligarch known as ‘Putin’s Banker’, was handed a two-year prison sentence by the UK’s High Court. Pugachev had breached 12 court orders in a case brought by Russia’s Deposit Insurance Agency (DIA) as liquidator of Mezhprombank, which he co-founded and was accused of syphoning off $2bn from.
The DIA case against Pugachev rested on trusts located in New Zealand that Pugachev was accused of using to conceal his wealth. Further, he and the trustees were accused of refusing to disclose the full details of the trusts.
Pugachev had claimed that as a discretionary beneficiary, he had no rights or claims over the trust’s assets. However, the claimants successfully proved that Pugachev had been the protector of the trusts and that he had lived in a property that belonged to one of the trusts.
Hogan Lovells represented the DIA and had to apply significant pressure to the infamous oligarch to reveal his fortune and disclose details of the assets held in trust. At the outset of the case Michael Roberts, the lead partner at Hogan Lovells, tracked Pugachev to a flower stall on the Fulham Road where he served the initial freezing injunction as Pugachev was buying a bunch of flowers for his girlfriend, Alexandra Tolstoy, the socialite and descendant of novelist Leo Tolstoy.
Pugachev fled from Roberts, later claiming he thought Roberts was trying to attack him. In a comic scene, Pugachev then found he had locked himself out of his Rolls-Royce and was forced to run down the street frantically trying to wave down a taxi to assist his escape.
Pugachev had fled Russia, claiming he had fallen out of favour with the Russian president and was the victim of a ‘witch hunt’ by the Kremlin. He has since launched a $12bn arbitration claim against the Russian government for carving up his business empire, with King & Spalding representing him. The Fulham Road episode formed part of a long-running saga that resulted in the Court of Appeal stating that ‘sophisticated and wily operators should not be able to make themselves immune to the courts’ orders’.
Roberts believes the case shows that the courts are alert to such situations: ‘While bona fide trusts, including discretionary trusts, remain a legitimate form of estate planning, the Pugachev litigation shows the willingness of the court to adapt its orders, and fashion new forms of order, to ensure that freezing injunctions are properly effective and that you cannot screen off huge wealth behind artificial structures.’