The Cayman Islands led the way in 1987 when it passed the Trusts (Foreign Element) Law, later consolidated with other parts of Cayman Islands’ trusts statute to become Part VII of what is now the Trusts Law (2011 Revision). This has become known as the Cayman Islands’ ‘firewall legislation’.
In essence, the purpose of the Cayman Islands' firewall legislation is to insulate trusts governed by Cayman Islands law from attack by forced heirs and those claiming against the trust assets by reason of a personal relationship with the settlor.
Other offshore jurisdictions, such as Jersey and Guernsey, introduced their own firewall legislation in 2006 and 2008 respectively. The question we try to address in this article is whether
Cayman's firewall legislation would stand up to challenges similar to those which we have seen, for example, in Jersey. Are its provisions fit to face up to the current realities of the offshore trusts industry?
What does it say?
In summary, and subject to certain exceptions, the legislation provides:
(a) where a trust is expressly governed by Cayman Islands law and there is an exclusive jurisdiction clause in favour of the Cayman Islands court, any questions about that trust or disposition of property on to the trusts, must be determined in accordance with Cayman Islands law without reference to the laws of any other jurisdiction with which the trust might be connected (section 90);
(b) no trust governed by Cayman Islands law and no dispositions of property on to those trusts will be void, voidable, liable to be set aside or defective in any fashion, nor the trustee, any beneficiaries or other person be subject to any liability or deprived of any right because the trust or disposition avoids or defeats rights, claims or interests conferred by foreign law upon any person by reason of a personal relationship with the settlor (section 91); and
(c) where any foreign judgment is inconsistent with section 91 that judgment will not be recognised, enforced or give rise to any estoppel in the Cayman Islands (section 93).
A personal relationship with the settlor is widely defined, including "every form of relationship by blood or marriage, including former marriage", specifically including, children (whether adopted or illegitimate) and co-habitees. The Trusts Law also includes in that definition where a personal relationship exists between two people "and a third person, but no change in circumstances causes a personal relationship, once established, to terminate" [section 87].
The latter part of section 87 could be interpreted in more than one way and it is not clear exactly what situation the legislators were intending to cover, although it could be that of a husband, wife and child. Husband and wife each have a personal relationship, as defined in the legislation, with the child.
A change of circumstance, such as the divorce of husband and wife, would not change the personal relationship which both husband and wife each have separately with their child. However, as children are expressly provided for in the former parts of section 87, it is conceivable that the draftsmen of this part of the legislation had some other set of circumstances in mind, although we have found it difficult to envisage what they might be.
The definition of a personal relationship is central to the application of the Cayman Islands firewall legislation. Could this lack of clarity impact upon the effectiveness of the legislation? Further, section 93 does not mention section 90 at all. Is this too another weakness in the protection our firewall legislation is designed to provide?
How does it work in practice?
Consider the following examples relating to enforcement in the Cayman Islands of orders of, let us say, the Hong Kong court. The wife (W) succeeds in her application to vary the trust in the Hong Kong court as part of the financial provision on her divorce from her husband (H).
In common with the approach taken by some overseas courts, the Hong Kong court does not consider or apply Cayman Islands law, despite the trust being expressly subject to the exclusive jurisdiction of the Cayman Islands court. W comes to the Cayman Islands to enforce her financial order.
Scenario A: H is settlor of a discretionary trust of which W, H and their children are members of the class of discretionary beneficiaries. W obtains an order varying the trust to provide her with a life interest in the trust, the only asset of which is the former matrimonial home, a highly valuable property.
Scenario B: H is a discretionary beneficiary of a trust, together with his siblings. The trust was settled by H's father. W is not and never has been a beneficiary of the trust.
Scenario C: H is a discretionary beneficiary of a trust, together with several other named individuals who are unrelated to H. The settlor is H's godfather, who is a close family friend but not a blood relative. W is not and never has been a beneficiary of the trust.
The facts of Scenario A are similar to those which faced the Cayman trustee in RBS Coutts (Cayman) Limited v W & Others  (2) CILR 348. In that case, H and W were co-settlors of the trust and the trustee was seeking direction from the court about participation in an application by W to vary the trust in Hong Kong divorce proceedings. Henderson J confirmed:
"A trust in the Cayman Islands can only be varied in accordance with the law of the Cayman Islands and only by a court of the Cayman Islands. These overarching rules are provided for expressly in the Trusts Law (2009 Revision), in ss 90, 91 and 93 …" 
In our scenario, the Hong Kong court has not applied Cayman Islands law. H, W and their children comprise the class of discretionary beneficiaries. W has a "personal relationship" with the settlor and the beneficiaries have a "right" to require the trustees to consider from time to time whether to exercise their discretion in their favour.
Elevating W's interest in the trust to a life interest deprives the other beneficiaries of that "right" so W would potentially fall foul of the firewall legislation. However, it is interesting to note that section 91 refers to the deprivation of a beneficiary's "rights" and not "interests" or for that matter, "claims" as appears later in the section.
In Scenario B, W is not a beneficiary of the trust. Depending on the terms of the order of the Hong Kong court and assuming the trust contains appropriate powers for W to be added as a beneficiary so that such order could be put into effect, would W fall foul of the Cayman firewall legislation? The answer to this question is to some extent determined by the definition of "personal relationship".
The settlor is W's former father-in-law. The definition of personal relationship expressly includes "every form of relationship by blood or marriage, including former marriage". As former daughter-in-law, could W be said to have a "personal relationship" with the settlor such that she would fall foul of the firewall legislation in this scenario?
Again, the definition of "personal relationship" is key. W does not have a personal relationship with the settlor in this scenario. She does have a personal relationship with H but that is irrelevant because the application of sections 91 and 93 is limited to personal relationship with the settlor. Is this a limitation in the application of the Cayman Islands' firewall legislation which could and should be remedied?
Consider the firewall provisions of the Trusts (Guernsey) Law, 2007. The equivalent of section 91 is found at section 14(3) which is expanded to provide that no:
"… beneficiary … be subjected to any obligation or liability or deprived of any right, claim or interest, by reason that …
(b) the trust or disposition –
(i) avoids defeats or potentially avoids or defeats rights, claims, interests, obligations or liabilities conferred or imposed by the law of any other jurisdiction on any person –
(A) by reason of a personal relationship to a settlor or any beneficiary, or…"
Section 14(4), the equivalent of section 93 of the Cayman Trusts Law, goes further providing that a judgment or order of a court other than the Guernsey court will not be recognised, enforced or give rise to any right, obligation, liability or estoppel:
"…to the extent that … the Royal Court, for the purposes of protecting the interests of the beneficiaries or in the interests of the proper administration of the trust, so orders."
Section 84(2) of the Guernsey law provides that nothing in the trusts law "derogates from the powers of the Royal Court which exist independently of this Law…(b) in respect of trusts, trustees or trust property".
The definition of a personal relationship is unambiguous, including:
"..every form of relationship by blood, adoption, marriage or cohabitation regardless of whether the law of any jurisdiction recognises the validity, legitimacy or existence of the relationship, an includes a former personal relationship which has in law or in fact terminated.
A personal relationship also exists between two persons if a personal relationship exists between each of them and a third person." [Section 80]
Thus, the firewall provisions apply to personal relationships with the settlor or any beneficiary of the trust and relate to rights, claims and interests of any beneficiary. The application of the Guernsey firewall provisions are, therefore, potentially further reaching than the Cayman provisions and would potentially encompass Scenario C above, where W has a personal relationship with H but not with the settlor. The additional catch-all provision for the protection of the interests of beneficiaries provided by section 14(4) of the Guernsey legislation ensures that the discretion remains firmly with the Guernsey court, which would also have regard to the provisions of section 84(2).
Our review of Cayman's firewall legislation has highlighted that there may be lessons to be learned from legislative developments in other offshore jurisdictions. Perhaps because Cayman was the first to introduce such legislation and perhaps because it seems to have been designed to protect against forced heirship claims rather than foreign matrimonial orders, it contains ambiguities and potentially, gaps in its protection.
The Jersey legislation, for example, was developed in response to attempts to enforce foreign matrimonial orders there. While clarification of the definition of "personal relationship" would be welcome, further amendment might provide more robust protection. However, whether we want or need such far reaching firewall protection are questions for a different article.