All About Estates

Ready to Rumble: Law of Trusts vs. Law of Contracts

This Blog was written by : Peter Meitanis

 

In a battle that dates back to the Medieval Ages, two bitter rivals are back at it again. The location of the latest bout is British Columbia’s Court of Appeal. Get your popcorn ready folks.

Trust law is out for blood, citing the duty to account and the rule in Saunders v. Vautier. The Law of Contracts has some heavy hitters in its corner: an agreement, contractual intention, and the legal concept of consideration. Let’s get one thing straight before we continue – there is no consideration or love lost between these two.

Tale of the Tape

In N-Krypt International Corp. v. LeVasseur, 2018 BCCA 20, N-Krypt International Corp. (“N-Krypt”) purchased shares in Cirius Messaging Inc.(“Cirius”), a company controlled by the Thierry LeVasseur. A term of their agreement required N-Krypt to put its shares into a voting trust with LeVasseur as trustee. LeVasseur was exclusively empowered to exercise the voting rights associated with the shares, and N-Krypt was entitled to any dividends or distribution payments. N-Krypt would also waive its rights to information normally available to a shareholder.

The relationship between the parties broke down and N-Krypt, relying on trust law sought an order requiring:

• LeVasseur to account for his management of the shares and deliver information received in his capacity as trustee
• A return of the shares under the rule in Saunders v. Vautier or in the alternative, appointment of a new trustee

The early rounds

Both parties tried to land some hits early on, but missed. The trial judge rejected LeVasseur’s position that the arrangement was more like an escrow agreement. The trial judge also decided that the rule in Saunders v. Vautier did not apply, stating that a “different analysis is necessary when the settlor and the beneficiary are the same person, and the settlor/trustee has contractually bound themselves to leave the property in the trustee’s hands”.

The trial judge also addressed the question of what “trust information” N-Krypt was entitled to in light of the restrictions it had agreed to in the agreement. In noting that “the extent of the ‘trust information’ that will be ordered depends on the particular circumstances”, the judge held that
LeVasseur must provide N-Krypt (as beneficial owner) any information that dealt with changes in the value of the shares or benefits that would be received based on the shares. LeVasseur also had to disclose information which came into his possession as in his capacity as CEO and director of Cirius.

LeVasseur appealed. Looks like this one had to go to a panel of three judges.

Second winds

The Court of Appeal found the trial judge’s decision to be inconsistent with the contract, holding that “it was an error in principle to determine N-Krypt’s entitlement to information without reconciling the competing principles of contract and trust law raised in this case”. The Court emphasized the “context of the commercial agreement they had entered into” and held:

“…there is in my view nothing unfair about holding N-Krypt to the terms of the agreement it entered into to give up voting rights and access to corporate information in order to acquire a significant number of shares in Cirius”.

No split decisions here…..

By way of unanimous decision

LeVasseur’s appeal was allowed.

The trial judge’s focus on LeVasseur’s duty as a trustee led him to underemphasize the parties’ obligations and rights in the context of their commercial agreement. The trust was the mechanism used to give effect to the contract and the two are “indissociable”.

Something tells me it’s only a matter of time until these two heavyweights meet again.

About Paul Fensom
Scotiatrust offers a full range of estate, trust and philanthropic advisory services designed to meet a client’s personal objectives and designed to evolve across a variety of life stages and financial events. Email: paul.fensom@scotiawealth.com

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