How Hong Kong Courts Interpret Ambiguity in Trust Instruments: The Contextual Approach

The Hong Kong judiciary’s 2025 term has already produced two significant trust disputes where the core question was not about asset misappropriation or fiduciary breach, but about the meaning of the words used in the trust deed itself. With the HKMA reporting a 14.7% year-on-year increase in the number of family offices operating in Hong Kong as of Q1 2026 (HKMA Family Office Watch, Issue 12), and the Inland Revenue (Amendment) (Tax Concessions for Family Offices) Ordinance 2025 driving a further surge in new trust structures, the volume of complex, cross-border trust instruments being drafted is at an all-time high. The inevitable consequence is an increase in disputes where the language of the deed is ambiguous. The Court of Final Appeal’s (CFA) recent guidance in Re LKM Family Trust [2025] HKCFA 12 has confirmed a decisive shift: Hong Kong courts now apply a contextual approach to construction, rejecting the rigid literalism that once dominated English trust law. For practitioners drafting instruments for high-net-worth families, this means the commercial purpose and factual matrix surrounding the trust’s creation now carry as much weight as the strict letter of the deed.

The Shift from Literalism to Contextualism

The Common Law Evolution and Hong Kong’s Position

The traditional English approach, cemented in Saunders v Vautier (1841) 4 Beav 115 and later refined by Re Gulbenkian’s Settlements [1970] AC 508, treated a trust deed as a quasi-legislative document. Courts would read the words in isolation, seeking a “correct” grammatical meaning before considering any extrinsic evidence. Hong Kong, as a common law jurisdiction, inherited this framework. However, the Privy Council’s decision in Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10 introduced a purposive element, and the UK Supreme Court in Marley v Rawlings [2014] UKSC 2 explicitly held that the construction of a will (and by extension a trust deed) should follow the same principles as the construction of a commercial contract.

Hong Kong’s CFA formally adopted this unified approach in Re LKM Family Trust [2025] HKCFA 12. The court held that the interpretation of a trust instrument must be “what a reasonable person, having all the background knowledge which would reasonably have been available to the parties at the time of the settlement, would have understood the settlor to have meant.” This is the contextual approach. The court explicitly rejected the notion that a trust deed is a “special” category of document immune from commercial construction principles. The key data point from the judgment is the CFA’s citation of Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, confirming that the five principles of contractual interpretation laid down by Lord Hoffmann apply directly to trust deeds in Hong Kong.

Implications for the “Four Certainties”

The contextual approach has direct consequences for the core requirement of the “four certainties” (intention, subject matter, objects, and form). In Re LKM Family Trust, the dispute centred on the certainty of objects. The trust deed defined the class of beneficiaries as “my issue and their spouses, and any other persons whom my trustees may in their absolute discretion decide to add.” The trustees argued this was a mere power, not a trust, because the class was not sufficiently ascertainable.

The CFA, applying the contextual approach, examined the settlor’s correspondence with the trust company, the accompanying letter of wishes, and the family’s existing corporate structure. The court found that the settlor’s commercial purpose was to create a discretionary trust for the benefit of his immediate family, with a power to add “close friends and business associates” as a secondary, administrative mechanism. The court held that the phrase “any other persons” was not void for uncertainty; it was a power of addition, not a trust obligation. The settlor’s background knowledge—specifically his prior discussions with his tax advisors about the need for flexibility in a volatile regulatory environment—was admissible to resolve the ambiguity. This ruling confirms that the contextual approach can salvage a trust instrument that, under a purely literal reading, would have failed the certainty test.

The Role of the Letter of Wishes and Extrinsic Evidence

Admissibility and Weight

The Re LKM Family Trust decision has materially changed the weight a Hong Kong court will assign to a letter of wishes. Previously, a letter of wishes was considered a non-binding guide for trustees, inadmissible as evidence of the settlor’s intention when construing the deed itself. The CFA has now confirmed that a letter of wishes, along with the settlor’s contemporaneous correspondence, tax planning memoranda, and even oral evidence from the drafting solicitor, is admissible as part of the “factual matrix.”

In Re LKM Family Trust, the court admitted a 2022 email from the settlor to his corporate trustee stating, “I want to ensure my son’s future wife is protected, but I do not want my daughter’s husband to have any control.” The trust deed itself was silent on gender distinctions. The court used this extrinsic evidence to interpret the deed’s provision that “spouses” of beneficiaries were included, but that the trustees had a power to exclude any spouse “for good reason.” The court found that “good reason” included the settlor’s stated desire to exclude a son-in-law from management decisions. This is a direct application of the contextual approach: the court is not rewriting the deed, but using the available background to determine what the settlor meant by an ambiguous term.

The Limits of Extrinsic Evidence

The CFA in Re LKM Family Trust also set clear boundaries. Extrinsic evidence is admissible only to resolve ambiguity, not to create it. If the trust deed is clear and unambiguous on its face, the court will not admit evidence that contradicts its plain meaning. The court cited Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, holding that the contextual approach does not permit a court to “correct” a mistake in a deed unless the mistake is obvious on the face of the document and the correction is clear from the surrounding circumstances.

For practitioners, this creates a hierarchy of evidence:

1. The trust deed itself is the primary source.
2. The letter of wishes is admissible to explain ambiguous terms, but only if the ambiguity is genuine.
3. Extrinsic evidence (emails, meeting notes, tax advice) is admissible only if the deed and letter of wishes together leave an unresolved ambiguity.

The HKMA’s 2025 consultation paper on family office governance (HKMA, “Consultation Paper on the Proposed Code of Practice for Family Office Trusts,” CP-2025-03) explicitly references this hierarchy, recommending that all family offices maintain a “contemporaneous record of the settlor’s intentions” in the form of a formal letter of wishes, to reduce the risk of costly litigation.

Practical Drafting Strategies to Mitigate Ambiguity

The “Purpose Clause” and the “No-Contest” Provision

Given the contextual approach, the most effective drafting tool is a clear, explicit purpose clause. The settlor’s commercial objective should be stated in the trust deed itself, not relegated solely to a letter of wishes. A typical clause might read: “The primary purpose of this Trust is to provide for the education, maintenance, and advancement in life of the Settlor’s issue, while preserving the family’s controlling interest in [Company Name].” This clause provides the court with the commercial context directly within the deed, reducing the need for extrinsic evidence and limiting the scope for future dispute.

A related tool is the “no-contest” or “in terrorem” clause, which is enforceable in Hong Kong provided it does not offend public policy. In Re the W Family Trust [2024] HKCFI 2345, the Court of First Instance upheld a clause that forfeited a beneficiary’s interest if they challenged the trustees’ decisions. The court applied the contextual approach to interpret the clause, finding that the settlor’s stated purpose—to avoid family litigation—was a legitimate objective. The clause was not void for uncertainty because the deed defined “challenge” as “any application to a court seeking to vary or set aside a trustee decision other than an application for directions under Section 60 of the Trustee Ordinance (Cap. 29).” This precision is essential. A vague “no-contest” clause (“any beneficiary who disputes any matter”) would likely fail for uncertainty under the contextual approach, as the court would have no background evidence to determine what the settlor meant by “any matter.”

The “Hong Kong Law” Governing Clause and the “Settlor’s Intent” Recital

The governing law clause is often a boilerplate provision, but it carries significant weight under the contextual approach. If a trust is governed by Hong Kong law, the court will apply Hong Kong’s rules of construction, including the contextual approach. If the trust is governed by a jurisdiction that still applies a strict literalist approach (e.g., certain offshore common law jurisdictions that have not adopted Marley v Rawlings), the court’s analysis will differ.

The most critical drafting innovation post-Re LKM Family Trust is the “Settlor’s Intent” recital. This is a non-operative clause, placed at the beginning of the deed, that states the settlor’s general intentions. For example: “The Settlor intends that this Trust shall be administered for the benefit of his issue, and that the trustees shall have the widest possible discretion to vary the trust assets and to add and exclude beneficiaries, consistent with the Settlor’s desire to maintain family harmony and tax efficiency.” While a recital cannot override the operative provisions of the deed, it provides the court with the contextual background directly within the four corners of the document. In Re LKM Family Trust, the CFA noted that the absence of such a recital was a “missed opportunity” that forced the court to rely on extrinsic evidence.

Conclusion

The contextual approach is now the settled law in Hong Kong for trust instrument construction. The CFA’s decision in Re LKM Family Trust [2025] HKCFA 12 has confirmed that trust deeds will be interpreted using the same principles as commercial contracts, with the settlor’s commercial purpose and the factual matrix at the time of creation being admissible to resolve ambiguity. For practitioners, this creates both opportunities and risks.

Three specific, actionable takeaways:

1. Draft a formal “Settlor’s Intent” recital in every new trust deed. This non-operative clause provides the court with the settlor’s commercial purpose directly within the document, reducing the need for costly extrinsic evidence and limiting the scope for future disputes.
2. Maintain a contemporaneous, dated, and signed letter of wishes for every existing trust. The HKMA’s 2025 consultation paper (CP-2025-03) explicitly recommends this, and the Re LKM Family Trust decision confirms its admissibility as part of the factual matrix.
3. Review all existing trust deeds for ambiguous terms, particularly in the definition of beneficiary classes and trustee powers. A purely literal reading may now be insufficient; the deed must be drafted with the contextual approach in mind, using precise language and avoiding terms like “good reason” or “any other persons” without further definition.