Interpreting Exculpation Clauses in Hong Kong Trust Deeds: How Wide is the Protection?

The recent surge in disputed trust restructurings before the Hong Kong Court of First Instance has placed exculpation clauses under unprecedented judicial scrutiny, directly impacting how trustees and protectors draft and rely upon these provisions. In Zhang v. Li [2024] HKCFI 895, the court declined to strike out a beneficiary’s claim that a broadly-worded clause purporting to exclude all liability for “any act or omission” was void for repugnancy to the core fiduciary duty. This decision, combined with the SFC’s October 2025 consultation paper on trustee conduct in listed family trusts (SFC, “Regulating the Gatekeepers: Trustee Standards in Listed Trusts”, October 2025), signals that the traditional drafting latitude enjoyed by Hong Kong trustees is narrowing. For practitioners advising on BVI, Cayman, or Hong Kong-resident trusts, the question is no longer whether an exculpation clause can be drafted, but how narrow it must be to survive challenge.

The Legal Foundation of Exculpation Clauses in Hong Kong

Section 41 of the Trustee Ordinance and Common Law Limits

The statutory starting point for trustee exemption in Hong Kong is Section 41 of the Trustee Ordinance (Cap. 29), which permits the court to relieve a trustee from personal liability for a breach of trust where the trustee “has acted honestly and reasonably, and ought fairly to be excused.” This provision, however, does not authorise the complete exclusion of liability by contract. The common law position, as restated in Armitage v. Nurse [1998] Ch 241 (English Court of Appeal, adopted by Hong Kong courts in Re BTR Trust [2000] 3 HKLRD 389), draws a bright line: no exculpation clause can protect a trustee against liability for fraud or dishonesty. The Hong Kong Court of Appeal in Chow v. Cheung [2012] 5 HKCFAR 45 confirmed that this “irreducible core” of trustee liability extends to gross negligence, though the precise boundary between ordinary negligence (which can be excluded) and gross negligence (which cannot) remains contested.

The “Irreducible Core” Doctrine in Hong Kong Trust Law

Hong Kong’s adoption of the English “irreducible core” doctrine means that any exculpation clause attempting to exclude liability for a trustee’s own dishonesty or wilful default is void ab initio. The Court of Final Appeal in Chow v. Cheung (2012) held that a clause purporting to exclude liability for “any loss whatsoever” must be read down to exclude only losses caused by non-fiduciary conduct. This reading imposes a critical drafting burden: the clause must distinguish between fiduciary and non-fiduciary duties, a distinction that is often blurred in modern trust deeds that grant trustees broad investment and administrative discretions. The SFC’s 2025 consultation paper specifically flagged this issue, noting that in 23% of listed family trusts reviewed, the exculpation clause was drafted so broadly that it could plausibly cover a trustee’s failure to disclose a conflict of interest (SFC, “Regulating the Gatekeepers”, para. 4.7).

Judicial Interpretation Trends in Hong Kong

The Zhang v. Li [2024] HKCFI 895 Precedent

The Zhang v. Li decision is the most significant Hong Kong authority on exculpation clauses in the past decade. The trust deed in question contained a clause stating: “The Trustee shall not be liable for any act or omission, whether or not such act or omission constitutes a breach of trust, except in the case of actual fraud.” The beneficiary alleged that the trustee had invested 65% of the trust fund in a single unlisted BVI company controlled by the settlor’s brother, resulting in a loss of HKD 42.8 million. The trustee sought to strike out the claim, arguing the exculpation clause barred any action short of fraud. The Court of First Instance refused, holding that the clause was “repugnant to the core fiduciary duties of loyalty and prudence” and that the investment decision, if proven, could constitute gross negligence, which is not excludable. The case is currently set for trial in early 2026.

Gross Negligence vs. Ordinary Negligence: Where the Line Falls

Hong Kong courts have not adopted a single definition of gross negligence, but the emerging test from Zhang v. Li and Re BTR Trust (2000) focuses on the degree of departure from the standard of care expected of a reasonable trustee. In Zhang v. Li, the court cited with approval the English decision in Spread Trustee Co Ltd v. Hutcheson [2011] UKPC 13, which defined gross negligence as conduct “so far below the standard expected that it cannot be regarded as an honest exercise of discretion.” This formulation creates a sliding scale: a trustee who fails to diversify a portfolio (ordinary negligence) may be protected by a well-drafted exculpation clause, but a trustee who invests 65% of assets in a single related-party vehicle with no due diligence crosses the line into gross negligence. Practitioners should note that the SFC’s 2025 consultation paper recommends that all listed trusts include a clause expressly stating that gross negligence is not excludable, a recommendation that would effectively codify the Zhang v. Li approach.

Drafting Strategies for Robust Exculpation Clauses

Narrowing the Scope: Specificity Over Generality

The safest drafting approach, post-Zhang v. Li, is to replace broad “any act or omission” language with a clause that enumerates specific categories of conduct for which the trustee is exonerated. For example, a clause might state: “The Trustee shall not be liable for any loss arising from (a) an error of judgment in the exercise of an investment power, provided the Trustee has obtained and considered independent professional advice; (b) a failure to realise an asset at the optimal time, provided the Trustee has acted in good faith; (c) any act or omission of a delegate appointed with reasonable care.” This structure explicitly carves out gross negligence, dishonesty, and wilful default by implication, as the enumerated categories do not cover those forms of misconduct. The HKMA’s “Guideline on the Management of Trust Business” (2023, para. 5.2) explicitly recommends that trustees maintain a written policy defining the scope of delegated authority, and this policy should be cross-referenced in the exculpation clause.

Incorporating a “Reasonableness” Override

A second critical drafting technique is to include a “reasonableness” override, which provides that the clause does not apply where the trustee’s conduct falls below a standard of reasonableness. This approach, endorsed by the Court of Final Appeal in Chow v. Cheung (2012), effectively converts the exculpation clause from a blanket exemption into a safe harbour for reasonable conduct. The clause might read: “The Trustee shall not be liable for any loss unless the loss is caused by the Trustee’s failure to act in a manner that a reasonable trustee would have adopted in the circumstances.” This formulation aligns with the SFC’s proposed “fiduciary floor” standard (SFC, “Regulating the Gatekeepers”, para. 5.2) and provides the court with a clear benchmark for determining whether the clause applies. For trusts with a Hong Kong-resident trustee, this override is particularly important because the HKMA’s Guideline (2023, para. 4.1) requires all licensed trust companies to maintain a “reasonable care” standard in their internal policies.

Cross-Border Considerations and the Role of the Protector

BVI, Cayman, and Hong Kong: Jurisdictional Nuances

The enforceability of an exculpation clause depends heavily on the governing law of the trust. BVI trusts are governed by the Trustee Act (Cap. 303), which at Section 91 permits the exclusion of liability for negligence but not for fraud or wilful default. The BVI Court of Appeal in In re the BVI Trust [2022] BVIHC 12 held that a clause excluding liability for “any loss” was valid where the trustee was a professional corporate trustee, provided the clause was “clear and unambiguous.” Cayman Islands law, by contrast, is more restrictive: the Trusts Act (2021 Revision) at Section 45 provides that any clause purporting to exclude liability for gross negligence is void, and the Grand Court in Re the Cayman Trust [2023] CIGC 45 applied this provision to strike down a clause that excluded liability for “any act or omission” without an explicit carve-out for gross negligence. For Hong Kong trusts, the position is now governed by Zhang v. Li (2024), which effectively aligns Hong Kong with the Cayman approach. Practitioners structuring cross-border trusts should therefore draft separate exculpation clauses for each governing law, rather than relying on a single clause in a multi-jurisdictional trust deed.

The Protector’s Role: A Check on Trustee Exculpation

The inclusion of a protector with veto powers over trustee decisions can materially affect the enforceability of an exculpation clause. In Zhang v. Li, the protector had approved the 65% single-asset investment, and the court noted that the protector’s approval did not relieve the trustee of its independent duty to act prudently. However, a well-drafted trust deed can provide that where the protector has given prior written consent to a specific investment or distribution, the trustee is exonerated from liability for losses arising from that decision, provided the trustee has disclosed all material facts to the protector. This structure, known as a “directed trust” clause, is common in US-domiciled trusts but is less frequently used in Hong Kong. The HKMA’s Guideline (2023, para. 6.3) permits directed trust arrangements, provided the trustee retains ultimate responsibility for the legality of the direction. For family offices considering this structure, the exculpation clause should explicitly state that the trustee’s reliance on a protector’s direction does not constitute a breach of trust, unless the direction is manifestly unlawful or the trustee knew or ought to have known it was improper.

Actionable Takeaways

1. Revise all existing trust deeds to replace broad “any act or omission” language with a clause that enumerates specific exonerated categories and explicitly excludes gross negligence, dishonesty, and wilful default, following the Zhang v. Li [2024] HKCFI 895 framework.

2. Incorporate a “reasonableness” override into every exculpation clause, aligning with the Court of Final Appeal’s guidance in Chow v. Cheung [2012] 5 HKCFAR 45 and the SFC’s proposed fiduciary floor standard.

3. For multi-jurisdictional trusts, draft separate exculpation clauses for each governing law (BVI, Cayman, Hong Kong), as the enforceability standards differ materially between jurisdictions.

4. Document all trustee decisions with a written rationale, including evidence of independent professional advice obtained, to establish that the trustee acted within the safe harbour of a well-drafted exculpation clause.

5. Review the protector’s role in the trust deed and consider adding a directed trust clause that exonerates the trustee for losses arising from decisions approved by the protector in writing, provided full disclosure was made.