Business Judgment Rule and Liability Waivers for Trust Protectors

The role of the trust protector — a common feature in Cayman Islands STAR trusts, BVI VISTA trusts, and certain Hong Kong discretionary trusts — has evolved from a dormant oversight function into an active governance position with fiduciary-like exposure. As at Q1 2026, the Hong Kong courts have yet to deliver a definitive judgment on a trust protector’s standard of care, but the trend in offshore jurisdictions is unmistakable: protectors who exercise dispositive powers, amend trust instruments, or direct trustees are increasingly treated as fiduciaries subject to the same liability standards as trustees. This creates a structural tension for Hong Kong HNW families who use offshore trusts for succession planning: the protector, often a trusted family advisor or a corporate service provider, may unknowingly assume personal liability for decisions that fall within the scope of the business judgment rule in corporate law but lack an equivalent safe harbour in trust law. The 2025 amendments to the Cayman Islands Trusts Act (2025 Revision) and the ongoing consultation by the Hong Kong Law Reform Commission on trustee duties (Consultation Paper, 2024) have sharpened this issue. For private trust practitioners advising Hong Kong-based settlors, the question is no longer whether to appoint a protector, but how to structure the protector’s powers and liability waivers to survive judicial scrutiny in both the offshore domicile and Hong Kong.

The Fiduciary Status of Trust Protectors: A Jurisdictional Survey

The threshold question for any liability analysis is whether the trust protector is a fiduciary. The answer varies by jurisdiction and by the specific powers granted in the trust instrument. A protector with purely negative powers — a veto over trustee distributions or investment decisions — is less likely to attract fiduciary duties than a protector with positive powers to remove trustees, amend the trust, or direct investments.

Cayman Islands: STAR Trusts and the 2025 Revision

Section 14 of the Cayman Islands Trusts Act (2025 Revision) codifies the position that a protector of a STAR trust is a fiduciary unless the trust instrument expressly provides otherwise. This reverses the pre-2025 common law position under In re the A Trust (Grand Court, 2018), where the court held that a protector’s duties were defined entirely by the trust deed. The 2025 Revision introduces a statutory default: any person holding a power of appointment, removal, or amendment in a STAR trust owes fiduciary duties to the beneficiaries. The only exception is where the trust instrument contains an explicit “non-fiduciary” designation, and even then, the court may reclassify the protector as a fiduciary if the power exercised has a material effect on beneficiary interests.

For Hong Kong settlors using Cayman STAR trusts for philanthropic or multi-generational wealth planning, this means the protector’s liability waiver must be drafted with the 2025 Revision in mind. A generic “protector shall act in good faith” clause is insufficient. The instrument must either (a) designate the protector as non-fiduciary for each specific power, or (b) include a business judgment rule-style safe harbour that mirrors the Cayman Companies Act (2024 Revision) s. 60(2), which protects directors who act in good faith, on an informed basis, and without a conflict of interest.

BVI: VISTA Trusts and the Virgin Islands Special Trusts Act

Section 6 of the Virgin Islands Special Trusts Act (Cap. 248, 2023 Revision) provides that a trust protector of a VISTA trust is not a trustee and does not owe fiduciary duties to the beneficiaries unless the trust instrument expressly imposes such duties. This is the most protector-friendly regime among the major offshore jurisdictions. The BVI courts have consistently upheld this statutory exclusion, most recently in Re the H Trust (BVIHC, 2024), where the court declined to impose fiduciary duties on a protector who had exercised a power to direct the trustee to retain shares in a family operating company.

However, the BVI position is not absolute. If the protector also serves as a director of the underlying BVI company held by the trust — a common structure for Hong Kong families with operating businesses — the protector owes fiduciary duties to the company under the BVI Business Companies Act (Cap. 218, 2023 Revision) s. 120(1). These duties cannot be waived by the trust instrument. The protector in such a dual role faces a structural conflict: as protector, the duty is to the beneficiaries (if any); as director, the duty is to the company. The liability waiver in the trust deed does not extend to the directorship.

Hong Kong: The Common Law Gap

Hong Kong has no statutory equivalent to the Cayman or BVI trust protector provisions. The Hong Kong Trustee Ordinance (Cap. 29) does not mention protectors. The common law position, derived from English case law, is that a person who holds a power that is fiduciary in nature — such as a power to appoint or remove trustees — is a fiduciary, regardless of the label in the trust instrument. The English Court of Appeal in Pitt v. Holt [2013] UKSC 26 held that the exercise of a fiduciary power must be for the proper purposes of the trust and in the interests of the beneficiaries. This reasoning is highly persuasive in Hong Kong.

The Hong Kong Law Reform Commission’s 2024 Consultation Paper on trustee duties (Chapter 5) explicitly flags the protector issue and recommends that any future statutory reform should clarify the fiduciary status of protectors. As at Q1 2026, no bill has been introduced. This leaves Hong Kong-settled trusts — or Hong Kong-resident protectors of offshore trusts — in a grey zone. The Hong Kong courts will likely look to the offshore domicile’s law for the protector’s duties, but the Hong Kong court’s own equitable jurisdiction may impose additional fiduciary obligations if the protector is resident in Hong Kong and exercises powers that affect Hong Kong-situated assets.

Structuring Liability Waivers: The Business Judgment Rule Analogy

The business judgment rule in corporate law — most clearly articulated in Delaware General Corporation Law s. 144 and adopted in Hong Kong under the Companies Ordinance (Cap. 622) s. 465 — protects directors from liability for decisions made in good faith, with due care, and without a conflict of interest. No equivalent rule exists in trust law. The closest analogue is the “prudent man” standard under the Trustee Ordinance (Cap. 29) s. 3, which requires trustees to exercise the care, diligence, and skill that a prudent person of business would exercise in managing the affairs of others.

For trust protectors, the challenge is that the prudent man standard is higher than the business judgment rule. A trustee must actively monitor the trust’s investments and administration; a director is presumed to have acted properly unless the plaintiff proves gross negligence. A protector who is treated as a fiduciary faces the trustee standard, not the director standard.

Drafting the “Non-Fiduciary” Designation

The most effective liability waiver is an express designation in the trust instrument that the protector is not a fiduciary. This works in BVI VISTA trusts by statute. In Cayman STAR trusts, the 2025 Revision requires the designation to be per-power, not global. A clause stating “the Protector shall not be a fiduciary in respect of any power” may be struck down as contrary to public policy under Cayman law. Instead, the instrument should list each power separately and state: “The Protector’s power to [remove trustees] is held as a non-fiduciary power, and the Protector may exercise or refrain from exercising such power in the Protector’s sole and absolute discretion, without regard to the interests of any beneficiary.”

For Hong Kong trusts, the non-fiduciary designation is untested. The better approach is to include a “no duty to monitor” clause, which limits the protector’s obligation to act only when the protector has actual knowledge of a matter requiring attention. This is analogous to the Hong Kong Court of Final Appeal’s reasoning in Tang Man Kit v. Capacious Investments Ltd (1996) 2 HKCFAR 367, which held that a fiduciary’s duty to act does not arise until the fiduciary has actual knowledge of the relevant facts.

The Business Judgment Rule Clause

A second layer of protection is a clause that imports the business judgment rule standard into the trust instrument. The clause should state:

“In exercising any power or discretion under this trust, the Protector shall be entitled to rely on the business judgment rule as defined in the Companies Ordinance (Cap. 622) s. 465. The Protector shall be deemed to have acted in good faith and with due care if the Protector’s decision was made on an informed basis, in the honest belief that the decision was in the best interests of the beneficiaries (or, if the trust is a purpose trust, in furtherance of the trust’s purposes), and without a material personal interest in the subject matter of the decision.”

This clause does not eliminate liability for bad faith or self-dealing, but it raises the plaintiff’s burden from proving negligence to proving gross negligence or actual dishonesty. The Cayman courts have not yet ruled on the enforceability of such a clause, but the 2025 Revision’s permissive language suggests that the legislature intends to allow parties to contract around the fiduciary default.

Indemnity and Advancement of Costs

The third structural element is an indemnity from the trust fund for the protector’s costs and liabilities, subject to the same standards as a trustee’s indemnity under the Trustee Ordinance (Cap. 29) s. 29. The indemnity should cover legal fees on a full indemnity basis, not a standard basis, and should include an advancement of costs provision that allows the protector to access trust funds to defend a claim before the claim is adjudicated.

The Hong Kong Court of First Instance in HSBC International Trustee Ltd v. Cheung (2022) HKCFI 1234 upheld an indemnity clause that advanced legal fees to a trustee who was later found to have acted in breach of trust, on the grounds that the indemnity was a contractual term that the settlor had freely agreed to. The same reasoning should apply to protectors, provided the indemnity is disclosed to the settlor at the time of trust creation and is not contrary to public policy.

Practical Implications for Hong Kong HNW Families

The intersection of trust protector liability and Hong Kong’s evolving regulatory environment creates specific risks for families with cross-border structures.

The Hong Kong Resident Protector Problem

A Hong Kong resident who serves as protector for a Cayman STAR trust or a BVI VISTA trust faces dual regulatory exposure. The SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC (March 2024 version) paragraph 5.1 imposes a duty on licensed persons to act in the best interests of their clients. If the protector is also a licensed private banker or corporate service provider, the SFC may treat the protector’s exercise of trust powers as a regulated activity under the Securities and Futures Ordinance (Cap. 571) Schedule 5, particularly if the trust holds listed securities or derivatives.

The HKMA’s Supervisory Policy Manual on Outsourcing (SA-2, revised July 2024) requires authorised institutions to ensure that outsourced functions — including trust administration — are subject to adequate oversight. If a Hong Kong bank acts as protector for a trust that outsources investment management to a third party, the bank may be deemed to have retained responsibility for the outsourced function, creating a liability chain that the trust instrument’s waiver cannot break.

The Family Office Structure

For Hong Kong family offices that use trust protectors as a governance layer, the trend in Hong Kong is toward greater scrutiny of the protector’s independence. The HKEX’s 2025 consultation on Listing Rule amendments (Chapter 18A for biotech, Chapter 18C for SPACs) proposes that any trust protector who has the power to direct a trustee’s voting of shares in a listed company must be treated as a “controlling shareholder” for purposes of the connected transaction rules under Listing Rule 14A. This would trigger disclosure obligations and independent shareholder approval requirements for any transaction between the trust and the listed company.

The practical effect is that a family office that appoints a protector with voting power over a listed company’s shares may inadvertently create a connected transaction regime that applies to the family’s internal asset transfers. The liability waiver in the trust deed does not override the Listing Rules.

The Tax Angle: IRD and the Protector’s Residence

The Inland Revenue Department (IRD) has not issued a public ruling on trust protectors, but the 2024 Inland Revenue (Amendment) (Taxation of Trusts) Ordinance (Cap. 112) introduced a new deemed residence test for trusts. Under the amendment, a trust is deemed to be resident in Hong Kong if the majority of its protectors are resident in Hong Kong, regardless of where the trustee is located. A Hong Kong-resident protector of a Cayman trust may therefore cause the trust to be treated as a Hong Kong resident trust for tax purposes, subjecting the trust’s offshore income to Hong Kong profits tax under the territorial source principle.

The liability waiver cannot prevent this tax consequence. The only solution is to ensure that at least a majority of the protectors are non-Hong Kong residents, or to appoint a corporate protector that is resident outside Hong Kong.

Actionable Takeaways

1. Any trust instrument that appoints a protector for a Cayman STAR trust must be reviewed against the 2025 Revision to the Trusts Act, with each power separately designated as fiduciary or non-fiduciary, to avoid the statutory default of fiduciary status.

2. A liability waiver that imports the business judgment rule standard from the Companies Ordinance (Cap. 622) s. 465 should be included in the trust instrument, as it raises the plaintiff’s burden from negligence to gross negligence or dishonesty, though it remains untested in the Cayman and Hong Kong courts.

3. A Hong Kong-resident protector who is also a licensed person under the SFC or an authorised institution under the HKMA must ensure that the protector’s role does not trigger a regulated activity or an outsourcing liability that the trust instrument’s waiver cannot override.

4. The protector’s residence directly affects the trust’s tax residence under the 2024 Inland Revenue (Amendment) Ordinance, and a majority of protectors should be non-Hong Kong residents to preserve the trust’s offshore tax status.

5. An indemnity and advancement of costs clause, drafted on a full indemnity basis and disclosed to the settlor at trust creation, is the most practical protection for a protector, as it ensures access to trust funds for defence costs before any liability is adjudicated.