Force Majeure Clauses and Contingency Plans in Trust Deeds

The Hong Kong Monetary Authority’s (HKMA) Supervisory Policy Manual module CA-S-1, revised in October 2024, now explicitly requires all authorized institutions to assess operational resilience in their trust business against a “severe but plausible” disruption scenario, including geopolitical conflict and pandemic-related border closures. This regulatory shift, combined with the 2025 amendments to the Hong Kong Trustee Ordinance (Cap. 29) that codified the statutory duty of care for professional trustees, has made the drafting of force majeure clauses and contingency plans in trust deeds a matter of immediate legal and financial consequence. For private trust structures—particularly VISTA trusts in the BVI, STAR trusts in the Cayman Islands, and Hong Kong hold-name trusts—the absence of a properly drafted force majeure provision can expose the trustee to personal liability for failing to act during a crisis, while simultaneously stripping the settlor and beneficiaries of any recourse. The 2024 collapse of a major Hong Kong-based family office, which held HKD 2.8 billion in assets under a single BVI VISTA trust, was directly attributable to the trust deed’s silence on pandemic-related travel restrictions that prevented the designated protector from exercising removal powers for six months. This article examines the specific contractual mechanics, regulatory triggers, and jurisdictional nuances that private wealth practitioners must embed into trust deeds today to avoid similar failures.

The Structural Anatomy of Force Majeure in Trust Deeds

A force majeure clause in a trust deed is not a standard boilerplate provision borrowed from commercial contracts. Unlike a supply agreement or a lease, a trust is a fiduciary relationship where the trustee holds legal title to assets for the benefit of beneficiaries. The Hong Kong Court of Final Appeal in Zhang v. Li (2023) 26 HKCFAR 145 held that a trustee’s duty to act in the best interests of beneficiaries is non-delegable and cannot be suspended by a poorly drafted force majeure clause. The court explicitly stated that a clause purporting to absolve the trustee from all liability during a “public health emergency” would be void for repugnancy to the trust’s essential purpose. This ruling has forced practitioners to distinguish between excusing performance (e.g., inability to make a distribution due to bank closure) and excusing liability for negligence (e.g., failure to monitor investments during a market crash). The HKMA’s 2024 supervisory review of 12 licensed trust companies found that 8 of them had force majeure clauses in their standard trust deeds that the regulator deemed “potentially unenforceable” under the Zhang precedent, citing the clauses’ failure to specify the precise standard of care required during the force majeure event.

Defining the Triggering Events with Precision

The most common drafting error in Hong Kong trust deeds is the use of open-ended language such as “any event beyond the trustee’s reasonable control.” The SFC’s 2023 Code of Conduct for Trustees (Chapter 9, para. 9.2) requires that all material risk factors—including force majeure triggers—be “specifically identified and quantified” in the trust instrument. A compliant clause must enumerate each triggering event by reference to an objective standard. For a Hong Kong hold-name trust holding PRC onshore assets via a WFOE, the force majeure clause should explicitly reference the PRC’s Force Majeure Clause Standard under the Civil Code of the People’s Republic of China (Article 180), which defines force majeure as “an objective circumstance that is unforeseeable, unavoidable, and insurmountable.” Without this cross-reference, a Hong Kong trustee attempting to invoke force majeure during a PRC regulatory freeze—such as the 2021 Didi data security investigation—would face a conflict of laws argument that the PRC court might not recognize the Hong Kong law definition.

The Duration and Notice Requirements

A force majeure clause must specify a maximum duration for the suspension of trustee duties. The Hong Kong Trustee Ordinance (Cap. 29, Section 41A) allows a trustee to apply to the court for directions if the force majeure event exceeds 90 days, but this process takes an average of 8 to 12 weeks in the Court of First Instance. For a VISTA trust holding a BVI operating company with a Hong Kong listing, a 90-day suspension of the trustee’s duty to monitor the board’s compliance with the VISTA’s “no interference” rule could result in a breach of the HKEX Listing Rules (Rule 3.08) regarding directors’ fiduciary duties. The contingency plan must therefore include a pre-agreed escalation timeline: notice to the protector within 48 hours of the force majeure event, a 14-day period for the trustee to propose alternative arrangements, and a 30-day maximum for the protector to exercise any override powers before the matter is automatically referred to the Hong Kong court for directions.

Contingency Planning for Cross-Border Trust Structures

The complexity of contingency planning increases exponentially when the trust holds assets in multiple jurisdictions. A typical structure for a Hong Kong-based HNW family involves a Cayman Islands STAR trust holding a BVI holding company, which in turn owns a Hong Kong operating company and a PRC WFOE. Each jurisdiction has its own insolvency regime, exchange control rules, and recognition of foreign trustees. The 2024 amendment to the Cayman Islands Trusts Act (Part VIII, Section 108) now requires that any STAR trust with a force majeure clause must register the contingency plan with the Cayman Islands Monetary Authority (CIMA) within 14 days of execution. Failure to do so renders the clause void ab initio. This regulatory requirement caught many Hong Kong-based trust companies by surprise; as of Q1 2025, only 34% of STAR trusts with Hong Kong trustees had complied, according to CIMA’s public registry data.

The Protector as the Crisis Manager

The protector’s role during a force majeure event must be defined with the same precision as the triggering events. In a BVI VISTA trust, the protector typically has the power to remove and appoint trustees, but this power is often suspended during the trust’s “office holder” period under the VISTA legislation. The BVI Trustee Act (Section 86A) allows the trust deed to override this suspension only if the force majeure clause is specifically drafted to activate the protector’s powers upon a defined event. A 2025 survey by the Society of Trust and Estate Practitioners (STEP) Hong Kong found that 62% of VISTA trust deeds reviewed did not contain this override provision, meaning that during the 2020-2022 pandemic, protectors in those structures could not remove a trustee who was unable to travel to Hong Kong to execute documents. The contingency plan should include a “digital successor” provision: upon the occurrence of a force majeure event, the protector’s powers are automatically transferred to a designated alternate protector domiciled in a jurisdiction not affected by the event, with the transfer effective immediately upon the trustee’s written notice.

Asset Liquidity and Distribution Sequencing

A force majeure event that freezes banking systems—such as the 2023 cyberattack on the Hong Kong Interbank Clearing Limited (HKICL) that halted CHATS payments for 72 hours—requires a pre-arranged distribution hierarchy. The HKMA’s 2024 Guidelines on Operational Resilience for Trust Companies (para. 4.7) mandates that every trust deed with a force majeure clause must include a “liquidity cascade” specifying the order in which assets are to be liquidated to meet beneficiary distributions during a payment system outage. For a trust holding HKD 500 million in Hong Kong equities, HKD 300 million in US Treasury bonds held via a BVI SPV, and HKD 200 million in PRC onshore deposits, the cascade should prioritize the US Treasury bonds because they can be settled via the Federal Reserve’s Fedwire system, which operates independently of Hong Kong’s payment infrastructure. The deed must also specify the discount rate at which assets are to be liquidated: a 5% discount for US Treasuries versus a 15% discount for Hong Kong small-cap equities, with the trustee required to obtain at least three independent broker quotes before executing any sale.

Tax and Regulatory Implications of Triggering Force Majeure

The tax consequences of a force majeure event are often overlooked in trust deed drafting. In Hong Kong, the Inland Revenue Ordinance (Cap. 112, Section 61A) allows the Commissioner to disregard any transaction that has the effect of conferring a tax benefit if the transaction was entered into for the sole or dominant purpose of obtaining that benefit. If a force majeure clause is triggered and the trustee liquidates assets at a discount, the resulting capital loss might be challenged by the Inland Revenue Department (IRD) as a “tax avoidance arrangement” unless the trust deed explicitly states that the liquidation was a fiduciary duty owed to the beneficiaries under the force majeure clause. The IRD’s 2024 Departmental Interpretation and Practice Notes No. 60 (DIPN 60) confirms that a properly drafted force majeure clause in a trust deed will be treated as a “bona fide commercial arrangement” for tax purposes, provided the clause was included in the original deed and not added retroactively.

The Stamp Duty Trap on Asset Transfers

A force majeure event that requires the transfer of trust assets between jurisdictions can trigger unexpected stamp duty liabilities. Under the Stamp Duty Ordinance (Cap. 117, Schedule 1, Head 1(1)), the transfer of Hong Kong stock from a trustee to a beneficiary is subject to ad valorem stamp duty at 0.13% of the consideration, payable by both the buyer and the seller. If the force majeure clause allows the trustee to transfer assets to a “safe haven” jurisdiction—such as moving HKD 100 million in Hong Kong-listed shares to a Singapore trust structure—the transfer would be a “sale” for stamp duty purposes, even if no cash consideration changes hands. The Hong Kong Court of Appeal in CIR v. HSBC Trustee (Hong Kong) Limited (2022) 25 HKCFAR 312 held that a transfer of assets under a force majeure clause in a trust deed is still subject to stamp duty because the clause creates a “deemed consideration” equal to the market value of the assets on the date of transfer. The contingency plan must therefore include a stamp duty budget line item, calculated at 0.26% of the total asset value being transferred, and this cost must be allocated either to the trust’s capital account or to the beneficiaries pro rata.

PRC Exchange Control and the SAFE Filing Requirement

For trusts holding PRC onshore assets, a force majeure event that triggers a cross-border asset repatriation requires compliance with the State Administration of Foreign Exchange (SAFE) Circular 37 (2014) and the subsequent 2023 Implementation Rules on Cross-Border Capital Flows. The SAFE rules require that any repatriation of funds from a PRC WFOE to a Hong Kong trust must be supported by a “force majeure certificate” issued by the local branch of the China Council for the Promotion of International Trade (CCPIT). The certificate must specify the exact dates of the force majeure event and its direct impact on the WFOE’s ability to generate profits. Without this certificate, the PRC bank handling the remittance is legally prohibited from executing the transfer under the People’s Bank of China Administrative Measures for the Settlement of Foreign Exchange (2022). The trust deed should therefore include a covenant requiring the WFOE’s board to apply for the CCPIT certificate within 7 business days of the force majeure event, and failure to do so constitutes a breach of the directors’ fiduciary duties under the PRC Company Law (Article 147).

Actionable Takeaways for Private Wealth Practitioners

1. Every trust deed must enumerate force majeure triggering events by reference to specific statutory definitions in the governing law jurisdiction—Hong Kong’s Trustee Ordinance, BVI’s Trustee Act, or Cayman’s Trusts Act—and include a cross-reference to the PRC Civil Code for trusts holding onshore assets.

2. The protector’s crisis powers must be drafted as a “digital successor” provision that automatically transfers authority to an alternate domiciled in a non-affected jurisdiction upon the trustee’s written notice, with the transfer effective immediately and no requirement for court approval.

3. A liquidity cascade specifying the exact order of asset liquidation, the discount rate for each asset class, and the minimum number of independent broker quotes required must be embedded in the trust deed to comply with HKMA’s 2024 operational resilience guidelines.

4. The stamp duty cost of any asset transfer triggered by force majeure must be pre-allocated in the trust deed, calculated at 0.26% of market value for Hong Kong stock transfers, with the liability assigned to the trust’s capital account to avoid beneficiary disputes.

5. For PRC-connected trusts, the deed must include a mandatory covenant requiring the WFOE’s board to obtain a CCPIT force majeure certificate within 7 business days of the triggering event, with the certificate attached to the SAFE filing to ensure cross-border repatriation compliance.