Background
On May 23, 2017, the appellant — a Japanese individual — held approximately 916 million shares of Company A, a Hong Kong corporation, representing a substantial stake in its total issued share capital of roughly 9.36 billion shares. On that same date, the appellant entered into a trust agreement with the respondent, his elder brother, under which the appellant was both settlor and beneficiary and the respondent served as trustee. The appellant transferred the shares to the respondent as trust property. The stated purpose of the trust (Article 1) was to prevent deterioration of Company A’s value and to maximize the company’s profits. The trust was set for a 30-year term (Article 2(3)), and Article 15(2) — the provision at the center of this dispute — prohibited the settlor-beneficiary from terminating the trust at any time during that period.
In August and September 2020, the appellant served notice on the respondent purporting to terminate the trust pursuant to Article 164(1) of the Trust Act, which permits a settlor and beneficiary to terminate a trust at any time by their agreement (a power that, where the same person holds both capacities, may be exercised unilaterally). The respondent rejected the notice, contending that Article 15(2) constituted a valid “special provision” (別段の定め) under Article 164(3) of the Trust Act — a clause in the trust instrument that may lawfully displace the default termination right — and continued to perform his duties as trustee. The appellant then filed a petition before the family court to have the respondent removed as trustee under Article 58(4) of the Trust Act, which authorizes removal for “important reasons.” Both the family court and, on appeal, the Tokyo High Court rejected the petition. The High Court reasoned that Article 15(2) was a valid special provision, that the trust therefore had not been terminated by the notice, and that the respondent’s continued service accordingly gave rise to no “important reason” for removal.
The appellant obtained permission to appeal to the Supreme Court’s Third Petty Bench.
The Court’s Holding
The Supreme Court quashed the High Court decision unanimously and remanded the case for further proceedings. The Court held that the High Court had committed clear legal error by treating Article 15(2) as automatically effective as a “special provision” without first examining whether it satisfied the substantive requirements that trust law imposes. The Court articulated a two-stage analytical framework. First, a clause in a trust instrument that excludes the settlor-beneficiary’s statutory right to terminate the trust (an “exclusion clause”) can only be valid as a “special provision” under Article 164(3) of the Trust Act if it is rationally necessary for the achievement of the trust’s purpose. This requirement flows from the fundamental essence of a trust — namely, the separation of nominal ownership (vested in the trustee) from beneficial enjoyment (reserved to the beneficiary) and the prohibition on trustees receiving trust benefits for themselves (Trust Act Arts. 2(1) and 8). Because an exclusion clause inherently creates a conflict-of-interest situation by enabling a trustee to continue his role against the beneficiary’s will, and could allow the trustee to enjoy benefits exclusively at the beneficiary’s expense, its validity must be assessed against whether it is rationally necessary for the trust’s purpose — the same standard that governs conflict-of-interest exceptions under Article 31(2)(iv) of the Trust Act.
Second, even if an exclusion clause is found to be a valid special provision at the time the trust is created, a trustee’s actual refusal to honor a termination request at a later point in time is not automatically permissible. The Court held that the trustee’s conduct in rejecting a termination request and continuing to perform trust duties must itself be rationally necessary for the achievement of the trust’s purpose as of the time of that refusal. If it is not, the trustee may be exclusively enjoying benefits in a manner that negates the essence of the trust. Accordingly, both questions — the validity of the exclusion clause as such, and the propriety of the trustee’s specific refusal at the time it occurred — must be examined on remand by the Tokyo High Court.
Justice Watanabe Eriko wrote separately to elaborate on the remand. She cautioned that the trust’s stated purpose (preventing damage to Company A’s value and maximizing its profits) is abstract and insufficiently concrete to serve as a ready guide for the analysis. According to facts already established by the High Court, the trust was created specifically to allow the respondent to combine his own shares with the appellant’s shares so as to exercise majority voting rights in Company A, for the purpose of removing a named representative of the company — and that removal had already taken place before the appellant gave notice of termination. She further noted that the trust gave the respondent broad discretion over the voting of the shares for 30 years with no direction right for the appellant, effectively conferring majority control of a major company on the trustee for an extremely long period. This arrangement, she observed, demands a restrictive interpretation of the exclusion clause. The trust’s true purpose must be understood in light of the parties’ actual intentions and the circumstances surrounding the trust’s creation, not merely the literal text of an abstract contractual recital.
Key Takeaways
- A trust instrument clause excluding the settlor-beneficiary’s default right to terminate the trust under Trust Act Article 164(1) is not automatically valid as a “special provision” under Article 164(3); it must be rationally necessary for the achievement of the trust’s purpose, assessed against the fundamental prohibition on trustees enjoying trust benefits at the expense of beneficiaries.
- Even where such an exclusion clause is valid in principle, a trustee’s refusal at a specific moment in time to honor a termination request must independently satisfy the same rationality-necessity standard; failure to meet it may constitute “important reasons” for trustee removal under Trust Act Article 58(4).
- Courts must identify the substantive purpose of a trust — drawn from the background, circumstances, and genuine intentions of the parties — rather than relying on abstract or boilerplate recitals of purpose in the trust instrument.
- The conflict-of-interest framework in Trust Act Article 31, particularly the rationality-necessity standard in Article 31(2)(iv), provides the interpretive foundation for assessing clauses that structurally pit trustees’ interests against those of beneficiaries.
Why It Matters
This decision is the Supreme Court’s first authoritative guidance on when a trust instrument may lawfully strip a settlor-beneficiary of the statutory right to terminate a trust under the Trust Act. By anchoring the validity of such exclusion clauses to the essence of the trust relationship — specifically the prohibition on trustees享受ing trust benefits — the Court prevents parties from using the flexibility of Article 164(3) to invert the fundamental trustee-beneficiary dynamic and lock a beneficiary indefinitely into an arrangement that primarily serves the trustee’s interests. Practitioners drafting trust agreements with extended irrevocability provisions must now ensure that those provisions are demonstrably tied to concrete, achievable trust purposes and must assess whether continued irrevocability remains justifiable as circumstances change over time.
The decision also has significant implications for family and closely held business trusts, where settlors routinely transfer voting shares to relatives as trustees and where the line between trust administration and personal benefit can blur. Justice Watanabe’s supplementary opinion signals that courts on remand must look beyond formal contractual language to the economic reality of who benefits from the trustee’s continued control — a fact-intensive inquiry that will require parties to document trust purposes with specificity at the outset and to revisit those purposes when termination requests arise.