TRUSTEES, COSTS FOR AND AGAINST, AND INDEMNITIES

Fixed Recoverable Costs Extension: Autumn Course Details

Details of the courses are here, and can be booked here.

In

Price & Anor v Sanders [2019] EWCA Civ 2261

the Court of Appeal considered the circumstances in which a trustee is entitled to be indemnified from the trust fund in respect of costs incurred by the trustee, and awarded against the trustee, in litigation.

The general principle is set out in Section 31(1) of the Trustee Act 2000, which provides

(1)  A trustee—

      (a) is entitled to be reimbursed from the trust funds; or

      (b) may pay out of the trust funds,

      expenses properly incurred by him when acting on behalf of the trust.

In relation to the costs of proceedings in which a trustee is or has been involved, there are specific provisions in the CPR.

CPR 46.3 is concerned with the powers of the court to award costs in favour of trustees or personal representatives and it applies where a person is or has been a party to any proceedings in either of those capacities and costs are not payable under a contract to which CPR 44.5 applies.

 The general rule is that such a person:

“(2) . . . is entitled to be paid the costs of those proceedings, insofar as they are not recovered from or paid by any other person, out of the relevant trust fund or estate.”

Those costs will be assessed on the indemnity basis: CPR 46.3(3).

The Rule is supplemented by 46PD.1 which provides:

“1.1 A trustee or personal representative is entitled to an indemnity out of the relevant trust fund or estate for costs properly incurred. Whether costs were properly incurred depends on all the circumstances of the case including whether the trustee or personal representative (“the trustee”)—

(a) obtained directions from the court before bringing or defending the proceedings;

(b) acted in the interests of the fund or estate or in substance for a benefit other than that of the estate, including the trustee’s own; and

(c) acted in some way unreasonably in bringing or defending, or in the conduct of, the proceedings.

1.2 The trustee is not to be taken to have acted for a benefit other than that of the fund by reason only that the trustee has defended a claim in which relief is sought against the trustee personally.

It was common ground that the source of the right to an indemnity is to be found in Section 31(1) of the Trustee Act 2000 and that the provisions of the Civil Procedure Rules can only be a commentary upon and complementary to that Section.

The Court of Appeal said that that must be right, and indeed the point applies to all the provisions of the Civil Procedure Rules.

The policy is designed to ensure that the trustee is not out of pocket when acting as trustee on behalf of the trust and that the trust is efficiently and properly administered.

“The right to an indemnity is part of the fabric of the relationship between the settlor, the trustees and the beneficiaries” – See  Turner v Hancock (1882) 20 Ch D 303   (Paragraph 23)

The Policy poses two questions:

(i) were the expenses properly incurred?; and

(ii) were the expenses incurred by the trustee when acting on behalf of the trust?

The Court of Appeal said the answers to those questions are often far from straightforward and depended upon all the circumstances of the case.

Paragraphs 25 to 31 the Court of Appeal considered the case law in relation to cases specifically concerned with the costs incurred in litigation.

In

McDonald v Horn [1995] ICR 685

the court said:

“While warning that it was ‘well nigh impossible to lay down any general rules which can be depended on to meet the ever varying circumstances of particular cases’, he said that trust litigation could be divided into three categories. First, proceedings brought by trustees to have the guidance of the court as to the construction of the trust instrument or some question arising in the course of administration. In such cases, the costs of all parties are usually treated as necessarily incurred for the benefit of the estate and ordered to be paid out of the fund. Secondly, there are cases in which the application is made by someone other than the trustees, but raises the same kind of point as in the first class and would have justified an application by the trustees. This second class is treated in the same way as the first. Thirdly, there are cases in which a beneficiary is making a hostile claim against the trustees or another beneficiary. This is treated in the same way as ordinary common law litigation and costs usually follow the event.”

Here the Court of Appeal said:

“27.  A similar categorisation was adopted by Lightman J in Alsop Wilkinson v Neary & Ors [1996] 1 WLR 1220. He set out the categories and their likely effect in relation to the trustee’s indemnity at 1223H – 1224G as follows:

“Trustees may be involved in three kinds of dispute. (1) The first (which I shall call “a trust dispute”) is a dispute as to the trusts on which they hold the subject matter of the settlement. This may be “friendly” litigation involving e.g. the true construction of the trust instrument or some other question arising in the course of the administration of the trust; or “hostile” litigation e.g. a challenge in whole or in part to the validity of the settlement by the settlor on grounds of undue influence or by a trustee in bankruptcy or a defrauded creditor of the settlor, in which case the claim is that the trustees hold the trust funds as trustees for the settlor, the trustee in bankruptcy or creditor in place of or in addition to the beneficiaries specified in the settlement. The line between friendly and hostile litigation, which is relevant as to the incidence of costs, is not always easy to draw: see In re Buckton; Buckton v. Buckton [1907] 2 Ch 406. (2) The second (which I shall call “a beneficiaries dispute”) is a dispute with one or more of the beneficiaries as to the propriety of any action which the trustees have taken or omitted to take or may or may not take in the future. This may take the form of proceedings by a beneficiary alleging breach of trust by the trustees and seeking removal of the trustees and /or damages for breach of trust. (3) The third (which I shall call “a third party dispute”) is a dispute with persons, otherwise than in the capacity of beneficiaries, in respect of rights and liabilities e.g. in contract or tort assumed by the trustees as such in the course of administration of the trust.

Trustees (express and constructive) are entitled to an indemnity against all costs, expenses and liabilities properly incurred in administering the trust and have a lien on the trust assets to secure such indemnity. Trustees have a duty to protect and preserve the trust estate for the benefit of the beneficiaries and accordingly to represent the trust in a third party dispute. Accordingly their right to an indemnity and lien extends in the case of a third party dispute to the costs of proceedings properly brought or defended for the benefit of the trust estate. Views may vary whether proceedings are properly brought or defended, and to avoid the risk of a challenge to their entitlement to the indemnity, (a beneficiary dispute), trustees are well advised to seek court authorisation before they sue or defend. . . .

A beneficiaries dispute is regarded as ordinary hostile litigation in which costs follow the event and do not come out of the trust estate: see per Hoffmann L.J. in McDonald v. Horn [1995] I.C.R. 685, 696.”

An interesting point in the judgment is that failure to beat a Part 36 Offer may lead to a loss of indemnity for a trustee.

“In this case, which was essentially hostile litigation, it seems to me that it was a good indicator which ought to have caused the judge to consider Section 31(1) of the 2000 Act and the trustee’s indemnity in the round.

The same is true of the effect of CPR 36.17. Although the failure to meet a Part 36 Offer cannot of itself be determinative of whether a trustee is guilty of misconduct in the conduct of an action such that they should not be entitled to an indemnity from the trust fund, in appropriate circumstances, it may be a material indicator in that assessment. The judge, however, failed to give it any weight.” (Paragraph 43.)

Comment:

A helpful judgment in a difficult area of the law.

It would be useful if there was a corps of specialist judges who could give interim judgments on these points, that is in advance as to whether a trustee will enjoy indemnity in any given scenario, or, if in another field, a personal injury claimant will, or will not, enjoy the protection of Qualified One-Way Costs Shifting.