FAQ: Costs in Trust Disputes - Boodle Hatfield

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10 Feb 2017

FAQ: Costs in Trust Disputes

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Q: There is an assumption that where litigation relating to trusts is concerned, there is less personal cost risk to the parties, as they can ultimately look to the trust funds to pay their legal costs. Is that correct?

This is something of a misconception as far as trust litigation is concerned and one which is frequently held by both beneficiaries and by trustees themselves.

We frequently act for trustees involved in litigation. They have good reason to be most careful where litigation and costs are concerned, as they often have no personal interest in the trust or trust assets themselves. Trustees can therefore have the potential downsides to litigation, particularly in relation to costs risk, without any of the potential upside of a successful claim or defence of a claim. Any successful outcome they achieve in relation to the trust will be for the benefit of the trust and its objects, i.e. the beneficiaries. If trustees litigate unsuccessfully, however, there is a potential personal for personal costs risk.

The starting point for trustees is that they have a right to an indemnity under the general law and also under statute. If it is an express trust, then there may be an express right of indemnity in the trust document too. This means trustees can look to the trust funds to reimburse them for expenses, including legal costs and, in theory, adverse costs orders made against them in litigation conducted for the benefit of the trust. However, they can be deprived of this protection if they act improperly or unreasonably.

Beneficiaries don’t have a right of indemnity. If they engage in litigation relating to the trust fund then they will need the benefit of a costs order made by the court, if they want to seek their costs from the trust funds. Of course, a trustee could make a distribution or loan to a beneficiary to fund legal costs but this might give rise to a tax cost or it might be a decision which is criticised by other beneficiaries.

Q: Does the subject matter of the claim have an effect on the likelihood of the parties’ recovering their costs from the trust funds?

In relation to costs in English court proceedings, the general rule is that there are no fixed rules. Costs are always at the ultimate discretion of the court. However, there are a number of “starting points” which the parties can expect to apply, unless there is good reason in the particular circumstances for the court to deviate from them.

Some types of trust litigation are “non-hostile” in nature. Applications to determine a point of construction that has arisen in relation to the terms of the trust document(s), or for directions in relation to the administration of the trust, are specific examples (although those can be hostile applications in practice).

If the trustees decide that the matter has to be determined by the court, then the court may order that the parties’ costs be paid out of the trust funds whatever the outcome. However, even in such cases there may be competing arguments in relation to construction which affect different groups of beneficiaries in different ways. In that sort of case, the trustee may bring the application but should not adopt a partisan role and, instead, they should let representatives of the competing beneficiaries make the arguments. Provided the trustees do adopt a partisan role and the beneficiaries behave reasonably, then all of the parties may be entitled to their costs from the funs – no matter who “wins” the argument.

If a trustee brings such a claim unnecessarily, however, or a beneficiary unreasonably defends a construction application, then they can still be at risk in relation to their costs.

Q: Is there anything trustees can do to further protect their position?

One option for trustees is to bring an application known as a “Beddoe application”. In such an application, the trustees seek approval from the court to take, or not take, steps in litigation and thus receive prospective costs protection. The difficulty with engaging in litigation of any type without the protection of Beddoe relief is that the liability for costs is usually assessed at the end of the litigation process. Therefore, there is always a risk that trustees could be deprived of their costs from the trust fund, after they have incurred a liability to pay them. This risk is increased if they have unsuccessfully pursued or defended proceedings.

The trustees’ entitlement to seek Beddoe relief will depend on the sort of litigation in contemplation. Litigation between the trustees and third parties to the trust, i.e. non-beneficiaries, is what can be categorised as a “third party dispute” and may be appropriate for Beddoe relief. Claims by beneficiaries against trustees, however, are unlikely to be appropriate for Beddoe relief because it would involve the court having to predetermine, in effect, the merits of the dispute between them.

Beddoe applications are not straightforward and should not be embarked upon lightly. They will almost always be made in a standalone claim to the associated litigation. The trustee needs to give full disclosure to the court, including the legal advice obtained as to the merits of litigating (although there is provision for keeping that advice confidential in certain circumstances). It will usually be necessary to join at least some beneficiaries of the trust and there are examples of Beddoe applications being somewhat hijacked and turned into an attack on the trustees’ themselves (for being partisan). This is more likely to happen when the associated litigation involves some of the beneficiaries.

One alternative option for trustees is to seek an indemnity from one or more beneficiaries. This is not a risk-free approach and will not be practical in every case.  It was however recently endorsed in Fielden v Christie-Miller. In that case, the trustees obtained an indemnity from one beneficiary to defend a claim brought by another beneficiary. The claimant beneficiary sought to criticise the trustees for this approach and brought an application to amend his claim to seek their removal – the fact that they were operating under an indemnity from one of the other beneficiaries was one of the grounds mentioned.  The court however rejected this argument and said that the trustees were entitled to operate with the benefit of an indemnity, if that was the option they chose to take to protect themselves.

Q: What lessons for beneficiaries are contained in the costs judgment in Ong & ors v Ping?

This was an interesting case with a long history and various different elements. One part of the litigation was a claim in relation to the existence of a trust and, after the issue was decided in favour of the beneficiaries, an issue arose in relation to the defendant trustee’s liability for two sets of solicitors’ costs, as the beneficiaries had been separately represented by two firms.

The judgment confirmed the general rule that, from a trustee’s perspective, if the trustees decide not to use one set of advisers then they will not normally be entitled to recover more than one set of costs. It is perhaps more common for different beneficiaries, or groups of beneficiaries, to be separately represented if the outcome of the litigation will affect them in different ways.

In Ong, although the beneficiaries started out with somewhat different interests both in theory and in practice, after a point it became clear that their interests were for all practical purposes aligned. This was evidenced by the fact that they did instruct one counsel team to represent all of them at trial. The Judge, therefore, gave a direction that on assessment the claimants should only be entitled to the costs of one set of solicitors rather than two. He left the issue as to how the claimants would divide the costs between themselves to be decided.  It is therefore an important case for practitioners, as an inability to recover a substantial part of one’s costs can turn a victory into a defeat.

The above text formed the basis of an interview recorded for LexisNexis.

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