Lessen the burden

Costs in legal proceedings can be a sensitive issue. It’s particularly the case for trustees who apply to court for directions on how to administer their trusts. As James McNeill QC at Jersey’s Court of Appeal said in Trilogy Management v YT & Others [2012] JCA 204: “Trust litigation is often necessary: it is always expensive.”

But who should bear that expense? Effective and fair trust administration demands clarity. The Trilogy case provided light on the principles of costs in non-adversarial trust applications. In doing so, it has drawn together approaches established in a number of early cases (including litigation cases Alhamrani and Esteem), and consolidated the position in an area that it said had previously received only “sporadic consideration”.

Jersey trustees who may be contemplating applications to the court in these circumstances, for example when constructing a trust instrument or the correct administration of a trust, should take note of this case. It differentiates between the costs of trustees and beneficiaries/other convened parties, and also between costs at first instance and costs on appeal.

Philanthropic venture

A wealthy businessman established a charitable structure, with a corporate trustee (‘YT’, the first defendant), as part of his philanthropic activity. Under this structure, an investment company was established, some shares of which resided in a charitable trust. The trustee, as shareholder, would receive dividends from the investment company, which could then be applied for charitable purposes. The businessman retained control of both the investment company (by holding the controlling balance of the shares) and the charitable trust (by being the controlling shareholder in the trust’s corporate trustee).

On his death, certain interests passed to his wife. Eight charitable sub-trusts of a separate purpose trust were also created, each of which appointed one of his eight children as guardian of that. The charitable trust was to make annual distributions in equal shares to each of these sub-trusts so that the children could carry out their own philanthropic activities.

However, certain changes in the articles of association of the investment company and the accounting methods it used created discrepancies in the level of distributions made to the eight sub-trusts. So, applications were made to court.

Neutral trustee

The Court of Appeal held that a neutral trustee should usually be entitled to an indemnity from the trust fund in relation to all costs and expenses reasonably incurred in relation to the litigation.

This is a point which has received yet further consideration in the later case of In the Matter of the HHH Trust [2013] JRC 023, where the Royal Court confirmed that it included the costs of any other party exercising fiduciary functions in relation to the trust as well (for example, a settlor who retains the power to appoint or remove trustees and/or to appoint a protector).

In the Court of Appeal’s eyes, an indemnity in this sense meant full reimbursement, with no requirement for the trustee to seek an order of the court to such effect. The right was not, however, absolute and it was confirmed that if costs had not been incurred reasonably, this principle could be displaced. A trustee clearly has to act in a proportionate and reasonable way at all times. Where their behaviour falls short of this standard in relation to litigation, so will their right to be indemnified for costs incurred in relation thereto.

Further judicial guidance again comes into play here. In the Matter of the Representation of WW and XX [2013] JRC 013, the Royal Court confirmed that acting unreasonably may comprise taking unnecessary procedural steps that increased costs or acting in a partisan manner between beneficiaries. It would not usually arise where the court had simply disagreed with a trustee’s recommendations.

Beneficiary reimbursement

However, the position about beneficiaries’ or other convened parties’ costs is different. That party will, as with trustees, be entitled to an award of costs out of the trust fund (assuming no misconduct). However, if a beneficiary is awarded their costs, such costs will not be “reimbursed”. Instead, the best that party can hope for is that their costs will be paid on the indemnity basis. This will usually result in a large proportion of costs being recovered, though, it will unlikely amount to full reimbursement in the same manner as a trustee.

The missing link, as the Court of Appeal saw it, was a lack of clarity about whether there should be any form of assumption that a beneficiary or other convened party should be entitled to its costs on the indemnity basis.

In this regard, the Court of Appeal found Buckton v Buckton [1907] Ch 406 persuasive. The English case had been referred to as persuasive in another Jersey case (although in slightly different circumstances). Buckton confirmed that, at first instance, the costs of convened parties to a non-adversarial application should normally be awarded on the indemnity basis whether successful or not. This was because they had been incurred for the benefit of the trust/estate as a whole.

Appeals position

The position on appeal, however, is different. The Court of Appeal said the appellant (trustee or beneficiary) takes a costs risk. Further, if the appeal is unsuccessful, it is possible that they will not only bear their own costs but also those of the respondent party. This is because a first instance application, correctly brought, will be deemed necessary for the proper administration of the trust, whatever the outcome. But it does not follow that an unsuccessful appeal is also necessary in the same way.

If the appeal is successful, it will be deemed necessary to the proper administration, and the successful appellant will usually enjoy their costs out of the trust. In this situation, the unsuccessful respondent’s costs may still be deemed to have been incurred for the benefit of the trust (and so may also be paid out of the trust). However, the Court of Appeal thought it was inappropriate to lay down a “prescriptive matrix”. It said there should be no assumption that it was always right for the costs of unsuccessful respondents to be met out of the trust. In conclusion, the court said it would depend on the circumstances underlying each individual application.

In deciding whether a party was adopting an adversarial stance (that is, taking it outside the scope of these principles) the Court of Appeal added that a question may be asked as to whether the party stood to gain any material benefit from successful contentions in the litigation.

The judgment also confirmed the judicial approach to appeals on administrative trust matters from the Court of Appeal to the Judicial Committee of the Privy Council (Jersey’s highest appellate body). In view of the expense associated with trust litigation, the Court of Appeal held it was only in “exceptional circumstances” that a trust should be burdened with the expense of a further appeal to the Judicial Committee.

Pragmatic approach

It could be said that the judgment does not break new ground. But what cannot be underestimated is the consolidation of Jersey’s law in this area. This decision is a welcome clarification of the approach to costs awards for administrative trust proceedings. Also accepted is the judicial notice taken of the significant costs incurred in many trust applications, and the pragmatic approach taken towards appeals beyond Jersey’s Court of Appeal.

Given the high level of costs, the decision serves as a reminder that trustees should regularly review structures to ensure that underlying documents (and the provisions contained therein) remain germane and unambiguous. By far the most cost effective course of action is to avoid the need to apply to court at all.

Nick Williams is a partner at Ogier in Jersey