Trust Litigation A Costly Experience? 24 February 2012

Keith Robinson Counsel Litigation & Insolvency Bermuda

Introduction Trustees need to know about the costs risks of litigation In order to avoid personal liability if possible The goal must be to keep within the right of indemnity

Right of Indemnity (1) Trustee Act 1975 Section 22(2): “A trustee may reimburse himself or pay or discharge out of the trust premises all expenses incurred in or about the execution of the trusts or powers” However, section 22(2) is subject to any powers expressly provided in the instrument creating the trust (section 2(2) Express powers may impact upon the general right to reimbursement in section 22(2)

Right of Indemnity (2) Trustee entitled to an indemnity out of the fund in respect of costs and expenses properly incurred “Properly Incurred” means costs and expenses which have been both honestly and reasonably incurred “A trustee can only be indemnified out of the pockets of his cestuis que trust against costs, charges and expenses properly incurred for the benefit of the trust – a proposition in which the word “properly” means reasonably as well as honestly incurred” Per Bowen L.J. in In Re Beddoes

Right of Indemnity (3) Trustee’s Indemnity is only worth as much as the trust fund is worth If the trust fund is insufficient to meet the indemnity, the trustee will be out of pocket It will be no answer that the fund is insufficient to meet the expense

Trustees’ Litigation Costs Numerous types of legal proceedings in which a trustee can be involved and in respect of which a trustee can incur legal costs Categorization is imperfect, but broadly speaking there is a distinction between: (a) Third Party Litigation (b) Trust Litigation

Tales of the Unexpected – 3 rd Party Cases If it is in the interests of the trust to sue, or defend, proceedings brought by, a third party, the trustee will be entitled to its indemnity from the trust fund in relation to the legal costs he incurs in bringing or defending the claim “Litigation is a hazardous process and every lawsuit is prone to develop into a tale of the unexpected. How can a trustee feel absolutely assured, at the start of a case, that his decision to defend it will be incapable of criticism on the grounds of unreasonableness or personal benefit?” Per Sir John Waite, STG Valmet v. Brennan CA Gibraltar (1998) 4 ITELR 337, 348

The Theory of a Beddoes Order “If a trustee is doubtful as to the wisdom of prosecuting or defending a lawsuit, he is provided by the law with an inexpensive method of solving his doubts in the interest of the trust. He only has to take out an originating summons, state the point under discussion, and ask the Court whether the point is one which should be fought out or abandoned. To embark in a lawsuit at the risk of the fund without this salutary precaution might often be to speculate in law with money that belongs to other people” Per Bowen L.J. in Re Beddoes, Downes v. Cottam [1893] 1 Ch 547 CA

The Pitfalls of a Beddoes Application Can become lengthy and hotly contested applications costing as much as the litigation about which they concern If a trustee conducts a Beddoes application in a partisan way and loses - then a successful beneficiary will say that the trustee should not be allowed its costs of the Beddoes application Therefore, the trustee needs to take a balanced and even handed approach in running a Beddoes application

Costs of 3 rd Party Proceedings – Trustee Wins As between 3 rd Party and Trustee, normal litigation rule applies, generally this is that the loser will be ordered to pay the winner’s costs If the trustee is the winner, it will generally get an order that the loser pays the trustee’s costs. However, once assessed these are unlikely to cover the trustee’s expenses in full and the trustee will be entitled to be indemnified for the balance from the fund since the litigation costs will generally have been properly incurred

Costs of 3 rd Party Proceedings – Trustee Loses If the trustee is the loser and it is ordered to pay the winner’s costs, the trustee will have to bear both sets of costs – this is where a Beddoes order is crucial and protects the trustee Without a Beddoes order, the trustee will have to argue that bringing or defending the claim was in the interest of the trust and thus that the costs were properly incurred – difficult to do when you have lost With a Beddoes order, the trustee will be able to be indemnified from the fund provided that the fund is large enough to cover the costs liability

3 rd Party Litigation - Summary Beddoes Order - in theory an attractive idea as far as the trustee is concerned In modern litigation practice, Beddoes applications can be lengthy and expensive Easy with hindsight

Trust Litigation – “Internal” to the Trust Range of disputes Whether the trustee will get across the finish line with its indemnity depends on nature of dispute At every turn in the race the trustee risks losing its indemnity

Trust Litigation – Friendly or Hostile? Trustees’ Role is either (a) friendly (or neutral); or (b) hostile Broadly speaking, if friendly or neutral, the trustee is unlikely to be deprived of its indemnity If hostile, the trustee is likely to be deprived of its indemnity if it loses the argument

How can Trust Litigation be “Friendly” Proceedings seeking construction Proceedings seeking guidance or assistance (Possibly) Proceedings in which beneficiaries seek to enforce their rights in the administration or execution of the trust

When Trust Litigation is “Hostile” Claims for damages for breach of trust Claims that a trustee has been self dealing or profiting from the trust Claims seeking the removal of the trustee

Costs in “Friendly” Trust Litigation Costs of the trustee asking the court to determine questions of construction of the trust instrument or a question of law will ordinarily be properly payable from the fund So too will the costs of a trustee seeking the direction of the court when a “momentous” decision is to be taken Court might deprive a trustee of its indemnity if: The trustee takes a partisan approach to the proceedings The trustee invokes the jurisdiction of the court when the court’s assistance is not necessary

Costs in “Hostile” Trust Litigation Trustee is most at risk Facing a hostile claim and may be denied indemnity from the fund and also have to pay the other party’s costs if the case is lost Should not pay its legal costs out of the fund as the case progresses but out of its own funds Any other approach would be another breach of trust However, if a trustee successfully defends a claim of breach of trust then: The defeated claimant will usually be ordered to pay the trustee’s costs; and Any costs not recovered from the defeated claimant should be recoverable under the trustee’s indemnity from the fund The trustee’s costs of defense will have been “properly incurred”

End of the Race In Third Party Litigation, a Beddoe Order is still the best protection against a poor finishing position In “friendly” Trust Litigation the trustee should take a balanced and even handed approach – should finish well In “hostile” Trust Litigation, the finishing line is often illusive