"Trustees have traditionally relied on their indemnity which means that they are entitled to be indemnified from the trust fund for costs that they incur when acting properly and reasonably."

Sadly trustees are not immune from litigation - on the contrary more and more trustees are finding themselves dragged into court proceedings.  That inevitably raises the spectre of legal fees and who pays them.  This can be of particular concern to trustees who may have nothing to gain personally from the outcome of the litigation but who may have a lot to lose if a costs order is made against them.

Trustees will quite properly be concerned about two things; who will pay the costs that they incur in pursuing or defending the proceedings and what will happen if they are unsuccessful in the litigation - could they be personally subject to an adverse costs order?

Trustees have traditionally relied on their indemnity which means that they are entitled to be indemnified from the trust fund for costs that they incur when acting properly and reasonably.  This indemnity can extend to the costs of litigation but it is not a blanket, open ended indemnity as has recently been confirmed by Mr Justice Mann in Cripps Trust Corporation v Sands. The intention is that a trustee should not be out of pocket for acting properly in his representative capacity but there are limits to this principle.  There may be situations where it is necessary for trustees to adopt a 'neutral' stance within the proceedings and other occasions where it is prudent for trustees to seek the sanction of the court before taking a particular step in proceedings.

Cripps Trust Corporation v Sands was an example of what is commonly known as a 'construction dispute' but it illustrates how these disputes can easily escalate and how the legal costs occasioned by the disagreement can themselves become the subject of proceedings.

Lieutenant Colonel Sands died in 2000.  He left a large and valuable collection of paintings.  He had made a Will in March 1998 and followed that with a Codicil in early 2000.  By these documents his chattels (including the artwork) were to be held on trust by his trustees for his widow for her life and then the trustees had a power to divide the items, at their discretion, between an unrestricted class of beneficiaries which included museums and similar bodies.  In the event that such a power was not exercised, the items would fall into a trust of which the beneficiaries were the deceased's grandchildren.  The trustees had the power to decide how the artwork would be divided.

In the event the trustees ('CTC') did not exercise their power and a question arose as to whether, in effect, they had forfeited the ability to do so. CTC took advice from counsel and were advised that it was an 'open question'.

In the decade following the death the grandchildren fell out with the trustees and made allegations of delay and excessive charging.  One of the issues in dispute was whether the power to appoint in favour of alternative beneficiaries was still effective.  In November 2010 a letter was sent to the grandchildren in which it was said that, if they did not accept that the power was still effective, CTC would be left with no choice but to apply to the court for a decision on the point.

However, before CTC could issue its application, it was faced with hostile litigation from the grandchildren.   The grandchildren sought a declaration that the power was no longer exercisable and so the chattels should pass equally to them, a further declaration that CTC should be removed as trustees and further relief.

CTC put in a Defence in which it sought to justify its administration of the trust.  On the issue of whether or not the power to appoint was still valid CTC said that it did not adopt a position either for or against but, in the absence of a party putting a contrary view on behalf of the other potential beneficiaries, considered that it should assist the court by presenting the available arguments against the case.  CTC also appeared to indicate that, subject to the preservation of its lien as trustee, it was prepared to step down as trustee - either because, on one outcome, the property of the trust would vest in the grandchildren or because on the other, it was content to be replaced by independent and impartial trustees.

The judge expressed surprise that, in the circumstances, a compromise was not achieved.  Instead CTC made its own application to the court seeking an order that its costs of litigating the main dispute about the existence of the power to appoint should come out of the trust fund.  It was this application that Mr Justice Mann was required to decide earlier this year.

Normally, questions of costs are dealt with at the conclusion of the proceedings when arguments have been put, evidence heard and a decision made on the merits of the case. CTC was therefore effectively seeking the security of advance protection.  Its attempt to obtain this was unsuccessful.

In giving his judgment, Mr Justice Mann said that he started from the proposition that a trustee who acts reasonably and properly in the interests of the trust was entitled to an indemnity out of the trust assets for any costs and expenditure reasonably incurred.  He also made it clear that he was not making any findings on whether CTC should ultimately have its costs from the fund but he was not prepared to give CTC the comfort it sought.  There seemed to be a number of reasons for this.

Firstly, the judge was not satisfied that it was actually necessary for the court to rule on the construction point.  For example, it was possible that, even if the power remained exercisable, CTC may decide not to exercise it.  In that situation the question was academic.

Secondly, the judge at trial may decide that CTC had acted unreasonably in arguing the construction point and not retiring.

Thirdly, other factors may emerge during the course of the case that demonstrated that it was unnecessary to decide the construction point.

This case demonstrates how difficult it can be for trustees faced with hostility and the prospect of court proceedings.  It highlights the importance of seeking quality, impartial legal advice at an earlier stage to try and prevent a situation from going from bad to worse.