In its decision in Des Pallieres v JP Morgan Chase & Co the Jersey Court of Appeal has provided a clear view of the principles that apply to costs awards in trust proceedings for parties acting in a fiduciary capacity. The Court of Appeal's decision was preceded earlier this summer by the Royal Court's decision in Re Dunlop Settlement in which the costs incurred by a beneficiary in trust related proceedings were considered, and which itself serves as a useful summary of the principles that will be applied.
The key point that emerges from the Court of Appeal's judgment is that the principle of indemnity is paramount with regard to the costs incurred in trust proceedings by a trustee or other person with fiduciary functions in respect of a trust. The Court of Appeal confirmed that persons exercising fiduciary functions are entitled to an implied equitable indemnity in respect of costs reasonably incurred by that person in the exercise of those functions. That indemnity is equivalent to the statutory indemnity enjoyed by a trustee and, accordingly, will lead as a matter of principle, to a prima facie entitlement to recover costs on a full trustee indemnity basis. That right of indemnity (whether express or implied) can only be lost in circumstances where the trustee is guilty of misconduct or acting unreasonably.
The Royal Court's decision in Re Dunlop has confirmed the principle that beneficiaries convened to trust proceedings are also prima facie entitled to have their costs paid out of the trust fund on the indemnity (as opposed to standard) basis (which therefore is not the full indemnity to which a fiduciary would be entitled). Similarly, that entitlement can be lost in circumstances where the beneficiary acts unreasonably.
The proceedings in Des Pallieres involved an application for disclosure by Mr Des Pallieres (BDP) against JP Morgan Chase & Co (JPM). JPM was the settlor of an employee benefit trust (EBT) of which BDP (a former employee) was a beneficiary (including of a sub-trust within the EBT). JPM had a power to remove and appoint trustees and appoint a protector, which were agreed to be fiduciary powers.
The history of the proceedings, which were brought pursuant to Article 51 of the Trusts (Jersey) Law, was somewhat convoluted due to the way in which BDP had initially sought to raise hostile issues within an application for disclosure against both JPM and the trustee of the EBT. The hostile elements of the claim had been removed, and the application had proceeded to hearing as a trust directions application (albeit one commenced by JPM as beneficiary).
Royal Court decision
In the Royal Court, it was accepted that BDP would have a right to seek disclosure against JPM in connection with the exercise of its fiduciary powers. However, JPM had never exercised its powers of appointment or removal. The Court ultimately held that the documents of which BDP sought disclosure were in part available from the trustee or, in many cases were an attempt by BDP to obtain pre-action disclosure in respect of matters that BDP had indicated he might pursue JPM. Accordingly, the disclosure orders sought were refused.
The Royal Court awarded JPM its costs on the full trustee indemnity basis, but granted leave to BDP to appeal because the Court considered the question of how to categorise the nature of the proceedings (applying the principles in Re Buckton) which involved considering whether they were hostile or not to be a difficult one; the Royal Court also thought it important for the Court of Appeal to consider the somewhat novel area of law involving the position of a settlor with fiduciary powers.
By way of reminder, in Re Buckton it was held that there are 3 principal categories of proceedings: (1) applications by trustees for directions or guidance on a question of construction; (2) a similar kind of application brought by someone other than the trustee; and (3) hostile claims by a beneficiary. Cases in categories (1) and (2) are necessary for the administration of the trust and, therefore, the costs of all parties will ordinarily be directed to be paid from the trust fund. Cases in category (3) will typically result in costs orders following usual litigation principles - ie, the loser pays.
BDP argued that because the application he made was essentially one for pre-action disclosure - despite being brought under Article 51 and despite the hostile elements being removed - the costs should be awarded on the basis of hostile proceedings (Buckton category (3)). He therefore argued that they should not be ordered to be paid from the EBT (or more particularly, BDP's sub-fund) but should be ordered to be paid by him personally on a standard hostile litigation basis.
Court of Appeal decision
The Court of Appeal held that the costs order of the Royal Court was the correct one. However, it also held that the question of which of the Buckton categories the application fell into, did not need to be answered when looking at a trustee's or other fiduciary's costs. It held that JPM's entitlement to costs from the trust fund arose out of its implied right of indemnity as a party acting in a fiduciary capacity, irrespective of the nature of the proceedings. Nugee JA expressed the view that he did not consider that a hostile claim by a beneficiary against a trustee would fall within the Buckton categories at all.
In reaching its judgment, the Court of Appeal focused on the nature of the application, rejecting arguments that JPM had been acting in its own interests in resisting the scale of the disclosure sought. In doing so the Court gave helpful guidance on other kinds of litigation in which trustees or fiduciaries might be engaged in that capacity. For example, if a trustee is sued for breach of trust unsuccessfully, the Court considered that the right of indemnity would still apply, although the beneficiary might be held personally liable to meet the trustee's costs on a standard or indemnity litigation costs basis - the trustee could thereafter seek to recover from the trust the unrecovered costs (such as after assessment/taxation). Even if a breach of trust action were successful, it does not follow automatically that the trustee will have to bear the costs of the proceedings personally - for example, if an established breach were to be held to be minor or innocent the right of indemnity might still apply.
The Court of Appeal confirmed that the right of indemnity is one that can be lost in circumstances where the trustee or other fiduciary has been found guilty of misconduct.
Re Dunlop Settlement
The Court of Appeal in BDP v JPM cited with approval the costs judgment of the Bailiff in the Royal Court in Re Dunlop. The factual background to the substantive decision in Re Dunlop is described in an earlier briefing . In short, it involved the surrender of discretion by the trustee of the settlement and the authorisation by the Court of the trustee to enter into an agreement for the settlement of various claims in respect of the trust and its assets.
The Bailiff's judgment addressed the claim by one of the beneficiaries of the trust for recovery of her costs from the trust fund. The beneficiary had opposed the decision that was reached in the proceedings. The Royal Court referred to the Re Buckton principles and their application to beneficiaries' costs in trust litigation, as applied by the Court of Appeal in Jersey in Trilogy Management Limited v YT Charitable Foundation (International) Limited.
As regards the Buckton categories, the Bailiff held that the application was an administrative one brought by the trustee and, therefore, fell within category (1). As a consequence, the beneficiary had a prime facie right to an indemnity costs order unless deprived of that right through her own unreasonable conduct. For numerous reasons (such as not taking part in a mediation, failing to comply with orders for the filing of evidence, filing a "palpably wrong" witness statement and persisting in her opposition) the Bailiff held that the beneficiary had acted unreasonably. Rather than seeking to reach a view on an issues based cost award, the Bailiff adopted a broad approach and awarded her only half of her costs on the indemnity basis.
These decisions are important: they clarify and reiterate the principles which will be applied when the Courts in Jersey approach awards of costs in trust litigation. The very clear message from the Court of Appeal with regard to the indemnity enjoyed not only by trustees but also other fiduciaries will bring some degree of certainty to those acting in such positions who are convened to trust proceedings. The Royal Court decision also signals to beneficiaries that, if convened to a trust application they will likely recover their costs on an indemnity basis. Equally important for trustees and beneficiaries alike, where a claim for breach of trust is brought unsuccessfully by a beneficiary, the starting point will be that the trustee will be able to look to its right of indemnity to recover its costs in full from the trust assets.
As a postscript, there is one area of potential ambiguity that arises from the judgments, namely the circumstances where the trustee's right of indemnity or the beneficiary's prima facie entitlement can be lost. The Court of Appeal made reference to the loss of the right of indemnity where a trustee/fiduciary is found (as opposed alleged) to have been guilty of "misconduct". The Bailiff had remarked in Re Dunlop that the Court of Appeal in Alhamrani v JP Morgan Trust Company (Jersey) Limited had found that a "trustee may lose its costs indemnity by acting unreasonably rather than the higher test of being guilty of misconduct." Arguments over just how high the test that will be applied is, could still therefore arise in future cases.