Introduction

AO Hall has recently been involved in a case involving a dispute regarding the construction of a declaration of trust (“the Declaration”) which led to uncertainty as to beneficial ownership of the underlying assets.

The case is of interest because it confirms that (when asking the Court to exercise its supervisory jurisdiction in relation to trusts) a trustee may not always be entitled to rely on their indemnity to recover litigation costs in full out of the trust assets.  This is particularly so where the trustee is considered to be “at fault”, or has contributed to the costs arising.  In this case, the trustee was only entitled to recover its costs from the losing party on the standard recoverable basis, rather than in full on an indemnity basis out of the assets of the trust.

Background

The wording of the Declaration, which had been drafted by the Trustee, was ambiguous, hence the competing assertions of beneficial interests.

In accordance with usual practice, the Trustee made application to the Court in a neutral capacity to have the construction of the Declaration decided upon, and inviting those with the competing interests to argue their respective claims.

The Court construed the Declaration in favour of the Second Respondent and was requested to make an order in relation to the costs of the Trustee’s Application.

The Costs Issue

As one would expect the Court first took steps to categorise the proceedings pursuant to Re: Buckton [1907], which deals with the incidence of costs in various types of trust proceedings.

The Judge concluded that the proceedings fell within the “Buckton (4)” category and specifically referred to paragraph 21 – 79 of Lewin on Trusts, 18th Edition (2008) where it is recorded that

“Not all proceedings commenced by a trustee for the determination of some question affecting entitlement to the trust fund are within Buckton category (1), particularly in a case which does not involve the construction of the trust instrument but rather a dispute over the beneficial ownership of the trust fund [McDonald v Horn [1995] 1 All ER 961].  Although in form the proceedings come within Buckton category (1), in substance the dispute comes from the third category, and the costs of the rival claimants should be governed by the principles of cases falling within the third category, for the proceedings are akin to an interpleader. This kind of litigation might perhaps be conveniently treated as a fourth category.”

Given the case amounted to ordinarily hostile litigation between the two Respondents, the Judge concluded that the First Respondent should pay the costs of the Second Respondent on the standard recoverable basis.

Having made this conclusion the Judge turned to consider the applicant Trustee’s costs.

Both Respondents opposed the Trustee’s application to have its costs paid out of the trust assets (the normal order in a Buckton (4) case), arguing that the proceedings would not have been required had the Declaration been prepared properly.  Further, allegations were made that the Trustee’s assistance in the proceedings was inadequate, being “passive” rather than “neutral”.

The Judge concluded that the proceedings had only been required because of the uncertainty surrounding the Declaration and that in making the application the Trustee was aware that it would “precipitate rival constructions to be advanced by the Respondents” and, as such, the proceedings were less for the benefit of the trust and the trust property than for the Respondents to resolve their dispute or for the Trustee to resolve the uncertainty created by the wording of its own Declaration.

The Judge further noted that the successful Second Respondent had not requested the Trustee to seek the Court’s assistance.  Instead, its position had been that the Trustee should act on its instructions and it only participated in the proceedings because by making the application the Trustee afforded the First Respondent the opportunity to challenge the entitlement of the Second Respondent.  As such the Court concluded that it would be unjust for the Trustee to have its costs awarded from the trust property because that would be effectively awarding costs against the Second Respondent – who had been successful.

The Judge equally, however, did not consider that it would be just to order the Trustee to pay the costs of any other party, therefore the choice open to the Judge was to make no order as to the Trustee’s costs or to order that the First (unsuccessful) Respondent should also pay the Trustee’s costs.

Having classified the proceedings into the Buckton (4) category the Judge concluded that the First Respondent was at risk, if unsuccessful, of being faced with meeting the costs of all the other parties involved.  Here the Judge awarded both the Trustee’s and the Second Respondent’s costs be paid, by the First Respondent, on the standard recoverable basis.

Conclusion

This judgment was important because whilst the Trustee will usually get its costs in full on the basis of its indemnity, the judge concluded that this was a case in which the indemnity did not operate and thus the Trustee should only be treated in the same way as any other party to the litigation, i.e. only receiving its costs on the standard recoverable basis.

Furthermore and importantly the judge noted that if the Trustee considered that outcome to be harsh, it reflected the fact that the Trustee got itself into this position through its own acts when executing the Declaration and through choice by seeking the Court’s intervention in the full knowledge, or at least the expectation, that the Respondents would then mount rival claims and that the matter would proceed as hostile litigation.

This judgment will clearly be of great interest, and possible concern, to trustees and highlights the need for caution when drafting trust documentation in order to prevent subsequent criticism and personal exposure to the costs of any later proceedings.  That said, the judgment was given against much previous authority, and should not deter trustees, caught between rival claimants to the trust property, from having them argue their respective claims before the Court.  This will be particularly so where the ambiguity does not in fact arise from any fault of the trustee.