In Trilogy Management v YT(1) the Court of Appeal has clarified the principles relating to the payment of costs in non-adversarial trust applications. In so doing, it has drawn together approaches established in a number of early cases and consolidated the position in an area which it said had previously received only "sporadic consideration".
This case is of relevance for all trustees that may be contemplating applications to the court in such circumstances (eg, the construction of a trust instrument or the correct administration of a trust). The case differentiates between the costs of trustees and beneficiaries or other convened parties, as well as between costs at first instance and costs on appeal.
A wealthy businessman established a charitable structure as part of his philanthropic activity. Under this structure, an investment company was established, some of whose shares of which resided in a charitable trust. The trustee of the trust, 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 of his 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 thereof. 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 relation to the level of distributions made to the eight sub-trusts. Applications were therefore made to the courts.
In reaching its decision, the Court of Appeal held as follows:
- A neutral trustee is entitled to an indemnity from the trust fund in relation to all costs and expenses reasonably incurred.(2) This arises from statute, contract and inherent jurisdiction. A court order to this effect is unnecessary.
- An indemnity, in this sense, means full reimbursement.
- If costs have not been incurred reasonably, then this principle may be displaced.(3) A trustee must act in a proportionate and reasonable way at all times.
- The position differs regarding beneficiaries' or other convened parties' costs. 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 his or her costs, such costs will not be reimbursed. Instead, the best that that party can hope for is that his or her costs will be paid on an indemnity basis. Although this will usually result in a large proportion of costs being recovered, it is unlikely to amount to full reimbursement in the same manner as that in relation to a trustee.
- The court suggested that the missing link 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 an indemnity basis.
- In this regard, it found persuasive the English case of Buckton,(4) which had previously been referred to as persuasive in another Jersey case (although under slightly different circumstances), and which as recently as 2011 had been confirmed as good law in England and Wales. Buckton confirmed that at first instance, the costs of convened parties to a non-adversarial application should normally be awarded on an indemnity basis regardless of whether they were successful. This was because they had been incurred for the benefit of the trust or estate as a whole.
- However, the position on appeal is quite different. On appeal, the appellant (trustee or beneficiary) takes a risk in relation to his or her costs. Furthermore, if the appeal is unsuccessful, it is possible that he or she will bear not only his or her own costs, but also the costs of the respondent party. A first instance application, correctly brought, will be deemed necessary for the proper administration of the trust, whatever the outcome. However, it does not follow that an unsuccessful appeal is also necessary in the same way.
- If the appeal is successful, then the appeal will be deemed necessary to the proper administration and the successful appellant will usually enjoy his or her costs out of the trust. In this situation, the unsuccessful respondent's costs may still also be deemed to have been incurred for the benefit of the trust (and so may also be paid out of the trust). However, in relation to this last point, the court felt it inappropriate to lay down a prescriptive matrix, commenting only that there should be no assumption that it was always right for the costs of unsuccessful respondents to be met out of the trust. Instead, it would depend upon the circumstances underlying each individual application.
- In deciding whether a party was adopting an adversarial stance (ie, taking it outside the scope of these principles), the question may be asked as to whether the party stood to gain any material benefit from successful contentions in the litigation.
In addition to its position on costs, the judgment 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). The Court of Appeal held that "trust litigation is often necessary: it is always expensive". It added that accordingly, it is only in "exceptional circumstances" that a trust should be burdened with the expense of a further appeal to the judicial committee.
As convened parties, those who were awarded their costs on an indemnity basis included shareholders in companies involved in the structure and the trustees of the sub-trusts. This is consistent with Jersey's wide view as to who might be awarded costs in these circumstances (the salient question being whether involvement is necessary for proper administration).
This decision is a welcome clarification of the approach to cost awards in the context of administrative trust proceedings. Also welcome is the judicial notice taken of the significant costs incurred in many trust applications, and the pragmatic approach taken towards appeals beyond the Court of Appeal. Given the high level of costs, the decision is also a reminder that trustees should regularly review structures so as to ensure that underlying documents (and the provisions contained therein) remain germane and unambiguous. However, by far the most cost-effective course of action is to avoid, as far as possible, the need to apply to court at all.
For further information on this topic please contact Nick Williams or Nadia Brady at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email (firstname.lastname@example.org or email@example.com).
(2) It has recently been held that this principle also applies to the costs of any other party exercising fiduciary functions in relation to the trust (eg, a settlor who retains the power to appoint or remove trustees or appoint a protector). For further details please see "Settlor awarded costs on trustee indemnity basis in landmark judgment".
(3) In another recent decision, In the Matter of the Representation of Weingarten and Tolmie (January 22 2013), the Royal Court confirmed that acting unreasonably might 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.