In the Matter of X Trust

Royal Court of Jersey, 1 October 2012

W Bailhache,Deputy Bailiff, and Jurats Le Breton and Crill

This decision of the Royal Court of Jersey (the "Court") concerns funding of the costs of a claim for breach of trust commenced by certain beneficiaries of the X Trust (the "Representors") against the current trustee (the "Trustee") of the X Trust (the "Trust") and others.

The Court ordered the Trustee to pay the costs and disbursements that will be incurred by the Representors in pursuing the breach of trust proceedings out of the Trust fund. In addition, the Court ordered the Trustee to reimburse the Representors for costs already incurred in commencing the litigation, and made a protective costs order in favour of the Representors for any adverse costs orders made against the beneficiaries in the litigation, in each case out of the Trust fund.  

Facts

The Representors were the principal beneficiaries of the Trust and had commenced proceedings against the Trustee and others in the Royal Court of Jersey alleging breach of trust resulting in investment losses of just under £100 million. The Representors had previously funded their claims against the Trustee from distributions which they received from the Trust. These distributions had been made by the Trustee without reference to the Court.

However the Trustee was concerned that there was potential prejudice to the Trust from the continuance of legal proceedings against the Trustee and obtained an independent report which confirmed that the litigation could be damaging to the Trust's assets. The Trustee was therefore not persuaded that it should continue to make distributions to the Representors but, recognising that its personal interests and the interests of the beneficiaries of the Trust were in conflict, it asked the Representors to make an application to the Court for directions.

The Representors applied for directions that the Trustee of the Trust should continue to make distributions to them to fund the litigation. The Representors stated that they did not have any alternative source of funding, and that they were unable to borrow to fund the costs of the litigation as the remedy they sought was that the Trustee should reconstitute the Trust fund rather than pay damages to the Representors.  

The Court's decision

The Court held that the Trustee's approach of asking the Representors to make an application to court was the proper course to adopt. The Court noted that its jurisdiction to make orders in these circumstances had not previously been considered in a published judgment, nor had it been considered in absolutely comparable terms in England and Wales either.

The Court identified two possible bases on which it could act:

  1. the Court could use its power under Article 51(3) of the Trusts (Jersey) Law 1984 to direct the Trustee to make distributions to the Representors out of the Trust fund; and 
  2. the Court had an inherent jurisdiction to make the order in the standard 'Beddoe' form, as the Representors were in effect bringing the claim as trustees of the Trust on behalf of the beneficiaries of the Trust as a whole.

The Court concluded that the Representor's claim against the Trustee was analogous to a derivative action brought by a shareholder of a company under an exception to the rule in Foss v Harbottle,1 where the claim is brought on behalf of the company and for the benefit of the shareholders of a company as a whole. The Court noted that the principles applicable to derivative actions had been applied to a claim by a beneficiary on behalf of a trust in the English case of McDonald v Horn,2 albeit it was central to the reasoning in that case that the trust was a pension scheme and the beneficiary was not simply a voluntary recipient of the settlor's bounty.

The Court noted the dangers of beneficiaries litigating all too easily at the expense of the Trust and potential squandering of the Trust fund on unnecessary litigation. Further, in the case of discretionary trusts, it was possible that the beneficiary seeking to bring the claim might never be appointed any of the trust assets. This demonstrated that it was important for the Court to consider the interests of other beneficiaries of the Trust when deciding whether to make an order in favour of the applicant. The Court likened this exercise to the approach of the Jersey Courts to the question of whether disclosure of trust information should be made to a beneficiary following Schmidt v Rosewood Trust Limited3.

No beneficiary has the entitlement as of right to bring a derivative action at the expense of the trust fund, and it follows that there is no general principle that the costs incurred by a beneficiary in bringing such an action should always be met from the trust fund. The Court will have regard to all the circumstances and may have to balance the interests of beneficiaries as between themselves, the interests of beneficiaries and trustees, or conceivably the interests of beneficiaries and third parties. The ultimate issue is whether the order sought is in the best interests of the trust and of the beneficiaries as a whole.

The Court was provided opinions from Counsel instructed by the Representors' which concluded that claims made against the Trustee were well-founded in principle and should be maintained and concluded. The Court found that it would be unfortunate if the Representors were prevented from bringing such claims through lack of funding, and not in the best interests of the beneficiaries as a whole. The Court noted that the size of the Trust fund meant that the costs of the litigation would not affect the interests of beneficiaries who received an annual stipend from the Trust. On this basis, the Court ordered that the Representors should not bear their own costs for the claim as the claim was essentially for the benefit of all of the beneficiaries of the Trust.

The final factor that persuaded the Court to rule in favour of the Representors was that the Representors were the principal beneficiaries of the Trust and therefore if the Trust carried the expense of the claim, their interests in the Trust would bear the cost and therefore the risk of litigation was being borne by the right parties. The Court agreed with the submission by the Representors' Advocate that were a new trustee to be appointed and it commenced proceedings against the Trustee for the same claims, an order that the costs of those proceedings should be funded out of the Trust (i.e. a conventional Beddoe order) would likely be granted.

The Trustee provided an independent report to the Court which raised concerns that the litigation, whether successful or not, could damage the assets of the Trust, which included a shareholding in a public company, due to the nature of the allegations made and change of market perception as to the strength of the company. The Court held that this concern could be met, in part, by the Court directing the Greffier not to allow public access to the pleadings in the litigation. To the extent that there was still a danger of affecting the market for the company's shares, such danger could not be averted as it was impossible to predict what the effect of various factors might be on share price.

The Court held that the right balance was to be struck by making the orders sought by the Representors. The Court will review the orders it has made two months after discovery has been given by both parties. The Court considered that Counsel ought then to be able to advise on a more informed basis on the prospects of success for the Representors' claim. The Court will then decide whether funding should continue to be made available to the Representors from the Trust fund. The Court held that any costs orders made in favour of the Representors in the litigation against the Trustee should be held by them for the Trust.

Conclusion

This decision establishes that there will be instances where beneficiaries bringing a claim against trustees are entitled to seek orders that they be funded by the trust fund, when it is in the best interests of the trust and of the beneficiaries as a whole to do so. The beneficiaries may also be given the benefit of a protective costs order, as in this case. Given the recent popularity of litigation funding and costs insurance in Jersey, beneficiaries bringing claims against a trustee may wish to consider an application of the nature made in this case as an alternative.

The Court's ruling does not amount to an invitation for beneficiaries to litigate with trustees at the cost of the trust to the detriment of other beneficiaries. The Court will wish to see reasonable evidence that the litigation is well founded and will benefit the Trust, as is the case in conventional Beddoe applications.

The Court did not consider when a beneficiary might be authorised to bring a derivative action against a third party for breach of a duty owed to the trustee of the trust, in circumstances where the trustee is unwilling to bring such a claim. In such cases the reasons for the trustee's objections and the presence of any conflict of interest for the trustee will be key factors that the Court will consider.