7 November 2005
Jersey Court of Appeal confirms rights of non-trustee fiduciaries to an indemnity out of the trust fund
21 November 2013
6 May 2014
Royal Court clarifies limits of customary law exception in respect of time-barred breach-of-trust claims brought by incoming trustee
26 February 2014
6 August 2013
Direct disclosure obligations resulting from joinder of adult beneficiaries to matrimonial proceedings affecting trusts
24 February 2014
The notion of a trustee as a well-meaning but unpaid amateur is now long gone. However, it is clear that, in a number of instances, trustees' standards of behaviour, whether by commission or omission, are not necessarily consonant with the level of fees and charges drawn against the trust estate or otherwise paid by a settlor or the beneficiaries as trustees' fees.
In the face of this unfortunate reality, a particular question for any settlor or private client adviser when considering an offshore jurisdiction is whether a successor trustee, or the beneficiaries in the given jurisdiction, are able to get effective and sufficient redress against an ineffective and allegedly overcharging trustee.
Two recent cases in Jersey, Parujan v Atlantic Western Trustees Ltd (2003) and Re Carafe Trust; Guardian Trust Company Ltd v Louveaux & Ors (2005), demonstrate that the court in Jersey is prepared to examine fees charged by a retiring trustee and, if necessary, will act to remove a trustee by reason of overcharging and curtail as appropriate such trustee's normal statutory protections upon discharge from, or resignation from, office.
Where fees are charged properly
Jersey law is no different to other jurisdictions in that, under Article 26 of the Trusts (Jersey) Law 1984, "the trustee shall not be entitled to remuneration for his or her services… unless authorised by… the terms of the trust… the consent in writing of all the beneficiaries… or any order of the court". Assuming, however, that the relevant declaration of trust has the usual charging clause, including allowing for fees on an hourly basis for work done, the dispute will often be about whether given items of work were undertaken by the trustee in the proper administration of the trust.
Parujan offers particular guidance as to this. There, in the face of finding a fact that "the trustee failed to exercise sufficient control over the trust and was constantly trying to recover information which ought to have been in his possession at the outset", the court rejected the trustee's contention that the settlor's brother (who was named in the letter of wishes as a person to be consulted by the trustee and who had, in consequence, been allowed by the trustee to assume all but complete control over the trust assets without any consequent provision of information to the trustee) was responsible for the trustee, having spent time attempting to reassert its dominance over trust assets or elicit information as to what was being done by the settlor's brother with the trust assets. The court held that, given a trustee's fundamental duty to act "with due diligence… as would a prudent person… to the best of the trustee's ability and skill", the trustee had, by "[allowing] itself to be swamped by the demands of a difficult client… failed to act prudently and with due diligence" and "failed to perform to the standards required of a trustee in this jurisdiction".
The court therefore disallowed a portion of the relevant fees charged by the trustee for the extra work the trustee claimed had been occasioned by the settlor's brother's intermeddling and recalcitrance, but in truth the work would not have been necessary but for the trustee's failure to assert its office properly.
The court made an allowance for what it effectively characterised as the settlor's brother's contributory behaviour. The court thought the brother's conduct a relevant "factor", but failed to explain the basis upon which it had made such allowance beyond this observation. Presumably, a trustee's fees are either properly chargeable or not; the warrant for finding such fees partially properly chargeable is not apparent. This is particularly so given that equity does not recognise contributory negligence or foreseeability as factors limiting compensation for breach of equitable duties of trust or fidelity. Remember that the trustee here was, after all, in breach of trust.
It is therefore clear that a trustee who has failed to assert control over the trust property, or otherwise do that which they ought to as trustee, cannot then charge fees for the time spent in work attempting to remedy a situation which was a consequence of their failure as a trustee.
It remains unclear where the line is between appropriate work in marshalling assets and eliciting information and 'running after the horse and desperately trying to mount it'. However, it is likely that the necessary distinction will be plain enough on the facts as they arise. It is safe to assert that any situation in which a Jersey trustee has allowed another to control or deal in the trust assets (including proper delegation of specialist functions, such as investment management) such that the trustee does not know what is going on with the trust estate, will foreshadow the trustee's fees being impeached to some greater or lesser extent should someone care to attempt to do so.
One matter that may distinguish Parujan from other cases is that the intermeddling brother was not a beneficiary of the trust. In other cases, the person allowed to interfere or manage the trust's assets to the detriment of the trustee's discharge of their duties may be a beneficiary; Jersey law countenances that "where a trustee commits a breach of trust at the instigation or at the request or with the consent of a beneficiary, the court may… impound all or any part of the interest of the beneficiary by way of indemnity to the trustee". Clearly, it will lie ill in the mouth of one at whose instance a breach of trust has occurred to then complain of that breach. However, indemnifying a trustee against a claim for breach of trust by consenting beneficiaries is a different matter to allowing a trustee to charge against the trust estate for work occasioned only by the trustee's failure to do their duty as a trustee.
When should a trustee be removed?
The court in Parujan found that the combination of factors, including the trustee's conduct "in charging excessive fees", meant that it was in all parties' interests that the trustee be removed.
The exercising of this power by the court was, in the circumstances, unremarkable; but the live question will always be to what reasonable security a trustee is entitled given the likely context of some failure as trustee.
The trustee's continuing duty
In Jersey, Re Carafe Trust confirms that "where there are assets that remain under the control of the trustee and need to be administered and from which fees can ultimately be drawn, the trustee is under a continuing duty to exercise its duties as trustee to monitor and administer the assets, notwithstanding the existence of a fee dispute".
Trustee cannot allow themselves to be distracted or discouraged from their duties as trustee simply by reason of their fees not being paid; it is not good enough for a trustee to down tools by reason of non-payment. Given this principle, a trustee, if well advised, should be quick to approach the court for directions if there is work to be done for the trust but, for one reason or another, no money to pay for that work.
When should a trustee resign?
This question will clearly be relevant to a trustee's fee entitlement. The Royal Court in Jersey in Re Carafe Trust shows that a trustee is under no obligation to resign where there is no provision for security against which unpaid fees might be levied. Conversely, the fact of a trustee's fees being unpaid is not sufficient to justify the trustee failing to resign or refusing to resign if the beneficiaries or putative successor trustee are willing to provide sufficient security for payment of such fees as may be found ultimately owing.
The well-advised beneficiaries/putative successor trustee will suggest some kind of escrow arrangement for the amount in dispute, so providing to the trustee such security as they may require. It will not be difficult to characterise a trustee's refusal to such an arrangement as, first, unreasonable if the escrow amount is sensible, and second, warranting a subsequent finding by the court that the trustee could probably have resigned at the time of the escrow proposal and, that being so, is not entitled to their fees following such suggestion and refusal.
Objections to a trustee's fees
Assuming that the trustee has first produced itemised bills sufficiently detailed for the beneficiaries to address and answer the relevant unpaid items of work, it is clear that the beneficiaries must specify how much of the trustee's fees are disputed and on what basis each item is disputed. It has been confirmed in Jersey that those cavilling at a trustee's fees will be "wrong to have refused to particularise exactly which element of the fees they objected to, particularly… [if] provided with a very detailed breakdown".
The first point for any trustee in a fees dispute must be to require the beneficiaries to make clear with precision to what they are objecting in the trustee's claimed fees and the basis upon which they do so. Conversely, the beneficiaries must be prepared to provide such paticularisation of their disagreement with the trustee's claimed fees and to provide appropriate security for those fees, such that the trustee cannot reasonably refuse to resign.
It may be that the trustee cannot resign because of the state of the trust accounts and records. Put simply, no one else may want, or be able to do, the job. If no successor trustee can be identified by reason of the difficulties in the trust's administration, or the absence of information as to the trust's assets, the question of the trust's unworkability must be brought before the court quickly as a further substantive matter upon which the court must order in addition to the fees dispute.
Paul Tracey is an associate with Sinels