25 June 2007
Five recent decisions of the Royal Court of Jersey illustrate that Jersey continues to be at the cutting edge of trust law. The first relates to the so-called 'dog-leg' claim by beneficiaries of a trust directly against the directors of a corporate trustee. The other four decisions relate to a trustee's entitlement to repayment of legal costs from trust assets where the trustee is a party to litigation involving the trust and is acting neutrally.
The dog-leg claim is based on a director of a company's duty under, in the case of Jersey, Article 74(1)(b) of the Companies (Jersey) Law 1991 to "exercise the care, diligence and skill that a reasonably prudent person would exercise" in carrying out the director's duties in relation to the company. The right to performance of this duty is claimed to be an asset of the trust and, where a director is alleged to have breached the duty, it is claimed that the beneficiaries of the relevant trust can enforce performance of the duty in circumstances where the corporate trustee will not do so.
In Alhamrani v Alhamrani (2007) the plaintiffs, who were beneficiaries of two Jersey law trusts, brought claims in October 2005 against two corporate trustees for breach of trust. They had also pleaded claims against two of the directors of the respective trust companies pursuant to Article 56 of the Trusts (Jersey) Law 1984, which provided that, where a breach of trust was committed by a corporate trustee, every director of the corporate trustee at the time of the breach was deemed a guarantor of all damages and costs awarded against it. However, following the repeal of Article 56 in October 2006, the plaintiffs withdrew their Article 56 claims, but applied to the Royal Court for permission to bring dog-leg claims against the two directors instead.
The Royal Court commented that reported decisions concerning the dog-leg claim were "extremely limited". It referred to four judgments from courts in England, Guernsey and Australia and academic commentary. In Young v Murphy (1994) the Supreme Court of Victoria rejected the proposition that the director's duty of care was an asset of the trust. It considered that the duty was owed to the company and was available to the company's creditors upon liquidation.
In HR v JAPT (1997), however, the English High Court refused to grant an application to strike out a dog-leg claim in circumstances where the corporate trustee of a pension scheme was worthless. Its sole asset was 30p in cash, it had no insurance, no premises and the sole activity of its directors was the management of the scheme, of which they had the exclusive conduct.
The Royal Court of Jersey noted that there were no exceptional circumstances in Alhamrani, such as those in HR v JAPT. The trust companies were not 'one-trust' companies and the directors' activities were not confined exclusively to the trusts in question. However, the court considered that the mere fact that a director had particular responsibility for the affairs of a particular trust would not be sufficient "to displace the fundamental nature of a director's statutory duties to his company". It agreed with the comments of the Guernsey Court of Appeal in Rowe & Rich v Cross & Cross (1998-99) that, if the dog-leg claim is to become "a binding principle of law, it still has some progress to make". The Royal Court therefore refused leave for the disputed amendment.
Trustees' legal costs
Jersey has no specific rules of court regulating a trustee's entitlement to legal costs where it is involved in litigation, and four judgments of the Royal Court from 2006 and 2007 all concern this issue.
In Alhamrani (2006) and Alhamrani (2007), the bailiff delivered two judgments setting out the principles to be applied by the court in instances in which a trustee involved in litigation seeks recovery of its legal costs from trust assets and the trustee is acting neutrally (ie the costs do not relate to hostile litigation against the trustee), but where the beneficiaries object to payment from the trust.
In Alhamrani (2007) Page summarised those principles and applied them. The Alhamrani judgments are subject to a pending appeal to the Jersey Court of Appeal, but in Landau v Landau (2007) deputy bailiff Michael Cameron St John Birt also applied the principles in circumstances where the court, exercising its supervisory jurisdiction over trusts, considered that it was not reasonable for all the legal costs to be paid from the assets of the trust and gave further guidance concerning 'assessment' (rather than taxation) of the trustee's legal costs.
The court summarised the principles as follows:
- The general principle is that a trustee, acting reasonably and in the exercise of their duties, powers and discretion, is entitled to an indemnity from the trust fund in relation to all costs and expenses properly incurred.
- Strictly speaking, that principle is one that arises as a matter of basic trust law and an express order to such effect is unnecessary.
- In such circumstances, no question of taxation arises, even if such an order (that is, an order for an indemnity from trust funds) is made in express terms.
- It is to be emphasised that this general principle only applies where a trustee is acting reasonably.
- This general rule can be displaced or overridden by the court, but only by specific order to that effect.
- A beneficiary who thinks that a trustee has acted unreasonably and ought not to be entitled to recover their costs in full (or perhaps at all) has the same remedies as those available for any alleged breach of trust or fiduciary duty, or for other misconduct. It is therefore incorrect to say that, without the automatic operation of taxation, there is no mechanism for preventing the plundering of the trust fund by an unscrupulous trustee. A beneficiary or other interested party who wishes to complain of such misconduct has a right of recourse to the court, which would not hesitate to use its supervisory jurisdiction to impose appropriate orders or penalties.
The Royal Court's decisions are positive news for Jersey's trust industry and are further evidence of the sophistication of trust law on the island. Although some jurisdictions will have their own rules of court dealing with trustees' costs orders, it is suggested that the decisions in Jersey will also be of relevance to many common law jurisdictions.
The Alhamrani judgments concerning the 'dog-leg' claim protect directors of professional corporate trustees against an additional potential liability, while not shutting the door to plaintiffs proceeding with a 'dog-leg' claim in the exceptional circumstances encountered by the English High Court in HR v JAPT.
The Alhamrani and Landau judgments concerning trustees' costs balance the trustee's need not to be left out of pocket for legal costs where acting neutrally with allowing beneficiaries to invoke the court's supervisory jurisdiction over trusts where, for example, the legal costs were inappropriately incurred or disproportionate.
Mark Temple is a partner at Ozannes