Time for Beddoes
29 March 2004
5 March 2014
Direct disclosure obligations resulting from joinder of adult beneficiaries to matrimonial proceedings affecting trusts
24 February 2014
21 February 2014
Jersey Court of Appeal confirms rights of non-trustee fiduciaries to an indemnity out of the trust fund
21 November 2013
4 June 2013
With the repeal of Order 62, everything has changed in relation to costs for contentious trust disputes. William Richmond-Coggan reports
It used to be so straightforward. In the UK, under Order 62 of the Rules of the Supreme Court a trustee litigant would ordinarily have expected to be indemnified for their costs out of the trust fund. Now, however, with the repeal of that order and the consolidation of all costs provisions within the Civil Procedure Rules (CPR), all that has changed.
Trustees have no more expectation of their costs than any other litigant, meaning that they risk being exposed personally to considerable expense if they actively participate in litigation and are ultimately unsuccessful. The only way of avoiding this is to obtain directions from the court, sanctioning the route which the trustees propose to take, in which case they will generally be protected as to costs, even where the eventual result would ordinarily have resulted in an adverse order.
The Beddoes (or Part 64 of the CPR) directions
Part 64 was incorporated into the CPR in 2003, Section 1 providing, among other things, for “claims… for the court to determine any question arising in… the execution of a trust”. However, the jurisdiction of the court to entertain such applications goes back to the case of Re: Beddoe Downs & Cottam (1893), and the complexities that have grown up around the relatively simple core principle over the last century or so show no sign of disappearing from the new procedure.
The essential element of the procedure is that it enables a trustee to obtain the court’s endorsement (in the form of directions), most usually for a proposed course of action but also for actions already taken. With such an endorsement comes the most significant benefit for the trustee litigant: protection in respect of the costs incurred in conducting the litigation.
When they are available
In Alsop Wilkinson (A Firm) v Neary (1995), Mr Justice Lightman identified three classes of litigation in which trustees may find themselves involved as defendants. These can best be illustrated by example.
Zebedee Trustees is an offshore trust company that administers a trust on behalf of two beneficiaries, Dougal and Ermintrude. The assets of the trust are two shares, held one apiece for the two beneficiaries, in a company (Roundabout Limited) which in turn owns a number of properties. Zebedee Nominees is the director of the company. Dougal resides in one of the properties, while the others are let to third parties.
A dispute arises between the third party tenants and their landlord (Roundabout) as to disparities in the service charge being paid by them as compared to Dougal.
Category 1: a ‘trust dispute’
Dougal takes the view that it is for Zebedee to set the service charge via the nominee directors; Ermintrude considers that, as an ultimate beneficial owner, she is entitled to require Zebedee to implement a consistent service charge. Where two sets of beneficiaries have conflicting views as to how a trust should be administered, Judge Lightman’s advice to trustees was to take a neutral course in which they submitted to the court’s jurisdiction without expressing a preference for any particular position. Where circumstances prevent the trustees from pursuing this neutral course, they may seek directions from the court as to the route they prefer. If approved, they will be protected as to costs, even if ultimately their proposed course of action is unsuccessful.
Category 2: a ‘beneficiary dispute’
Ermintrude then demands inspection of all documents pertaining to the trust’s property holdings, and all underlying company documentation relating to Roundabout. Baffled by the impact of the recent decisions in Schmidt v Rosewood Trust Ltd (Isle of Man) and Re: Rabaoiotti 1989 Settlement (Jersey), Zebedee makes a comprehensive disclosure. This disclosure reveals certain irregularities in the way that Zebedee has administered the trust, and so Ermintrude brings proceedings against it for damages. Judge Lightman’s advice in Alsop Neary is that such disputes fall outside the scope of the Beddoes directions in that they are to be treated as normal hostile litigation (with costs following the event and not to come out of the trust fund).
Category 3: a ‘third-party dispute’
In the meantime, the third party tenants bring proceedings against Roundabout and the trustees as directors. Judge Lightman gave no specific advice on this category, while emphasising the utility of the Beddoes directions in cases of doubt. Since the beneficiaries are at odds as to whether or not the proceedings ought even to be defended, Zebedee is liable to be criticised by one or other of the beneficiaries no matter what the outcome. It would appear to be an ideal case for the Beddoes directions.
Beddoes proceedings often entail a determination as to the likelihood of success in pursuing or defending litigation, and as such there is often perceived to be a risk that if such determinations were made by the judge in the main action, prejudice to one party or the other would ensue.
Beddoes proceedings are accordingly presided over by a judge unconnected with, and therefore without any knowledge of, the position in the litigation. However, this places a burden on the parties to ensure that all pertinent information to the main proceedings is before the Beddoes judge, and this will almost certainly include comprehensive advice from counsel as to the merits of the proceedings.
While disclosure to the court of such frank advice on the strengths of a trustee’s case is essential if a Beddoes application is to succeed, this can be a source of concern where the trustee’s opponent in the main litigation is also a party to the Beddoes application (ie because they are the beneficiary of the trust). In such circumstances, it is possible to keep such advice confidential between the trustee and the court, so that on the one hand the beneficiary is not excluded from the proceedings altogether, but on the other the trustee’s case is not unduly prejudiced. In more extreme cases it may be possible to obtain the court’s permission to have a beneficiary excluded altogether, and there are provisions within the CPR that would enable the substance, if not the existence, of an application to be excluded from the public record. It seems likely that such an approach will only be adopted in the most unusual circumstances, and to date no example of this having been tried appears to have occurred (or at least to have been reported).
Such tools, when properly used in the hands of a trustee litigant, can be a considerable assistance. For a trustee confronting such litigation, this will mean a considerable outlay on advice at a relatively early stage in the proceedings. However, such ‘front-loading’ of the costs of litigation is becoming a much more prevalent feature of proceedings under the CPR in any event, even without this special procedure.
Additionally, unless the act of seeking the Beddoes directions itself is considered unreasonable by the court (eg in a clear Category 2 case), the trustee can usually hope to recover the costs of even an unsuccessful Beddoes application from the trust fund. What is certain is that the risk of non-recovery of these costs is considerably smaller than that of proceeding without the protection of directions in any situation where they are available.
William Richmond-Coggan is a solicitor advocate at Fladgate Fielder