In this analysis, written by Paul Grant, Associate, at law firm Signature Litigation, Paul shares practical tips should trustees unfortunately become involved in litigation and some steps they can take to protect themselves
Any trustee will attest to the inherent challenges and risks of the role. Professional trustees in particular are consistently faced with making decisions of a fiduciary, regulatory, compliance or accounting nature.
These risks and challenges must be taken seriously and the consequences considered every time a trustee decision is made. Whilst it is impossible for professional trustees to predict the future, it is imperative they should have sufficient information at their disposal to inform their decision-making in order to further protect their businesses, themselves and, most importantly their clients.
Of paramount importance to a trustee will be the ability to demonstrate that it has at all times acted with prudence and due consideration. A professional trustee should ensure the everyday nuts and bolts of its business are in place to enable it to meet its obligations. Comprehensive record keeping, for instance, will allow a trustee to document the rationale and background to a decision-making process. An equally obvious example is the need for robust policies and procedures to be in place which form the framework of how decisions are made.
There will be occasions, however, when even the most diligent of trustees may find themselves caught up in litigation. This article looks at the steps that trustees can take to protect themselves from the risk of incurring adverse costs when they are involved in litigation against third parties, particularly by seeking Beddoe relief.
Trustees’ liability for costs in litigation
Where trustees are involved in litigation against third parties, they personally take on the risk of incurring adverse costs if they unsuccessfully initiate a claim against a third party. They might also face the threat of claims by beneficiaries if they do not defend such claims adequately.
It has long been recognised that a trustee intending to bring or defend proceedings in his capacity as trustee should first seek directions authorising him to do so. This is known as a Beddoe application; its name deriving from the case of Re Beddoe [1893] 1 Ch 547 where the Court stated that “…a trustee who, without the sanction of the court, commences an action unsuccessfully, does so at his own risk as regards the costs”. In Re Beddoe, the Court held that a trustee’s costs of unsuccessfully defending a claim could not be recovered out of the estate because the trustee had not previously sought directions from the Court before defending the litigation.
The application for Beddoe relief will involve seeking the court’s directions in relation to the claim. If the court approves the trustee’s proposed action, then regardless of a successful outcome in the claim, the trustee will be entitled to recover their costs via an indemnity from the estate. In practice, the relief operates much like a protective costs order which can be extremely valuable for trustees and helps to protect them from costs risks that they may otherwise personally incur.
Key purposes of pursuing a Beddoe application
The key reasons for pursuing Beddoe relief are: (a) to obtain an indemnity for their litigation costs; and (b) to seek directions from the court as to whether they should engage in court proceedings in their role as trustee. They will need to satisfy the court that they are justified in initiating or defending litigation.
The types of claims in relation to which a Beddoe application is generally appropriate include: (1) claims by trustees against third parties which do not amount to proprietary claims against the trust; (2) claims for recovery of trust assets; and (3) claims by a trustee against his co-trustee, or against beneficiaries.
A Beddoe application is not typically suitable in anticipation of all types of litigation. For instance, internal disputes amongst beneficiaries regarding the trust. In such cases it would generally be wrong – unless the beneficiary dispute required the trustee to remain neutral – for trustees to finance their defence with trust funds.
When should professional trustees consider making an application for a Beddoe Order?
Absent the sanction of the court, trustees engage in litigation at their own risk and bear personal liability for associated costs. A professional trustee should consider making an application for a Beddoe order once they anticipate a trust dispute or third-party dispute regarding the administration of their duties in respect of the trust.
Beddoe applications must be made in separate proceedings as its grant is a separate matter from the proceeding and, instead, is a matter between the beneficiaries and the trustees. The application should (if possible) be made before the trustee takes any binding step to bring or defend the claim in question. Because beneficiaries of a trust have a direct interest in the question of how trust funds are used, they too must be parties to the Beddoe application.
Where the main litigation is an external dispute and the beneficiaries are aligned with the trustee, Beddoe applications will be fairly straightforward. If the main litigation is contentious and involves a hostile beneficiary, however, the Beddoe application can often involve a substantial and contested hearing. In some circumstances, this may be as costly and time-consuming as the main litigation.
Practical considerations
Once afoot, trustees have an obligation of full and frank disclosure in Beddoe applications. They must put all relevant evidence before the Court; including advice on the merits of the claim, likely costs of the litigation and details of the trust assets.
Issues may also arise in relation to privileged material. In hostile trust disputes, beneficiaries may be interested in the trustee’s legal advice and will seek to obtain copies of that advice. Case law suggests that a trustee should be prepared to provide redacted legal material to the hostile beneficiary who will be an adverse party to the trustee in the prospective litigation, provided that this does not prejudice the way in which the trustee could conduct the main litigation. By contrast, advice taken by trustees for the benefit of the trust, such as advice paid for by the trust and advising on the proper discharge of their functions as trustees is not advice upon which trustees can assert privilege against beneficiaries.
