Trust Litigation
A Costly Experience?
24 February 2012
Keith Robinson
Counsel
Litigation & Insolvency
Bermuda
Introduction
• Trustees need to
know about the costs
risks of litigation
• In order to avoid
personal liability if
possible
• The goal must be to
keep within the right
of indemnity
Right of Indemnity (1)
• Trustee Act 1975
• Section 22(2):
• “A trustee may
reimburse himself or
pay or discharge out of
the trust premises all
expenses incurred in or
about the execution of
the trusts or powers”
• However, section 22(2)
is subject to any
powers expressly
provided in the
instrument creating the
trust (section 2(2)
• Express powers may
impact upon the
general right to
reimbursement in
section 22(2)
Right of Indemnity (2)
• Trustee entitled to an
indemnity out of the
fund in respect of costs
and expenses properly
incurred
• “Properly Incurred”
means costs and
expenses which have
been both honestly and
reasonably incurred
• “A trustee can only be
indemnified out of the
pockets of his cestuis
que trust against costs,
charges and expenses
properly incurred for the
benefit of the trust – a
proposition in which the
word “properly” means
reasonably as well as
honestly incurred” Per
Bowen L.J. in In Re
Beddoes
Right of Indemnity (3)
• Trustee’s Indemnity is
only worth as much as
the trust fund is worth
• If the trust fund is
insufficient to meet the
indemnity, the trustee
will be out of pocket
• It will be no answer
that the fund is
insufficient to meet the
expense
Trustees’ Litigation Costs
• Numerous types of legal proceedings in which a
trustee can be involved and in respect of which a
trustee can incur legal costs
• Categorization is imperfect, but broadly
speaking there is a distinction between:
(a) Third Party Litigation
(b) Trust Litigation
Tales of the Unexpected – 3rd Party Cases
• If it is in the interests of
the trust to sue, or
defend, proceedings
brought by, a third party,
the trustee will be
entitled to its indemnity
from the trust fund in
relation to the legal
costs he incurs in
bringing or defending
the claim
• “Litigation is a
hazardous process and
every lawsuit is prone to
develop into a tale of the
unexpected. How can a
trustee feel absolutely
assured, at the start of a
case, that his decision to
defend it will be
incapable of criticism on
the grounds of
unreasonableness or
personal benefit?” Per
Sir John Waite, STG
Valmet v. Brennan CA
Gibraltar (1998) 4 ITELR
337, 348
The Theory of a Beddoes Order
• “If a trustee is doubtful as to the wisdom of
prosecuting or defending a lawsuit, he is
provided by the law with an inexpensive method
of solving his doubts in the interest of the trust.
He only has to take out an originating summons,
state the point under discussion, and ask the
Court whether the point is one which should be
fought out or abandoned. To embark in a lawsuit
at the risk of the fund without this salutary
precaution might often be to speculate in law
with money that belongs to other people” Per
Bowen L.J. in Re Beddoes, Downes v. Cottam
[1893] 1 Ch 547 CA
The Pitfalls of a Beddoes Application
• Can become lengthy and hotly contested
applications costing as much as the litigation
about which they concern
• If a trustee conducts a Beddoes application in a
partisan way and loses - then a successful
beneficiary will say that the trustee should not
be allowed its costs of the Beddoes application
• Therefore, the trustee needs to take a balanced
and even handed approach in running a
Beddoes application
Costs of 3rd Party Proceedings – Trustee Wins
• As between 3rd Party and Trustee, normal
litigation rule applies, generally this is that the
loser will be ordered to pay the winner’s costs
• If the trustee is the winner, it will generally get
an order that the loser pays the trustee’s costs.
However, once assessed these are unlikely to
cover the trustee’s expenses in full and the
trustee will be entitled to be indemnified for the
balance from the fund since the litigation costs
will generally have been properly incurred
Costs of 3rd Party Proceedings – Trustee Loses
• If the trustee is the loser and it is ordered to pay
the winner’s costs, the trustee will have to bear
both sets of costs – this is where a Beddoes
order is crucial and protects the trustee
• Without a Beddoes order, the trustee will have
to argue that bringing or defending the claim
was in the interest of the trust and thus that the
costs were properly incurred – difficult to do
when you have lost
• With a Beddoes order, the trustee will be able to
be indemnified from the fund provided that the
fund is large enough to cover the costs liability
3rd Party Litigation - Summary
• Beddoes Order - in
theory an attractive
idea as far as the
trustee is concerned
• In modern litigation
practice, Beddoes
applications can be
lengthy and
expensive
• Easy with hindsight
Trust Litigation – “Internal” to the Trust
• Range of disputes
• Whether the trustee
will get across the
finish line with its
indemnity depends
on nature of dispute
• At every turn in the
race the trustee
risks losing its
indemnity
Trust Litigation – Friendly or Hostile?
• Trustees’ Role is either (a) friendly (or neutral);
or (b) hostile
• Broadly speaking, if friendly or neutral, the
trustee is unlikely to be deprived of its
indemnity
• If hostile, the trustee is likely to be deprived of
its indemnity if it loses the argument
How can Trust Litigation be “Friendly”
• Proceedings seeking
construction
• Proceedings seeking
guidance or assistance
• (Possibly) Proceedings
in which beneficiaries
seek to enforce their
rights in the
administration or
execution of the trust
When Trust Litigation is “Hostile”
• Claims for damages
for breach of trust
• Claims that a trustee
has been self dealing
or profiting from the
trust
• Claims seeking the
removal of the
trustee
Costs in “Friendly” Trust Litigation
• Costs of the trustee
asking the court to
determine questions of
construction of the trust
instrument or a question
of law will ordinarily be
properly payable from
the fund
• So too will the costs of a
trustee seeking the
direction of the court
when a “momentous”
decision is to be taken
• Court might deprive a
trustee of its indemnity
if:
• The trustee takes a
partisan approach to the
proceedings
• The trustee invokes the
jurisdiction of the court
when the court’s
assistance is not
necessary
Costs in “Hostile” Trust Litigation
• Trustee is most at risk
• Facing a hostile claim and
may be denied indemnity
from the fund and also
have to pay the other
party’s costs if the case is
lost
• Should not pay its legal
costs out of the fund as the
case progresses but out of
its own funds
• Any other approach would
be another breach of trust
• However, if a trustee
successfully defends a
claim of breach of trust
then:
• The defeated claimant will
usually be ordered to pay
the trustee’s costs; and
• Any costs not recovered
from the defeated claimant
should be recoverable
under the trustee’s
indemnity from the fund
• The trustee’s costs of
defense will have been
“properly incurred”
End of the Race
• In Third Party
Litigation, a Beddoe
Order is still the best
protection against a
poor finishing
position
• In “friendly” Trust
Litigation the trustee
should take a
balanced and even
handed approach –
should finish well
• In “hostile” Trust
Litigation, the
finishing line is often
illusive