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Costs in trustee applications

25 June 2013

This briefing looks at the principles which apply in relation to the recovery of costs from a trust fund.

Trustee's entitlement to reimbursement
The general rule under Article 26 of the Trusts (Jersey) Law 1984 (the "Trusts Law") is that "A trustee may reimburse himself or herself out of the trust or pay out of the trust for all expenses and liabilities reasonably incurred in connection with the trust.".

Additionally, Article 53 of the Trusts Law provides that "The court may order the costs and expenses of and incidental to an application to the court under this Law to be raised and paid out of the trust property or to be borne and paid in such a manner and by such persons as it thinks fit."

Where the trustee is acting reasonably, such that all costs and expenses are properly and reasonably incurred; he will be entitled to reimbursement. This was reiterated in Alhamrani v Russa Management Limited 2006 JLR 176.

In order for these rules to apply, the trustee must be seen as a neutral trustee; not seeking to defend or pursue his own personal interests. However, where costs or expenses have not been reasonably incurred or the trustee has acted in breach of trust or duty, the court may displace or override that general  principal and order that the neutral trustee is not entitled to those costs or expenses (as per Alhamrani v JP Morgan Trust Company (Jersey) Limited 2007 JLR 527.

Challenge by beneficiaries
It was also held in Alhamrani 2007 JLR 527 that a beneficiary does not have an automatic right to taxation of the costs and expenses of a neutral trustee, but it does have the right to raise a complaint, question or doubt about the reasonableness of those costs. When such a query has been properly raised, the court will decide how best to proceed.

In relation to a beneficiary's right to raise a complaint in relation to costs, the Court of Appeal considered the threshold to have been reached in the Alhamrani litigation. Previous decisions in the Alhamrani litigation had required there to be "real grounds for concern about the propriety of fees and expenses". The Court of Appeal considered that to require real grounds for concern was to set the threshold too high. Accordingly, provided that a beneficiary could properly allege that costs had been unreasonably incurred in breach of Article 26(2) of the Trusts Law, or in breach of trust, then there was an entitlement to have that allegation determined "…if the allegation is not obviously bad, and requires investigation". The threshold is therefore equivalent to that which applies in a strike out application. The "high hurdle" mentioned in the previous case of Alhamrani 2006 JLR 176 was applicable therefore to the resolution of the issue by taxation or otherwise, not to the threshold. Once a challenge that is not strikeable has been made, "costs and expenses would only be disallowed on taxation if they were shown clearly to have been unreasonably incurred, which was a high hurdle - and the trustee would have the benefit of any doubt" (as per Alhamrani 2007 JLR 527).

The position of a beneficiary with regard to challenging trustees' costs was also considered in another decision in the Alhamrani litigation; J.P. Morgan Trust Company (Jersey) Limited v Alhamrani 2007 JLR Note 26. This provided that a beneficiary must have sufficient opportunity to examine the costs claimed by a trustee in order to take a reasonably formed view of them, but does not have a right to call for and inspect a trustee's correspondence and notes from meetings, or to examine its files in detail in the hope of discovering something untoward.

Further, in Alhamrani 2007 JLR 527, the Jersey Court of Appeal also set out guidance as to how trustees costs would be assessed by the court on challenge by a beneficiary. In particular:

"(i) issues of whether the amounts of costs, or particular items of costs, were reasonably incurred would be referred to the Greffier for taxation;
(ii) the Greffier will not apply the indemnity basis in r.12/5 to this taxation, nor will the Factor ‘A’ and Factor ‘B’ rates be applicable. The Greffier will be applying the legal position that I have sought to set out in this judgment, namely that the trustee is entitled to be indemnified for all his costs unless it is clearly shown that any of them have been unreasonably incurred;
(iii) the taxation ordered will be under the inherent jurisdiction of the court and the express power in r.12/3(1)(b). Nonetheless, most (if not all) of the detailed provisions of Part 12 will be inapplicable because they apply between a paying party and a receiving party, rather than between a trustee and the fund. The Greffier will, however, be at liberty to apply parts of Part 12 by analogy where appropriate, including, in particular, those at rr. 12/7 and 12/8 concerning the costs of taxation;
(iv) in the course of such taxation, conducted on the principles described above (in the exercise of the inherent jurisdiction of the court), the Greffier can refer any issue of law or difficulty to the court and any party may apply to the Greffier or the court itself for such a reference; and
(v) the court would normally order issues of alleged breach of trust or duty to be tried in the normal way by the court itself, depending, of course, on the nature of the allegation."

As to the procedure in respect of an assessment or taxation of costs, the Court of Appeal's guidance substantially adopted that given by the Deputy Bailiff in Landau v Anburn Trustees Limited 2007 JLR 250 and was as follows:

  • The scales applicable on a normal taxation do not apply to the taxation of a neutral trustee's costs and expenses.
  • It is part of a trustee's duty to consider whether a particular lawyer or firm of lawyers is appropriate to the matter in respect of which advice is sought, and the amount of the trust assets. Advisers should be employed "whose skills and charges bear a proper relationship both to the nature of the problem and to the size of the trust fund."
  • In view of the above, it is likely that the Greffier will consider whether it was reasonable to spend time on a particular matter and, if so, whether the amount of time spent was reasonable.
  • The Greffier must consider whether fees were reasonably incurred and not whether they were incurred at the right level.
  • Expenses can only be disallowed if they were incurred unreasonably, and that is a "high hurdle" with any question of doubt being resolved in favour of the trustee.
  • Insofar as the fees of English solicitors and English Chancery counsel are concerned, a trustee will be entitled to recover reasonable costs so incurred where this is reasonably done.

Costs of other convened parties
The position of other convened parties, such as beneficiaries, was considered in the recent case of Trilogy Management v YT [2012] JCA 204. It was held that if acting in furtherance of a neutral trust application, rather than advancing an adverse position that benefits that party personally, the party would, as with trustees, be entitled to an award of costs out of the trust fund. This award would, at best, be on the indemnity basis, rather than a 'reimbursal' as for a trustee. Although this would usually result in a large proportion of costs being recovered by a convened party, an amount equal to a full reimbursement would be unlikely.

Distinction between first instance and appeal costs
Trilogy also provided guidance as to the distinction between trustee/convened party applications in first instance and appeal cost awards (although stressing that it did not wish to lay down a prescriptive matrix in relation to convened parties, as it would ultimately be down to the court's discretion in each case). A neutral first instance application, in relation to difficulties in construction or administration, would be deemed necessary for the proper administration of the trust, regardless of the outcome. In this situation the costs of convened parties should normally be awarded on the indemnity basis, regardless of the success of the application, as their costs would be deemed to be incurred for the benefit of the trust as a whole.

In contrast, on appeal, the appellant takes a risk in relation to their costs. If an appeal is successful, then it will be considered necessary to the proper administration of the trust and the successful appellant will usually recover his costs out of the trust. In this situation the unsuccessful respondent's costs may also be considered to have been incurred for the benefit of the trust and be paid out of the trust fund (although this cannot be presumed). The recovery of costs by the unsuccessful party would depend on the circumstances, in particular whether they sought to gain any material benefit from success in the litigation. If so, they may be deemed to be adopting an adversarial stance and would be unable to recover their costs.

It was held that an unsuccessful appeal is not also necessary in the same way. In this situation it is quite possible that an appellant trustee/beneficiary would have to bear not only their own costs but also the costs of the respondent party.

Distinction between a neutral application and an adverse position
The distinction between a party acting in furtherance of a neutral trust application and acting for their own benefit may in practice be difficult to ascertain. In Trilogy the appellant, Mrs C, (who was the settlor's widow) was not considered to have adopted an adverse position as she did not stand to gain a material benefit from successful contentions in the litigation. A slightly different test seems to have been applied however in relation to a company associated with some of sub-trusts involved; Trilogy Management Limited, who was awarded its costs on an indemnity basis from the trust fund. Trilogy's position 'was not an ordinary adversarial one of seeking to gain an advantage but, rather, that some form of advantage might have flowed to Trilogy had we found in its favour'. Unlike with Mrs C therefore, Trilogy could have gained a material benefit from the litigation; yet it was still awarded its costs. It seems from this that the court is more likely to refuse a costs award in trust litigation where a party has consciously adopted an adverse position, actively seeking some benefit from the proceedings, rather than just having the mere possibility that some benefit will flow from their position. This appears to be open to interpretation however, and it will be interesting to see how the Jersey courts deal with this point in future.

Trilogy considered the English case of Singapore Airlines Ltd v Buck Consultants Ltd [2011] EWCA Civ 1542 which involved a dispute over the construction of the terms of a pension scheme in the context of a negligence action by Singapore Airlines, the scheme employer, against Buck Consultants. In this case, Buck drafted the terms of the scheme; and was appointed by the court to represent the members of the scheme in order to resolve, as a preliminary issue, the correct construction as to the drafting of the scheme. Whilst Buck appeared to have been acting in a neutral capacity in their representation of the members, the findings of the court on this preliminary issue would have had an impact on the negligence action. The court therefore decided that Buck was acting in a dual capacity in proceedings; ostensibly on behalf of members, but with a second element of self-interest. Buck Consultants were therefore ordered to bear their own costs.

In the Matter of the Dunlop Settlement [2013] JRC 123
The recent case of Dunlop provides welcome guidance as to the Jersey court's stance on the distinction between a neutral and an adverse position. In this case, a beneficiary of a trust was awarded her costs on an indemnity basis on the grounds that she had been convened in the context of a neutral application relating to the administration of the trust.

The Royal Court held that although the beneficiary had a direct financial interest in the outcome of the litigation, this was not enough to constitute an adversarial stance. The Jersey court highlighted that it 'will often, and probably usually, be the case that a beneficiary convened to an application by trustees will put forward a stance which he considers will be to his benefit. That is entirely natural and indeed it is one of the purposes of convening the beneficiaries in the first place'. The fact that a beneficiary may stand to gain personal benefit from being convened does not therefore mean they are taking an adversarial stance, and in reality this is the usual position.

In this way, the Jersey court reconciled the decisions of Trilogy and Singapore Airlines and reasserted the position as set out in the case of Buckton v Buckton [1907] 2 Ch 406. Buckton is the starting point in relation to the costs of trustees/beneficiaries in trust applications and provided for three main categories:

  1. In an application by a trustee in relation to a question over the administration of the trust or to ascertain the interests of beneficiaries, costs would be paid out of the estate.
  2. In an application for the same purpose as above, but made by the beneficiaries rather than the trustee for reasons of convenience or similar, again costs would be paid out of the estate.
  3. In an application by a beneficiary who makes a claim adverse to other beneficiaries, where the court is essentially determining rights between adverse litigants, the unsuccessful party bears the cost.

The Jersey court in Dunlop stressed that an application would not be taken outside of category 2 of the Buckton categories merely because a beneficiary had a financial interest in the outcome of the point in issue before the court. Although something similar occurred in Singapore Airlines, the facts of that case were unusual, and the defendant was still ultimately engaged in adverse litigation despite that not being the reason for their involvement at the preliminary stage.

A further point that was addressed in Dunlop was that whilst the beneficiary was entitled to costs on an indemnity basis in this instance, she could be deprived of these to the extent that she had acted unreasonably in the proceedings (which the court did in fact find she had done in the Dunlop case and reduced her entitlement by 50%).

It is well established in Jersey under statute, case law and the inherent jurisdiction of the court that a neutral trustee shall be entitled to a reimbursement from the trust fund of his costs or expenses reasonably incurred. Beneficiaries have the right to challenge such costs recovery in appropriate circumstances; but will have a high burden to prove that trustees have indeed incurred their costs and expenses unreasonably.

Trilogy has served to clarify that a convened party may also be entitled to a recovery of their costs from the trust fund when convened to an application for the benefit of the trust, but this will at best be on the indemnity basis, and is likely to be only in the case of first instance applications and successful appeals. This case also demonstrates the fine distinction between parties taking an adverse position (ie acting for their own advantage) and a party acting for the proper administration of the trust. Dunlop has now clarified this to some extent, and it seems that in the case of beneficiaries at least, the possibility of personal gain is not enough to constitute an adverse position such that they would be liable for their costs if they were the unsuccessful party. How the court would address this in the case of a trustee or other convened party who stood to receive some personal gain is not yet clear.

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