Benefit test

  • Author : Robert MacRae
  • Author : Andreas Kistler
  • Date : April 2013
ABOUT THE AUTHORS: Robert MacRae is a Partner and Andreas Kistler is a Senior Associate at Carey Olsen

In a recent decision of the Royal Court of Jersey,1 directions were given that the costs of a claim for breach of trust commenced by certain beneficiaries (the claimants) against the current trustee of the X Trust and others should be funded out of the assets of the trust. The Court also gave directions for reimbursement of costs already incurred by the claimants in commencing the litigation and made a protective costs order in their favour in respect of any adverse costs orders made in the litigation.

Facts

The claimants were the principal beneficiaries of the trust and had begun proceedings against the trustee and others in the Royal Court of Jersey alleging breach of trust resulting in investment losses of just under GBP100 million. The claimants had previously funded their claims against the trustee from distributions that they received from the trust. These distributions had been made by the trustee without reference to the Court. However, the trustee was concerned about potential prejudice to the trust arising from the continuance of legal proceedings against the trustee, and obtained an independent report that confirmed that the litigation could damage the trust’s assets. The trustee was therefore not persuaded that it should continue to make distributions to the claimants but, recognising that its personal interests and the interests of the beneficiaries of the trust were in conflict, asked the claimants to make an application to the Court for directions.

The claimants applied for directions that the trustee of the trust should continue to make distributions to them to fund the litigation. The claimants stated that they had no alternative source of funding, and that they were unable to borrow to fund the litigation. The remedy they sought was that the trustee should reconstitute the trust fund rather than pay damages to the claimants.

The Court’s approach

The Court held that the trustee’s approach in asking the claimants to make an application to Court was the proper course to adopt. The Court noted that its jurisdiction to make orders in these circumstances had not previously been considered in a published judgment, nor had it been considered in absolutely comparable terms in England and Wales.

The Court identified two possible bases on which it could act. First, the Court could exercise its power under Article 51(3) of the Trusts (Jersey) Law 1984 to direct the trustee to make distributions to the claimants. Alternatively, the Court had inherent jurisdiction to make the order in the standard ‘Beddoe’ form,2 as the claimants were, in effect, bringing the claim on behalf of the beneficiaries of the trust as a whole.

The Court concluded that the claim against the trustee was equivalent to a derivative action brought by a shareholder of a company under an exception to the rule in Foss v Harbottle,3 where the claim is brought on behalf of the company and for the benefit of the shareholders as a whole. The Court noted that the principles applicable to derivative actions, and the costs of them, had been applied to a claim by a beneficiary on behalf of a trust in the English case of McDonald v Horn,4 albeit it was central to the reasoning in that case that the trust was a pension scheme and the beneficiary was not merely a voluntary recipient of the settlor’s bounty.

The Court was alive to the dangers of beneficiaries litigating at the expense of the trust and potential squandering of the trust fund on unnecessary litigation. Further, in the case of discretionary trusts, it was possible that the beneficiary, seeking to bring the claim, might never be appointed any of the trust assets. This demonstrated that it was important for the Court to consider the interests of other beneficiaries of the trust when deciding whether to make an order in favour of the applicant. The Court likened this exercise to the approach of the Jersey Courts to the question of whether disclosure of trust information should be made to a beneficiary following Schmidt v Rosewood Trust Ltd.5

No beneficiary has an entitlement to bring a derivative action at the expense of the trust fund, and it follows that there is no general principle that the costs incurred by a beneficiary in bringing such an action should always be met from the trust fund. The Court will have regard to all the circumstances and may have to balance the interests of beneficiaries between themselves, beneficiaries and trustees or, conceivably, beneficiaries and third parties. The ultimate issue is whether the order sought is in the best interests of the beneficiaries as a whole.

The Court was provided with opinions from the claimants’ Counsel, which concluded that claims made against the trustee were well-founded in principle and should be maintained. The Court found that it would be unfortunate and not in the best interests of the beneficiaries as a whole if the claimants were prevented from bringing such claims through lack of funding. The Court noted that the size of the trust fund meant that the costs of the litigation would not affect the interests of beneficiaries who presently received an annual stipend from the trust. The Court concluded that the claimants should not be required to bear the costs of the claim, as the claim was essentially for the benefit of all of the beneficiaries.

The final factor that persuaded the Court to rule in favour of the claimants was that the claimants were the principal beneficiaries of the trust, and therefore if the trust incurred the expense of the claim, their interests in the trust would bear the cost, so the risk of litigation would be borne by the right parties. The Court considered that if a new trustee were to be appointed, and if it were to begin proceedings against the trustee for the same claims, an order that the costs of those proceedings should be funded out of the trust (i.e. a conventional Beddoe order) would likely be granted.

The trustee had provided the Court with an independent report that raised concerns that the litigation, whether successful or not, could damage the assets of the trust, which included a shareholding in a public company, due to the nature of the allegations made and their bearing on market perceptions of the strength of the company. The Court held that this concern could be addressed, in part, by the Court directing the senior Court officer not to allow public access to the pleadings in the litigation.

The decision

The Court held that the right balance would be struck by making the orders sought by the claimants. The Court will review the orders made two months after discovery has been given by the parties. The Court considered that Counsel ought then be able to advise on a more informed basis on the prospects of success for the claimants’ claim. The Court will then decide whether funding should continue from the trust. The Court directed that any costs orders made in favour of the claimants, in the litigation against the trustee, should be held by them for the benefit of the trust.

An alternative to third-party litigation funding?

This decision establishes that there will be instances where beneficiaries bringing a claim against their trustee are entitled to seek orders that they be funded by the trust, when it is in the best interests of the beneficiaries as a whole to do so. The beneficiaries may also be given the benefit of a protective costs order, as in this case. Litigation funding and costs insurance have recently emerged in Jersey, but beneficiaries bringing claims against a trustee may wish to consider an application of the kind made in this case as a potentially cheaper alternative.

The Court’s ruling does not amount to an invitation to beneficiaries to litigate with trustees at the cost of the trust, to the detriment of other beneficiaries. The Court will wish to see reasonable evidence that the litigation is well founded, and will benefit the trust, as is the case in conventional Beddoe applications.

In the Matter of X Trust [2012] JRC 171
An order blessing a decision to commence or defend litigation for the benefit of a trust, normally sought by a trustee under the authority of In re Beddoe [1893] 1 Ch 547
[1843] 2 Hare 461
[1995] 1 All ER 961
[2003] 2 AC 709

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