To avoid finding themselves personally liable for costs which are likely to be substantial, trustees must know how to effectively manage disputes.
Trustees’ fundamental duties are to preserve and protect the fund which may include enforcing causes of action for damages or defending the trust against adverse claims. These duties are owed to the beneficiaries. They are not absolute duties but require trustees to exercise reasonable care.
Communicating with the beneficiaries to establish their views is essential. If nothing else, this will considerably reduce the risk of a claim against the trustees being brought by the beneficiaries down the line.
There may be a clause in the trust document which provides that the trustee is entitled to be reimbursed out of the fund for all litigation costs unless it is proved that such costs were incurred dishonestly or a clause that the trustee need not take any action unless it is first indemnified and/or provided with security to its satisfaction.
Do the beneficiaries have the rights of action in respect of any claims?
Statute or the transaction documents may provide that the beneficiaries can pursue or defend proceedings in their own right. Under the Trust Indenture Act 1939, if a US bondholder’s right to receive payment is impinged on without his consent, that bondholder has the right to take direct action against the third party responsible. The US bond trustee (unlike its English equivalent) is not given a wide discretion to act on the bondholders’ behalf.
Court action and the costs involved
Trustees need to know the merits of their case and familiarise themselves with the costs regime of the jurisdiction in which the court action will be conducted. In many jurisdictions (such as England and Wales), costs follow the event which means an award of costs will generally flow with the result of litigation; the successful party being entitled to an order for costs against the unsuccessful party. However, in other jurisdictions, there is no fee shifting. In the US, each party to civil litigation is responsible for its own legal costs regardless of which party prevails; this is the “American Rule”.
Alternatives to court action
The Civil Procedure Rules 1998 and Practice Directions in England and Wales specifically state that starting proceedings should usually be a last resort. The parties should consider whether some form of alternative dispute resolution might enable them to settle the matter without starting proceedings.
Weigh up the options
Trustees need to weigh up all the options before adopting the course of action which in their view is in the best long-term interests of the trust.
How to protect against the costs of any court action
Under English law, trustees can apply to the court for directions (otherwise known as a Beddoe application) as to whether or not proceedings should be conducted on behalf of the trust. Similar relief to that provided by the English courts is likely to be available in other jurisdictions where trusts are recognised and available.
The principles of Beddoe proceedings were first laid out in the nineteenth English case of Re Beddoe, Downes v Cottam [1893] 1 CH 547. In 2003, the principles were incorporated into the Civil Procedure Rules 1998 and Practice Directions at Part 64B.
Beddoe applications take the form of a separate action and are heard by a different judge to the main proceedings. They must be supported by evidence including the advice of an appropriately qualified lawyer as to the prospects of success and the beneficiaries’ views. Save in exceptional circumstances, Beddoe applications should be dealt with on paper and ideally they should be made before taking any steps in the main proceedings.
Beddoe proceedings offer trustees a means of complete protection from any future claims by the beneficiaries. Further, if litigation is pursued with the court’s approval, the trustees’ costs incurred in the litigation will be recoverable against the trust fund whatever the eventual outcome of the litigation. It is a myth to think that trustees are safe by simply following the advice of their counsel.
Trustees should consider obtaining a written agreement from all the beneficiaries that any litigation costs would be met out of the trust fund. Where there are numerous beneficiaries and trustees do not know who or where they all are, this approach is not feasible.
As an alternative, the trustees could seek to obtain an indemnity for the litigation costs from one or more of the beneficiaries, provided that they are not aware that other beneficiaries are against the litigation being conducted.
Prospective costs order
Under English law, trustees may apply for a prospective costs order. The English courts will order that one side will pay the other side’s costs whatever the result of the litigation. Prospective costs orders are generally only sought in administrative proceedings and are only made in very strong cases where the judge hearing the application is satisfied that the trial judge would make the same costs order.
Insurance
Trustees may be able to get indemnity or “after the event” insurance for the costs of conducting litigation which later turns out to be unsuccessful.
Final thoughts
If trustees have to conduct expensive litigation the outcome of which is not clear, trustees should always use protection. Under English law, the best protection afforded is by making a Beddoe application and obtaining the court’s approval in the form of directions for a proposed course of action. Ultimately, this gives trustees their most valuable benefit – protection against becoming personally liable for any costs incurred in pursuing or defending the litigation. As Lord Justice Lindley advocated in Re Beddoe, Downes v Cottam: “A trustee who, without the sanction of the court, commences an action or defends an action unsuccessfully, does so at his own risks as regards the costs, even if he acts on counsel’s opinion.”
David Allen (Partner) and Julie Bowring (Senior Associate), are lawyers in the Litigation and Dispute Resolution Group of the London Office of Mayer Brown International LLP
