Valuable guidance on recovering costs after the removal of an invalidly appointed trustee

In a recent decision of the Royal Court of Jersey (In the Matter of the Piedmont Trust and the Riviera Trust [2016] JRC016), the Court delivered its judgment on costs in relation to proceedings regarding the replacement of trustees and protectors of two related trusts.  The substantive decision, in which the replacements were ruled invalid, was delivered in September 2015 (In the Matter of the Piedmont Trust and In the Matter of the Riviera Trust [2015] JRC196).

The costs decision provides useful guidance for trustees and other fiduciaries on the circumstances in which a party can rely on its indemnity from trust assets in respect of adverse costs orders.  Importantly, the judgment provides guidance on the circumstances in which trustees and other fiduciaries might be deprived of that indemnity.

Background

The substantive dispute concerned two discretionary family trusts. The beneficiaries of each of those trusts were the adult children (and their respective children) of the father/settlor, who was the protector of both of the trusts.  The father's two adult daughters were originally the trustees of the trusts.  Within the context of a family dispute, the father (as protector of the trusts):

1. removed  the daughters as trustees of the trusts and appointed his adult son as the trustee of both trusts; and
2. retired as protector of the trusts and appointed his adult son in his place.

The adult daughters (being the beneficiaries and former trustees) commenced proceedings in relation to their removal as trustees and the appointment of their brother as trustee and protector of the trusts.  In the substantive judgement, the daughters were wholly successful in having the removals and appointments ruled invalid.  The costs decision concerned whether the parties' costs ought to be paid from the trust funds.

Decision

In determining the position on costs, the Court substantively relied on the decision of Nugee J in Re The JP Morgan 1998 Employee Trust [2013] (2) JLR 235 (“JP Morgan").  In that case the Court held that "when considering costs in relation to trust litigation, different principles apply depending on whether the person whose position is under consideration is a trustee (or other fiduciary) or a beneficiary."

Trustees

In relation to trustees (and other fiduciaries), the Court affirmed the principals in Alhamrani v JP Morgan Trust Company (Jersey) Limited [2007] JLR 527 and Re HHH Trust [2013] (1) JLR 135, respectively, that:

…the trustee is entitled to be reimbursed for the expenses and liabilities that he has reasonably incurred in connection with the trust.  The concept of “reimbursement” implies full repayment and the authorities in England have always made it clear that a trustee has the right to full reimbursement of his expenditure properly incurred on behalf of the trust.

[T]he underlying principle…is that a person exercising fiduciary powers in the interests of beneficiaries cannot, absent a finding of misconduct, be expected to meet the costs reasonably incurred by him or her in the exercise of those powers out of his or her personal assets.  The fiduciary’s implied right of indemnity is to be equated, therefore, to a trustee’s right to be reimbursed in full and not to be subject to taxation…

The Court went further to approve, in relation to litigation commenced by a trustee, the principle that "an unremunerated trustee will not lightly be ordered to pay the costs of litigation if he has made an innocent mistake or acted in a manner which has ex post facto been shown to be misguided or even careless" and that "[M]ere negligence or honest mistake will not deprive the representative of payment; but other than that what is sufficient misconduct cannot be precisely described and will be a matter of fact and degree."

Accordingly, trustees and other fiduciaries will usually be entitled to be indemnified from the trust fund for their expenses and liabilities.  This will be so unless the trustee or other fiduciary incurred those expenses or liabilities when exercising fiduciary powers and it can be shown that a trustee or fiduciary engaged in misconduct.  The relevant costs incurred must also have been reasonably justifiable and properly incurred.  This will necessarily be an objective assessment of the relevant facts and circumstances of each case.

Beneficiaries

In respect of costs of beneficiaries in trust related litigation, in determining whether the beneficiaries ought to be entitled to their costs indemnified out of Trust, the Court made its decision based on the categories of proceedings typically commenced in relation to trusts (as set out in JP Morgan):

1. Proceedings commenced by trustees in respect of a question regarding the administration of the trust.
2. Proceedings commenced by beneficiaries in respect of the administration of the trust.
3. Proceedings commenced by beneficiaries in respect of claims which are adverse to those of other beneficiaries.

In the first and second class of proceedings, the Court held that provided that the beneficiary has not acted unreasonably, beneficiary typically ought to be entitled to an indemnity out of the trust in respect of their costs incurred.  The costs of proceedings in the third category are typically not costs which can be indemnified from trust assets, but the categories should not be strictly applied.

Application

In this case the Court found that none of the actions taken by:

1. the father, in removing his daughters as the trustees of the trusts and appointing his son as trustee;
2. the father, in retiring as protector and appointing his son as protector of the trusts; or
3. the daughters, in commencing proceedings to in relation to the father's actions,

were of the character which would cause those parties to lose the right to an indemnity from the trusts.  Thus, each party was entitled to be reimbursed their costs of the litigation from the trust funds (albeit on different grounds).

Implications

This decision provides valuable guidance for persons who exercise trust powers in a manner which is subsequently found to be invalid.  While the father's actions were ultimately found to be invalid by the Court, he was not deprived of his indemnity from the trust funds because his actions did not constitute misconduct.  This case also affirms the principle that trustees and other fiduciaries will be entitled to rely on their indemnity provided their actions remain within "the band of reasonable decisions".

For more information, please contact Richard Norridge or your usual Herbert Smith Freehills contact.