For professional trustees and their insurers, the ability to obtain an indemnity from trust assets in the face of a claim against a trustee by a third party is obviously of critical importance, insulating the trustee from personal liability and the insurer from having to expend its policy limits. Ultimately, if the value of any judgment and costs award exceeds the value of trust assets, the trustee could face personal liability (and the insurer an indemnity obligation) for the excess amount. However, being able to draw upon trust assets to fund defence costs as incurred is obviously attractive from a funding perspective and may provide leverage in settlement negotiations with the third party if the target trust assets are being eroded.

Although a trustee is not obligated to obtain the court’s permission to defend a third party claim, or to seek an indemnity from the trust assets, it is a well-established principle in England and in most commonwealth jurisdictions that, where a trustee is ultimately unsuccessful, a retrospective indemnity will only be granted in exceptional circumstances (see Re Beddoe [1893] 1 Ch 547). To mitigate the risk of personal liability, therefore, a prudent trustee is well-advised to apply to the court in advance of pursuing or defending any claim on behalf of a trust, an application known as a “Beddoe application”.

Frequently, the amount claimed by the third party will exceed the available trust assets putting the trustee’s indemnity claim in potential conflict with the third party’s claim. This was the position in X (as Trustee of the A Trust) v Y (as Beneficiary of the A Trust) (unreported) 15 March 2017, where the Grand Court of Cayman, per Smellie CJ, granted Beddoe relief to a Cayman trustee to defend an English third party claim which, if successful, could exhaust the assets of the trust.

Background

The Trustee of the A Trust (the “Trustee”) was joined as a defendant in English proceedings arising out of a sale and purchase agreement (the “English Proceedings”). The plaintiffs in the English Proceedings (“Z”) were claiming in contract for breach of warranty and for damages in tort for deceit. In the proceedings, Z also sought to preserve the only realizable asset of the A Trust as a means to enforce any potential judgment, the sum of which could exhaust the assets of the Trust.

Faced with this claim, the Trustee brought an application in the Grand Court of Cayman seeking (1) directions to defend the English Proceedings, (2) permission to borrow funds from another trust, the C Trust, to discharge the costs of the defence, and (3) indemnity for any costs and expenses properly incurred to be reimbursed from the assets of the A Trust.

Beddoe relief

In Cayman, the Grand Court has a statutory power (section 48 of the Trusts Law (2011 revision)) as well as powers under its inherent jurisdiction to give directions with regard to the participation in litigation and the trustee’s right to be indemnified by the trust, which are then binding on those interested under a trust, even if the trustee is ultimately unsuccessful in the litigation.

The Court made clear that the test for obtaining an indemnity from a trust fund in respect of third-party litigation “turns upon the issue whether or not [the trustee] will act properly in bringing or defending the claim“. A trustee will not be protected merely because he/she acts on legal advice. A Beddoe application, therefore, involves a review of the merits of the claim sought to be defended and a trustee is obligated to make full disclosure of the strengths and weaknesses of their case.

Parties to a Beddoe application

Given that a decision to grant a trustee an indemnity from a trust’s assets will directly affect the beneficiaries of that trust, the beneficiaries are necessary parties to a Beddoe application. In this case, the primary beneficiary consented to the application and the Attorney General (representing a charity’s interests) did not object.

One of the questions that arose for consideration, however, was whether the third party, namely Z, had a right to participate in the Beddoe application. Z contended that it should be given formal notice of the proceedings to allow it to make written submissions on whether the trustee would be acting properly in defending the claim.

The Court dismissed Z’s claim that it should be entitled to formal notice or that it should be entitled to make submissions. In dismissing the claim the Court distinguished between the three kinds of litigation in which trustees might become involved (as stated in Alsop Wilkinson v Neary [1996] 1 WLR 1220), being: (1) ‘a trust dispute’; (2) a ‘beneficiaries dispute’; and (3) a ‘third party dispute’. Z’s claim in the English Proceedings was held to fall squarely within the ‘third party dispute’ category given that Z was not claiming any proprietary interest in the trust assets.

Despite this finding, Z was still given the opportunity to make representations to the Court by way of a letter, sent as a response to the informal notice given to Z by the Trustee.

Burden of costs

Z further sought to argue that what was being claimed in the Beddoe proceedings in Cayman was a “pre-emptive costs order“, which would predetermine the incidence of costs as between Z and the Trustee in the English Proceedings. As the Judge made clear, however, the application was clearly not a pre-emptive costs application given that the application was made in proceedings separate from the English Proceedings. Furthermore, the Grand Court of Cayman was clearly concerned with an issue between the Trustee and the beneficiaries of the A Trust and any decision of the Court would not impede the discretion as to costs of the judge dealing with the English Proceedings.

Smellie CJ did acknowledge, however, that Z would be adversely affected by the Trustee’s Beddoe application, if granted, given that the trust assets available to meet any costs order in Z’s favour in the English Proceedings (if successful) would be reduced by the costs of the defence incurred by the Trustee. But he went on to state that the fact that Z may be adversely affected was no basis for denying the Trustee Beddoe relief. In particular, the Judge relied on the fact that Z was not asserting a proprietary interest in the A Trust assets in the English Proceedings, and therefore must “[take] the trust assets as it finds them at the time of judgment“.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.