Costs in trust litigation – a recent development


Trustees and beneficiaries involved in trust litigation are naturally concerned to understand the circumstances in which they can expect to recover their costs of proceedings (either from another party or by indemnification out of the assets of the fund) or in which they might have to pay another party’s costs. Two English cases establishing the costs position in various categories of trust litigation have long been the starting point for any such consideration.

In Alsop Wilkinson v Neary and others [1994] Ch. 2692 Mr Justice Lightman identified three types of dispute which might concern a trustee.

(1) Trustee disputes with one or more beneficiaries as to the propriety of actions taken by the trustee (Beneficiaries Disputes). The beneficiaries may allege breach of trust and seek reconstitution of the fund and/or the removal of the trustee. A Beneficiaries Dispute is treated as ordinary hostile litigation in which costs will follow the event (loser generally pays) and the trustee has no entitlement to indemnity from the trust fund.

(2) Trustee disputes with parties other than beneficiaries in respect of, e.g. contractual or tortious rights and obligations affecting the trustee by dint of its administration of the trust (Third Party Disputes). Trustees have a duty to protect and preserve the trust estate for the benefit of the beneficiaries and, therefore, are sometimes obliged to conduct litigation for that purpose. Accordingly, their right to an indemnity from the assets of the trust extends to the costs of a Third Party Dispute properly brought or defended for the benefit of the trust estate, whatever the outcome of the dispute. Trustees should apply for authorisation from the court (before a judge that will not hear the substantive dispute) before they sue or defend – a Beddoes application. So long as they make full disclosure of the strengths and weaknesses of their case, and conduct the litigation according to any directions of the court, their entitlement to an indemnity is secure.

(3) Disputes as to the trusts on which the trustees hold the subject matter of the settlement (Trust Disputes). Such disputes may be "friendly" litigation necessary to establish the true construction of the trust instrument, or "hostile" litigation, as where the validity of the settlement and, therefore, the entitlement of the trustees to control the trust assets is challenged. Here Mr Justice Lightman was summarising Re Buckton [1907] 2 Ch 406, in which three further subcategories for costs in Trust Disputes had been identified.

(3.1) Where the trustee applies to the court for the determination of an issue as to the construction of the trust instrument or arising in the administration of the trust, its costs (and the costs of the beneficiaries) are incurred for the benefit of the trust and all parties are entitled to an indemnity out of the trust estate.

(3.2) Where the application is made by a beneficiary, as opposed to the trustee, but the substance of the application is as in 3.1, the same costs rule will apply.

(3.3) Where an application is presented, and made in the same form, as a construction summons (as in 3.1 and 3.2) it may in substance have the character of a hostile claim raised to establish a beneficial interest or entitlement to the trust fund at the expense of another. In such cases, the trustee may sometimes have a limited role to play – serving a defence agreeing to submit to the court’s directions and providing disclosure – before withdrawing to allow the parties to fight their own battles. The trustee is entitled to its indemnity but the beneficiaries may be characterised as hostile litigants and will be at risk of adverse costs orders inter se.

Both Alsop Wilkinson and Re Buckton recognise that the distinction between friendly and hostile Trust Disputes may not always be easy to draw. Such was the situation in Singapore Airlines Limited & another v Buck Consultants Limited [2011] EWHC 56 (Ch), which led Lady Justice Arden to establish a fourth, hybrid, costs category for Trust Disputes.

Singapore Airlines Limited (SAL) established a pension scheme for its employees in 1974. The current trustee is Capital Cranfield Pension Trustees Limited (Trustee). SAL retained Buck Consultants Limited (Buck) as a pension benefits consultant to provide advice on and draft documents in relation to the scheme – specifically a new set of scheme rules (Rules). SAL and the Trustee later began negligence proceedings against Buck in relation to the drafting of the Rules. Buck proposed, and SAL agreed, that certain issues as to construction of the Rules should be determined as preliminary issues. For the purpose of the hearing on the preliminary issues, Buck was also appointed by the court to represent the interests of the scheme’s beneficiaries (SAL’s employees).

Buck was largely successful on the preliminary issues. The judge ordered SAL to pay Buck’s costs on the standard basis and this was accepted as being the conventional order. However, the judge went on to order that Buck should recover the shortfall between its costs on the standard basis of assessment (which would be paid by SAL) and its costs on the indemnity basis of assessment from the scheme assets. The judge, therefore, was placing those costs in category 3.2 for Trust Disputes – in large part because Buck was also representing the interests of the beneficiaries.

On appeal SAL argued that this was an inappropriate order considering that the preliminary issues had arisen in the context of Buck’s defence of a negligence claim and therefore were very largely concerned with the defence of Buck’s own personal interests. Buck argued that even in that context the determination of the preliminary issues was in the interests of the scheme beneficiaries as a whole, and relied on its representative role to support that position.

On appeal, Lady Justice Arden found that Buck’s costs over and above those to be paid by SAL were not properly costs from category 3.2. The key factors were that Buck had a "direct financial benefit in the outcome of the preliminary issue" and that its interests were "antipathetic to the Scheme" because the preliminary issues were designed to bring to an end the negligence claims that could have resulted in Buck paying damages to the Trustee and SAL.

However, the judge also acknowledged that this was not a pure category 3.3 situation, as the preliminary issues did in fact resolve issues as to the construction of the Rules, which was to the benefit of the scheme members. The judge, therefore, found that "the categories of proceedings [for costs in Trust Disputes] enumerated in Re Buckton should not be regarded as closed" and that "there is…room for a further category where the issue of construction is being pursued, not simply by a beneficiary, but also by a third party for its own separate interests…" This allowed Lady Justice Arden to divide Buck’s costs that were not recovered from SAL as to 50% payable by Buck itself and 50% out of the scheme assets.

Singapore Airlines Limited emphasises that the court will seek to award costs in trust litigation on the basis of the substance of the dispute and not the form. Trustees and their advisers will need to give careful thought to the potential costs implications of putting issues before the court for determination, particularly where those issues arise against a background of disagreement between beneficiaries and the trustees.

There is now greater scope for a party to argue that a claim brought for directions in the administration of the trust, or for construction of the trust instrument, is (at least partly) more in the nature of hostile (category 3.3) than friendly (category 3.1 or 3.2) litigation, and so costs should be divided up accordingly.

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