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Court Introduces New Assessment Procedure for Trustees Legal Costs
Written by Dr Elena Moran.
One of the occupational hazards of being a trustee is the threat of litigation. No matter how prudently and cautiously a trustee acts, there will inevitably be circumstances in which the trustee finds itself in court. In a series of recent decisions the Royal Court has provided guidance on the manner in which trustees’ legal costs will be supervised by the court.
The treatment of costs depends in the first instance on the role that the trustee takes in the litigation. There are two main situations that can cause a trustee to call in the lawyers.The first and worst case is where proceedings are brought against a trustee for breach of trust. Typically the case is brought by a present or former beneficiary. The most common allegations are that the trustee has failed to take proper steps to preserve the assets of the trust or has improperly favoured one beneficiary over another.
The second situation is where the trustee applies to the court for directions as to how it should exercise its powers, commonly referred to as a “Beddoes” application. There is no criticism of the trustee, which is acting in a neutral capacity.For example, a protector gives an investment direction to a trustee.It is not clear whether the direction is a proper exercise of the protector’s powers. A prudent trustee will make a Beddoes application for guidance from the court as to whether it should act on the protector’s direction.
In the first situation a trustee is not generally entitled to take its legal costs from the trust fund.The trustee must fund the litigation itself. If successful the trustee will normally get an order that its taxed costs are paid by the losing party.This means that the legal costs will be checked by an officer of the court.A maximum hourly rate is allowed (depending on the seniority of the lawyer) and a test of reasonableness is applied. Typically, a recovery rate of about two-thirds is achieved, leaving a significant shortfall.Depending on the terms of the trust deed, the trustee may be able to recover some or all of the shortfall from the trust fund. Much will depend on the terms, if any, of the indemnities in the trust deed.
In the second situation, where a trustee is acting in a neutral role, the trustee is normally entitled to take its own fees as well as any legal fees from the trust fund. It was previously unclear whether those fees were subject to taxation.In a series of recent cases the Royal Court has ruled that where a trustee is acting in a neutral capacity the principles of taxation do not apply. The normal order will be that the trustee is entitled to a full indemnity from the trust fund.
The concern for many beneficiaries will be that the lack of a taxation process gives neutral trustees carte blanche to spend trust money. As anyone who has been involved in litigation knows, unchecked litigation costs can soon exhaust even a substantial trust fund. To prevent this happening the Royal Court has ruled that beneficiaries are entitled to information about the level of fees and how they have been spent.
In the first instance a trustee must provide the beneficiaries with timely accounts for its own fees plus any legal fees and expenses. The Court has also indicated that a sensible trustee will provide beneficiaries with sufficient information to satisfy them that the fees have been reasonably incurred.
If they remain unhappy with the explanations given by the trustee the beneficiaries can ask the court to order what is to be called an “assessment” of the fees. It is not necessary to allege that there has been a breach of trust on the part of the trustee. However, it is not clear how bad the conduct has to be for the court to get involved. In the words of the Bailiff “It seems to me that the characterisation of what conduct is sufficiently bad to give a judge real cause for concern that something has gone wrong must be left for decision on a case-by-case basis. Suffice it to say that, in my judgment, small flies in the ointment are unlikely to cause the engagement of the supervisory jurisdiction of the court.”
If the court is convinced that the supervisory jurisdiction of the court should be invoked the court will ask the Greffier (an officer of the court) to do an assessment of the fees and determine if the sums claimed are reasonable. In the first case where this happened the court gave the following guidance to the Greffier.First, a trustee should be alert to the necessity of employing advisers whose skills and charges bear a proper relationship both to the nature of the problem and the size of the trust fund.In other words, hire a lawyer with an appropriate hourly rate.
Second, the full hourly rate can be charged as long as the rate is not out of line with the fees charged by other firms. Third, the Greffier must consider whether it was reasonable to spend time on a matter as well as the amount of time spent.Finally, only something that falls outside the band of reasonable actions will be disallowed.Any doubt should be exercised in favour of the trustee.
The court went on to state that where a lawyer’s fees are disallowed because they were unreasonably incurred, it would be very difficult for the lawyer to sue for those fees. The result is that a trustee should not end up with a shortfall unless it has hired the wrong lawyer or insisted that the lawyer carry out unnecessary work.
Now that beneficiaries have a defined route of challenging the legal fees of even a neutral trustee, trustees would be well advised to ensure that bills are monitored on a regular basis and that fees are proportionate to the nature of the dispute and the amount in the trust fund. A trustee that exercises proper control over its lawyers is unlikely to have its fees assessed by the court. A failure to exercise proper control could leave both trustee and lawyer seriously out of pocket.