Introduction
Underlying claim
Applicable law
English position
Jersey court decision
Comment
In In the matter of the X Trust ([2012] JRC 17) an application for Beddoe relief was made to the Royal Court of Jersey by beneficiaries of a trust, so that they could pursue breach of trust claims against the incumbent trustee at the expense of the trust fund and without being exposed to personal costs.
Although the English Court of Appeal has decided that discretionary beneficiaries should not ordinarily be given Beddoe relief, the Royal Court concluded that in appropriate circumstances, beneficiaries should enjoy Beddoe protection, in particular where they are effectively suing in a derivative capacity for the benefit of the trust fund.
The trust fund had suffered substantial losses due to alleged breaches of trust by the trustee. The claimant beneficiaries' investigations into the claim against the trustee had initially been funded by distributions. However, the trustee (while acknowledging that it was conflicted) subsequently took the view that there was a potential prejudice to the trust from the maintenance of the proceedings against it and refused to continue making any further payments towards litigation costs in the absence of a court order.
The court was satisfied that Article 51(3) of the Trusts (Jersey) Law 1984 gave it jurisdiction to order that distributions be made to the beneficiaries, assuming that the payments were for the benefit of the trust. The court further stated that if that had been the only option available, it would have made such an order. However, the court also concluded that it had an inherent jurisdiction to make a Beddoe order in favour of the beneficiaries, because they were effectively bringing the claim as trustees for the benefit of the trust.
The court referred to the principle in the English decision of Wallersteiner v Moir, in effect exporting the Beddoe jurisdiction to derivative actions brought under the exception to the rule in Foss v Harbottle. This principle was extended in McDonald v Horn to derivative action cases brought by beneficiaries on behalf of a trust.
MacDonald v Horn concerned a pension scheme in relation to which a group of members took action against the trustees. The claimants applied for a pre-emptive cost order requiring that their costs and any costs that they would have to pay to the defendant (should they win or lose) be paid on an indemnity basis out of the pension fund. The application succeeded at first instance and the High Court decision was upheld in the Court of Appeal.
Before McDonald v Horn, beneficiary claimants with hostile claims against trustees would normally have been treated as ordinary litigants, where costs follow the event; but in that case Justice Hoffman extended the Beddoe jurisdiction on two bases:
- The pension scheme members were in essence bringing a derivative action, seeking restitution of the entire fund in which they had only a limited interest; and
- By reason of their employment and (usually) having made pension contributions, they had rights arising out of their commercial relationship with the trust, which entitled them to be satisfied that the trust was being properly administered.
The court was careful not to extend the principle to typical discretionary beneficiaries who have not contributed, but simply enjoy the 'settlor's bounty'; he stated that their position is not so analogous to shareholders suing in a derivative capacity.
The principles of McDonald v Horn have not been extended in any published English judgments to beneficiaries of ordinary discretionary trusts.
The Jersey court took careful consideration of the decision in McDonald v Horn and the possibility of beneficiaries all too easily litigating at the expense of the trust. However, the court also considered the principles arising from the Privy Council decision in Schmidt v Rosewood, in particular the right of a beneficiary to seek protection from a court of equity, and that court's inherent jurisdiction to supervise the administration of a trust, balancing competing interests of different beneficiaries as necessary.
The court concluded there was no reason why its inherent supervisory jurisdiction should not extend to making a Beddoe order in favour of discretionary beneficiaries, provided that the court considered that such an order was in the interests of the trust, and thus the beneficiaries as a whole. While the existence of a contractual nexus (such as existed in McDonald) may add weight to the arguments in favour of such an order, the absence of such a nexus does not imply that the beneficiary has no right to the proper administration of the trust.
The court reviewed the following factors:
- The trustee was defending itself and not the trust; the beneficiaries were therefore in effect standing in the shoes of the trustees and the trustees were in effect a third party. This brought the action out of the Alsop Wilkinson v Neary category of a 'beneficiary dispute' (where the usual hostile litigation costs rules apply) and into the 'third-party dispute' category, where it was appropriate for the court to consider granting Beddoe protection.
- The dispute was akin to derivative proceedings even though, as principal beneficiaries, the claimants were likely to see some benefit if the main litigation was successful.
- English leading counsel had provided two opinions from which it was clear that the claims were not fanciful and were well founded in principle.
- If the Beddoe order was not made, there was a real possibility that the claim would have to be discontinued through lack of funding, which arguably would not be in the interests of the beneficiaries as a whole.
- The interests of the other beneficiaries were unlikely to be substantially adversely affected if the litigation was lost - some of them typically received small annual stipendiary amounts (which could continue to be paid regardless), while others (who had interests in a parallel trust) had no immediate probability of benefit unless and until the X Trust outperformed the other parallel trust.
Taking all of these factors into account, the court concluded that it was in the interests of the trust for the Beddoe relief to be granted.
Although the hearing of this matter was in private, the judgment was published (although in anonymised format), because the jurisdiction to make these orders has not previously been considered by the Royal Court in a published judgment.
The judgment demonstrates the willingness of the Jersey judiciary to give due weight to the body of English trust law, while being prepared to use the court's supervisory jurisdiction to strike out in a slightly different direction where, in its view, the interests of the trust merit it.
This case could significantly increase the ability of beneficiaries to hold trustees to account for wrongdoing. In order for beneficiaries of discretionary trusts to obtain Beddoe relief, they are likely to have to show that any damages awarded in the proceedings are for the benefit of the trust (such that the proceedings are in reality a form of derivative proceedings), that the usual Beddoe test is met and that they are not opening the floodgates to excessive beneficiary litigation at the expense of the trust.
For further information on this topic please contact Edward Mackereth at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email ([email protected]).
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