The Royal Court recently delivered a landmark decision on the ability of non-trustee fiduciaries to recover the costs that they incur in connection with the discharge of their fiduciary functions. In HHH Employee Trust(1) the court found that the costs of administrative proceedings incurred by a settlor with reserved fiduciary powers were recoverable out of the trust fund on a 'trustee indemnity' basis.
The corporate settlor settled an employee benefit trust to incentivise its employees. The trustee was an independent service provider. B had been an employee of the settlor and was a beneficiary of the trust and a sub-trust, along with his family. The settlor retained fiduciary powers under the trust.
B brought proceedings under Article 51 of the Trusts (Jersey) Law 1984 against both the trustee and the settlor, asserting that he should be provided with an extensive range of documents in order to obtain advice on his interest in the sub-trust.
The court found that the wide-ranging disclosure sought by B, and the purpose for which B sought it, was unrelated to the exercise of the settlor's fiduciary powers and discharged the settlor from the case.(2)
The court was then required to determine:
- the basis on which the settlor was entitled to its legal costs; and
- the source from which these costs should be paid.
Entitlement to legal costs
The court noted that trustees have a right to indemnity, which arises as a matter of statute, contract and the court's inherent jurisdiction. Under Jersey law trustees are entitled to be reimbursed in full for all of the expenses and liabilities reasonably incurred in connection with a trust.(3) However, in the case at hand, the settlor was not a trustee for the purposes of the law and had no contractual right of indemnity under the terms of the trust deed.
The court referred to some limited authority in support of its view that third parties with fiduciary functions in relation to a trust (eg, protectors) have an implied equitable right of indemnity in respect of the costs reasonably incurred by them in connection with the discharge of their fiduciary functions.(4) The court drew on this authority to find that that the settlor's right to indemnity in the discharge of its fiduciary functions could be equated with a trustee's right to be reimbursed in full and was not subject to principles of costs taxation. Provided that there had been no misconduct on the part of the settlor, and it had incurred its legal costs and expenses in the discharge of its fiduciary functions, the settlor was entitled to have its costs paid on a trustee indemnity basis.
No allegation of misconduct had been made by the settlor. B had invoked the supervisory jurisdiction of the court under Article 51 of the law, in order to seek disclosure from the settlor. The court had found that B's application was partly an attempt to obtain pre-action disclosure and that the settlor's fiduciary functions gave rise to no obligation on the part of the settlor to disclose the information requested by B. However, regardless of the result of B's application, B had made the settlor a party to the proceedings in its capacity as a fiduciary and it was as a fiduciary that the settlor had made its submissions to the court. The extent of the settlor's fiduciary obligation to disclose the information requested by B had arisen in the administration of the trust and had been determined for the benefit of the trust estate.
The court held that under these circumstances, it would have been wrong for the settlor to have to pay personally the part of the costs that it had incurred while discharging its fiduciary functions (which an order for costs either on a standard or normal indemnity basis would have entailed). The court found that settlor was entitled to indemnification for the costs that it had incurred in connection with responding to B's application on a trustee indemnity basis.
Source of payment
When considering the source from which the settlor's costs should be paid, the court noted that the case had been brought by a beneficiary and had raised questions of law that arose in relation to the administration of the trust and sub-trust. By analogy with the second category of proceedings in the English case of Buckton,(5) the court found that the settlor's costs were payable out of the trust fund. The court did not need to consider how the settlor's costs should be distributed across the trust fund, as the sub-trust was held entirely for the benefit of B and his family, in whose interests the application had been brought.
Consequently, the court ordered that the settlors' costs be paid out of the sub-trust on a trustee indemnity basis.
The court's award of the settlor's costs on a trustee indemnity basis reflects the progressive and well-reasoned approach of the Jersey court in trust matters. In the absence of a direct authority, the Jersey court demonstrated its willingness to expand Jersey's law on trusts to achieve an outcome that fairly compensated the settlor fiduciary and provided future legal certainty for other non-trustee fiduciaries.
The court's approach will be welcomed by non-trustee fiduciaries, who can now rest assured that (in the absence of a finding of unreasonable behaviour) they will not be left out of pocket when participating in proceedings that concern the exercise of their fiduciary functions.
For further information on this topic please contact Edward Mackereth or Shaun Maloney at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email ([email protected] or [email protected]).
Endnotes
(1) In re HHH Employee Trust and the B Sub-trust [2013] JRC 023.
(2) In re HHH Employee Trust and the B Sub-trust [2012] JRC 127B. For further information about the substantive judgment, please see www.ogier.com/Publications/library/Pages/In_the_matter_of_the_HHH_Employee_Benefit_Trust_scope_of_disclosure_obligations_owed_by_settlors_with_reserved_powers.aspx?PDF=true.
(3) Alhamrani v JP Morgan Trust Company (Jersey) Limited [2007] JLR 527.
(4) See Harvey v Oliver [1887] 57 LT 239, Lewin on Trusts [21-31], Trusts Protectors [7.32].
(5) In re Buckton [1907] 2 Ch 406 at 414.
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