Breach of trust & the cost consequences – Blades v Isaac [2016] EWHC 601

 In Comment

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Case Summary from LawSkills | Private Client specialist trainers

Here trustees acted in breach of their duty to account to beneficiaries by not providing information to potential beneficiaries of a discretionary trust. However, they had refused to disclose the information in order to avoid adding to family discord and had relied on counsel’s opinion which advised that they did not have to disclose this information. As no loss had been caused to the trust, they were not liable for the costs of the beneficiary who brought the successful claim against them. Both their own costs and the beneficiary’s were payable out of the trust fund by way of indemnity in any case.

The facts

On 19 June 2013 Valerie Lee died leaving a Will dated 9 August 2012 which created a discretionary trust of her sole estate, valued for probate at £903,574. Richard Isaac, a solicitor and partner in Tanners Solicitors LLP was the sole executor and trustee (the other two professional executors having renounced probate). He was subsequently joined as a trustee by Christopher Alexander, one of his co-partners. Tanners had advised Valerie and drawn up her Will.

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The original class of potential beneficiaries included Valerie’s younger daughter Felicity Blades, Felicity’s husband and their children and Valerie’s cleaner. Valerie’s other daughter (the eldest), Deryn Binder, was only added in October 2014 by the trustees exercising their power to add beneficiaries. Valerie’s letter of wishes indicated that among suggested gifts to members of the class of beneficiaries she wished Deryn to receive 5% so she was added to the class in order to fulfil this. Distributions were made in 2014 and 2015 to all members of the class except to Felicity’s husband.

During their parents’ lifetime both Deryn and Felicity and their husbands had worked at some point for the successful family business, but following strain in the relationship with her parents, Felicity and her husband had left the business and moved away. Later Deryn had fallen out with her mother and relations between Felicity and Deryn had become strained as a result, although Felicity denied this.

Felicity had been unhappy with Tanners and the trustees from the beginning of their involvement in administering her mother’s estate. She had made several requests for a detailed breakdown of her mother’s estate, which the executor had refused on the basis that the estate accounts were confidential to the executor and trustees and were not for distribution to the beneficiaries. Felicity had argued that as both trustees were partners in Tanners there would be no external scrutiny of Tanners’ charges.

Deryn had asked to see a copy of Valerie’s letter of wishes to the trustees, which they had also refused to disclose. Felicity had asked for details of the Will trust assets and payments made from the trust, but the trustees refused this too. Felicity had made it clear that she thought Deryn might challenge the Will and payments out of the trust.

The trustees justified their refusals by saying that as Felicity and Deryn had a difficult relationship they were concerned about potential harm to family relationships by disclosing the requested information either to Felicity or to Deryn. Richard said he had been made aware by Valerie of difficult family dynamics and issues throughout the 11 years she had been his client before her death. Felicity argued that while she and Deryn did not have a close relationship due to Deryn being 14 years her senior so having left home when Felicity was young, it was not a difficult one and they communicated.

On Richard and Christopher continuing to refuse to disclose requested information but before they could apply to court for directions as they had suggested they would do, Felicity applied to court for an order that:

  • Richard, as executor, provide a full account of Valerie’s estate, including Tanners’ charges for administering it;
  • Richard and Christopher, as trustees of the discretionary Will trust, disclose to Felicity full details of the assets in the trust, their dealings with them and their charges.

Richard and Christopher initially continued to refuse to give Felicity disclosure of the information above, relying on counsel’s opinion, but shortly before trial and on the contrary advice of different counsel, they provided her with this information. The issue at trial was therefore about who should bear the costs of the disclosure argument.

The law

On disclosure (and below)

A trust beneficiary can hold the trustees to account in administering the trust: Schmidt v Rosewood Trust Co Ltd [2003] 2 AC 709.

On costs

s51 Senior Courts Act 1981 provides in part that, subject to rules of court, the costs of and incidental to all proceedings in the High Court are in the discretion of the court, and that the court has full power to determine by whom and to what extent the costs are to be paid.

By Civil Procedure Rule (CPR) rule 44.2(1), the court has discretion as to whether costs are payable by one party to another, the amount of those costs, and when they are to be paid. Then under rule 44.2(2), if the court decides to make an order about costs, the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party, but the court has discretion to make a different order.

In trust and estate litigation there are special provisions in CPR rule 46.3 for the costs of trustees and personal representatives (PRs):

(1) This rule applies where –

(a) a person is or has been a party to any proceedings in the capacity of trustee or personal representative; and

(b) ……

(2) The general rule is that that person is entitled to be paid the costs of those proceedings, insofar as they are not recovered from or paid by any other person, out of the relevant trust fund or estate.

(3) Where that person is entitled to be paid any of those costs out of the fund or estate, those costs will be assessed on the indemnity basis.

And in para 1 of the Practice Direction to Part 46:

1.1 A trustee or personal representative is entitled to an indemnity out of the relevant trust fund or estate for costs properly incurred. Whether costs were properly incurred depends on all the circumstances of the case including whether the trustee or personal representative (‘the trustee’) – 

(a) obtained directions from the court before bringing or defending the proceedings;

(b) acted in the interests of the fund or estate or in substance for a benefit other than that of the estate, including the trustee’s own; and

(c) acted in some way unreasonably in bringing or defending, or in the conduct of, the proceedings.

1.2 The trustee is not to be taken to have acted for a benefit other than that of the fund by reason only that the trustee has defended a claim in which relief is sought against the trustee personally.

Where a trustee is accused of breach of duty, but no loss is caused to the trust fund, he is prima facie entitled to an indemnity for his costs from the trust fund whether he is in breach of duty or not. This will be lost if he is guilty of misconduct: Re Londonderry’s Settlement [1964] Ch 594.

The costs of other parties, such as beneficiaries who issue proceedings against trustees or PRs, are governed by case law and in particular by Re Buckton [1907] 2 Ch 406. In that case the judge said that there were three classes of case:

  • Application by originating summons (now Part 8 claim) by trustees for directions/construction: all parties’ costs come out of the trust estate;
  • Application which could have been made the trustees (as in (1)) but in fact is made by a beneficiary, joining the trustees as defendants: all parties’ costs come out of the trust estate;
  • Application by a beneficiary adverse to other beneficiaries, in hostile litigation which could have been begun by writ action (now Part 7 claim) but was in fact begun by originating summons: the general costs rule applies, and the unsuccessful party is generally ordered to pay the costs.

The decision

Although it was unnecessary for Matthews M to consider the disclosure issue as this had been resolved shortly before trial, he did consider disclosure as part of addressing the issue of costs.

As the witnesses were not cross examined Matthews M could not make a decision on the extent, or otherwise, of a difficult relationship between the sisters; he could only look at the conflicting witness statements. However, he could not reject as “incredible” the evidence that it was the trustees’ view that relations between the sisters were difficult and family dynamics were strained. He also bore in mind that Valerie had imposed a discretionary trust on her assets and had not chosen to leave them outright to her daughters.

Matthews held that it was for the trustees as legatees to hold the executor to account over the administration of the estate. However, it was for Felicity as a potential beneficiary of the trust, to hold the trustees to account for what the trustees had received and done with it.  She could therefore claim against the trustees that as trustees they should exercise their rights as legatees or if they could not or unreasonably would not do so, she could claim to exercise them herself on behalf of the trust as a derivative claim as per Parker-Tweedale v Dunbar Bank [1991] Ch 12.

“Since the same person was both personal representative and one of the two trustees, it is clear that that trustee at least could not hold himself to account, and, since the other was his partner in the law firm that had acted for him (as personal representative) and for both trustees, it is hard to see how that trustee could do so effectively either. It is a classic case for a derivative claim.”

An alternative argument on disclosure was that the trustees had an obligation to ensure that the correct assets were paid over to them by the executor, which included making sure that the executor’s costs were reasonable. The trustees would be liable for breach of trust to the potential beneficiaries if they failed in this duty. Felicity would have standing to challenge the trustees over complying with this obligation.

Matthews held that the most the trustees had breached was their duty to account to beneficiaries by providing appropriate information, but there had been no loss caused by their breach. “Looking at the evidence in this case, what I find is that the trustees, for all the reasons that they gave and have already been mentioned, in good faith had genuine concerns about the harm that might be done to the relationship between the two sisters if they supplied information showing the unbalanced treatment by the trustees of the two families out of the discretionary trust.”

The trustees had done what they thought was right in taking specialist chancery counsel’s opinion and had relied on it. When the court, at a preliminary hearing, had made comments, the trustees had taken note of them and obtained an opinion from a different specialist chancery counsel. They had disclosed the information when this counsel gave his opinion that they should do so.

Matthews held that in exercising his discretion under CPR rule 44.2(2) the trustees should not therefore be ordered to pay Felicity’s costs but these should be paid out of the trust. The trustees’ costs should also be payable out of the trust fund on an indemnity basis. This was treating the case as falling into the second Re Buckton category. It was an additional factor that the trustees had been prevented from applying to court for directions over the disclosure question as they had suggested they would do (when their costs would have been payable out of the trust fund) by Felicity first issuing proceedings herself.

In case he was wrong on his primary decision above, Matthews went on to look at the trustees’ indemnity for liabilities out of the trust fund to cover the consequence of if he had instead ordered the trustees to pay Felicity’s costs. This indemnity principle arose in relation to their own costs in any event.

Matthews looked at whether the costs were an expense which had been “properly incurred” and so by operation of s31(1) of the Trustee Act 2000 were payable out of the trust. If the liability had not been ‘properly incurred’ then the indemnity could also be lost under paragraph 1 of Practice Direction 46. If a Beddoe order is obtained from the court the trustees have their indemnity for costs. But the test for ‘properly incurred’ costs was independent of whether a Beddoe order had been sought: “In other words, a trustee might not seek a Beddoe order, and yet might manage to establish that the liability he incurred to pay costs to another party was properly incurred.”

Matthews looked at the extent to which Richard had given any information. Richard had kept both sisters ‘informed’ in general terms about progress in administering the estate, and had given them details of the charging rates and confirmation that his fees would be charged on a time-spent basis rather than being based on the value of the estate. He had warned Felicity that if she corresponded with him, his charges would be increased in spending time replying.

When Richard had refused to provide details of the trust assets, he had suggested that the trust accounts be disclosed to a third party firm of solicitors so they could scrutinise them to confirm if there was anything of concern in them. He had referred to Lewin on Trusts as stating that this was the normal way of acting where the trustees had such concerns and that the trustees were worried about the “severe potential for conflict” from disclosing them to Felicity. When this option was rejected, Richard and Christopher had obtained and relied on an opinion from a senior counsel that they did not have to disclose the information to the beneficiaries. When they obtained an opinion from a different counsel and this recommended disclosure of the estate information, Richard had provided this.

Where a beneficiary successfully sues the trustee, that trustee will have no indemnity for any costs ordered to be paid to the beneficiary where the claim was for a breach of trust causing loss to the trust fund. On the other hand, there is no good reason for withholding the indemnity merely because the trustee has been found to be in breach of some other duty not causing loss to the trust fund.”  As this was a case where the breach of trust had not resulted in any loss to the trust the trustees would be indemnified for Felicity’s costs out of the trust fund.

Looking at when the costs would not be properly incurred for paragraph 1 of Practice Direction 46, Matthews found that it was not necessary for the trustees to have sought the court’s directions as this was not an external third party claim. On the facts he found that the trustees believed they were acting in the interests of the beneficiaries and not themselves. If the accounts had been inspected by a third party firm of solicitors, any excessive costs would have been highlighted. This offer of third party inspection was not the behaviour of trustees who know they have overcharged. The trustees’ fear of causing difficulties between the sisters was very real and Matthews held that they were not acting other than in the interests of the trust.

Looking at the third factor, “standing back and looking at the matter in the round, whilst I think that the initial error made by the trustees was unfortunate, and compounded by the opinion of counsel first instructed, it was made in the context of an unusual variation on the ‘normal’ trustee disclosure problem, and a difficult family relationship, and nothing that they did thereafter could be stigmatised as misconduct, or done otherwise than with the intention of acting in the best interests of the beneficiaries. In those circumstances I do not consider that it would be fair to deprive them of their indemnity under paragraph 1 of PD 46.”

Practice points

  1. Even where disclosing trust information to beneficiaries may inflame already difficult relations between the beneficiaries, trustees have a duty to account to beneficiaries by providing appropriate information, and so should disclose the requested trust information.
  1. If trustees are in any doubt about their duty to disclose trust information they should firstly obtain an opinion from specialist chancery counsel on the issue.
  1. In order to be certain to obtain the protection of their costs being paid out of the trust fund in any litigation, trustees should seek a Re Beddoe order from the court before proceeding with any litigation.
  1. If litigation is commenced by a beneficiary before the trustees have applied for a Re Beddoe order, remember that all is not lost regarding costs. Providing any breach of trust has not caused loss to the trust and the costs are a ‘properly incurred’ trust expense, the court may still order that the trustees’ costs and the costs of the other parties be paid from the trust fund.
  1. If the trustees’ breach causes loss to the trust they will not be able to obtain an indemnity from the trust fund for the beneficiary’s costs.

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