When are trustees liable for party-party costs?

When are trustees liable for party-party costs?

Casting your mind back to your law school days, you’d remember the general rule that where a trustee has properly incurred an expense in fulfilling their duties as a trustee, they are entitled to be indemnified from the trust funds. This general rule is applicable to the costs incurred by a trustee in the conduct of adversarial litigation.

But how does it operate in the costs context?

If the trustee is successful in the litigation and used trust funds to pay their lawyer-client legal costs and disbursements, they are generally entitled to a costs order that indemnifies the trust fund (not the trustee personally).

If the trustee is unsuccessful, the answer is more complicated, and doesn’t always result in a happy ending for the trustee. It is open for the Court:

💵 to order the costs be payable directly from the trust fund, or otherwise the that trustee be indemnified from the trust fund

💵 to refrain from making such an order, in which case the trustee remains personally liable for costs

💵 to make ‘no order as to costs’, in which case each party must bear their own costs and the trustee is not entitled to be reimbursed from the fund – see Donnelly v Maxwell-Smith [2010] FCAFC 154, at [22]-[24]

A Court will make a costs order that denies the trustee’s right of indemnity in relation to some or all party-party costs, if in the course of litigation:

❌ the trustee has acted unreasonably

❌ the trustee has acted for his own benefit rather than for the benefit of the trust

This test is satisfied where the trustee has actively violated or grossly neglected their duties as trustee. For example, if the trustee has incurred legal costs:

❗ by his own misconduct - see Teo v Buckeridge [2016] WASC 164, at [7] (citing Re Spurling's Will Trusts; Philpot & Philpot [1966] 1 All ER 745 with approval)

❗ in breach or neglect of his duties as trustee – see Parkes Linnegar v Watson (No 2) [2011] NSWSC 181, at [11]-[12]

❗ in an attempt to repudiate the trust or prevent it from being carried out – see West v Public Trustee [1942] SASR 109, at 122

❗ by making an application without any prospects of success – see Drummond v Drummond [1999] NSWSC 923, at [52]-[57]

How can a trustee safeguard against personal liability for an adverse costs order?

Seek the Court’s advice. If a trustee commences proceedings without seeking advice, there is a greater risk they will be found to have acted unreasonably or in their own interests; see Park v Whyte (No 3) [2018] 2 QD R 275, at [58]-[60].

This risk can be ameliorated by the trustee applying for a ‘Beddoe order’ – an order directing the trustee whether to bring or defend proceedings – see Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand [2008] 237 CLR 66, at [71]. The application should be supported by merits advice from a lawyer, costs estimate, and evidence of the value of the property subject to the dispute. The advantages of seeking a Beddoe order are:

✨ the costs of the application are paid from the trust fund if the trustees fully disclose the strengths and weaknesses of their (proposed) case

✨ compliance with the Court’s direction safeguards the trustee against personal liability for costs

✨ the interests of the trust are not subordinated to the trustee’s fear of personal costs liability

However:

✨ the Court will not investigate the evidence or make a pre-determination of the trustee’s prospects of success

✨ a Beddoe order is not a predetermination of the issue of costs between the trustee and their opponent in the substantive proceeding

✨ a Beddoe order does not provide parallel protection on appeal, in which case a further Beddoe order should be sought

Take Aways

Trustees should always seek the Court’s advice before bringing or defending proceedings on behalf of a trust. Otherwise, the trustee runs a greater risk they will be held personally liable for the costs of the proceeding.