Beddoe Applications - Part 2

In my article Beddoes applications – when, what & how? I discussed what a Beddoes application is, why it may be made & how to make an application.  In this article, I discuss the question of costs insofar as they arise in respect of trust claims and costs incurred solely by trustees.

Why make a Beddoes application – a recap?

A Beddoe orders provides the trustees with protection as regards the question of costs.  If no application is made then the trustees risk becoming personally liable for their own costs as well as those of any other party for any proceedings commenced, or defended, if they are ultimately unsuccessful with those proceedings.  Whilst they could in theory seek to establish that any costs incurred were properly incurred as an expense of the trust, a Beddoes application provides certainty at the outset of the proceedings for trustees.

 

The Beddoes jurisdiction

The Beddoes jurisdiction arises out of special costs rules affecting trustees.  They are largely contained within the provisions of Part 46 of the Civil Procedure Rules 1998 together with relevant case law.  In summary, they are as follows:

Trustees who are a party to any legal proceedings in that capacity are entitled, subject to one important exception, to be paid the costs of those proceedings (including any costs of other parties which they are ordered to pay) out of the relevant trust, assessed on the indemnity basis, to the extent that they are not recovered from anyone else.

The one important exception is any case where the costs are not properly incurred, in particular where the trustees have acted unreasonably or in substance for their own, or indeed a third party’s, benefit.  In such circumstances, the trustees would be deprived of the indemnity.

 

Matters for the court to consider

A court will only make a Beddoes order if it is satisfied that, in the circumstances of the case as known at the time, the indemnity will indeed apply, and the exception will not.

For costs purposes, disputes involving trustees are usually divided into three kinds:

1.

A trust dispute where there is a dispute about the terms of the trust or the assets which are subject to it.  This can either be “friendly” (such as an argument over the true construction of the trust instrument) or “hostile” (such as a challenge to the whole trust, or a claim by one beneficiary to the share of another).

In “friendly” trust disputes, it will usually be clear to the court that the proceedings are for the benefit of the whole trust, and that the trustees will obtain their indemnity at the end of the proceedings.  The court is therefore likely to make a Beddoe order.

“Hostile” trust disputes are or may be different.  If it is a case where the trustees are in effect rival claimants to the fund, they should normally adopt a neutral role and allow the rival claimants to fight it out between themselves.  If this stance is adopted then the trustees will be entitled to the indemnity as regards the costs necessarily and properly incurred, for example in serving a defence but no more.

2.

A beneficiary dispute where a beneficiary sues the trustees for breach of trust, a devastavit (a mismanagement of the trust) or other wrong allegedly committed.

In such disputes, the court is usually unable to predict in advance whether the trustees will be held to have acted unreasonably or in substance for their own benefit until the claim is concluded, since that is usually the point of the claim!  Costs should therefore follow the event (i.e. the outcome of the claim) and not come out of the trust fund.  A Beddoes order would not therefore be made.

3.

A third party dispute which has nothing to do with the internal workings of the trust but instead with the relations between the trustees and some other third party – for example, a breach of contract or tort claim brought by or against the third party or a boundary or other property dispute with a neighbour.

In third party disputes, the interests of the trustees and the beneficiaries are not normally in conflict nor are the interests of the beneficiaries as between themselves.  If the trustees provide all relevant information to the court, it can judge whether they have acted reasonably in spending trust or estate money in bringing or defending the claim.  If the court considers they are acting reasonably, it may make a Beddoe order.

 

Making a Beddoes application

Beddoes applications are brought under Part 64 of the Civil Procedure Rules 1998 (“CPR”).  They must be brought by way of separate proceedings to the main action, i.e. the proceedings in respect of which the trustees seeks the relevant costs protection.  Although brought as an application for directions, they are issued by way of a claim form under CPR, Part 8.  Beneficiaries should generally be parties to the application as they are entitled to be heard on the issue of whether trust monies should be spent or placed at risk in the main action.

The application must be supported by witness evidence which should include details as to what steps the trustees have taken as regards matters generally prior to the issue of the application.  It is important therefore for trustees to ensure they have entered into some form of dialogue with the beneficiaries and/or third party as regards the main action, even if such consultation has ultimately not proved fruitful prior to the issue of any application.  Such contact should include the possibility of settlement of the main action as well as the question of costs.

 

An example of a successful Beddoes application in a trust claim

In Baker & Another V Dunne & Others the claimants were trustees of a will trust of the deceased.  The defendants were the deceased’s three children who were equal beneficiaries under the will trust.  The application was opposed by one of the children, Jonathan but supported by the other two.

The trust included ownership of a pub, the Albert Arms from which Jonathan had for several years been running a business on an informal basis and without paying any rent.  The trustees sought vacant possession of the pub.

The trustees had already obtained an order for possession by the time of the hearing but Jonathan alleged that it would be a breach of trust for them to recover possession because the value of the pub was enhanced by his occupation and the operation of the business.

The trustees had already sought and obtained various Beddoe orders regarding the possession proceedings themselves but in light of the threatened claim for breach of trust they sought a further order as regards any proceedings in relation to the enforcement of the possession order and subsequent sale of the freehold pub.

In granting the further Beddoes order the court took into account the fact that the trustees had obtained undisputed valuation advice in respect of the pub and because there was no real alternative to obtaining vacant possession and selling the pub in accordance with that advice.

As regards the threatened claim for breach of trust the court determined that it amounted to little more than a complaint that the trustees had chosen not to sell the pub to Jonathan.  Once vacant possession had been obtained, however, it was open to Jonathan to make an offer to purchase the pub on the open market.

An example of an unsuccessful Beddoes application in a trust claim

In Pettigrew & Ors V Edwards an issue arose regarding payment of income to the life tenant of a deceased’s residuary trust.  The deceased died leaving her residuary estate on trust to the deceased’s sons in equal shares, albeit subject to payment of income to the life tenant, the deceased’s fourth husband.  The sons were the trustees of the deceased’s residuary trust along with her solicitor.

The value of the residuary estate exceeded £500,000 and included a promissory note for the sum of £100,000 signed by the life tenant in respect of monies loaned to him by the deceased.  When the deceased died the trustees sought repayment of the loan.  Ultimately, they took the decision to withhold the income due to life tenant as repayment of the monies loaned.  The life tenant disputed that there was any such debt and issued a claim against the trustees seeking payment of the outstanding income plus interest together with a direction that the trustees must pay the income to him during his lifetime.

The trustees filed a defence to the claim together with a counterclaim and subsequently applied for a Beddoes order in respect of the costs of the action.

The court considered that the proceedings involved two separate cases:

• Case 1 which concerned the validity and enforceability of the promissory note; and
• Case 2 which concerned how the result bore an obligation on the trustees to pay the income to the life tenant which he was otherwise entitled to.

Case 1 was a third party claim and was a candidate for a Beddoe order.

Case 2 was internal to the trust and was not a candidate for a Beddoe order.

The mere fact that case 1 was a candidate for a Beddoe order did not necessarily mean it was appropriate to make such an order.  The beneficiaries were adults and if the court were to make an order it would result in injustice to the life tenant as if the trustees’ claim against him failed his status as a beneficiary would mean he would have paid in part for the unsuccessful claim despite his own success.  The injustice was significant and justified refusing to make a Beddoe order.

It was not considered appropriate to direct the trustees as to whether they should make or continue their counterclaim in light of the refusal of the Beddoe order in respect of case 1.

Conclusion

These cases demonstrate the importance of the trustees reviewing the circumstances of any potential claim very carefully before issuing any application for a Beddoes order focussing specifically on the type of claim in question and their role within those proceedings.  Whilst the very nature of the Beddoes order is to provide trustees with protection as regards costs, they still need to be very careful to ensure that they are correctly bringing or defending proceedings.

 

How we help

If you are a trustee (or a personal representative (“PRs”)) who is considering whether to issue a Beddoes application or, alternatively, are a beneficiary under an estate seeking to oppose a Beddoes application being threatened or made by trustees (or PRs) and wish to receive advice in relation to the same, please contact our specialist team of lawyers at disputeresolution@boyesturner.