24 October 2013

In the Matter of the JP Morgan 1998 Employee Trust

This decision of the Court of Appeal is of particular interest because it deals with the right of an applicant who is a fiduciary, but not a trustee, to obtain its costs of court proceedings from the trust fund. The Court also clarified the principles concerning a trustee's right to an indemnity from the trust fund.

Background

JP Morgan Chase & Co ("JPM") is the settlor of an employee benefit trust known as the JP Morgan 1998 Employee Trust (the "Trust").  One of a number of sub-trusts under the Trust is the Bertrand des Pallières Dependant Fund (the "B Sub-Trust") under which Bertrand des Pallières (the "Beneficiary") and his family are beneficiaries. 

During his employment with JPM between 1993 and 2005, the Beneficiary was resident but not domiciled in the UK.  The proceedings arose out of his concern that if he or his family were to derive benefit from the B Sub-Trust, a substantial liability to UK income tax and national insurance contributions would arise. 

Although the Beneficiary was considering possible claims against JPM regarding statements made to it prior to the establishment of the B Sub-Trust, the representation in its final form was confined to an application against JPM and the trustee of the Trust for disclosure of certain information under Article 51 of the Trusts (Jersey) Law 1984, as amended (the "Trusts Law").  

Application for disclosure

Under the Trust, JPM did retain some powers - a power to remove trustees and to appoint and remove new or additional trustees and a power to appoint a protector.  It was agreed by all that these were fiduciary powers.   The Royal Court held that in principle the Beneficiary had a right to seek disclosure of the documents held by JPM in connection with its fiduciary powers under the Trust.  Nevertheless, it found that disclosure had either already been made or the purpose for which disclosure was sought did not relate to the exercise of JPM's fiduciary powers.  It therefore declined to order JPM to give any disclosure and discharged it from the representation.

Costs orders

As to the costs of the application, the Royal Court ordered that i) JPM's costs be paid out of the B Sub-Trust on the trustee basis and ii) the Beneficiary's costs also be paid out of the B Sub-Trust on the indemnity basis.  The Beneficiary appealed and asked instead for an order that JPM's costs be paid personally by the Beneficiary on the standard basis. 

If this had been allowed, the costs incurred by JPM would have been submitted for taxation by the Court in accordance with the rules of court.  Consequently, the level of costs recovered by JPM would have been significantly lower than if JPM were allowed to recover its costs on the trustee basis.

The Court of Appeal however rejected the appeal and allowed the decision of the Royal Court to stand.

Costs of trustees

The Court of Appeal began by helpfully confirming some of the general principles applicable to costs incurred by trustees.  A trustee has a right of indemnity which arises under statute (Article 26 of the Trusts Law), under contract and under the Court's inherent jurisdiction.  This is a complete indemnity so that a trustee is not left to bear any part of the costs out of his own pocket.  It is always possible, however, for a beneficiary to challenge such costs as being unreasonably incurred or of an unreasonable amount.

The right to an indemnity can be lost if the trustee is guilty of misconduct as expenses must be "reasonably incurred in connection with the trust" (Article 26).  A trustee found guilty of a breach of trust is likely to have to bear personally the costs of unsuccessfully defending itself, although if the breach was minor, he may not have to bear such costs as courts do not wish to discourage persons from becoming trustees by inflicting costs upon them if they have done their duty or even if they have committed an innocent breach of trust.

Whilst a trustee's right to an indemnity may be lost through misconduct, it is not lost through allegations of misconduct.   So, if a trustee is sued for breach of trust and the claim fails, the trustee is entitled to an indemnity for the costs of defending himself even though in doing so, he was acting largely for his own benefit.   The fact that the beneficiary's proceedings were hostile in nature is irrelevant to the issue of whether the trustee is entitled to an indemnity.

The entitlement of a trustee to an indemnity does not prevent an order for costs being made against a beneficiary who sues unsuccessfully for breach of trust.  In such circumstances, it is likely that a court would order that the trustee should recover its costs from the unsuccessful beneficiary.  To the extent the beneficiary does not pay, or in relation to any shortfall between the costs that the beneficiary is ordered to pay and the trustee's actual costs, a trustee can recover the difference  out of the trust fund, pursuant to its right to be indemnified.

Costs of a non-trustee fiduciary

The Court of Appeal agreed that a person with functions in relation to a trust which are fiduciary but who is not a trustee, is entitled to an indemnity in respect of costs reasonably incurred by him in the discharge of such functions.  He has a right to be reimbursed in full (provided the costs were reasonable) and his costs will not be subject to taxation.  JPM had been brought before the Court in its fiduciary capacity only (not as settlor or former employer of the Beneficiary) and it incurred the costs of the proceedings in the discharge of its fiduciary functions. It followed that JPM (not having been found guilty of any misconduct) was entitled to an indemnity out of the trust fund for the costs reasonably incurred by it in the proceedings. 

Equally, JPM could have brought the application itself and recovered its costs from the trust fund.  Whilst it was not, as settlor, entitled as of right to bring an application under Article 51 of the Trusts Law, it could have done so with the leave of the Court.   Faced with the demand for disclosure by the Beneficiary, JPM could have sought the guidance of the Court as to the extent of its obligations as a fiduciary to comply with the request and the leave of the Court would probably have been granted.   

Comment

This is helpful guidance for persons with fiduciary powers in relation to a trust (whether protectors, settlors or otherwise) as to their likely exposure or otherwise on costs if they are contemplating bringing an application for directions under Article 51 or are subject to such an application brought by a beneficiary.  The judgment also provides useful clarification as to the nature of a trustee's right to be indemnified out of the trust fund  in relation to its costs.

Please note that this briefing is only intended to provide a very general overview of the matters to which it relates. It is not intended as legal advice and should not be relied on as such.

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