On 1 June 2021, the Supreme Court issued judgment in Lambie Trustee Limited v Addleman [2021] NZSC 54. The case involved the principles relating to disclosure of legal advice obtained by trustees to beneficiaries of the trust.

To cut a long but interesting story short, the court held that while legal privilege applies to the legal advice, a “joint interest exception” applied which entitled beneficiaries of the trust to see the advice on the assumption it is ultimately obtained for their benefit.

The practical effect of the judgment was that Prudence Anne Addleman was entitled to see the legal advice obtained by the trustees, even though that advice was specifically directed to the issue of whether or not the trustees should disclose certain ‘trust information’ requested by her and notwithstanding that it sought legal guidance about the right course of action in the face of threatened litigation by Addleman. This note is not focussed on the reasoning in that judgment but on the costs rulings that followed.

On 17 February 2023, more than 18 months later, the Supreme Court issued its costs decision. And for all trustees, especially professional ‘independent’ ones, it’s sobering. The court:

• awarded Addleman her actual out-of-pocket legal costs (for senior and junior counsel) to be paid out of the trust property;
• directed that the professional trustee company, incorporated by a law firm to provide ‘independent’ trustee services, be denied indemnity for its costs from the trust, not only in the Supreme Court, but also in the Court of Appeal. These were its own out-of-pocket costs, plus Addleman’s costs for which the trustee is personally liable (s 81(1) Trusts Act 2019);
• directed the trustee to reimburse to the trust, from funds not sourced from the trust, any costs paid out of the trust in respect of the appeals to the Supreme Court and Court of Appeal; and
• awarded Addleman costs on scale (2B) in the High Court with the trustee’s indemnity removed here too. In short, the professional trustee company is liable for a substantial sum in legal costs. Section 81(2) of the Trusts Act 2019 provides that a trustee who incurs an expense or a liability when acting reasonably on behalf of the trust is entitled to reimburse itself or to pay the expense or liability directly from the trust property. The key qualifier for getting paid is that it must be “acting reasonably”. Clearly, the Supreme Court held that the trust company did not act reasonably. In seeking costs, Addleman argued that the trustee’s actions were not reasonable (ie, proper) because [5]:
• The trustees were well aware of the need to give disclosure to her and that she was a “principal beneficiary”, yet the trustee aligned itself entirely with the interests of her sister and another beneficiary of the trust.
• There were procedures that the trustee could have adopted such as seeking directions from the court or a Beddoe or prospective costs order.
• The trustee unreasonably rejected a reasonable settlement offer.
• There is a general proposition that trustees should not lightly pursue appeals.

The Supreme Court noted that “careless and unreasonable conduct in the conduct of litigation” may deprive a trustee of the indemnity. Further, a trustee partisan in his or her own interests or the interests of only some beneficiaries likewise may be deprived of indemnity [10].

The court accepted Addleman’s arguments and stated that it must have been apparent to the trustee that on the authorities some further disclosure, at least, had to be made to Addleman. And that Addleman’s settlement offer, albeit late in the proceedings, corresponded closely to the result the court arrived at, so if the offer had been accepted it would have reduced the costs incurred.

The court also added that the content of the offer and the trustee’s abrupt rejection of it removed any reservations the court may otherwise have had about Addleman’s suggested approach to costs and indemnity [11].

Comment

In my experience, companies incorporated by law firms for the sole purpose of acting as ‘independent’ trustee have no assets of their own. All ‘their’ assets belong to (ie, are held in) the trust. This means the Addleman costs orders will likely have placed the trustee company into insolvency.

It follows that while the trust may have the property necessary to pay Addleman’s costs, the sums paid may not be replaced by funds sourced by the trustee personally. If this eventuates, then Addleman might be forgiven for thinking she is paying her legal costs out of her ‘own funds’ – not literally, but nevertheless from funds in which she has an interest as a discretionary beneficiary of the trust. Is that fair? Is that just?

A company trustee has no mind of its own, of course – it is the alter ego of its director(s). As Fletcher Moulton LJ in Bath v Standard Land Company Limited [1911] 1 Ch 618 at 637 stated in respect of such directors:

They have complete and perfect knowledge of the nature of the acts which the company is doing through them. But they have even more than this. They know that there is no mind interposed between them and the cestui que trust which administers the trust. It is they who are in fact doing it and no one else, although it may be done in the name of the company.

So, if the trustee company cannot meet the costs awards, then a question arises as to the potential liability of the director(s) of that company who, after all, caused it to ‘act unreasonably’, resulting in the denial of the usual right of indemnity.

Of greater significance, perhaps, is the message the Supreme Court has effectively given to all trustees who might get drawn into litigation as a result of their trustee decisions. The message: act reasonably and be careful. That may translate into seeking court directions or Beddoe orders (the court’s sanction of proceedings by trustees). It also means trustees should try to ensure they are not drawn into the arena of the battle between beneficiaries. It seems the trustee in this case sided with one beneficiary over the other.

The well-known obligation is now codified in s 35 of the Trusts Act 2019 which states: “A trustee must act impartially in relation to the beneficiaries and must not be unfairly partial to one beneficiary or group of beneficiaries to the detriment of the others.”

As a matter of practice, especially for independent professional trustees, particular care must be taken to apply professional detachment, objectivity and a ‘reasonability test’ to decisions and when discharging their trusteeship responsibilities.

Experience teaches that this might be challenging when a strong-willed settlor of a discretionary family trust, who is also a trustee and beneficiary, is a longstanding and valued client of the law firm and consciously or unconsciously seeks to lead or dominate trustee decision-making.

For some reason the trustee in this case aligned itself entirely with the interests of one beneficiary of the trust. That alignment and the decisions that flowed from it appears to be a key factor as to why the trustee in this case ended up in so much strife. The Supreme Court has sent a powerful message to trustees who act in this manner. ■

Andrew Steele is an Auckland barrister specialising in trusts and estates ■