Trustees’ liability for costs in litigation
A Beddoe order is based on the case Re Beddoe  1 Ch 547, where it was stated that “…a trustee who, without the sanction of the court, commences an action or defends an action unsuccessfully, does so at his own risk as regards the costs….”
Where trustees are involved in litigation against third parties, they personally take on risks of incurring adverse costs (if they unsuccessfully initiate a claim against a third party) and they also run the risk of claims from beneficiaries if they do not defend such claims adequately.
In anticipation of such litigation, trustees may consider making use of a Beddoe application to court under Part 64 of the Civil Procedure Rules (CPR). The application will seek the court’s directions in relation to the claim. If the court approves the trustee’s proposed action, then regardless of a successful outcome in the claim, the trustee will be entitled to recover their costs via an indemnity from the estate, much like a protective costs order. This can be very valuable for trustees and helps to protect them from costs risks that they may personally incur from third party litigation.
What are the key purposes of submitting a Beddoe application?
The key purposes for the trustee are to (i) obtain an indemnity for their litigation costs and (ii) to seek directions from the court as to whether they should engage in court proceedings in their role as trustee. They will need to satisfy the court that they are justified in initiating or defending litigation.
In obtaining sanction from the court before engaging in litigation, the trustees have effectively gained affirmation that their action is justified and therefore, that costs should be recoverable from the trust.
It is effectively a prospective costs order for trustees/executors/administrators, which, if granted to them, will allow them to recover their own litigation costs and also costs against them in proceedings incurred on behalf of the trust fund against third parties.
The order is only likely to be awarded where proceedings have been properly brought or defended by the trustee in carrying out their duties to represent the beneficiaries of the trust as a whole.
When should professional trustees consider making an application for a Beddoe Order?
A professional trustee should consider making an application for a Beddoe order where they anticipate a trust dispute or third-party dispute regarding the administration of their duties in respect of the trust.
A Beddoe application is not suitable in anticipation of all types of litigation, such as internal disputes regarding the trust (beneficiary disputes). In such matters it would be wrong for trustees to finance their defence with trust funds, unless the beneficiary dispute required the trustee to remain neutral.
- The application must be made separately to the proceedings under CPR Part 8, as its grant is a separate matter from the proceedings and is instead between the beneficiaries and trustees.
- Without the sanction of the court, trustees engage in litigation at their own risk and bear personal liability for associated costs. With the grant of an order offering indemnity out of the trust estate, it is certainly worth considering whether the benefit of making such application outweighs the risk of entering into litigation without one (where litigation is contemplated in respect of the trustee’s exercise of their powers and duties).
- Check whether any terms of the trust deed contain express provision for trustees’ participation in the types of litigation described above, as a Beddoe application may not be needed.
- Complying with the guidance of CPR Part 64 to secure this indemnity can be expensive and time-consuming, due to the need for consultation with beneficiaries and lawyers, consideration of mediation and need to provide evidence upfront.
- If successful, trustees can be entitled to the costs of making the Beddoe application itself from the trust. However, if the trustee does not feel that the application can be easily justified, then they run the risks of bearing the costs of making the application.
- Is there enough in the fund to cover any potential claims exposure? It is not clear in the UK what would happen if a full indemnity was requested in pursuant of a Beddoe order.
- It is interesting to note that it was held in the Grand Court of the Cayman Islands (Financial Services Division) [not reported]* that the Beddoe application was not a pre-emptive costs application itself, so the trustee was entitled to indemnity from the trust assets, even though if successful, it would have exhausted the trust.
How else can trustees protect themselves in legal proceedings on behalf of the trust?
- By written agreement of all beneficiaries of the trust. This is not always practical and depends on the beneficiaries. A weakness is that a beneficiary may still challenge the validity of a written agreement or challenge the trustee on their appraisal of the strengths/weaknesses of the proceedings
- Seek an indemnity from one or more of the beneficiaries for the trustee’s litigation costs. This method is more preferable to the written agreement of the trustees, but the protection will depend upon the indemnifying beneficiary’s ability to meet these future costs.
- Trustees should consider making a Beddoe application for directions from the court before bringing or defending claims on behalf of the trust.
- If a trustee commences action to bring or defend a claim on behalf of the trust without a Beddoe application, it is unlikely that a court will grant a retrospective indemnity for costs.
* X (as Trustee of the A Trust) v Y (Beneficiary of the A Trust)