Jersey: "Dog-Leg" Claims And Trustee’s Legal Costs

Five recent decisions of the Royal Court of Jersey illustrate that Jersey continues to be at the cutting edge of trust law. The first relates to the so called "dog-leg" claim by beneficiaries of a trust directly against the directors of a corporate trustee. The other four decisions relate to a trustee’s entitlement to repayment of legal costs from trust assets where the trustee is a party to litigation involving the trust and is acting neutrally.

The "dog-leg" claim is based on a director of a company’s duty under, in the case of Jersey, Article 74 (1) (b) of the Companies (Jersey) Law 1991 to "exercise the care, diligence and skill that a reasonably prudent person would exercise" in carrying out the director’s duties in relation to the company. The right to performance of this duty is claimed to be an asset of the trust and, where a director is alleged to have breached the duty, it is claimed that the beneficiaries of the relevant trust can enforce performance of the duty in circumstances where the corporate trustee will not do so.

In Alhamrani v Alhamrani (2007) JRC026 the plaintiffs (who were beneficiaries of two Jersey law trusts) brought claims in October 2005 against two corporate trustees for breach of trust. They had also pleaded claims against two of the directors of the respective trust companies pursuant to Article 56 of the Trusts (Jersey) Law 1984 (the "Trust Law"), which provided that where a breach of trust was committed by a corporate trustee then every director of the corporate trustee at the time of the breach was deemed a guarantor of all damages and costs awarded against it. However, following the repeal of Article 56 of the Trust Law in October 2006, the plaintiffs withdrew their Article 56 claims but applied to the Royal Court for permission from to bring "dog-leg" claims against the two directors instead.

The Royal Court (Page, Commissioner, sitting alone) commented that reported decisions concerning the "dog-leg" claim were "extremely limited". It referred to four judgments from Courts in England¹, Guernsey² and Australia³ and academic commentary. In Young v Murphy (1994) the Supreme Court of Victoria rejected the proposition that the director’s duty of care was an asset of the trust. It considered that the duty was owed to the company and was available to the company’s creditors in liquidation. However, in HR v JAPT (1997) the English High Court (Lindsay J) refused to grant an application to strike out a dog-leg claim in circumstances where the corporate trustee of a pension scheme was worthless. Its sole asset was 30p in cash; it had no insurance, no premises and the sole activity of its directors was the management of the scheme of which they had the exclusive conduct.

The Royal Court noted that there were no exceptional circumstances in the Alhamrani case, such as those in HR v JAPT. The trust companies were not "one trust" companies and the directors activities were not confined exclusively to the trusts in question. However, the Court considered that the mere fact that a director had particular responsibility for the affairs of a particular trust would not be sufficient "to displace the fundamental nature of a director’s statutory duties to his company". It agreed with the comments of the Guernsey Court of Appeal in Rowe & Rich v Cross & Cross (1998/99) that if the "dog-leg" claim is to become "a binding principle of law it still has some progress to make". The Royal Court therefore refused leave for the disputed amendment.

Jersey has no specific rules of Court regulating a trustee’s entitlement to legal costs where it is involved in litigation and four judgments of the Royal Court from 2006 and 2007 all concern this issue.

In Alhamrani v Alhamrani (2006) JLR 176 and (2007) JRC 053 the Bailiff delivered two judgments setting out the principles to be applied by the Court where a trustee involved in litigation seeks recovery of its legal costs from trust assets and the trustee is acting neutrally (i.e. the costs do not relate to hostile litigation against the trustee), but where the beneficiaries object to payment from the trust. In Alhamrani v Alhamrani (2007) JRC 012 Commissioner Page summarised those principles and applied them. The Alhamrani judgments are subject to a pending appeal to Jersey’s Court of Appeal, but in Landau v Landau (2007) JRC 084 Birt, Deputy Bailiff, also applied the principles in circumstances where the Court, exercising its supervisory jurisdiction over trusts, considered that it was not reasonable for all the legal costs to be paid from the assets of the trust and gave further guidance concerning "assessment" (rather than taxation) of the trustee’s legal costs.

The Court summarised the principles as follows:

1. The general principle is that a trustee, acting reasonably and in the exercise of his duties, powers and discretions, is entitled to an indemnity from the trust fund in relation to all costs and expenses properly incurred.
2. Strictly speaking, that principle is one that arises as a matter of basic trust law and an express order to such effect is unnecessary.
3. In such circumstances, no question of taxation arises – even if such an order (that is, an order for an indemnity from trust funds) is made in express terms.
4. It is to be emphasised that this general principle only applies where a trustee is acting reasonably.
5. This general rule can be displaced or overridden by the Court but only by specific order to that effect.
6. A beneficiary who thinks that a trustee has acted unreasonably and ought not to be entitled to recover his costs in full (or, perhaps, at all) has the same remedies as those available for any alleged breach of trust or fiduciary duty, or for other misconduct: To say that without the automatic operation of taxation there is no mechanism for preventing the "plundering of the trust fund" by an unscrupulous trustee is therefore incorrect. A beneficiary or other interested party who wishes to complain of such misconduct has a right of recourse to the Court, which would not hesitate to use its supervisory jurisdiction to impose appropriate orders or penalties.

The Royal Court’s decisions are positive news for Jersey’s trust industry and are evidence of the sophistication of trust law in Jersey. Although some jurisdictions will have their own rules of Court dealing with trustee’s costs orders, it is suggested that the decisions will also be of relevance to many common law jurisdictions.

The Alhamrani judgment concerning the "dog-leg" claim protects directors of professional corporate trustees against an additional potential liability, whilst not shutting the door to plaintiffs proceeding with a "dog-leg" claim in the exceptional circumstances encountered by the English High Court in HR v JAPT. The Alhamrani and Landau judgments concerning trustee’s costs balance the trustee’s need not to be left out of pocket for legal costs where acting neutrally, but allowing beneficiaries to invoke the Court’s supervisory jurisdiction over trusts where, for example, the legal costs were inappropriately incurred or disproportionate.

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