In the case of X (as Trustee of the A Trust) v Y (as Beneficiary of the A Trust) (unreported) 15 March 2017, the Grand Court of the Cayman Islands granted Beddoe relief to a trustee where the trustee faced a claim that risked wiping out the Trust's assets.
Z claimed damages against the Trustee of the A Trust under the terms of a sale and purchase agreement for breach of contract and the tort of deceit. The value of the claim outweighed the value of the Trust's assets. Accordingly, the Trustee sought directions from the Court to defend the proceedings and an indemnity out of the Trust assets for the costs and expenses of doing so. In the absence of such Beddoe relief, the Trustee risked being personally liable in the event the defence was unsuccessful.
Whilst Z was not a beneficiary of the Trust directly affected by the application for Beddoe relief, the claim being a 'third party dispute", the Court allowed Z the opportunity to make representation on the application because Z might have identified an argument that undermined the Trustee's proposed defence.
As to whether the Trustee was entitled to Beddoe relief, the Court considered the beneficiaries' interests in the Trustee protecting the Trust assets by defending the proceedings versus Z's interest in the value of the assets, against which Z could enforce any judgment, not being reduced by an unsuccessful defence.
Ultimately, the Court held that a contingent creditor in Z's position, who was not asserting a proprietary claim to the trust assets, had to take the trust assets as it found them at the time of judgment and the Trustee was permitted to defend the proceedings with an indemnity for its costs reasonably incurred in doing so.
In this case, the Court appeared to accept that the Trustee had contractually limited its own liability to Z to the value of the Trust assets which justified the third party having to take the trust assets as it found them as at the date of judgment. However, this justification may not stand where a trustee has not contractually limited their own liability to a third party in which case a trustee's personal liability to the third party is not limited. For this reason, the Court's decision in this case might not be followed in a case where the Trustee has not contractually limited its own liability to the third party.
Further, the Court appears to have taken the view that a contractual limitation as between the Trustee and the third party limits the Trustee's 'total' liability to the Trust assets i.e. the damages plus the Trustee's costs and any adverse costs. This prevents the Trustee being personally liable to pay any amount which it cannot pay out of the trust assets and the loss is borne by the third party. This mirrors the position that would apply in respect of a company debtor with insufficient assets: the burden of losses would fall on the third party who would take the company's assets as it found them as at the date of enforcement of the judgment.
This judgment is a useful reminder that Trustees should:-
- apply to Court for permission to defend proceedings and for an indemnity out of the Trust assets to cover the costs and expenses of doing so (Beddoe relief) in order to avoid being personally liable;
- ensure that the necessary contractual limitations and limited recourse provisions are in place when entering into contracts with third parties; and
- ensure that contracts are entered into by Trustees "in their capacity as Trustees".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.