The Court of Appeal’s recent decision in Pratley v Courteney  NZCA 436 concerns the costs incurred by a trustee in defending a claim against trust assets. The issue for the court to determine was whether the trustee was entitled to an indemnity from the trust fund. The case provides some helpful guidance for trustees involved in litigation and highlights the potential risks for trustees in both defending and not defending a claim.
The case involved the Courteney family, namely William Ronald Courteney (Ron) and his wife, Joan Courteney, along with their two adult sons, Steven and Stuart.
Steven had a close relationship with his parents. Prior to 1997, Ron and Joan lived in England, which is where Steven and Stuart grew up. Steven emigrated to New Zealand in 1995 with his wife and daughter. About two years later, Ron and Joan followed Steven to New Zealand and, with his assistance, purchased the property neighbouring his own.
In contrast, Stuart did not have a good relationship with his parents. He lived in Germany with his partner from 1988 to 2010 and had little contact with them.
In 2002, Ron and Joan made mirror wills. Under those wills, each person appointed the other as executor and left that person the whole of the estate. The will of the survivor appointed Steven as executor and divided the assets as follows:
- All financial assets held overseas were left to Stuart.
- Personal chattels were to be divided between Stuart, Steven, and Steven’s wife and daughter.
- The residual estate was left to Steven.
In 2009, Ron and Joan visited Stuart in Germany. Ron was frail at the time and experienced periods of delirium. In March 2010, Ron was admitted to hospital in a delirious state. Around that time, Steven became very concerned about his mother’s state of mind and behaviour, particularly how she was treating Ron. Steven was also concerned about the treatment Ron was receiving at the hospital and arranged private care for him.
Joan viewed Steven’s attempts to assist his father adversely. She considered the additional care to be expensive and unnecessary and that Steven was deliberately abusive towards her. On 8 June 2011, Joan made a new will, which made no provision for Steven nor his family. Stuart was appointed as the executor under that will and, in the event Ron predeceased Joan, the whole of her estate was left to Stuart.
Ron died on 17 July 2011. Joan died less than a year later, on 21 May 2012.
Claims brought by Steven
Following his father’s death, Steven filed a claim in the District Court. That claim was for reimbursement of $36,869 he had spent on his father’s care. Joan defended the claim on the basis that she did not consider the additional care was necessary. Once Joan died, Stuart continued the estate’s defence of the claim.
The claim was advanced on two alternative bases. First, that Steven’s wife had retrospectively authorised these expenses acting under an enduring power of attorney. Second, in restitution, on the basis that Steven paid the expenses as a “necessitous intervener” providing Ron with the “necessities of life”.
After Joan’s death, Steven also brought a High Court claim against Joan’s estate under the Family Protection Act 1955, on the basis that he was not provided for in her will. Steven’s daughter, being Joan’s only granddaughter, joined the proceedings as a second plaintiff.
Appointment of Mr Pratley
In the course of the proceedings, Steven had difficulty obtaining adequate disclosure from Stuart about the overseas assets of Joan’s estate. This led to an application to remove Stuart as executor and trustee and replace him with an independent solicitor, Lance Pratley. On 20 October 2015, Clifford J ordered that Mr Pratley replace Stuart as executor and trustee on the express basis that Mr Pratley’s costs would be payable by the estate.
When Mr Pratley accepted the appointment, he was not aware that a two-day District Court hearing had been set down to determine Steven’s reimbursement claim. The hearing was due to commence three weeks after Mr Pratley was appointed. It was not until 21 October 2015 that Mr Pratley found out about the hearing and he only obtained the relevant files from the solicitors acting for the estate on 30 October 2015. By that time, it was one working week before the trial.
Mr Pratley brought an application to adjourn the hearing but this was declined. The case proceeded and, ultimately, Steven was successful in establishing his claim in restitution.
Steven was also successful in his Family Protection Act claim, which proceeded by way of formal proof hearing in May 2017. Cull J awarded Steven all of the estate assets in New Zealand. Her Honour then considered the liabilities of the estate, including the costs incurred in defending Steven’s District Court claim. Cull J’s provisional view was that these costs should not be paid out of the estate assets awarded to Steven. The judge invited the parties to file submissions if they disagreed.
Mr Pratley opposed Cull J’s proposed directions. This resulted in a hearing to determine whether Mr Pratley was entitled to be indemnified from the New Zealand assets of the estate in respect of the costs and expenses he incurred defending Steven’s District Court claim.
High Court decision
Cull J determined that Mr Pratley was not entitled to an indemnity for his costs.
Her Honour considered that the issue turned on whether it was “necessary” for him to defend the claim. The judge accepted that Mr Pratley had make a judgement call in difficult circumstances. She also accepted that Mr Pratley acted out of an abundance of caution and with the best motives. However, she concluded that his defence was not necessary.
Cull J gave several reasons for this finding. First, she observed that Stuart, the former trustee and executor, acted in a conflict of interest and breached his duty to act even-handedly. Her Honour found clear evidence of acrimony between the brothers and concluded that the District Court litigation was a “hostile dispute” between claimants. Cull J noted that Stuart had already provided his submissions and elected to step away from the litigation. She considered it was open to Mr Pratley to have the claim decided on the strength of the submissions and evidence that had already been filed by the previous trustee without being involved.
Cull J also considered the litigation was uneconomical given the dispute was over $36,000, which was less than Mr Pratley’s costs. The judge provided that the trustee’s obligation to protect the assets of the trust had to be measured against the erosion of trust property by litigation costs.
Her Honour noted that Mr Pratley should have made a Beddoe application in the High Court to seek directions as to whether he should continue the defence of Steven’s claim. She considered this could have been accommodated and resolved in the week before the District Court hearing.
Mr Pratley appealed the decision.
Court of Appeal decision
Trustees’ costs generally
In considering trustees’ litigation costs, the court commented that:
“ An executor and trustee has a duty to protect estate assets for the benefit of the beneficiaries. This duty extends to representing the estate in claims made against it by third parties where there are reasonable grounds of defence. The trustee must act reasonably, exercising due skill and care. In cases of doubt, the trustee may take legal advice or seek directions from the Court. So long as the trustee acts honestly and reasonably, he or she is normally entitled to an indemnity for all expenses reasonably incurred in the execution of the trust.”
From this starting point, the court noted the three categories of trust disputes as summarised by Lightman J in Alsop Wilkinson (a firm) v Neary  1 WLR 1220 (HC), which are frequently referred to in relation to trustees’ costs.
The first category is a “trust dispute”, for example a dispute about the proper construction of the trust. The second category is a “beneficiaries dispute”, which concerns the propriety of any action taken or to be taken by the trustees. The third category is a “third party dispute”, being a dispute with a person other than in their capacity as a beneficiary in respect of the trust.
One of the fundamental differences between the second and third dispute categories is how trustees’ costs are treated. Disputes in the second category are classified as ordinary hostile litigation. Costs therefore follow the event and are not paid out of the trust estate. In contrast, trustees in third party disputes are generally entitled to an indemnity from the trust fund for the fees they incur. This is on the basis that trustees are entitled to an indemnity against all costs, expenses and liabilities properly incurred in administering the trust. They also have a duty to protect the trust estate for the benefit of the beneficiaries, which includes representing the trust in third party disputes.
Mr Pratley’s costs
In this case, the court considered that Cull J erred in categorising Steven’s District Court claim as a beneficiaries dispute. Steven was not claiming against the estate in his capacity as a beneficiary; rather, he was claiming to be a creditor of the estate. Accordingly, his claim fell within the third Alsop category, being a third party dispute.
Mr Pratley, as the sole executor and trustee, was responsible for dealing with the claim. He had a duty to preserve the estate assets for the benefit of all beneficiaries, whoever they turned out to be. The court did not agree that it would have been appropriate for him to step back from the litigation and let Stuart deal with it. The court observed that “[h]ad Mr Pratley abrogated his responsibility to defend the claim, he could have been vulnerable to a claim by Stuart for failing in his duty to protect the assets of the estate” (at ).
In response to the High Court’s comment that Mr Pratley could have made a Beddoe application, the court considered that Mr Pratley could not be criticised for not taking this course of action. The court found there may not have been time to obtain directions before the trial and Mr Pratley needed to consider the costs that would be incurred. The court noted that “trustees are not entitled to immunise themselves against possible claims irrespective of the difficulty of the issue or the amount at stake” ().
The Court of Appeal determined that Steven’s claim was not straightforward legally and the outcome was not a forgone conclusion. Although Steven was ultimately successful, Mr Pratley acted reasonably in continuing the defence of the claim in accordance with the legal advice he received.
Finally, the court looked at the High Court’s view that the defence was uneconomical. The court held that an “executor and trustee is not entitled to allow a claim against the estate to proceed on an undefended basis merely because the amount claimed is modest”. This would have been in breach of Mr Pratley’s trustee duties. It was not in dispute that Mr Pratley’s costs for defending the claim were reasonable.
Ultimately, the court allowed the appeal, concluding that Mr Pratley acted reasonably and was entitled to be indemnified for his costs out of the estate assets.
Trustees can take some comfort from the comments made by the Court of Appeal in this decision. The case provides clear authority that trustees should defend third party disputes where there is a reasonable basis for doing so. In those circumstances, trustees can also feel confident that they will be indemnified for their costs from the trust fund.
That said, the difficulty is often identifying whether a dispute, often with a person who is a beneficiary of the trust, is properly classified as a beneficiary or third party dispute. The demarcation between these categories is not always clear. Trustees should tread with caution and obtain advice on this issue before incurring thousands of dollars of legal fees defending a claim where there may be no ability to recoup those funds from the trust.
Georgia Angus email@example.com is senior solicitor with Auckland trusts, estates and relationship property specialists Morris Legal.