Glasgow Harley Trustee Limited v McLaughlin
[2018] NZHC 290
•1 March 2018
IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY
I TE KŌTI MATUA O AOTEAROA WHAKATŪ ROHE
CIV-2017-442-000078 [2018] NZHC 290
UNDER The Trustee Act 1956 IN THE MATTER
of THE ASHLEY TRUST
BETWEEN
GLASGOW HARLEY TRUSTEE LIMITED and JOHN MCLAUGHLIN, as trustees of the Ashley Trust
Applicants
AND
MARK JAMES MCLAUGHLIN and ANDREW ASHLEY MCLAUGHLIN Respondents
Hearing: 12 February 2018 Appearances:
O D Peers for Applicants (via AVL) J W A Johnson for Respondents
Judgment:
1 March 2018
JUDGMENT OF ASSOCIATE JUDGE MATTHEWS
Introduction
[1] The respondents are two of the adult beneficiaries in the Ashley Trust (the Trust), of which the applicants are the trustees. The second-named applicant, John McLaughlin, is another beneficiary. In a related proceeding the respondents sue the applicants in their capacity as trustees of the Trust challenging actions and decisions
of the trustees in relation to the Trust assets,1 (the 52 proceeding).
1 M & A McLaughlin v J McLaughlin (director of Glasgow Harley Trustee Ltd) & M Russell (First
Defendants) and B Nelson (Second Defendant) HC Nelson CIV-2017-442-52.
GLASGOW HARLEY TRUSTEE LTD & J MCLAUGHLIN, as trustees of the Ashley Trust v
M MCLAUGHLIN & A MCLAUGHLIN [2018] NZHC 290 [1 March 2018]
[2] The applicants (the trustees) apply in this proceeding for orders approving their actions in defending the 52 proceeding, authorising them to make payment of their legal and associated costs on that proceeding from the assets of the Ashley Trust, and authorising them to indemnify a Mr Nelson who is the second defendant on the
52 proceeding from the assets of the Trust in respect of costs or adverse costs awards.
[3] Applications of this kind are commonly referred to as Beddoe applications.2 A succinct description of a Beddoe application appears in Garrow and Kelly Law of Trust and Trustees:3
The general rule is that the costs of litigation for the benefit of a trust are paid out of the trust fund; however, trustees will be denied their costs out of the trust fund if they have acted in breach of trust or unnecessarily. One protection available to trustees is to make a ‘Beddoe application’, which is an application to the Court for directions whether or not the trustee should bring or defend proceedings in his or her capacity as trustee. This procedure requires the trustee to make full disclosure of the strengths and weaknesses of his or her case and, provided full disclosure is made, he or she has the full assurance that they will not personally have to bear the costs or pay those of anyone else.
[4] The rationale of a Beddoe application is described in these terms by the High
Court of Australia:4
[71] In short, provision is made for a trustee to obtain judicial advice about the prosecution or defence of litigation in recognition of both the fact that the office of trustee is ordinarily a gratuitous office and the fact that a trustee is entitled to an indemnity for all costs and expenses properly incurred in performance of the trustee’s duties. Obtaining judicial advice resolves doubt about whether it is proper for a trustee to incur the costs and expenses of prosecuting or defending litigation. No less importantly, however, resolving those doubts means that the interests of the trust will be protected; the interests of the trust will not be subordinated to the trustee’s fear of personal liability for costs.
[72] It is, therefore, not right to see a trustee’s application for judicial advice about whether to sue or defend proceedings as directed only to the personal protection of the trustee. Proceedings for judicial advice have another and no less important purpose of protecting the interests of the trust.
2 The name is derived from in Re Beddoe, Downes v Cottam [1893] 1 Ch 547.
3 Greg Kelly and Chris Kelly Garrow and Kelly Law of Trusts and Trustees (7th ed, LexisNexis, Wellington, 2013) at 24.36.
4 Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar The
Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42.
[5] Presently before the Court are applications associated with the Beddoe applications, for orders in the following terms:
(a) Suppressing all of the documents contained within Bundle 3 as annexed to the affidavit of John David Manuel McLaughlin sworn in support of this application, on the grounds that the documents contained within Bundle 3 contain information that is subject to legal privilege and/or is confidential to the trustees.
(b) Suppressing the original versions of the affidavits filed in support of this application and in particular those sections of John David Manuel McLaughlin’s and Mark William Russell’s affidavits in support which are prefaced with the words “Confidential text” and which are underlined.
I refer to the material described in these paragraphs as the “contested material”.
[6] In neither the application nor the written submissions of counsel for the trustees was any indication given on the ambit of the requested suppression. Mr Peers informed me at the hearing that the trustees ask that the contested material not be made available to the respondents, or any other beneficiaries of the Trust, nor any person in the event the file should be searched at the High Court Registry. The intended ambit of the orders is that they should prevail throughout the Court’s consideration of the present proceeding, as well as the 52 proceeding.
[7] The contested material comprises, first, a number of paragraphs in two affidavits sworn respectively by Mark William Russell and John David Manuel McLaughlin, the second-named first applicant. Mr Russell became a trustee for a brief period then resigned. Mr McLaughlin has been a trustee throughout the life of the Trust and remains a trustee now. Both are defendants in the 52 proceeding. The remaining contested material is exhibits to the affidavit of Mr McLaughlin compiled in exhibit Bundle 3. I refer to this material in more detail later in this judgment.
[8] Because of the nature of this application Mr Johnson, counsel for the respondents, has not seen any of the material in issue. Copies of the affidavits served on the respondents have the relevant passages redacted. No other parties have been served with bundle 3. Mr Johnson therefore presented submissions on the principles the Court should apply in deciding the application, not on the material in issue itself.
I indicated to him that I would review the material with Mr Peers present in court only, a position which he accepted is the correct way for the Court to proceed.
[9] Accordingly after the close of Mr Peers’ submissions in reply Mr Johnson withdrew and Mr Peers then took me through the relevant passages in the affidavits and the documents in Bundle 3, explaining in each case his reason, in terms of the arguments presented on the relevant principles to be applied, for submitting that they should be the subject of the orders sought.
Litigation privilege and legal professional privilege
[10] Two issues can be recorded briefly. First, both counsel agree that litigation privilege may properly be claimed if it applies to any of the contested material.
[11] Secondly, it is unnecessary to decide whether legal professional privilege applies in a Beddoe application, as having viewed the contested material I record that legal professional privilege is not claimed, or applicable, in respect of any of it.
Summary of the position of each party
[12] Essentially the trustees, in seeking the orders described in paragraph [2], are asking the Court to allow them to pay their costs from the assets of the Trust before their actions which are called into question by the respondents have been examined by the Court. They say, correctly, that as a consequence, there is a duty on them to act with complete candour to the Court on these applications.5 As a result, they have put before the Court material which the Court should see and consider but which the respondents should not see, as disclosure of it would be prejudicial to the trustees’ defence. They say that in opposing suppression of the contested material the respondents are in effect fishing for information which they think may support their claim against the trustees in the substantive proceeding.
[13] Conversely, the respondents say that as the Court is being asked to allow the trustees to have their costs paid from the Trust assets, and thus effectively by the
beneficiaries, they should know what material is before the Court on that issue and
5 Alsop Wilkinson v Neary [1995] 1 All ER 431 at 434-435.
have an opportunity to respond to it. They say that applications of this kind are inappropriate for litigation which they say is hostile, being claims by the beneficiaries against the trustees in which the trustees’ actions in relation to the Trust are called into question, unless there are exceptional circumstances. They say there is no general cloak of confidentiality over material put before the Court on such applications and that the general obligations on trustees to disclose trust information apply in relation to the Court’s consideration of this application. In this respect they rely on the principles discussed and enunciated by the Supreme Court in Erceg v Erceg.6
Issues
[14] Two issues were raised by counsel during their submissions which can be referred to briefly. First, counsel engaged in some debate on the merits of making an application under the principle in Re Beddoe in the context of hostile litigation, a case where the trustees’ actions are called to account by beneficiaries. The ordinary rules as to costs apply to such actions. Accordingly the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party, subject to the general qualifications which apply in ordinary hostile litigation.7 On whether a Beddoe application is appropriate in this circumstance, I need only record the view of the learned authors of Lewin on Trusts:8
Sometimes trustees who are sued for breach of trust seek to protect their position by making a Beddoe application for directions as to whether they should defend. Apart from exceptional circumstances, this is inappropriate. For, in contrast to the position concerning third party proceedings, a trustee who loses a breach of trust action is not entitled to indemnity, and so cannot expect the court to indemnify him at a time when it is not known whether or not the charge of breach of trust is well founded.
[15] The pathway for the trustees may, on that basis, be on a fairly steep incline. I
return to this issue later in this judgment.9
[16] Secondly, although neither counsel argued that the principles applicable to discovery of documents in civil cases should be applied in relation to the present
6 Erceg v Erceg [2017] NZSC 28, [2017] 1 NZLR 320.
7 Lynton Tucker and others Lewin on Trusts (19th ed, Sweet & Maxwell, London, 2015) at 27 – 173.
8 Lewin on Trusts at 27-181.
9 At [21 b.].
application, there was reference to discovery issues that may arise in the 52 proceeding. I agree with the observations of counsel that the contested material may be the subject of further debate in the context of discovery when that comes to be considered on the 52 proceeding. For now, questions of relevance, proportionality and so forth may be put to one side.
[17] As it is unnecessary to consider whether any claim to privilege is valid for the reasons set out, the issue before the Court is whether the trustees can claim confidentiality in respect of all or part of the contested materials for which litigation privilege is not claimed.
[18] On this the Court is to apply the principles in Erceg. I start with the following passage:10
[51] We see the starting point as being the obligation of a trustee to administer the trust in accordance with the trust deed and the duty to account to beneficiaries. A beneficiary who seeks such an account may seek access to documentation necessary to assess whether the trustee has acted in accordance with the trust deed. That can be expected to be the basis on which the beneficiary will seek disclosure of trust documentation.
[19] The Court then observes: “Given the wide variety of situations that may call for the Court to exercise its … supervisory jurisdiction, it is hard to articulate any hard and fast rules”.11 In deciding on confidentiality the Court must identify a course of action which is most consistent with the proper administration of the Trust and the interests of all beneficiaries, not just those requesting disclosure.12 The Court also noted the principle that trustees are not required to give reasons to discretionary beneficiaries, for the manner in which they exercise their discretions.13
[20] The Court went on to say:
[56] Drawing these threads together, we consider the matters that need to be evaluated in relation to an application for disclosure of trust documents include the following:
10 Erceg v Erceg, above n 6.
11 At [52].
12 At [53].
13 At [55].
(a) The documents that are sought. Where a number of documents are sought, each document (or class of document) may need to be evaluated separately, given that different considerations may apply to basic documents such as the trust deed and more remote documents such as the settlor’s memorandum of wishes.
(b) The context for the request and the objective of the beneficiary in making the request. The case for disclosure will be compelling if meaningful monitoring of the trustee’s compliance with the trust deed in the administration of the trust could not otherwise occur. In this regard, it may be relevant that disclosure has been made to other beneficiaries. However, assuming no improper motive on the part of the beneficiary seeking information, the fact that disclosure has previously been made to other beneficiaries will rarely be a decisive factor against disclosure.
(c) The nature of the interests held by the beneficiary seeking access. The degree of proximity of the beneficiary to the trust (or likelihood of the requesting beneficiary or others in the same class of beneficiaries benefitting from the trust) will also be a relevant factor.
(d) Whether there are issues of personal or commercial confidentiality.
Recognition should be given to the need to protect confidential matters of a personal or commercial nature. The Court should also take into account any indications in the trust deed itself about the need for confidentiality in relation to commercial dealings or private matters in relation to particular beneficiaries.
(e) Whether there is any practical difficulty in providing the information.
If the information sought by the person requesting the information would be difficult or expensive to generate or collate, that may be a factor against requiring its disclosure.
(f) Whether the documents sought disclose the trustee’s reasons for decisions made by the trustees. It would not normally be appropriate to require disclosure of the trustees’ reasons for particular decisions.
(g) The likely impact on the trustee and the other beneficiaries if disclosure is made. In particular, would disclosure have an adverse impact [on] the beneficiaries as a whole that would outweigh the benefit of disclosure to the requesting beneficiary? In the case of a family trust, this may include the possibility that disclosure would embitter family feelings and the relationship between the trustees and beneficiaries to the detriment of the beneficiaries as a whole. However, on the other hand, non-disclosure may have a similar effect.
(h) The likely impact on the settlor and third parties if disclosure is made.
The impact that disclosure will have on the settlor and/or on third parties will need to be considered.
(i) Whether disclosure can be made while still protecting confidentiality.
This may require that copies of documents supplied to a beneficiary are redacted to ensure non-disclosure of confidential information.
(j) Whether safeguards can be imposed on the use of the trust documentation. Examples would include undertakings and inspection by professional advisers only and other safeguards to ensure the documentation is used only for the purpose for which it was disclosed.
[21] I refer to these paragraphs in turn, to the extent that they are applicable to the present case:
(a) I have examined the documents and evaluated them in turn, together with the redacted passages in the affidavits. I return to this later in this judgment.
(b)The context of the request is an application which has the potential to have an adverse effect on the trust fund, and therefore the beneficiaries, and (as presented), to pre-empt the right of the beneficiaries to submit that the trustees should not be indemnified for costs if their action succeeds. I have already noted the difficulties facing the applicants on their Beddoe applications.14 I do not accept that there is any improper motive on the part of the respondent beneficiaries in seeking to have access to the contested material, as Mr Peers suggested. They have brought the 52 proceeding against the trustees calling into question certain actions by the trustees, as they are entitled to do. On that proceeding, the observation from Erceg that “the case for disclosure will be compelling if meaningful monitoring of the trustee’s compliance with the trust deed in the administration of the Trust could not otherwise occur” may be apt. That is not necessarily the position on the Beddoe applications, but it demonstrates why a Beddoe application may be found to be inappropriate in relation to the issues raised in the 52 proceeding. In short, if the beneficiaries establish their case against the trustees the Court may then form the view that the trustees should bear their own costs. Mr Peers responded to this self-evident conundrum by saying that in that event the trustees could be required to repay any payments of costs that they had received pursuant to a Beddoe order. This is an issue for the Court when considering the application itself, but the fact that the
Court is going to be asked for orders protecting the trustees in relation to
14 At [14]-[15].
costs before the 52 proceeding is heard supports the case for disclosure of material that might, in other circumstances, be withheld by the trustees as confidential.
(c) The respondents have an interest in the Trust as two of four discretionary beneficiaries. There is nothing presently before the Court to suggest that they are unlikely to benefit from the Trust along with other beneficiaries.
(d)When considering the contested material I identified a limited amount of information which I find should remain confidential as being of a personal nature.
[22] I have not found any of the other factors identified in Erceg to be of assistance in formulating my decision in relation to each item of the contested material.
Affidavit of J D M McLaughlin dated 12 December 2017
Paragraphs 37 – 39 and 42 - 43
[23] These contain opinions of Mr McLaughlin on matters personal to a named individual, which I find to be of little or any probative value on the Beddoe application. I find that disclosure would be of no material benefit to the respondents. I uphold the claim to confidentiality. These passages will continue to be redacted.
Paragraphs 153 – 155
[24] These passages contain reference to legal advice to which litigation privilege attaches. They also contain the names of persons who are intended to be witnesses on behalf of the applicants on the 52 proceeding and brief reference to the advice given by these persons. Again these passages are covered by litigation privilege and will continue to be redacted.
Paragraph 182
[25] This passage refers to evidence to be prepared for the 52 proceeding. It is subject to litigation privilege. Redaction will continue.
Affidavit of Mark William Russell dated 12 December 2017
Paragraph 5
[26] The unredacted text of paragraph 5 refers in some detail to Mr N R W Davidson QC (now Davidson J). The single redacted sentence is not subject to litigation privilege. Although Mr Peers briefly raised the possibility that it may be subject to general legal privilege, the circumstances outlined in paragraph 5 do not, in my view, establish that position. As the respondents request access to this evidence in the context of a Beddoe application I find confidentiality cannot be claimed. This sentence will no longer be redacted.
Paragraphs 31 – 34
[27] Paragraph 31 refers to issues relating to insurance for all the trustees. I find this paragraph is not confidential so may not be redacted.
[28] Paragraph 32 contains material which is subject to litigation privilege. All of paragraph 32 will remain redacted save for the last sentence commencing “By email dated 10 July 2017 …” which will not remain redacted: it demonstrates that the trustees are not insured in respect of the 52 proceeding. I accept Mr Johnson’s submission that this material is relevant to whether continuing to defend the 52 proceeding is in the best interests of the Trust. I find this outweighs the trustees’ claim to confidentiality in respect of this email.
[29] Paragraph 33 is subject to litigation privilege.
[30] Paragraph 34 is not trust related and need not be disclosed.
Paragraphs 44 and 45
[31] This paragraph contains material concerning the deliberations of the trustees and on that basis Mr Peers argues that it should be confidential. However, it refers to documents within bundle 1 of the exhibits which have already been disclosed. Paragraph 44 summarises the entries in the minutes of the trustees on 24 March 2016 which are at pp 168 and 169 of Bundle 1 of the exhibits to Mr McLaughlin’s affidavit.
No confidentiality therefore remains. Accordingly paragraph 44 and 45 will not be redacted.
Bundle 3 of exhibits to the affidavit of J D M McLaughlin
[32] The bundle contains 68 numbered pages.
Page 1
[33] In the context of the application for Beddoe orders I find that this document should be disclosed. It is an email to a Mr Hollyer asking him to accept engagement for a stated purpose. He did so, and produced a report which the respondents have. The letter of instruction is not confidential in my view, in these circumstances.
Pages 2 – 5
[34] The documents on these pages are subject to litigation privilege and may be withheld.
Pages 6 – 13
[35] Consistent with the ruling in relation to paragraphs 31 and 32 of Mr Russell’s affidavit I find that the documents on these pages are not confidential so may not be withheld.
Pages 14 – 21
[36] The documents on these pages are subject to litigation privilege having been brought into existence after the threat of litigation and containing communications with and about a witness and his evidence. They may be withheld.
Pages 22 – 24
[37] On these pages I find one email which appears at the top of page 23 attracts litigation privilege. The remaining communications on these pages do not attract litigation privilege. However I find them to be confidential. They record deliberations of the trustees. All documents on these pages will be suppressed.
Page 25
[38] The document on this page attracts litigation privilege, for the reasons applying to pages 14 – 21.
Pages 26 – 27
[39] Consistent with my ruling in relation to paragraph 31 of Mr Russell’s affidavit
I find the document on these pages is not confidential and may not be withheld.
Pages 28 – 40
[40] The documents on these pages attract litigation privilege – advice of counsel –
and may be withheld.
Pages 41 – 53
[41] Consistent with my ruling in relation to paragraph 32 of Mr Russell’s affidavit, all the documents on these pages are subject to litigation privilege and may be withheld.
Pages 54 – 56
[42] The documents on these pages attract litigation privilege and may be withheld.
Pages 57 – 60
[43] Consistent with my ruling in relation to paragraph 34 of Mr Russell’s affidavit, the document on these pages is personal, irrelevant to the Trust, and therefore confidential. It may be withheld.
Page 60A (3 pages)
[44] The document on these pages is subject to litigation privilege and may be withheld.
Pages 61 – 64
[45] The document on these pages is subject to litigation privilege (communication with witness) and may be withheld.
Pages 65 – 66
[46] The document on these pages is subject to litigation privilege (communication with witness) and may be withheld.
Pages 67 – 68
[47] Consistent with my ruling in relation to paragraph 33 of Mr Russell’s affidavit the document on these pages is subject to litigation privilege and may be withheld.
Duration of orders
[48] Although, as I have recorded in paragraph [6], Mr Peers indicated that he sought orders which would prevail throughout the hearing of the Beddoe applications and the 52 proceeding, I am not satisfied that this is appropriate. I have considered the application before me with specific reference to the Beddoe applications and in my view different considerations apply in relation to the 52 proceeding, including consideration of the principles which apply to the discovery of documents. Accordingly the rulings made in this judgment apply until further order of the Court. A further order will be considered in the context of the issues arising on the 52 proceeding.
Costs
[49] Costs are reserved. Counsel may (within five working days) file memoranda, not exceeding three pages in length, if costs are not agreed. My present view is that
both parties have enjoyed a measure of success, and costs should lie where they fall.
J G Matthews
Associate Judge
Solicitors:
Buddle Findlay, Christchurch
Wynn Williams, Christchurch