What is a Beddoe order?
A trustee might need to make a claim against a third party or defend a claim brought against them by a third party in relation to the trust. In England and Wales, the losing party to a case is usually ordered to pay the majority of the winning party’s costs. A trustee is no different to any other person and shares the same litigation costs risk. When a trustee becomes involved in litigation, the starting point is that the trustee is personally liable for the costs of the litigation.
A Beddoe order is a court order which authorises a trustee to become involved in litigation, or choose not to be involved in it, and for the costs of that litigation to be recoverable from the trust fund. Beddoe orders are named after the judgment in Re Beddoe [1893] 1 Ch 547 in which the court 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… and when the trustee seeks to obtain such costs out of his trust estate, he ought not to be allowed to charge them against his [beneficiaries] unless under very exceptional circumstances.”
How do I obtain a Beddoe order?
In order to obtain a Beddoe order, a trustee needs to make a Beddoe application to court under Part 64 of the Civil Procedure Rules. In doing so, a trustee is asking the court to give directions as to whether the trustee should bring or defend legal proceedings in relation to the trust. In other words, the trustee is asking the court to approve its litigation decision.
A Beddoe application needs to be supported by detailed witness evidence in relation to the structure and value of the trust together with information about the underlying proceedings, including costs estimates. All relevant information must be disclosed to the court. Otherwise, the order is likely to be set aside at a later date and its costs protection will be lost. Most Beddoe applications will be heard by the court in private, after which the court will make its decision as to whether or not an order should be granted.
When should a Beddoe application be made?
There are three types of dispute here: a third-party dispute, trust dispute and beneficiaries dispute. A third-party dispute involves a dispute between a trustee and someone other than the beneficiaries such as between a trustee and an investment adviser who has negligently managed the trust’s assets. A trust dispute involves the administration of the trust and a beneficiaries dispute involves a dispute between a beneficiary and the trustee arising out of the trustee’s management of the trust. A Beddoe application can be made when there is a third party dispute or a trust dispute. It is unlikely to be appropriate for a beneficiaries dispute. An application should be made before any costs have been incurred, because it is rare for a court to grant a Beddoe order retrospectively. If a trustee makes a retrospective application, they risk being personally liable for the costs already incurred.
How does the court decide whether to grant a Beddoe order?
The court has wide discretion in deciding whether to grant a Beddoe order and will make its decision according to the particular facts and merits of each case. The key consideration for the court is what course of action would be in the best interests of the beneficiaries of the trust as a whole. In making its decision, the court will consider the prospects of success for the underlying claim, the value of the proceedings compared to the trust assets and the likely costs arising out of the proceedings. A Beddoe application is separate to the main proceedings. The application and main proceedings will each be heard by a different judge, because the Beddoe application judge will no longer be impartial after having determined the likely outcome of the main proceedings.
What is the scope of a Beddoe order?
The court is able to decide on the scope of its order. It might give directions all the way to trial. Alternatively, if it wants to retain more control as the main proceedings develop, it can choose to only give directions in stages, such as only in relation to the statements of case (being the claim and defence), witness evidence or disclosure. This would mean that the trustee would need to return to court to renew their application for each non-approved stage of the main proceedings.
Do I really need this?
A trust, unlike a company, is not a legal entity. A trustee personally enters into any legal relationships on behalf of the trust and is personally liable for any losses or other amounts ultimately owed by the trust. If a trustee doesn’t make a Beddoe application and loses court proceedings, the trustee would be personally liable for the potentially significant costs of the proceedings which they have incurred as trustee in addition to the costs incurred by the winning party. Unless a trustee can prove that all costs were properly incurred and should be paid for out of the trust fund, the costs will remain personally owed by the trustee. Where a trustee can’t prove this and the beneficiaries have declined to provide an indemnity, the solution is for the trustee to obtain a Beddoe order, which removes this uncertainty and risk. If it is obvious what the best course of action is, however, a trustee should think carefully before making a Beddoe application, because they might be held liable for the costs of the Beddoe application itself.