Beddoe Orders: McCallum v McCallum [2021] NZCA 237

Anyone involved with claims involving trustees or executors of estates would be well-advised to be aware of the protections provided by Beddoe orders. Beddoe orders are an important weapon in a trustee’s arsenal when they are a party to proceedings, but there are limitations. With claims involving trustees and executors seemingly on the rise, the recent Court of Appeal decision in McCallum v McCallum is a timely reminder of the importance of Beddoe orders.

This judgment was an appeal by William McCallum Junior (William Jnr) challenging the making of partial Beddoe orders in favour of the defendant trustees and executors by the High Court. The essence of William Jnr’s appeal was that:

1. Beddoe orders should be abolished, being contrary to public policy.
2. The making of the orders in this case was in breach of natural justice.
3. The orders should not have been made in this case which involved “hostile” litigation.

The key facts were that William Jnr’s father, Bill Snr, settled the W F McCallum Trust (Old Trust) in 1986. The trustees were Bill Snr, his brother, Robert Callum (Robert) and William Jnr. William Jnr was removed as a trustee in 2016.

In August 2016, Bill Snr settled the McCallum Family Trust (New Trust). The trustees were Bill Snr, Robert and Bill Snr’s nephew, Callum McCallum (Callum).

Shortly thereafter, a series of transactions occurred involving the Old Trust and the New Trust, and Bill Snr’s separate property. Assets were exchanged between Bill Snr and the Old Trust, and there was a transfer of assets from Bill Snr to Robert, to Callum’s trust, and to the New Trust.

Bill Snr died in January 2017. In November 2017, the remaining assets of the Old Trust were re-settled onto the New Trust.

In March 2019, William Jnr brought the substantive proceedings underlying the Beddoe application against Robert and Callum in three different capacities: (1) as trustees of the New Trust; (2) as executors and trustees of Bill Snr’s estate; and (3) personally.

Robert and Callum applied for Beddoe orders in May 2019.

The right of a trustee to be compensated out of the assets of the trust, for costs and expenses properly and reasonably incurred in the administration of the trust, is longstanding and well settled.¹ However, the Courts have developed specific rules for the costs of litigation relating to a trust or an estate.

Beddoe orders are directions given by a Court approving trustees or executors bringing or defending proceedings at the cost of the trust.² A Beddoe order essentially seeks the Court’s approval to bring or defend proceedings and gives the trustees or executors an indemnity from the trust fund or estate for their litigation costs, and any adverse costs order made if unsuccessful. Beddoe orders are therefore potentially a very valuable tool.

Beddoe orders will only be made where necessary, and in the best interests of the trust (as opposed to the trustees). They are inappropriate where the litigation is “hostile”, that is, alleging wrongdoing by the trustees.

The Court of Appeal discussed the general legal principles governing trustee duties, trustee costs and Beddoe applications.

In relation to trustee duties, the Court referred to its own decision in Pratley v Courtney where it made the point that a trustee has a duty to protect trust assets for the benefit of beneficiaries.³

The Court of Appeal made the following points in relation to Beddoe orders:

1. Beddoe applications are made, usually by originating application, separately from the substantive proceeding. They seek directions as to whether to bring or defend the substantive proceeding, at the trust’s expense. As the effect of the order is to give pre-emptive direction for the indemnification of the applicant’s expenses from the trust’s funds, full disclosure of the strengths and weaknesses of the proceedings is required.⁴
2. A Beddoe order will not however be granted in hostile litigation, unless in exceptional circumstances. Typically, such a case involves a claim by a beneficiary asserting breach of trust or other fiduciary duty by the trustee. Some “hostile”⁵ claims will earn pre-emptive indemnity via a Beddoe order.
3. The greater the degree of self-interest of the trustee bringing or defending the proceeding, the less likely it will be that a Beddoe order should be made. That is because it is correspondingly less likely pre-determination of that matter is in the trust’s best interests. There will still be circumstances where the trustee would be self-interested, but it would nonetheless be appropriate to grant pre-emptive indemnity. For instance, where the substantive proceedings are weak or vexatious, and should be tested by way of strike-out or summary judgment, or where it is in the interests of the trust that the claim be defended but the trustee otherwise lacks resources to do so. It may be in the trust’s best interests that at least a partial Beddoe order is made.

The Court of Appeal rejected William Jnr’s counsel’s argument that Beddoe orders should be abolished in New Zealand on public policy grounds as being contrary to natural and open justice. The Court described the Beddoe order jurisdiction as “having a long and secure lineage”.

The Court said that in some cases it may be possible to discriminate between causes of action, authorising and indemnifying the defence of some but not others.

In this case, it was appropriate for a Beddoe order to be made in relation to the second cause of action, being a “novel” claim for breach of fiduciary duty by Bill Snr, translated into a claim against Robert and Callum as trustees of the New Trust and in their personal capacity, based on knowing receipt. This claim was not made on the basis that Robert and Callum were in breach of trust with respect to the New Trust. It was held to be in the best interests of the beneficiaries of the New Trust that this claim was defended because the effect of the claim, if successful, would be to diminish the New Trust’s assets. However, the indemnity could only extend to the reasonable and proper costs attributable to the New Trust’s defence, as opposed to any costs incurred by Robert and Callum personally in defending it.

The Court of Appeal accepted it was appropriate for a limited Beddoe order to be made in respect of the third and eighth causes of action for the same reason that a successful claim would diminish the assets of the New Trust. As a result, it was in the New Trust’s interests that the respondents defend those causes of action.

The Court held that Beddoe orders should not have been granted on the fourth cause of action, which was brought against the respondents in their personal capacity. Beddoe orders should also have been refused on the seventh cause of action, which seeks the removal of the respondents as executors and trustees. A trustee challenged on this basis cannot expect a pre-emptive costs indemnity via a Beddoe order.

The ability to apply for Beddoe orders is an extremely useful tool for trustees and executors in appropriate cases. Without Beddoe orders, trustees and executors proceed at risk. However, careful consideration needs to be given whether it is appropriate to seek the Court’s assistance whether by way of an application for a full Beddoe order, or partial, particularly in hostile litigation. Generally, Beddoe orders are likely to be made if the Court is satisfied it is in the best interests of the trust or where the claim against the trustee or executor is weak. Claims involving allegations of breach of trust where the trustee or executor has a self-interest in defending the claims are unlikely to attract a Beddoe order. The ability to seek partial Beddoe orders may give trustees and executors some comfort.

McCallum provides important guidance as to the procedural requirements, to when applications are likely to be successful, and the types of arguments which will be made by beneficiaries to resist the making of the orders.

This publication is intended as a general overview and discussion of the content dealt with. It should not be used in any specific situation, in which case you should seek specific legal advice.