Failure to disclose can be costly

Requests from beneficiaries for trust documents are common issues for trustees and their legal advisers. The English law rules that govern such requests are based on centuries of common law. They are applied in, and guided by, the courts of the commonwealth. However, there remain certain parts of the rules that are yet to be clarified, such as precisely when trustees can withhold trust advice from a beneficiary’s demand on grounds of privilege.

The recent decision of the Supreme Court of New Zealand in Lambie Trustee Limited v Addleman considers this point. The appellant, Lambie Trustee Limited (the Trustee) is the trustee of the Lambie Trust, which has two beneficiaries, Mrs Addleman and her sister, Ms Jamieson. Mrs Addleman requested a number of trust documents from the Trustee (the Request), including legal advice provided to the Trustee in relation to (i) the administration of the trust, (ii) the Trustee’s obligations in view of the Request and (iii) the litigation brought by Mrs Addleman to enforce her rights under the Request (the Advices). All of the Advices had been paid for by the Trustees out of assets held in the Lambie Trust.

It was accepted by the parties that all of the Advices were subject to privilege that the Trustee could assert against a third party. However, it is generally the rule that, where advice is taken by a trustee for the benefit of the beneficiaries, there is a joint interest in that advice held by both the trustee and the beneficiaries, meaning the former cannot assert privilege against the latter.  

The key issue in these proceedings was whether that joint interest privilege ended in relation to any of the three categories of the Advices and, if so, precisely when it ended.

High Court and Court of Appeal decisions    

At first instance, the Judge accepted the argument that the Lambie Trust had been established for and funded by Ms Jamieson. Therefore, Mrs Addleman was not entitled to obtain disclosure of the Advices (as well as other trust documents requested).   

Mrs Addleman appealed to the Court of Appeal, which considered evidence that casted significant doubt over whether the Lambie Trust was in fact established for and funded by Ms Jamieson.  On that basis, the appeal was allowed and the Trustee was ordered to disclose trust documents to Mrs Addleman, including all of the Advices. 

Supreme Court decision

The Trustee appealed to the Supreme Court, which granted permission on the issue of whether it was correct that the Advices should be disclosed to Mrs Addleman. 

The Supreme Court took the opportunity to review the general principles of trustee disclosure, when privilege arises in trust advice and when it can be asserted by trustees against beneficiaries.

The Supreme Court dealt quickly with the first category of Advice (as to the administration of the trust), noting that “it is clear beyond argument” that privilege in such advice cannot be asserted against a beneficiary. A joint interest is almost certainly going to exist between beneficiaries and trustees in such advice.

Where that joint interest ended was somewhere between the second category of Advice (as to the trustee’s obligations pursuant to the Request) and the third (as to the litigation to enforce the Request). 

The Supreme Court noted that, in almost all of the cases where the courts had found that the joint interest had ended (most of which were decisions of the English courts), litigation had already commenced. Conversely, in cases where the joint interest remained, the general trend was that the advice had been given before litigation was in contemplation. It had therefore been held that contemplation of litigation marked the point at which the joint interest ended. 

However, the Supreme Court disagreed that contemplation of litigation terminates the joint interest, finding instead that it is only when the advice is taken for the “dominant purpose of defending litigation” that the joint interest ends. Their reasoning was that a beneficiary may threaten litigation against a trustee, such as to compel document disclosure, and at that stage trustee will seek advice on what is the right course of action, i.e., to accept or resist the demand based on its obligations. As the trustee is obtaining advice on how to carry out its duties, beneficiaries will retain a joint interest in that advice.  

However, the balance tips once a trustee has taken the decision to resist the demand; at that point the parties’ positions will be sufficiently conflicting such that the joint interest will have ended.  

In this case, right up to the point of proceedings being issued, the Trustee continued to discuss with Mrs Addleman which documents could be disclosed. Mrs Addleman retained a joint interest in advice on this subject and so all Advices given before the litigation began could be disclosed.  

However, after this point, the parties no longer had a joint interest in the subject matter of the dispute and so the Trustee was permitted to withhold all Advices after issue of proceedings. 

Costs  

While the Supreme Court’s decision was handed down in June 2021, it took until February 2023 for the question of costs to be resolved.  

The general position in a beneficiary dispute (i.e., where beneficiaries bring litigation against trustees, as categorised in Alsop Wilkinson v Neary) in which the claim does not extend to breach of trust is that the trustee will retain its right to indemnify itself out of the trust funds – even if unsuccessful – unless it is guilty of misconduct. In considering the parties’ conduct, courts retain a broad discretion and, in this case, the Supreme Court was particularly critical of the Trustee taking a partisan position in support of Ms Jamieson at first instance.  

As a result, the court ordered that the Trustee be deprived of its indemnity (including for costs incurred at the Court of Appeal), while Mrs Addleman’s costs were to be paid from the trust fund.  

Wider significance

This case is instructive guidance for English trustees and lawyers on when the court will draw the line between ordering disclosure and permitting a withholding on grounds of privilege. Trustees and their advisers should be mindful that courts may order disclosure of legal advice given right up until proceedings are brought. 

Furthermore, trustees should proceed with caution when resisting beneficiaries’ applications, whether for trust documents, advice or other claims falling short of breach of trust, as the courts can punish trustees even where they are partially successful in defending the application.

It is also worth bearing in mind that the Advices in this case were all paid for out of the trust fund. Trustees who are concerned about their advice being disclosed with harmful consequences can help prevent this by settling the costs of that advice from their own assets.