Third Party Claims Against Trustees: Resolving Competing Claims Over Trust Assets

For professional trustees and their insurers, the ability to obtain an indemnity from trust assets in the face of a claim against a trustee by a third party is obviously of critical importance, insulating the trustee from personal liability and the insurer from having to expend its policy limits. Ultimately, if the value of any judgment and costs award exceeds the value of trust assets, the trustee could face personal liability (and the insurer an indemnity obligation) for the excess amount. However, being able to draw upon trust assets to fund defence costs as incurred is obviously attractive from a funding perspective and may provide leverage in settlement negotiations with the third party if the target trust assets are being eroded.

Although a trustee is not obligated to obtain the court's permission to defend a third party claim, or to seek an indemnity from the trust assets, it is a well-established principle in England and in most commonwealth jurisdictions that, where a trustee is ultimately unsuccessful, a retrospective indemnity will only be granted in exceptional circumstances (see Re Beddoe [1893] 1 Ch 547). To mitigate the risk of personal liability, therefore, a prudent trustee is well-advised to apply to the court in advance of pursuing or defending any claim on behalf of a trust, an application known as a "Beddoe application".

Frequently, the amount claimed by the third party will exceed the available trust assets putting the trustee's indemnity claim in potential conflict with the third party's claim. This was the position in X (as Trustee of the A Trust) v Y (as Beneficiary of the A Trust) (unreported) 15 March 2017, where the Grand Court of Cayman, per Smellie CJ, granted Beddoe relief to a Cayman trustee to defend an English third party claim which, if successful, could exhaust the assets of the trust.

Background

The Trustee of the A Trust (the "Trustee") was joined as a defendant in English proceedings arising out of a sale and purchase agreement (the "English Proceedings"). The plaintiffs in the English Proceedings ("Z") were claiming in contract for breach of warranty and for damages in tort for deceit. In the proceedings, Z also sought to preserve the only realizable asset of the A Trust as a means to enforce any potential judgment, the sum of which could exhaust the assets of the Trust.

Faced with this claim, the Trustee brought an application in the Grand Court of Cayman seeking (1) directions to defend the English...