Unscrambling the omelette – Ratification and trustees de son tort

20/09/2023
James Sheedy
Partner

In a recent decision of the Deputy Bailiff, In Re Blackberry Trust [2023] JRC156 the Royal Court of Jersey has taken the relatively unusual step of depriving a professional trustee of a significant portion of its costs incurred in relation to an application for rectification of its actions while a trustee de son tort.

Background

This decision follows the earlier decision (reported at [2022] JRC 179) in which the Royal Court held that an instrument dated 31 January 2020, purporting to appoint Appledore Trustees Limited as professional trustee of the Blackberry Trust, had been ineffective.
The result of that finding was that Appledore had administered the Blackberry Trust as a trustee de son tort (i.e. a person who assumes to act as trustee without having been properly appointed as one) for a period of nearly two and half years. It had undertaken numerous transactions and made significant distributions to or for the benefit of beneficiaries, purportedly as the validly appointed trustee. This included its conduct of the proceedings in which it attempted first to remedy its defective appointment and then to seek ratification of its actions.

A year had passed between the decision declaring Appledore’s appointment as trustee void and the hearing approving ratification.

The issues for the court were:

• Whether, and if so, the basis upon which Appledore’s various actions could be ratified; and
• Whether Appledore’s conduct of the proceedings was such as to justify a deprivation of its ability to recover all of its costs relating to those proceedings.

The decision does not involve any revision or novel development of the fundamental principles of ratification but it is a useful guide for trustees de son tort to understand what is expected of them if they seek ratification.

Principles applicable to ratification

The Royal Court, in earlier litigation, had laid down the principles applicable to ratification (i.e. sanction and confirmation) of actions taken by a trustee de son tort. The fundamental need for ratification arises because a trustee de son tort, while purporting to exercise the powers of a properly appointed trustee, is not properly constituted as the trustee. As between itself and the beneficiaries (and in some circumstances between itself and third parties), because the purported exercise of its powers are not rooted in the trust instrument, its actions are formally without any proper basis.

As the Royal Court observed BB Trust [2011 JLR 672] ratification is the mechanism to avoid “the havoc that may ensue from any attempt to unscramble what was purportedly done by the trustee de son tort”.

The court in Appledore’s case directed the parties, in advance of the final hearing, to attempt to agree which of Appledore’s actions as trustee de son tort were capable of ratification and the basis of such ratification, applying the ‘Tucker Categories’ identified in the earlier Z Trust litigation Z Trust [2016] (1) JLR 132. In summary, those categories are:

1. Confirmation by perfection of an imperfect act or transaction. “Category 1” i.e., a confirmation of a voidable transaction (e.g. one made by an agent without authority from its principal).
2. Confirmation by replacement of a tainted or doubtful act or transaction by an effective one with a similar effect. “Category 2” i.e., the replacement of acts or transactions undertaking by the trustee de son tort with an act or transaction in the same terms by the de jure trustee.
3. Confirmation by non-intervention “Category 3” i.e., a court direction to the de jure trustee that the acts or omissions of the trustee de son tort remain undisturbed and the trusts are accordingly administered on the same footing as if those acts or omissions had been done with the authority of de jure trustees.

It is conceptually possible for the actions of a trustee de son tort not to be capable of ratification, if for example, Appledore purported to exercise powers that were beyond even what a properly constituted de jure trustee could do e.g. by making distributions to a non-beneficiary.

The parties agreed that all but one of Appledore’s actions as trustee de son tort were capable of ratification under Category 3 (i.e. a direction to the de jure trustees not to intervene). The remaining transaction was a loan that the parties agreed could be remedied by means of a Category 2 ratification. The court observed that while there is a conceptual distinction between the three ‘Tucker categories’ the practical distinction between them is slight. For all intends and practical purposes, they lead to the same place – the actions of the trustee de son tort stand.

This decision is a useful as a guide of what is expected of a trustee de son tort seeking ratification:

• The beneficiaries to a ratification application are entitled to require from the trustee de son tort, with precision information about:

1. 1. what actions it undertook; and
   2. to provide sufficient information about those actions to enable an informed view to be taken of whether or not ratification would be contrary to the welfare of the beneficiaries and the administration of the trust.

• The level of detail required will depend upon various factors, including:

1. 1. the length of the trustee de son tort’s tenure;
   2. the complexity of its actions;
   3. the financial consequences for the trust;
   4. the value of transactions; and
   5. the level of trust which the beneficiaries have reposed in the trustee de son tort.

• The trustee de son tort is expected to willingly and proactively adopt a ‘cards on the table’ approach and to deal quickly and accurately with any reasonable requests for information.

Principles applicable to costs

The court in this case was so dissatisfied with Appledore’s conduct in seeking ratification of its actions as trustee de son tort that it deprived it of 40% of its costs.

The court affirmed the principle that a trustee de son tort is entitled to the usual statutory indemnity applicable to properly appointed trustees for reimbursement from the trust fund for all its costs and expenses reasonably incurred. That is subject to the principle that a trustee de son tort (as with a properly constituted trustee) may be deprived of its indemnity if it has acted unreasonably or is guilty of misconduct. That includes conduct arising in the course of the proceedings in which ratification is sought.

The issue in this case was whether Appledore had conducted itself appropriately and reasonably, by which reference was made to the following statement of principle in Lewin:

48-007 A trustee may be deprived of costs, or ordered to pay costs, not only by reason of his conduct which occasioned the proceedings, but also by reason of his unreasonable conduct in bringing unnecessary trust proceedings, or his conduct in the proceedings themselves, for example by taking procedural steps which needlessly increase costs, by acting in a partisan manner to some beneficiaries against others, by adopting an excessive role in trust proceedings by contesting claims which ought to be contested by others, not the trustees, or which ought not to be contested at all.”

The court’s key findings about Appledore’s conduct were:

• While a trustee is to be afforded a degree of latitude in what arguments it advances before the court when seeking directions, Appledore gave the clear impression that it was not adopting a neutral position and had deployed a number of arguments (incurring costs) regardless of their merits. That was not trustee-like behaviour and should be discouraged.
• Appledore had established a pattern of producing incomplete and insufficiently detailed documents at the ‘11th hour’ to explain its actions.
• The court identified that the fact this case had taken a year to resolve, following the original hearing, was a consequence of Appledore’s failure to give proper disclosure of its actions to inform the analysis necessary for ratification.
• Appledore had adopted an unreasonable approach to the provision information and documents which had run up unnecessary additional costs for the other parties

Key take-aways:

• Ratification of the actions of a trustee de son tort is an indulgence, not a right.
• In seeking ratification, a trustee de son tort should conduct itself in a manner that is proactive, open, sensible, pragmatic and cooperative. The default position should be a ‘cards on the table’ approach to the provision of information about its actions and what it has spent.
• A trustee de son tort who seeks ratification should be prepared for scrutiny of its fees, costs and expenses. It should be in a position to show what it has spent, and to clearly identify which fees, costs and expenses are disputed and those which are not.
• A trustee de son tort that departs from these principles is at risk of being found to have conducted itself unreasonably or improperly and may be deprived of a substantial portion of its costs as a result.