“Mr. Kenge,” said Allan, appearing enlightened all in a moment. “Excuse me, our time presses. Do I understand that the whole estate is found to have been absorbed in costs?” “Hem! I believe so,” returned Mr. Kenge. “Mr. Vholes, what do you say?” “I believe so,” said Mr. Vholes. “And that thus the suit lapses and melts away?” “Probably,” returned Mr. Kenge. “Mr. Vholes?” “Probably,” said Mr. Vholes.
-Bleak House, Charles Dickens
An executor or trustee, may incur expenses when undertaking their role in a number of ways: they may incur expenses administering the estate which have nothing to do with legal proceedings, and they may incur legal costs, either in a non-contentious context, by getting legal advice for example, or by incurring costs in litigation, in a variety of potential disputes that may arise. They may then seek to have their liabilities reimbursed from the estate.
The starting point for their reimbursement is to be found in section 31 of the Trustees Act 2000 (which is also applied to personal representatives by section 35 of the Trustees Act 2000) by which a trustee or executor is entitled to recover her expenses out of the estate:
(1)A trustee—
(a)is entitled to be reimbursed from the trust funds, or
(b)may pay out of the trust funds,
expenses properly incurred by him when acting on behalf of the trust.
(2)This section applies to a trustee who has been authorised under a power conferred by Part IV or any other enactment or any provision of subordinate legislation, or by the trust instrument—
(a)to exercise functions as an agent of the trustees, or
(b)to act as a nominee or custodian,
as it applies to any other trustee.
But a trustee does not enjoy a complete indemnity down to the last pound: the section reflects the principle that a trustee will be indemnified for expenses “properly incurred” by him, and by implication not for expenses “improperly incurred”. But who is to say what is proper or improper, and what do these phrases actually mean when considering the pounds and pence of costs or expenses incurred?
When court proceedings are involved, this section must be considered in conjunction with section 51 of the Senior Courts Act 1981, which provides that the court has a discretion in relation to the costs of any proceedings that are undertaken in court. This section is supplemented by the Civil Procedure Rules which provide as follows:
(1) This rule applies where –
(a) a person is or has been a party to any proceedings in the capacity of trustee or personal representative; and
(b) rule 44.5 does not apply.
(2) The general rule is that that person is entitled to be paid the costs of those proceedings, insofar as they are not recovered from or paid by any other person, out of the relevant trust fund or estate.
(3) Where that person is entitled to be paid any of those costs out of the fund or estate, those costs will be assessed on the indemnity basis.
What this rule means, is that if for example a trustee or executor gets involved in litigation, and wins the case, they may well recover their costs from the losing party on the standard basis. But that means that usually, a shortfall will arise between what they get back from the losing party, and what they have spent. So as per rule 46.3(2) they are entitled to seek that shortfall from the estate. But they do not automatically get everything, because the court then must assess that shortfall, on the indemnity basis.
This is not quite the indemnity basis which applies in civil litigation: I think of it as “indemnity basis plus” by reason of Practice Direction 46, which is based on the old Rules of the Supreme Court, and before that, caselaw in the Chancery Division. What the Practice Direction provides is:
1.1 A trustee or personal representative is entitled to an indemnity out of the relevant trust fund or estate for costs properly incurred. Whether costs were properly incurred depends on all the circumstances of the case including whether the trustee or personal representative (‘the trustee’) –
(a) obtained directions from the court before bringing or defending the proceedings;
(b) acted in the interests of the fund or estate or in substance for a benefit other than that of the estate, including the trustee’s own; and
(c) acted in some way unreasonably in bringing or defending, or in the conduct of, the proceedings.
1.2 The trustee is not to be taken to have acted for a benefit other than that of the fund by reason only that the trustee has defended a claim in which relief is sought against the trustee personally.
(my emphasis added)
Thus, the conclusion is that the focus on the court on assessment should be on whether the costs were properly incurred, or not improperly incurred, which is a slightly different test to whether the costs were reasonably incurred. The next question that needs to be asked, is whether the effect of section 31 renders the process of assessment pointless, because if the costs are assessed on an indemnity basis but disallowed, can the executor still claim them anyway under section 31? The answer to that is “no”, for three reasons.
First, because both section 31 and Practice Direction 46.1 are not in conflict with each other: rather they complement each other, as they both use the same criteria of “properly incurred”. If costs are not properly incurred and disallowed on assessment, then they cannot in my view be “properly incurred” under section 31.
Secondly, although the law can sometimes be an ass it would be a remarkable situation, if the parties could be put to the trouble and expense of an assessment, the costs judge spend time painstakingly assessing the costs, but at the end of that process, the executor can simply ignore it and take the moneys out of the estate anyway.
Thirdly because the caselaw supports in my view this conclusion, though it must be read carefully and mindful of the fact that some of it is 70 years old, and the costs rules were different historically to the costs rules which apply today.
The most important question however that falls to be addressed, is what is proper/improper for these purposes? How high is the bar set for a finding of impropriety? The interesting part here, is that judicial views have shifted over the years on what the threshold test is.
Starting with the Practice Note [1953] 1 WLR 1452 formulated 70 years ago, in two passages Vaisey J noted this:
One thing is perfectly plain, and it is important that the profession should understand it. If a trustee submits to having his costs taxed as between solicitor and client, he is entitled to his costs as so taxed and nothing more. He is not entitled to take the taxing master through his bill and then, when the taxing master disallows certain items, to go away and say:
“That does not matter. I know I have wasted the taxing master’s time, but I do not care about that. I do not care what he taxes off. I will help myself to whatever he has disallowed.”
That is wrong, and, hoping that I could help to resolve that difficulty in which trustees have found themselves, I, with the assistance of the Chief Registrar and the Chief Taxing Master and with the approval of all the judges of the Chancery Division, came to the conclusion that a form of words should be used which would give trustees more than solicitor and client costs, that is to say, give them all the costs to which they are entitled.
And:
It is, I think, plain that those words “the costs and expenses of and incident to any application” are intended to cover the whole of the costs that the trustees were entitled to, and mean almost the same as costs on an indemnity basis, or costs as between solicitor and own client. It seemed appropriate to use the words of the statute. Any suggestion that trustees are being deprived of costs, and that this would be a more hostile taxation than there has been under the old solicitor and client taxation is absolutely wrong; the whole point of making this change was to give the trustees more, to give them a wider range and to make sure that all costs and expenses which had been properly incurred would be allowed on the taxation.
This establishes that the decision of the costs judge cannot be ignored, and effectively precludes any further indemnity from the estate after a judicial decision to the contrary, but also that the emphasis is on properly incurred costs.
The correct approach to the assessment of counsels’ fees was considered in the case of In re Grimthorpe [1958] Ch 616, where a taxing master’s decision to disallow counsel’s fees was overturned, as the fees had been incurred in good faith and were not improper, which would suggest that “proper” is a fairly low bar. However, in the later case of In re Whitley [1962] 1 WLR 922 the analysis of what would be proper for counsels’ fees was expressed in these terms:
In my judgment, that passage from the judgment of Danckwerts J. in In re Grimthorpe 12 is just as applicable to rule 31 of the Supreme Court Costs Rules as it was to the Practice Direction that Danckwerts J. was considering in that case. The test in other words is: proper or improper. In one sense, of course, the fees incurred for briefing counsel for the plaintiffs in the matter of this originating summons were quite obviously properly incurred in the sense that it was proper for the plaintiff bank to brief counsel to represent them, and that fact is recognised by the order for the taxation and payment of the costs and expenses of the plaintiff bank that I, in fact, made. Quite apart from that, however, what I now have to apply my mind to is the question whether they were proper not only in having been incurred but proper in amount. Mr. Foster has suggested in argument a number of considerations which I ought to have in mind in attempting to answer that question, and all of them were, I think, proper considerations. The first was: the complexity of the legal questions involved. A lawyer has only to read the summons to appreciate that the questions involved are indeed complex. Secondly, the complexity of the questions of fact that were involved. It was not a case in which the facts were all undisputed I have already mentioned that an application was made to Pennycuick J. for leave to cross-examine certain of the deponents on their affidavits, and that leave was given, the matter was put into the witness list and, in fact, such cross-examination took place before me and continued for some time. Thirdly, the court ought to take into account the amount at stake. William Whitley’s estate was a very large one, being over £500,000 gross, and its net value at the time when the summons came before me after duty had been paid was something like £300,000. The amount of the advances with which I was particularly concerned in dealing with questions 1 and 2 of the summons was in excess of £120,000. Fourthly, says Mr. Foster, the question of payment for interlocutory work should be taken into account, and that matter, I think, I have already sufficiently dealt with. Fifthly, it is submitted that I must take into account the possibility that counsel for the plaintiff would have to argue, and as I have already said he was indeed called on by me to do so, and he did so. Finally he says, and I accept it, that I must take into account the standing of counsel concerned. I need only say that counsel concerned was an eminent junior of over 20 years’ experience who has since taken silk. In all those circumstances it seems to me that I cannot find that both the brief fee and the refresher, were really so out of proportion that I can fairly designate them as improper.
This is very close to a simple “reasonableness” test.
In the more recent case of Robert Hugh Thomas Davies v Ian Watkins [2012] EWCA Civ 1570 the Court of Appeal summarised the approach to “properly” incurred costs in this way:
23. The position seems to me to be fairly summarised in Lewin on Trusts, 18th ed., paragraph 21-64, as follows:
“The right of a trustee to indemnity in respect of costs extends only to costs properly incurred in the execution of the trust. By this is meant costs which have been both honestly and reasonably incurred. A doubt is to be resolved in favour of the trustee, and so the right is sometimes expressed in terms of a double negative, that is the trustee is entitled to costs not improperly incurred. The right of indemnity can be lost or curtailed by such inequitable conduct on the part of the trustee as amounts to a violation or culpable neglect of his duty as trustee.”
It is interesting to note, that in this case, the use of the word reasonably was imported: which as I say, can mean something different than “properly”. But the upshot is clear I think from perusal of these authorities. The costs judge has a real discretion as to whether costs are properly incurred in amount, that is exercised using many of the benchmarks of reasonableness, and if she acts to reduce fees, on the basis that they were not properly incurred, that will satisfy the same test under section 31, which uses the same language precluding the recovery of any shortfall from the estate.