MCCALLUM JNR v MCCALLUM & ORS AS TRUSTEES OF THE MCCALLUM FAMILY TRUST [2021] NZCA 237

MCCALLUM JNR v MCCALLUM & ORS AS TRUSTEES OF THE MCCALLUM FAMILY TRUST [2021]NZCA 237 [8 June 2021]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA294/2020[2021] NZCA 237BETWEEN WILLIAM FRASER MCCALLUM JNRAppellantAND CARRICK ROBERT ZACHARYMCCALLUM, CALLUM FRASERMCCALLUM AND MCCALLUMINDEPENDENT TRUSTEES LIMITED ASTRUSTEES OF THE MCCALLUMFAMILY TRUSTFirst RespondentCARRICK ROBERT ZACHARYMCCALLUM AND CALLUM FRASERMCCALLUM AS EXECUTORS OF THEESTATE OF WILLIAM FRASERMCCALLUM SNRSecond RespondentFIONA CATHERINE JANE MCCALLUMBY HER LITIGATION GUARDIANMARTHA SELWYNThird RespondentHearing: 4 May 2021Court: Kós P, Gilbert and Goddard JJCounsel: D A T Chambers QC and J M McGuigan for AppellantA S Butler and A M Cameron for First and Second RespondentsS L Robertson QC for Third RespondentJudgment: 8 June 2021 at 9 amJUDGMENT OF THE COURTA The applications to adduce fresh evidence are granted to the extent identifiedat [26] of this judgment.B The appeal is allowed to the extent identified in [68] and [69] of thisjudgment.C No order is made for costs.____________________________________________________________________REASONS OF THE COURT(Given by Kós P)TABLE OF CONTENTSPara NoIntroductionBackgroundTrusts and transfersLitigationJudgment appealedAppealTrustee duties, trustee costs, and Beddoe applicationsTrustee dutiesTrustee costsBeddoe applicationsShould Beddoe orders be abolished in New Zealand?Should Beddoe orders have been made here?Breach of natural justice"Hostile litigation" —– submissions"Hostile litigation" —– discussionCostsResult[1][5][6][15][20][23][27][28][29][37][46][52][53][56][59][71][72]Introduction[1] "Beddoe orders" are directions given by a court approving trustees bringing ordefending proceedings at the cost of the trust.1 With a Beddoe order in place, trustees1 So-called after the decision of the English Court of Appeal in Re Beddoe [1893] 1 Ch 547 (CA).may pursue or defend claims with the confidence that they will not be liable personallyfor costs reasonably incurred. Without such an order, they proceed at risk.[2] These orders are supposed to be fast and inexpensive. The orders sought inthis case have been fought tooth and nail for two years. So, neither fast norinexpensive.[3] Beddoe orders will only be made where necessary and in the best interests ofthe trust (as opposed to the trustees). And they will seldom be appropriate wherethe litigation is "hostile", that is, alleging wrongdoing by the trustees.[4] In this case, partial Beddoe orders were made by Gwyn J.2 This appealchallenges the making of these partial orders.Background[5] The McCallum family moved from Scotland to South Auckland in the 1860s.There they acquired land: the Pakihi and Karamurau Islands off the Clevedon coast,and an estate at Wairoa Bay, Clevedon, known as Lismore. There they builta substantial homestead.Trusts and transfers[6] In 1986 Bill Snr (1936–2017) settled the W F McCallum Trust (Old Trust).The beneficiaries of that trust were his wife, Heather; children, William Jnr and Fiona;any grandchildren; any trust or superannuation scheme for the benefit ofthe aforementioned persons; and any charitable trust. The trustees were Bill Snr; hisbrother, Robert; and his son, William Jnr.[7] At that stage Fiona was 25 years of age, and William Jnr was 24. They arenow 60 and 59 years of age respectively. Neither has children. Fiona has beenintellectually disabled for most of her life, and suffered a stroke three years ago.William Jnr appears to have capacity, but suffers from his own developmentaldifficulties. He is described as vulnerable. In 2016 he was removed as a trustee of2 McCallum v McCallum [2020] NZHC 907 [Judgment appealed].the Old Trust because of his unwillingness to engage with the other trustees.3Woodhouse J held that he was "unfit to continue to act as a trustee".4 He also saidthat:5The evidence establishes that William junior is not competent to make sensibledecisions relating to management of the trust assets, that he is not able todistinguish between his duties as a trustee and his personal interests, and thathe is either unwilling or unable to participate in the necessary decision makingof the trustees.[8] In 2010 Bill Snr was diagnosed with prostate cancer. By 2016 that conditionwas irreversible and hospice care was needed. Heather (then aged 83 years) also hadserious health issues. Jumping ahead, Bill Snr died in January 2017, and Heather inAugust 2017.[9] Beginning in August 2016, a series of transactions occurred involving boththe Old Trust and the McCallum Family Trust (New Trust), and Bill Snr's separateproperty. The exact details will concern the Judge who decides the substantiveproceedings in due course. The detail need not concern us here, dealing as we areseparately with a Beddoe order application. The key participants in those transactionswere three: Bill Snr, his brother Robert, and Bill Snr's nephew, Callum (son of hislate brother, John).[10] In sum, however, there was an exchange of assets between Bill Snr andthe trustees of the Old Trust, and a transfer of assets from Bill Snr to Robert,Callum's trust,6 and the New Trust. We need only summarise the four organisingtransactions.[11] First, in August 2016 Bill Snr settled the New Trust. The trustees wereBill Snr, Robert and Callum. The discretionary beneficiaries of the New Trust wereBill Snr, Heather, Fiona, William Jnr, any children of William Jnr and Fiona, and anytrust for the benefit of the discretionary beneficiaries. The final beneficiaries of theNew Trust are any children of William Jnr and Fiona, any charitable trusts, Bill Snr's3 McCallum v McCallum [2017] NZHC 1218.4 At [18].5 At [20].6 For value as to part, but alleged to be undervalue.grand-nephews and grand-nieces (some of whom are Callum's children), and any trustfor the benefit of the final beneficiaries.7[12] Secondly, Bill Snr made a will in November 2016 in which he gave his personaldomestic assets to Heather, forgave his debt to the New Trust, and gifted the residueof his estate to the trustees of the New Trust. One of the assets falling into that residuewas a debt owed by the Old Trust.[13] Thirdly, in the same month Bill Snr also gifted a number of assets tothe New Trust, including shares in two family companies, his half share in the familyhome, and the yacht Thistle.[14] Fourthly, and after Bill Snr's death, there was a resettlement of the remainingassets of the Old Trust on to the New Trust. That occurred in November 2017.Litigation[15] Heather's estate comprises a half share in the family home and about $1 millionheld in bank accounts. Before her death she had brought proceedings againstBill Snr's estate under the Property (Relationships) Act 1976. Her executor hascontinued those proceedings. We can set them to one side for present purposes.[16] More relevantly, the substantive proceedings (being CIV-2019-404-00372)underlying the Beddoe application were brought in March 2019. William Jnr isplaintiff, later joined in that capacity by his sister Fiona through her litigation guardian.The defendants are Robert and Callum in three capacities: (1) as executors andtrustees of the estate of Bill Snr; (2) as trustees of the New Trust; and (3) personally.[17] The statement of claim (at least at the time Gwyn J heard the Beddoeapplication) alleges:87 Robert and Callum were identified also as limited interest beneficiaries, enabling their use ofthe yacht Thistle.8 The pleading has been amended further. We address the Beddoe application, however, on the stateof the pleadings at the time of the original hearing. We do however take into account the fact thatFiona has been joined as plaintiff in the substantive proceedings.(a) First cause of action (against the defendants in their capacities asexecutors of Bill Snr's estate): that Bill Snr breached his moral duty interms of the Family Protection Act 1955 by not making adequateprovision for William Jnr (and Fiona)'s proper maintenance andsupport.(b) Second cause of action (against the defendants in their capacities astrustees of the New Trust, and personally): a novel cause of actionalleging that Bill Snr owed "legal and fiduciary duties" to William Jnr(and Fiona), based (it appears) on a combination of parentage andwealth, to make sufficient provision for his children out of his estate.Assets received by Robert and Callum are said to have been transferredin breach of these duties, and to be held on constructive trust forWilliam Jnr (and Fiona).9(c) Third cause of action (against the defendants in all three capacities):that the assets of the Old Trust were invalidly resettled on theNew Trust.(d) Fourth cause of action (against the defendants in their personalcapacities): that Robert and Callum knowingly received trust and estateassets for no or inadequate consideration.(e) Fifth cause of action (against Callum in his personal capacity): thatCallum breached his fiduciary duties as a trustee by profiting fromthe assets of the Old Trust, of which he is not a beneficiary, andreceiving an asset from Bill Snr at undervalue which was subject toa moral duty owed by Bill Snr to William Jnr (and Fiona).(f) Sixth cause of action (against Robert in his personal capacity): thatRobert breached his fiduciary duties by receiving an asset from Bill Snrat undervalue which he knew was subject to a moral duty owed byBill Snr to William Jnr (and Fiona).9 If sustained, the claim would seem to enable tracing from the Old Trust.(g) Seventh cause of action (against the defendants in all three capacities):an application for order for removal of Robert and Callum as trusteesof the two Trusts, and as executors of Bill Snr's estate.(h) Eighth cause of action (against the defendants in their capacities asexecutors of Bill Snr's estate): seeking orders that the grant of probateof Bill Snr's estate be recalled, and that his November 2016 will bedeclared invalid on the basis that it was procured by undue influencethrough "sustained pressure" from Robert and/or Callum.[18] On 17 May 2019 Robert and Callum applied for Beddoe orders in these terms:(a) Whether it is reasonable and proper for the first applicants to defendthe proceedings in CIV-2019-404-00372.(b) Whether the first applicants as trustees of the Trust are entitled to bereimbursed out of the assets of the Trust for their reasonable legalcosts.(c) Whether the second applicants as executors should defendthe proceedings in CIV-2019-404-00372 seeking their removal asexecutors, and whether they are entitled to be reimbursed out ofthe assets of the estate for their reasonable legal costs of doing so.[19] It is obscure which the "Trust" referred to is, but we will take it to bethe recipient New Trust. We shall have more to say about the form of application laterin this judgment.Judgment appealed[20] In the judgment appealed, Gwyn J carefully reviewed the jurisdiction to grantBeddoe orders, the nature of the claim, the Trusts, and the merits of the substantiveproceedings. She noted in the latter respect that an opinion had been provided bythe applicants from independent counsel, Mr Chris Kelly. That opinion was of courseprivileged and had not been seen by the respondents to the application. Whilethe Court was assisted by it, the Judge had made her own necessarily preliminaryassessment of the merits of the substantive proceedings.1010 Judgment appealed, above n 2, at [34].[21] Taking a preliminary and provisional view only, the Judge accepted for presentpurposes that the trustees' position was a strong one.11 To the extent that there wereallegations of breach of trust or obligations owed by executors, it would in the usualcourse not be appropriate for the trustees to actively defend such allegations. But atthe stage the Judge was considering the matter, Fiona was not a plaintiff. The Judgenoted that, to the extent the relief William Jnr was seeking would result in significantassets passing to him alone, the proceedings could not be said to be in the best interestsof the trusts as a whole.12 The Judge took a cause of action by cause of action approachto the claim. She noted that even where it was appropriate that the applicants remainneutral, that did not necessarily mean "passive". As the Judge put it:13In some cases, the Court may be assisted by the provision of factualinformation and/or submissions from the trustees as to the principles of law orconstruction involved, although a claim is not actively defended on its merits.[22] Reviewing, then, the eight causes of action (set out at [17] above), the Judgeheld:14(a) First cause of action (Family Protection Act): no order granted.15(b) Second cause of action (fiduciary duty of parent): application grantedin respect of the reasonable and proper legal and associated costs ofdefending the second cause of action in the substantive proceedings.The Judge noted that the claim was novel, and did not allege a breachof trust. The Judge said:16Bearing in mind the legal complexity but limited prospect ofsuccess, the Beddoe application is granted in respect ofthe reasonable and proper legal and associated costs ofdefending the second cause of action in the substantiveproceedings. I expect that this will solely, or largely, entailsubmissions on the relevant legal principles.11 At [38].12 At [39]. Since the date of judgment, Fiona has been joined as a plaintiff in the substantiveproceedings.13 At [41].14 At [81].15 The applicants had indicated they would abide the Court's decision: at [43].16 At [50].(c) Third cause of action (invalid resettlement): application granted forthe reasonable and proper legal and associated costs of providingthe Court with all relevant factual information and submissions onrelevant legal principles, but not actively defending the merits ofthe claim.(d) Fourth cause of action (knowing receipt): application granted forthe reasonable and proper legal and associated costs of providingthe Court with all relevant factual information and submissions onrelevant legal principles, but not actively defending the merits ofthe claim.(e) Fifth and sixth causes of action (breach of fiduciary duties): no ordergranted.17(f) Seventh cause of action (removal of trustees): application granted inrespect of the reasonable and proper legal and associated costs ofdefending this cause of action in the substantive proceedings solely inrespect of the claim seeking the applicants' removal as executors ofBill Snr's estate.(g) Eighth cause of action (recall of probate): application granted forthe reasonable and proper legal and associated costs of providingthe Court with all relevant factual information and submissions onrelevant legal principles, but not actively defending the merits of theclaim.Appeal[23] From that judgment William Jnr appeals. Fiona is now joined as plaintiff inthe substantive proceeding, and respondent on the Beddoe appeal. In effect sheparticipated as co-appellant, her counsel, Ms Robertson QC, supporting the appeal,17 The applicants, at least in their relevant capacities as trustees and executors, were abiding theCourt's decision on these causes of action: at [70]–[71].although not quite for the same reasons advanced for William Jnr by Ms Chambers QCand Ms McGuigan.[24] The essence of William Jnr's appeal was that: (1) Beddoe orders should beabolished, being contrary to public policy; (2) the making of the orders here was inbreach of natural justice; and (3) (in a context of hostile litigation), even ifthe foregoing complaints were not upheld, the orders should not have been made inthis case. Ms Robertson focused on the latter argument only for Fiona. Later in thisjudgment we will address the submissions made in more detail.[25] There was no cross-appeal by Robert and Callum against the limits imposedby the Judge on the orders granted.[26] William Jnr, and Robert and Callum, each seek to adduce fresh evidence.There was no great contest about this evidence. It is largely documentary, and tothe extent it is updating in nature, we will receive it. That said, we find most of it ofvery little practical assistance in determining the appeal. We advised counsel atthe hearing that we had elected not to read the opinion of independent counsel, giventhe natural justice appeal ground. We have not found it necessary to revisit thatdecision. Obviously, the fact that Fiona is now plaintiff in the substantive proceedingsis a material development, and we take that into account.Trustee duties, trustee costs, and Beddoe applications[27] Before turning to the issues arising on appeal, we survey briefly the essentialprinciples governing trustee duties, trustee costs and Beddoe applications.Trustee duties[28] As this Court observed in Pratley v Courteney, a trustee has a duty to protecttrust assets for the benefit of the beneficiaries.18 The duty extends to bringing, anddefending, claims necessary to fulfil that duty. But they must do so where the groundsfor action, or defence, are reasonable. The trustees must exercise due skill and care.If there is doubt as to what they may do, trustees should take legal advice, and they18 Pratley v Courteney [2018] NZCA 436, [2018] NZAR 1787 at [18].may seek directions from the court.19 Litigation costs incurred for the benefit ofthe trust in its defence will generally be paid out of trust funds. But they must bereasonably and properly incurred.20 A Beddoe order may be sought to confirmpre-emptively the propriety of action or defence, and to confirm the trustees'entitlement to indemnity for costs to be paid out of the trust's funds.Trustee costs[29] The legal history of costs in trusts litigation was surveyed briefly bythe High Court in Woodward v Smith.21 But the starting point, as noted by this Courtin Butterfield v Public Trust, is that it is:22 one of the fundamental rights of an honest express trustee that costs andexpenses properly incurred in the administration of the trust are compensableout of the assets of the trust.In support of that proposition, we cited the judgment of Danckwerts J in ReGrimthorpe:23It is commonplace that persons who take the onerous and sometimesdangerous duty of being trustees are not expected to do any of the work ontheir own expense; they are entitled to be indemnified against the costs andexpenses which they incur in the course of their office; of course, thatnecessarily means that such costs and expenses are properly incurred and notimproperly incurred. The general rule is quite plain; they are entitled to bepaid back all that they have had to pay out.[30] As this Court noted in Butterfield, the right is essentially proprietary in nature,recognised as an incident of trusteeship. It is to an indemnity for reasonable costs andexpenses incurred in the administration of the trust. The entitlement is against the trustitself, and a current trustee is entitled to deduct reasonable costs and expenses incurredin the administration of the trust from trust assets, in exercise of a right ofexoneration.2419 At [18].20 See also McLaughlin v McLaughlin [2018] NZHC 3198, [2019] NZAR 286 at [18].21 Woodward v Smith [2014] NZHC 407, [2014] 3 NZLR 525 at [21]–[25].22 Butterfield v Public Trust [2017] NZCA 367, [2017] NZAR 1439 at [20].23 At [20], citing Re Grimthorpe [1958] Ch 61 (Ch) at 623.24 At [21].[31] This Court, in its supervisory jurisdiction, will review costs and expensesincurred. It will do so to ensure the costs were necessarily incurred in the interests ofthe trust and that they were reasonable in extent. In Butterfield we endorsed thisobservation made by the High Court in New Zealand Māori Council v Foulkes:25The limitation on a trustee's right of indemnity is, however, that the expensesare "properly incurred". The duty to seek advice does not extend, for instance,to pose questions the answers to which are perfectly obvious. Nor where noreal and substantial dispute exists. Unnecessary proceedings, or the taking ofunnecessary procedural steps needlessly increasing costs, may mitigate(or eliminate) the right of indemnity. Again, excessive costs lie beyond thescope of indemnity. Every dollar paid in trustees' expenses is a dollar deniedto beneficiaries of the Trust.[32] The editors of Lewin on Trusts observe that a trustee's indemnity out ofthe trust fund extends both to his own costs and any costs he is ordered to pay otherparties, unless the court orders otherwise:26Thus, where a trustee successfully defends proceedings brought bya beneficiary, he should be entitled to an indemnity out of the fund for anycosts not recovered from the beneficiary. Even where he is unsuccessful, heis still in principle entitled to recover from the trust fund any costs he has beenordered to pay to the successful beneficiary. In either case, however, the courtmay limit or remove that entitlement Misconduct, broadly construed, may deprive a trustee of a right to indemnity. Givenwe are dealing here with assets the trustee is charged with protecting, misconductincludes careless and unreasonable conduct in the conduct of litigation orthe management of the trust. A trustee partisan in his own interests or the interests ofonly some beneficiaries likewise may be deprived of indemnity.27[33] It is also patent that there will be some proceedings in which the right toindemnity is, or is likely to be, displaced. And that in turn will affect whether it isproper to make a pre-emptive Beddoe order. There have been various, differingattempts in the authorities to classify proceedings in which indemnity for trustees'costs might or might not be given.25 At [21], citing New Zealand Māori Council v Foulkes [2015] NZHC 489 at [31] (footnoteomitted).26 Lynton Tucker, Nicholas Le Poidevin and James Brightwell Lewin on Trusts (20th ed,Sweet & Maxwell, London, 2020) vol II [Lewin on Trusts] at [48–005] (footnote omitted).27 At [48–008].[34] As Hoffmann LJ observed in McDonald v Horn, the classic statement is thatof Kekewich J in Re Buckton.28 The latter case concerned costs in the event, ratherthan a pre-emptive Beddoe application. Kekewich J divided trust litigation into threebroad functional categories:29(a) Proceedings brought by trustees to obtain the court's guidance onconstruction of the trust deed or some aspect of the trust administration.The costs of all parties necessarily participating in those proceedingsare treated as incurred for the benefit of the estate and will be orderedto be paid out of the trust fund.(b) An application similar in nature to the first category, but brought bysomeone other than a trustee (such as a beneficiary). It would equallyhave justified application by a trustee. The same approach is taken tocosts in this category as in the first category.(c) Claims where a beneficiary or third party is making what might betermed a hostile claim against the trustees, or another beneficiary. Thatclaim may still involve a point of construction or administration, butwill often involve a claim to a beneficial interest or entitlement to a partof the fund. Here, the usual principles as to costs apply; they followthe event.[35] Trust proceedings may of course be characterised in a number of differentways. Elsewhere in their estimable text, the editors of Lewin identify seven broadfunctional categories of proceeding:30(1) proceedings for the construction of the trust instrument ordetermination of questions of law as to the validity or scope of thetrusts or powers under the trust instrument or imposed or conferred bylaw;28 McDonald v Horn [1995] 1 All ER 961 (CA) at 970, citing Re Buckton [1907] 2 Ch 406 (Ch) at413–415.29 At 414–415. Lewin on Trusts has identified two further categories: (d) a proceeding commencedby a trustee but otherwise with the characteristics of the third category; and (e) an issue ofconstruction pursued by a third party acting in dual capacity, in part for the benefit to thebeneficiaries, and in part for his own benefit by way of defence to a hostile claim: Lewin on Trusts,above n 26, at [48–039]–[48–040].30 At [48–002] (footnotes omitted).(2) proceedings in which directions are sought for the guidance ofthe trustee in the administration or execution of the trust;(3) proceedings in which the assistance of the court is sought undervarious statutory provisions, for example under the Trustee Act inrelation to the appointment of trustees and vesting of trust property;(4) proceedings in which the rights of beneficiaries in the administrationor execution of the trusts are sought to be enforced, for example inrelation to accounts, provision of information to beneficiaries ordistribution of the trust fund;(5) breach of trust proceedings;(6) proceedings concerning self-dealing and profits from the trust; and(7) proceedings for or concerning the removal of trustees.It is reasonably obvious that the prospects of indemnity for trustees' costs being deniedare greater in the latter three categories than in the former three (with the fourthcategory in no man's land, capable of being seized by either outcome). In the latterthree categories, a trustee ought not to expect a pre-emptive determination ofindemnity in their favour via a Beddoe order. That order will only be made wheredoing so is nonetheless in the best interests of the trust.31[36] We have not discussed thus far the subtly different tripartite classificationsystem posed by Lightman J in Alsop Wilkinson v Neary.32 That system, not explicitlyapplying Buckton, is more focused on the character of the party opposing the trusteesin the litigation:33(a) a dispute as to the trusts on which they hold the subject matter ofthe settlement ("a trust dispute");(b) a dispute with one or more of the beneficiaries as to the propriety ofany action which the trustees have taken or omitted to take or may ormay not take in the future ("a beneficiaries dispute"); and31 See the discussion commencing at [43] below.32 Alsop Wilkinson v Neary [1996] 1 WLR 1220 (Ch).33 At 1223–1224.(c) a dispute with persons, otherwise than in the capacity of beneficiaries,in respect of rights or liabilities assumed by the trustees as such inthe course of administration of the trust ("a third party dispute").The Alsop classification system is also helpful, as far as it goes, but it is less instructiveas to the likely availability or denial of indemnity. That is because the first and secondAlsop categories include both non-hostile and hostile proceedings (the latter being farless likely to earn indemnity). In contrast, the operating assumption underlyingthe first and second Buckton categories is that they are non-hostile (and, therefore,likely to earn indemnity). Despite these divergences, there has been a tendency to runthe Buckton and Alsop classification systems together.34Beddoe applications[37] As noted before, a Beddoe order may be sought to confirm pre-emptivelythe propriety of action or defence, and to confirm the trustees' entitlement to indemnityfor costs to be paid out of the trust's funds. Re Beddoe is a relatively rare instance ofa litigant in person succeeding on appeal. True, the appellant, a Mr Cottam, wasa solicitor. On the other hand, he succeeded despite the fact his dealings with thetrustee were described by Bowen LJ as "overbearing, irritating, and offensive".35The trustee had declined to deliver up certain deeds. He was then the subject of asuccessful claim in detinue brought by beneficiaries, of whom Mr Cottam was one.The trustee nonetheless obtained an order for indemnity for costs out of the trust fund.Mr Cottam appealed. As Bowen LJ put it:36If the present appeal fails what, we are told, amounts to nearly a quarter ofa tiny trust fund will have been wasted with impunity in an unsuccessfullitigation of no profit whatever to the trust; and the legal profession will havedevoured, without any corresponding advantage to anybody, a considerableportion of a very small oyster.34 See, for example, McLaughlin v McLaughlin, above n 20, at [24]–[25]; and Jeremy Johnson andJames Anson-Holland "Who Should Pay, and When?" [2019] NZLJ 360 at 360 and 362.35 Re Beddoe, above n 1, at 563.36 At 561.Warming to this theme, Bowen LJ went on:37On the true construction of the will the trustee had no answer in law tothe demand. But his solicitor entertained at the outset some doubt as to the lawof the case — doubts which the result shewed to be unfounded. He did nottake out any summons for directions from the Court, as he might have done,and thereby have avoided litigation; but on his own responsibility he defendedthe action down to the trial at the assizes, and was there defeated in the end.The vanquished trustee now seeks to impose the costs of this idle and fruitlesslitigation on the estate [38] Both Lindley and Bowen LJJ emphasised that the right of indemnity lay onlyfor costs reasonably and honestly incurred.38 Bowen LJ said:39If there be one consideration again more than another which ought to bepresent to the mind of a trustee, especially the trustee of a small and easilydissipated fund, it is that all litigation should be avoided, unless there is sucha chance of success as to render it desirable in the interests of the estate thatthe necessary risk should be incurred. If a trustee is doubtful as to the wisdomof prosecuting or defending a lawsuit, he is provided by the law with aninexpensive method of solving his doubts in the interest of the trust. He hasonly to take out an originating summons, state the point under discussion, andask the Court whether the point is one which should be fought out orabandoned. To embark in a lawsuit at the risk of the fund without this salutoryprecaution might often be to speculate in law with money that belongs to otherpeople.[39] As is apparent from the two preceding passages, Lindley and Bowen LJJ hadin mind originating applications being made for directions. That procedure emergedin the court's inherent jurisdiction in equity, but was then enacted in the Law ofProperty Amendment Act 1859 (UK) (Lord St Leonards' Act), and then in the Rulesof the Supreme Court 1883 (UK). Order 55, rule 3 provided a simpler, statutoryadvisory jurisdiction whereby trustees could obtain directions without going throughthe cumbersome process of bringing all interested persons before the Court.40The innovation of Re Beddoe was less the making of the declarations sought than itsdeclaration as to the potential consequences of not seeking them.37 At 561–562.38 At 562. See also 557–558.39 At 562.40 Susan Kiefel "Judicial Advice to Trustees: Its Origins, Purposes and Nature" (2019) 42(3) MULR993 at 997, citing Re Davies (1888) 38 Ch 210 (Ch) at 212, and Re Wenham [1892] 3 Ch 59 (Ch)at 60–61.[40] Beddoe applications are made, usually by originating application, separatelyfrom the substantive proceeding. They seek directions as to whether to bring or defendthose substantive proceedings, at the trust's expense. The applicants are usually, butnot invariably, trustees. As the effect of the order is to give pre-emptive direction forthe indemnification of the applicant's expenses from the trust's funds, full disclosureof the strengths and weaknesses of the proceedings is required.41[41] A Beddoe order will not however normally deal with party-and-party costs —that is, as between the applicant trustees and the other parties to the substantiveproceedings. Because the trustees remain at risk of payment of those costs,applications are sometimes made also for what are known as "prospective costsorders". Those are designed to deal with party-and-party costs. Such an applicationwas made (and declined) in Woodward v Smith.42[42] We referred earlier to the concept of "hostile" claims.43 There are a number ofNew Zealand authorities suggesting that a Beddoe order will not be granted in hostilelitigation, or only in exceptional circumstances.44 The expression "hostile" isa convenient but crude shorthand for cases where it is inappropriate to pre-emptallocation of costs in advance of the ultimate event. Typically, such a case involvesa claim by a beneficiary asserting breach of trust or other fiduciary duty by the trustee.Because the label is crude, it is also inaccurate. For example, it is not inappropriate topre-empt indemnity where trustees are defending the interests of the trust against thirdparties. Such litigation is "hostile" in a general sense, but the trustee will beindemnified for the reasonable and necessary costs in defending the trust estate againstinsurgents. In that sense the label "hostile" is wrong; some "hostile" claims will earnpre-emptive indemnity via a Beddoe order. A better (but still not wholly accurate)label would be "self-interested" litigation. In that sense, the fifth, sixth and seventhmodern Lewin categories referred to at [35] above are "self-interested litigation" andunlikely to earn pre-emptive indemnity via a Beddoe order. Whether, in the end result,41 McLaughlin v McLaughlin, above n 20, at [19].42 Woodward v Smith, above n 21, at [56].43 See above at [3] and [34].44 Woodward v Smith, above n 21, at [39]; Fundación Pimjo Ac v Aguilar & Aguilar Ltd [2015]NZHC 1402 at [36] and [57]; and Easton v New Zealand Guardian Trust Co Ltd [2016] NZHC3011 at [12].indemnity is available to trustees defending such actions will depend on the ultimateoutcome of, and the trustees' conduct in, the litigation.[43] Thomas J in McLaughlin v McLaughlin was right to criticise earlier authoritysuggesting a Beddoe application brought in hostile proceedings will succeed inexceptional circumstances only.45 We endorse these observations made in thatdecision:46The test as educed from case law is simply that Beddoe applications aregauged against the fundamental question of what is in the best interests ofthe trust. The Court must therefore exercise its jurisdiction in the best interestsof the trust, and the beneficiaries as a whole, having regard to allthe circumstances. This may include the need to balance the interests ofdifferent beneficiaries, as well as the interests of beneficiaries and trustees.That basic test conforms to the principle on which such applications arefounded, namely that trustees ought to be indemnified for costs properly andreasonably incurred for the benefit of the trust.[44] As the Judge also observed, the substantive outcomes with or withoutthe "exceptional circumstances" gloss are unlikely to differ materially. It would bedifficult to imagine a truly hostile proceeding, involving an allegation of a breach oftrust with at least some prospect of success, where it would be in the best interests ofthe trust to pre-emptively indemnify the trustees for costs out of the trust assets beforedetermining those allegations.47[45] No absolute rule can, or should, be stated. As Sir Terence Etherton observedin Spencer v Fielder:48I have emphasised that what matters is whether, in substance, trustees who areparties to litigation are acting in the best interests of the trust rather than fortheir own benefit. It is clear, for example, that, depending on the precise facts,trustees may be entitled to an indemnity for costs even though incidentallythey will secure a personal benefit from a successful claim or defence or wherethere are allegations of breach of trust What can be said is that the greater the degree of self-interest of the trustee bringingor defending the proceeding, the less likely it will be that a Beddoe order should bemade. That is because it is correspondingly less likely predetermination of that matter45 McLaughlin v McLaughlin, above n 20, at [28].46 At [29] (footnotes omitted).47 At [30].48 Spencer v Fielder [2014] EWHC 2768 (Ch), [2015] 1 WLR 2786 at [27].is in the best interests of the trust. But there will still be circumstances where thetrustee defence would be self-interested, but it would nonetheless be right to grantpre-emptive indemnity. For instance, where the substantive proceedings are weak orvexatious, and should be tested by way of strike-out or summary judgment, or whereit is in the interests of the trust that the claim be defended but the trustees otherwiselack resources to do so.49 And, as we go on to consider, it may be in the best interestsof the trust that at least a partial Beddoe order is made.Should Beddoe orders be abolished in New Zealand?[46] We can deal with this argument briefly.[47] In William Jnr's written case, the following submission was advanced: "it willbe submitted that Beddoe applications are contrary to New Zealand's principles ofnatural justice and open justice and should not be part of New Zealand law".[48] That submission might be described as heroic. It heralded a titanic clash withembedded equitable authority. But it proved a damp squib.[49] In the end Ms Chambers neither abandoned, nor exploited, the submission.Rather, the argument segued to the safer alternative ground that Beddoe applicationswere not appropriate in proceedings where the claim was properly classified as hostilelitigation.[50] We are in any case quite unpersuaded by the heroic argument. We acceptthe submission made to us by Mr Butler, for Robert and Callum, that the Beddoe orderjurisdiction has a long and secure lineage. As Re Beddoe itself exemplifies, itrepresents an important protection for trustees in authorising the bringing or defendingof a suit in circumstances where there might be doubt as to the availability ofindemnity. Finally, the existence of the jurisdiction has been confirmed in major49 Re Evans [1986] 1 WLR 101 (CA) at 107; STG Valmet Trustees Ltd v Brennan (1999) 4 ITELR337 at 351 (CA) at 351; and Re Uncle's Joint Pty Ltd [2014] NSWSC 321, (2014) 12 ASTLR 487at [28].cognate jurisdictions within the Commonwealth.50 No good reason is evident whyNew Zealand should abandon that safe convoy and henceforth refuse to entertainBeddoe applications.[51] Some clarification of when it is proper to make such orders is, however,needed.Should Beddoe orders have been made here?[52] Two challenges were advanced by William Jnr. Ms Chambers argued thatthe process adopted by the Judge in this case was in breach of natural justice andinappropriate. Ms McGuigan argued that the Judge erred in granting Beddoe ordersin the context of hostile litigation, in which a trustee had a personal interest indefending the proceedings.Breach of natural justice[53] We can deal with the natural justice challenge briefly. The essential objectionswere two. First, that the receipt by the Judge of independent counsel's opinion onthe strengths and weaknesses of the trustees' defences to the substantive proceedingswas not shared with William Jnr (or Fiona), contrary to their right to receive trustinformation.51 Secondly, the hearing was bifurcated in that the appellant's counselwere excluded from that part of the hearing in which that opinion was addressed.[54] We agree, however, with the submission made by Mr Butler that the processhere was an orthodox one and did not breach natural justice. Counsel for the appellantwere given notice of the Beddoe application and provided copies of all relevantmaterial other than Mr Kelly's opinion of 17 May 2019. The issue of litigationprivilege had been addressed by Associate Judge Bell in his judgment of50 No English citation is needed; the Beddoe order is well embedded in that jurisdiction. In Australia,see Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the DiocesanBishop of Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42,(2008) 237 CLR 66.51 Relying on Addleman v Lambie Trustee Ltd [2019] NZCA 480; and Erceg v Erceg [2017] NZSC28, [2017] 1 NZLR 320.30 July 2019.52 No appeal was filed. The procedure adopted on the day was one towhich counsel had acceded in advance. Neither protest was made, nor a recall sought.[55] While it is unusual for a Judge to see material that only one party has seen, itis not exceptional; it happens also in contested privilege cases. It is also conventionalin Beddoe applications, the purpose of the independent opinion being to alert the Judgeto pitfalls that otherwise might be concealed by supporting submissions of a generallyexhortatory nature.53 Rather than prejudice the unseeing respondent to the application,the procedure exists to protect his or her interests. Further protection is given to thatparty by providing that the Judge determining the Beddoe application will not alsodetermine the substantive proceedings.54"Hostile litigation" — submissions[56] Ms McGuigan submitted that the Judge erred here in granting Beddoe ordersin the context where either the trustees were: (1) self-interested, in as much as a breachof trust is alleged; or (2) disinterested because the challenge was essentially onebetween rival beneficiaries. In neither case could it be said to be in the interests ofthe trust that legal costs incurred by the trustees be pre-emptive indemnified.The Judge had made too much of the original state of the proceedings in whichWilliam Jnr was sole plaintiff, given relief would now be shared between William Jnrand his sister, Fiona, following her joinder. Ms McGuigan submitted it was not in thebest interests of the New Trust or Bill Snr's estate for the respondents to activelydefend the plaintiffs' claims in the substantive proceeding, let alone access trust andestate funds to do so. Rather, the respondents should remain neutral to the extent theyare acting in trustee or executor capacities.[57] Ms Robertson supported the submissions made by Ms McGuigan.Her submissions were helpful. She submitted this was not an appropriate case fora Beddoe order. The respondent trustees were "effectively defending claims ofmisconduct made against them". They ought not to have recourse to the trust fund to52 McCallum v McCallum [2019] NZHC 1925.53 See generally Lewin on Trusts, above n 26, at [48–147].54 At [48–133].defend any claims unless and until the claims are dismissed, and they should moreovernot have been meeting their legal costs from the trust fund to date.[58] Mr Butler (who was not engaged prior to this appeal) sought to upholdthe judgment. He submitted that the Judge had properly recognised the claim ashostile in nature, but then appropriately approached the proceeding, which involveda variety of differing claims against the respondents in different capacities, on a causeof action by cause of action basis. He submitted that the Judge's assessment wascareful and nuanced. Mr Butler also submitted that the decision of a Judge ona Beddoe order application is in the nature of an exercise of a discretion. He thereforesubmitted that the present appeal was governed by the May v May (review) criteria,55not the Austin Nichols (general appeal) criteria.56 The appellant needed to show anerror of law."Hostile litigation" — discussion[59] We will start with Mr Butler's last point: the standard of review.[60] That submission is answered by the decision of the Supreme Court inErceg v Erceg which makes clear that the exercise of the supervisory jurisdiction,whether based on inherent or statutory jurisdiction, is an ordinary decision, requiringevaluation, rather than more limited review of the exercise of discretion.57 The samegoes for any appeal to this Court in such a case. As the Supreme Court put it:58In the present case, the decision of the High Court was subject to a generalright of appeal to the Court of Appeal under s 66 of the Judicature Act 1908.We do not see any reason to distinguish the nature of the appeal in the presentcase from that in Kacem v Bashir. That being the case, we consider the Courtof Appeal was free to decide the case according to its view, and not constrainedas it would be if the May v May standard applied.[61] Although that case concerned disclosure of trust documentation tobeneficiaries, the same principles ought to apply to appeals in Beddoe applications.55 May v May (1982) 1 NZFLR 165 (CA).56 Austin Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141.57 Erceg v Erceg above n 51, at [18]–[19] and [70].58 At [70] (footnote omitted). See also [18]–[19] and [68]–[69].There is no sound policy reason to distinguish the two exercises of the supervisoryjurisdiction. Although Beddoe applications are in part concerned with costs, that doesnot make the jurisdiction discretionary. They are also concerned with authority to sueor defend, and with whether indemnity should be determined pre-emptively. This isnot the ordinary stuff of party-and-party costs, where discretion dominates, but stilldoes not displace principle.59 Although appeals in Beddoe applications are not to beencouraged, the appeal lies of right and, when conducted, is by way of rehearing.[62] We turn now to whether Beddoe orders should have been made here.[63] First, a significant difficulty lying in the way of the making of Beddoe ordershere was the complexity of the pleadings in which they were to be assessed. As [17]above makes clear, those pleadings involved a series of complex, interconnectedcauses of action interweaving defendant liability in varying capacities: as executors,as trustees of one or other Trust, and personally. Doubtless the claim might have beenmore clearly pleaded, but it is there for better or worse; no one has sought to strike itout for wanton infelicity. Instead it was incumbent on the respondents, as applicantsfor the orders, to draft their application in terms that addressed the different causes ofaction distinctly. In short, which aspects of the intended defence were to be authorisedand pre-indemnified amidst all the swirling allegations being addressed? How werethey to be distinguished from defence either in hostile (Buckton category three orLewin categories five to seven) trustee claims or claims against the defendants in theirpersonal capacities? It can only be steps taken in the capacity of executor or trusteethat should be authorised and indemnified. Had an attempt been made to discriminateby capacity sued, the difficulty of making a Beddoe order would have been at onceapparent, and a more tailored application might have been advanced, or none at all.The blunt application made here — quoted at [18] above — was never fit for purpose.[64] Secondly, in some cases it may be possible to discriminate between causes ofaction, authorising and indemnifying the defence of some but not others. McLaughlinis a case in point. Thomas J declined to grant Beddoe orders for four of the five causes59 Shirley v Wairarapa District Health Board [2006] NZSC 63, [2006] 3 NZLR 523 at [15]–[17];and Manukau Golf Club Inc v Shoye Venture Ltd [2012] NZSC 109, [2013] 1 NZLR 305 at [7]–[8].of action, on the basis they each involved serious allegations against the defendanttrustees. But an order was granted for the second cause of action (an application fordirections as to the proper investment of trust assets), authorising payment of costs outof trust funds, but subject to the direction of independent senior counsel agreed orappointed.60 The present appeal however is of an order of magnitude more complexthan McLaughlin, given the form of the pleadings. Nonetheless, and in agreementwith the Judge, we think it is still capable of the discriminatory analysis needed.[65] The sole cause of action in which a general Beddoe order was made wasthe second cause of action, being the "novel" claim of breach of (parental) fiduciaryduty by Bill Snr, translated into a claim against Robert and Callum as trustees of theNew Trust and in their personal capacities, based on knowing receipt. The claim isnot made on the basis that Robert and Callum are in breach of trust, with respect tothe New Trust. We would accept it is in the best interests of the beneficiaries ofthe New Trust that this claim is defended, because the effect of the claim, if successful,would be to diminish the assets of that Trust. But the indemnity can extend only toreasonable and proper costs attributable to the New Trust's defence, as opposed to anycosts incurred by Robert and Callum personally in defending it. The costs sheetedhome to the Trust must reflect the marginal costs needed to protect the trust assets,bearing in mind the defence being advanced by other contradictors at their own (ratherthan the Trust's) cost. No party contended for the appointment of independentsupervising counsel — the course adopted by Thomas J in McLaughlin. So thatBeddoe order may stand, and any argument about reasonableness or apportionmentwill need to be addressed after the event.[66] A limited Beddoe order was made in the case of the third, fourth, seventh andeighth causes of action. The third cause of action was brought against the respondentsin all three capacities. It involves allegations of invalid resettlement of Old Trust assetson Bill Snr (ultimately then received by Callum) and the remaining assets of theOld Trust being resettled on the New Trust. The fourth cause of action (which isconnected to the third) is against the respondents in their personal capacities, andalleges that Robert and Callum knowingly received trust and estate assets for no or60 McLaughlin v McLaughlin, above n 20, at [119]–[127].inadequate consideration. The Judge identified weaknesses in relation to the claimsin her judgment.61 The Judge went on to say:62I conclude that it is appropriate to grant the order to a limited extent.The Beddoe application, in so far as it relates to the third and fourth causes ofaction, is granted to enable the defendants to assist the Court withthe provision of all relevant factual information and submissions on relevantlegal principles, but not to actively defend the merits of the claims.[67] We accept that defence of the third cause of action is in the interests ofthe New Trust, for the same reasons given in relation to the second. The scope of theorder made is very limited. There is no cross-appeal. It might be thought that therewould be little point seeking an order in such confined terms. The terms ofthe application — set out at [18] above — were less constrained. To the extent thetrustees incur legal costs for the limited purposes identified by the Judge, namely toassist the Court with the provision of factual information and submissions on relevantlegal principles (but not actively defending), the trustees are patently entitled to expectindemnity, subject only to any rebate for misconduct. There can be no real argumentabout the matter, and the risk to the trustees in taking these limited steps would beslight indeed. The making of a Beddoe order serves very little utility beyond declaringthe obvious. Prudent marshalling of the assets of the Trust might militate againstthe costs of application. But we do not find the Judge erred in making the order.The same observation made in [65] above about only necessary marginal cost beingindemnifiable applies here.[68] We part company from the Judge on the fourth cause of action. This claimconcerns the transfer of assets of Bill Snr's estate (but said to be held on constructivetrust for the Old Trust, namely shares in Excelsior Ltd) to Robert, and assets ofthe Old Trust (a one-third interest in Lismore Farm) to Callum, allegedly in breach oftrust. That claim lies against the respondents purely in their personal capacities.The New Trust has no interest in those assets. It is not in the interests of the New Trustthat it funds the defence of that claim. The Judge erred making the Beddoe order inrespect of the fourth cause of action.61 Judgment appealed, above n 2, at [52]–[57] and [64]–[68].62 At [69].[69] We also differ from the Judge on the limited Beddoe order made in respect ofthe seventh cause of action. That seeks the removal of Robert and Callum as executorsof the estate, and trustees of the two Trusts. The basis for removal advanced is allegedmisconduct. A trustee challenged on that basis cannot expect a pre-emptive costsindemnity, and a Beddoe order ought not be made in such a case.63[70] Finally, however, we accept the limited Beddoe order made in respect of theeighth cause of action was appropriate. It is based on alleged undue influenceexercised by Robert and Callum on Bill Snr. As with the third cause of action, thatclaim if successful would diminish the assets of the New Trust. It is in the bestinterests of the New Trust that the respondents defend the eighth cause of action,subject again to the point made at the end of [67] above.Costs[71] The appellant has had modest success, setting aside two of the four limitedorders made, but not the more extensive order relating to the second cause of action.In the usual way, and in the absence of misconduct, parties to a Beddoe applicationare entitled to be indemnified as to their fair and reasonable legal costs out of the assetsof the trust.64 There is no misconduct demonstrated in relation to the present appeal.Accordingly, we make no order for party-and-party costs. If there is any challenge tothe costs claims made, that may be taken up in the High Court.Result[72] The applications to adduce fresh evidence are granted to the extent identifiedat [26] of this judgment.[73] The appeal is allowed to the extent identified in [68] and [69] of this judgment.[74] No order is made for costs.63 Lewin on Trusts, above n 26, at [48–085]–[48–086].64 Pratley v Courteney, above n 18, at [18]; Davies v Watkins [2012] EWCA Civ 1570; and Lewinon Trusts, above n 26, at [48–157].Solicitors:Kelly Flavell Law, Auckland for AppellantBSA Law, Auckland for First and Second RespondentsHaigh Lyon, Auckland for Third Respondent