It can be an unpleasant surprise to find that trustees and executors are not always entitled to reimbursement for their litigation costs.
While most trustees and executors will assume that costs incurred in the course of their trustee or executorship will be paid from the estate or trust, the recent decision in Courteney v Pratley is an illustration of the perils that trustees or executors can face when they go to court.
Trustees and executors are in charge of the property of others. They are not expected to pay for their own expenses in doing so and, as such, are usually entitled to reimbursement of the costs they incur.
When trustees and executors go to court, however, they are only entitled to be reimbursed for their litigation expenses where those were ‘properly incurred’ in the course of their trustee or executorship. These factors will be relevant to whether the cost was properly incurred:
- Whether the cost arose from actions taken within the scope of the trustee or executorship
- Whether the cost was incurred because the trustee or executor’s obligations required them to incur the costs, and
- Whether the expense incurred was reasonable: Re O'Donoghue  1 NZLR 116.
Where trustees are litigating against a third party to protect trust property, they will generally expect to be reimbursed because they are maximising, or trying to maximise, the property available to the beneficiaries: Re Buckton  2 Ch 406.
The need to be careful
Last year’s decision in Courteney v Pratley, however, suggests that executors and trustees may need to be more careful. In this case, Mr Pratley had been appointed by the High Court as executor shortly before a civil claim against the estate was to be heard in the District Court. Mr Pratley sought independent advice as to the merits of defending the claim and instructed lawyers to defend the claim on behalf of the estate. The estate was worth about $500,000 and the claim against the estate was for less than 10% of this. The estate lost the District Court case and was ordered to pay costs.
At a later stage the eventual beneficiary of the estate challenged Mr Pratley’s right to reimbursement of the litigation costs of the lawyers who had been instructed to defend the District Court case. The beneficiary said that the estate should not have defended the litigation and that the expense had not been properly incurred because it was not reasonable in all of the circumstances.
Justice Cull agreed with the plaintiff, Mr Courteney, and found that Mr Pratley was not entitled to reimbursement for the lawyers’ expenses incurred defending the District Court proceeding against the estate. She acknowledged that Mr Pratley had acted in good faith, and on legal advice, and that he believed he was protecting the estate assets.
However, Justice Cull found that executors and trustees should be cautious before proceeding with expensive litigation. She said that Mr Pratley ought to have applied to the High Court for directions as to whether he was to defend the District Court litigation or not. Even though the situation was urgent, and Mr Pratley had not been able to have the District Court case put off, Justice Cull still found that he should have urgently applied to the High Court for authorisation before instructing lawyers to defend the case.
When executors and trustees engage in litigation against beneficiaries (known as ‘hostile litigation’) they are often aware of the possibility that they will not be reimbursed for their costs in doing so. Most trustees and executors will assume, however, that if they are incurring legal costs in the course of defending trust or estate assets they will be entitled to reimbursement from the trust or estate.
Instead, the Courteney decision suggests that trustees and executors must carefully consider the size of the trust or estate, the likely costs that are expected to be incurred in the course of any litigation and, if they are unsure whether the steps they plan to take are reasonable or not, they should apply to the High Court for directions as to how to proceed.
It would be wise for executors and trustees to consider doing this at an early stage if litigation is contemplated or has been started against them, in order to avoid finding themselves personally liable for the litigation costs.