Do trusts pay trustees’ litigation costs?

March 22 2018

We assume this will be the case, but as a trustee or executor, you aren’t always entitled to be reimbursed for your litigation costs. A recent case has highlighted the personal liability faced by trustees and executors. If you’re a trustee or executor, here’s what you need to know.

While it is often the case that costs incurred will be paid from a trust or estate, the decision in Courteney v Pratley[1] clearly shows trustees and executors can’t make this assumption when they go to court.

The assumption is based on the fact that trustees and executors are responsible for the property or assets of others. Much like an employee of a business, they generally aren’t expected to pay for their expenses as part of their work, or are entitled to be reimbursed for costs.


When are you entitled to have litigation expenses paid?

If you’re a trustee or an executor, when you go to court you can be reimbursed for litigation expenses where they were ‘properly incurred’ as part of your duties. These are the factors that determine if costs are properly incurred:

  • If your costs resulted from your work as a trustee or executor.
  • If your obligations as a trustee or executor required you to incur the costs.
  • If the expenses incurred are considered reasonable.[2]

In the situation where you are in litigation against a third party to protect trust property, you can expect to be reimbursed for your costs because you are acting in your duty as a trustee to maximise the property available to beneficiaries.[3]


Why you need to be careful

The decision in Courteney v Pratley indicates the need for trustees and executors to take more care with costs. Mr Pratley was appointed by the High Court as executor of an estate not long before a claim was made in the District Court.

Mr Pratley sought independent advice to determine the pros and cons of defending the claim. As a result, he instructed lawyers to defend the claim on behalf of the estate. The claim against the estate was for less than 10% of its $500,000 value. The estate lost the District Court case and was ordered to pay costs.

[1]                                                                                        Courteney v Pratley [2017] NZHC 3285.


[2]                                                                                        Re O’Donoghue [1998] 1 NZLR 116.


[3]                                                                                        Re Buckton [1907] 2 Ch 406.

Here’s where the situation gets perilous. Some time after the case, the beneficiary of the estate questioned Mr Pratley’s right to reimburse the lawyers he had instructed to defend the District Court case. The beneficiary claimed the estate should not have defended the case, that the legal costs were not properly incurred, and therefore not reasonable when considering the value of the estate was further lessened by the outcome of the litigation.

Justice Cull agreed that Mr Pratley was not entitled to reimburse the lawyers’ expenses incurred by defending the District Court proceeding against the estate. She acknowledged that Mr Pratley had acted on legal advice, and that in good faith he believed he was protecting the estate assets.

She went on to caution trustees and executors about proceeding with costly litigation. She said that despite the urgency of the case, Mr Pratley should have applied to the High Court for directions about whether he should defend the litigation or not. She made the point that even though the District Court case could not be delayed, he still would have been able to make an urgent application to the High Court for authorisation before acting.


Don’t end up in hostile litigation

Again we come back to the assumption executors and trustees make that they are entitled to be reimbursed by an estate for defending it from legal action. If you find yourself in hostile litigation, which is where trustees and beneficiaries engage in litigation, you should be aware that there is a possibility you will not be reimbursed for your costs.

The decision in Courteney v Pratley suggests that executors and trustees should review the size and value of the trust or estate, and the probable costs for defending it in litigation. The warning, which comes loud and clear, if that if you are unsure if your plans are reasonable or not, you should make an application to the High Court to obtain directions.

Obviously, the sooner you can obtain directions the better. The alternative is personal liability for the costs of litigation.


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