The answer to this question is, in many respects, simple. Only in limited circumstances will legal advice provided to a trustee be privileged such that access can be validly denied to beneficiaries of the trust.
A number of recent decisions have confirmed that beneficiaries and trustees share a joint privilege in legal advice concerning the management or administration of the trust.[1]This means beneficiaries will, in many cases, be given access to legal advice provided to a trustee (despite that advice being privileged as against the rest of the world). This can be an unwelcome surprise to many trustees, particularly given that access is often sought in proceedings brought by the beneficiaries of the trust against the trustee.
However, while the general principle is simple, the application of it is not. The question as to whether particular advice concerns 'the management or administration of the trust' can be complex and there is still judicial disagreement about the basis for the joint privilege which exists between beneficiaries and a trustee.
This article seeks to shed some light on these difficult questions and provide suggestions on ways in which trustees (and their advisers) can maximise their chances of maintaining privilege as against beneficiaries.
In what advice do trustees and beneficiaries share a joint privilege?
The first point to make is that the cases draw a distinction between advice given to trustees in relation to the management or administration of the trust (broadly, the “affairs of the trust”) on the one hand, and advice given for the benefit of the trustee personally, on the other. Trustees and beneficiaries share joint privilege in the former, but not the latter.
The joint privilege arises by virtue of the formal legal relationship between the trustee and beneficiaries, who have a correlative duty and interest, respectively, in the proper administration of the trust. That relationship gives rise to a shared interest in advice concerning the management and administration of the trust.[2] By way of example, a beneficiary was said (in obiter) in Krok v Szaintop Homes Pty Ltd to share a joint interest in the following communications:
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advice from senior counsel to the trustee concerning requests made by a beneficiary for "information about the trusts";
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advice to the trustee on "matters which might be said to have a bearing on the available fund or assets in respect of which a discretion might be exercised"; and
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"advice about the vesting of a trust and the taxation implications of that event".
The limits of the joint privilege are perhaps best described by the circumstances in which the court has held that advice was given for the benefit of the trustee personally (and was therefore not the subject of joint privilege between the trustee and beneficiaries). The cases establish at least the following two categories in which advice may be given for the benefit of the trustee personally:
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advice given to a trustee in respect of litigation (or contemplated litigation) brought against it by a beneficiary; and
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advice concerning the person’s legal obligations, not as trustee, but in some other capacity.
In determining whether advice is given for the benefit of the trustee personally, the focus is on the relationship between the parties at the time the communications were made.[3]
In relation to the first category, a litmus test is whether it is possible to claim litigation privilege over the communication under s 119 of the Evidence Act 1995 (NSW) (or at common law). However, Bergin CJ in Equity made clear in Gray v BNY Trust Company of Australia Ltd (Formerly Guardian Trust Australia Ltd) (Gray) that the beneficiary and trustee must be adversaries in a real sense at the relevant time. The facts of that case are helpful to illustrate the point.
Rollo Gray, a beneficiary of his deceased mother’s estate, brought proceedings seeking a revocation of the grant of probate to BNY Trust Company of Australia Ltd (BNY) on the basis that BNY had failed to pursue Robert Gray (Rollo’s brother and a fellow beneficiary of the estate) in relation to various loans made to him by the mother (Revocation Claim). BNY subsequently filed a cross-claim against Robert Gray seeking a declaration that he owed the estate the amounts of the loans made to him. From that time, Rollo Gray dropped the Revocation Claim against BNY , but continued with “some minor claims” which BNY did not seriously resist.
In later proceedings, Rollo Gray sought an order that BNY produce communications with its solicitors, Mallesons, in relation to the previous proceedings. Bergin CJ in Equity held that Rollo Gray:
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was not entitled to any communications between BNY and Mallesons in respect of the Revocation Claim because the interests of Rollo Gray and BNY were adverse at the time the communications were made; but
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was otherwise entitled to communications between BNY and Mallesons because, at the time the communications were made, Rollo Gray and BNY “were not, in reality, adversaries”.
In relation to the second category, legal advice may be irrelevant to a person’s position as trustee such that a beneficiary has no joint interest in that advice. Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd (Dura)[4]provides a good example.
Hue Boutique Living Pty Ltd (Hue), in its capacity as trustee of the SC Land Richmond Unit Trust (Richmond Trust), owned land in Richmond, Melbourne, on which it undertook to construct 29 residential apartments. Hue engaged a builder, Dura (Australia) Constructions Pty Ltd (Dura), to construct the apartments. Dura was also a unitholder in the Richmond Trust.
Dura commenced proceedings against Hue in relation to matters arising under the building contract. In the course of the proceedings, Dura applied for inspection of a number of documents produced on subpoena by third parties, evidencing communications between Hue’s various project consultants (eg, quantity surveyor, replacement builder, contract superintendent, architect) and its solicitors.
Macaulay J held that Hue and Dura did not share a joint interest in the privileged communications because the advice sought did not relate to Hue’s obligations as trustee, but was given in connection with Hue’s personal interest as the owner under the building contract. The fact that Hue was also trustee of a trust in which Dura was a beneficiary was “purely coincidental and its role as trustee had no bearing on the content of the legal advice it was given”.
Advice paid for by the trust
Often, advice relating to the management or administration of the trust will be paid for out of the trust assets, but that factor alone will not determine whether joint privilege subsists in the advice. While in Krok, the fact that “the trustee felt at liberty to reimburse itself from the trust assets for the cost of the advice” lent support to a conclusion of joint privilege, Macaulay J opined in Dura that the question of whether a trustee has properly used trust funds to pay for legal advice is independent of the question of whether the trustee and beneficiaries share joint privilege in that advice.
Importantly, there are circumstances in which legal advice which does not relate to the management or administration of the trust may properly be paid for out of the assets of the trust. For example, the relevant advice in Gray was initially paid for by the trustee personally, but was subsequently ordered to be paid for out of the assets of the trust following unsuccessful litigation brought by the beneficiary. The later costs order did not give the beneficiary a joint privilege in the advice. An analogous situation may arise where a trustee obtains judicial advice pursuant to s 63 of the Trustee Act 1925 (NSW) that it be entitled to use the assets of the trust to defend proceedings brought against it by a beneficiary. That order would be highly unlikely to give the litigious beneficiary a joint interest in privileged communications relating to the proceedings.
Different considerations may apply if the beneficiary seeks advice outside of litigation
For completeness, it should be emphasised that the above analysis relates to a situation in which a beneficiary seeks an order for inspection of a document in the course of litigation and the trustee seeks to maintain a claim for legal professional privilege.
The courts have recognised that beneficiaries have a separate right to seek access to trust documents which is independent of any right arising in the litigious context (ie, pursuant to a subpoena or discovery process). There is, however, a divergence of judicial opinion as to the basis of that right:
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the "proprietary interest" approach holds that the right arises as an incidence of the beneficiary’s proprietary interest in trust property;
[5]
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the “keeping beneficiaries informed” approach maintains that access to trust documents may be granted on a discretionary basis pursuant to the court’s inherent jurisdiction to supervise and intervene in the administration of trusts, and the obligation arises due to the inherent obligation to keep beneficiaries informed.<
[6]
Given the attendant uncertainty, there has been some suggestion that different considerations may apply to the disclosure of privileged communications where beneficiaries seek access to legal advice outside of the litigious context (or in proceedings against a trustee for alleged breach of duty in failing to provide trust documents or information to a beneficiary).[7]
However, in our view there is no reason why the doctrine of joint privilege should not apply with equal force to applications in a non-litigious context. If the proprietary interest approach is accepted, there is a compelling argument that a beneficiary’s proprietary interest in trust property (and his or her incidental right to trust documents) ought not to extend to communications which do not concern the management or administration of the trust.
Alternatively, if the keeping beneficiaries informed approach is preferred, the trustee’s substantive right to legal professional privilege should not be overridden by the exercise of a non-statutory judicial discretion which purported to compel the production of privileged communications to a beneficiary who did not share a joint interest in those communications.[8]
Practical tips for trustees and their advisers
The “take away” for trustees and their legal advisers is this: except in the limited circumstances described in (1) and (2) above, legal advice should be sought and given with an eye to the possibility that beneficiaries may ultimately obtain access to that advice.
For this reason, it is important to think about the purpose for which the advice is being given and, where possible, set out that purpose at the time of seeking/ providing the advice. In particular, legal advice which is provided in relation to actual or contemplated litigation, or to a trustee acting in a different capacity, should state that position expressly.
To strengthen a claim that the trustee is seeking advice in its personal capacity, the trustee may wish to seek advice pursuant to a separate retainer which is not paid for out of the assets of the trust. Inhouse counsel may wish to engage an external law firm (preferably one which does not provide regular advice in relation to the management or administration of the trust generally) to provide the advice.
Finally, if there is sufficient doubt that the matter, a trustee should give careful consideration as to whether an application for judicial advice pursuant to s 63 of the Trustee Act is necessary in the circumstances. If the trustee acts in accordance with judicial advice, it will bedeemed to have acted in accordance with its duty as trustee in the subject matter of the application, and will be protected from any future claim by a beneficiary in that regard.
This article was first published on The Australian Superannuation Law Bulletin, August 2012.
[1] Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd [2011] VSC 477; BC201107329 (Dura); Krok v Szaintop Homes Pty Ltd (No 1) [2011] VSC 16; BC201100297 (Krok); Gray v BNY Trust Company ofAustralia Ltd (Formerly Guardian Trust Australia Ltd) (2009) 76 NSWLR 586; [2009] NSWSC 789; BC200907418 (Gray); Schreuder (as executor of the will of Murray) v Murray (No 2) (2009) 140 ALR 139; [2009] WASCA 145 (Schreuder); Farrow Mortgage Services Pty Ltd (in liq) v Webb (1996) 39 NSWLR 601 at 608; 132 FLR 466; 14 ACLC 1240; BC9602830 per Sheller JA (Waddell AJA agreeing) (Farrow). Back to article
[2]Above note 1, Farrow; see also Schreuder, per Pullin JA. Back to article
[3] Above note 1, Gray. Back to article
[4] Above note 1, Dura. Back to article
[5]See, for example, Re Londonderry’s Settlement [1965] Ch 918; [1964] 3 All ER 855; [1965] 2 WLR 229; Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405; BC9203940 per the majority; McDonald v Ellis (2007) 72 NSWLR 605; [2007] NSWSC 1068; BC200708266. Back to article
[6]Schmidt v Rosewood Trust Ltd [2003] 2 AC 709; [2003] 3 All ER 76; [2003] 2 WLR 1442; [2003] UKPC 26; Hartigan Nominees Pty Ltd v Rydge (1992)29 NSWLR 405; BC9203940 per Kirby P in dissent; Avanes v Marshall (2007) 68 NSWLR 595; [2007] NSWSC 191; BC200701448. Back to article
[7] Above note 1, Schreuder, per Buss JA (McLure JA agreeing) at [92] and following, and per Pullin JA at [10]–[11]; Krok, at [14]; and Dura, at [15]. Back to article
[8]8 Above note 1, Schreuder, per Buss JA (McLure JA agreeing) at [99]. Back to article