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Beneficiaries, executors, trustees, and privilege

March 17th, 2009 · No Comments

Update, 19 August 2009: See now also Gray v BNY Trust Company of Australia Limited (formerly Guardian Trust Australia Limited) [2009] NSWSC 789.

Original post: In the last post, I mentioned that the claimant beneficiary was not allowed to see the solicitor’s file, despite having initiated a costs dispute with the executor’s solicitor. A recent decision of the Supreme Court of Western Australia spells out the law on the question: Murray v Schreuder [2009] WASC 51.  The law is:

58  In the case of a non-discretionary trust, … a beneficiary has a right – subject to exceptions – to inspect trust documents used by the trustee in the administration of the trust.  An exception will arise in the case of documents which are private to the trustee that may evidence the reasons that the trustee has made his or her decision or exercised a discretion, in circumstances where disclosure is not required and has not been made by the trustee:  Hartigan v Rydge (434, 442, 445); or where the document is the subject of a duty of confidence owed to a third party:  see, for example, Hartigan v Rydge (433, 446); Schmidt (734); Morris v Morris (1993) 9 WAR 150, 154; or where disclosure is not in the interests of the beneficiaries as a whole:  Rouse v IOOF Australia Trustees Ltd (1999) 73 SASR 484, 499; or where the terms of the trust deed give rise to an express or implied limit on a beneficiary’s right of access to trust documents:  Hartigan v Rydge (446).

The whole of the reasons’ legal discussion of this issue is reproduced below.

’44  … in relation to both the invoices and the letters and emails,
[the trustee, Professor Schreuder’s] claim to privilege was based on the premise that
Mrs Murray, as a beneficiary, has no entitlement, as of right, to inspect the
documents held by Professor Schreuder relating to the administration of
the trust.  Counsel for Professor Schreuder relied on Avanes v Marshall
(2007) 68 NSWLR 595.  I do not, however, accept that premise.  To the
extent that Avanes v Marshall is to be understood to be authority for such
a proposition, I do not, with respect, consider that it correctly states the
law.

45  It was long regarded as the law that in the case of a non-discretionary
trust, where a beneficiary had a vested or contingent interest, the
beneficiary had a prima facie right to inspect any property forming part of
the trust estate, including trust documents used by the trustee in the
administration of the trust:  see Re Tillott [1892] 1 Ch 86, 88 – 89.
46  In Fratcher WF, Scott on Trusts (4th ed, vol IIA, 1987), the relevant
principle was stated as follows:

The trustee is under a duty to the beneficiaries to give them on their
request at reasonable times complete and accurate information as to the
administration of the trust.  The beneficiaries are entitled to know what the
trust property is and how the trustee has dealt with it.  They are entitled to
examine the trust property and the accounts and vouchers and other
documents relating to the trust and its administration.  Where a trust is
created for several beneficiaries, each of them is entitled to information as
to the trust.  Where the trust is created in favour of successive
beneficiaries, a beneficiary who has a future interest under the trust, as
well as a beneficiary who is presently entitled to receive income, is entitled
to such information, whether his interest is vested or contingent.

A beneficiary is entitled to inspect opinions of counsel procured by the
trustee to guide him in the administration of the trust. (462 – 465)

47  That statement of the law was adopted by Kirby P in Hartigan
Nominees Pty Ltd v Rydge
(1992) 29 NSWLR 405, 422 – 423, and by
Gummow J in Re Simersall; Blackwell v Bray (1992) 35 FCR 584,
587 – 588.  It is supported by dicta in O’Rourke v Darbishire
[1920] AC 581, 619 and 626.  See also, Re Fairbairn [1967] VR 633,
635 – 640; Spellson v George (1987) 11 NSWLR 300, 315 – 316.

48  In Re Londonderry’s Settlement [1965] Ch 918, the defendant was
an object of a power of discretionary appointment under a trust.  Being
dissatisfied with the amount distributed to her by the trustees, the
defendant sought copies of certain documents, including documents which
would reveal how the trustees had exercised their discretion.  While the
Court of Appeal did not dissent from the general proposition that a
beneficiary of a trust has a prima facie right to inspect trust documents,
their Lordships observed that such a proposition begs the question of what
is a ‘trust document’.  The right of a beneficiary to inspect trust documents
did not necessarily extend to all documents in the hands of the trustee.
Their Lordships did not attempt a comprehensive definition of a ‘trust
document’, but Harman LJ regarded the principle which protects trustees’
deliberations on a discretionary matter from disclosure as overriding the
general rule.  Harman LJ concluded that such documents ‘are not trust documents in the proper sense at all’ (933).  Danckwerts LJ and Salmon LJ reached a similar conclusion in separate reasons.

49  The New South Wales Court of Appeal had occasion to consider the
question in Hartigan v Rydge.  In that case, a discretionary trust had been
established for the purpose of carrying out the wishes of its instigator (not
the settlor), who provided the trustees with a memorandum indicating his
wishes as to what the trustees should do.  An object of the trust, who had a
contingent or possible interest in the trust funds, sought to inspect the
memorandum.

50  Mahoney JA considered that there were limits to the right of such a
beneficiary to inspect documents of the trust (431 – 434).  His Honour
considered that the right of a beneficiary to inspect documents is limited
to documents which are the property of the trust and does not extend to
documents as to which the beneficiary, as beneficiary, has no proprietary
interest.  A document (such as notes made by the trustee of discussions
with other beneficiaries or possible beneficiaries) which is prepared by the
trustee, not for the purposes of the beneficiaries but for the trustee’s own
purposes, is not the property of the trust.  Nor will a beneficiary be
entitled to see a document which has been given to the trustee on the basis
that it is confidential, such as a document relating to the personal affairs
of a particular beneficiary or correspondence to and from other
beneficiaries.  And a document need not be disclosed if it will reveal the
reasons why a discretionary power was exercised.

51  Sheller JA considered (444) that, in determining what documents a
beneficiary was entitled to inspect, an inquiry as whether or not the
beneficiary has what can be described as a proprietary interest in the
document was not a helpful one.  His Honour regarded the determinant in
the decision in Re Londonderry’s Settlement as being the preservation of
the trustee’s right not to disclose the reasons for exercising a discretion.
He concluded that that case was authority for the proposition that
beneficiaries have no right to see documents private to the trustees which
may evidence the reasons why the trustees have made their decisions.
Sheller JA considered (445) that the class of documents to which
beneficiaries are denied access should not be extended beyond those.  His
Honour agreed with the observations of Harman LJ in Re Londonderry’s
Settlement
(932) that the trustees were bound to disclose the trust
accounts and counsel’s advice to the trustees as to their rights and duties,
although that material may have influenced the trustees, because it does
not reveal motives, reasons or the process of reasoning.  His Honour also
concluded that a settlor (or in that case, the instigator) of the trust could effectively impose conditions of confidentiality on trustees in respect of
information.

52  Kirby P, dissenting, held that the applicant was entitled to inspect the
memorandum.  His Honour took a wider view of a beneficiary’s right to
inspect documents of the trust, concluding (422) that the right extended to
trust property and the accounts and vouchers and other documents relating
to the trust and its administration.  As I have mentioned, his Honour
adopted the statement of principle in Scott on Trusts to which I referred
earlier.

53  Subsequently, the Privy Council delivered its advice in Schmidt v
Rosewood Trust Ltd
[2003] 2 AC 709, on an appeal from the Isle of Man.
In that case, the appellant sought fuller disclosure of trust accounts and
information about trust assets in respect of which he claimed discretionary
rights or expectations.  Their Lordships made an extensive review of the
authorities, including Hartigan v Rydge, in respect of which they
expressed their general agreement with the judgments of Kirby P and
Sheller JA.  Lord Walker of Gestingthorpe, delivering the advice of their
Lordships, said:

Their Lordships have already indicated their view that a beneficiary’s right to seek disclosure of trust documents, although sometimes not inappropriately described as a proprietary right, is best approached as one aspect of the court’s inherent jurisdiction to supervise, and where appropriate intervene in, the administration of trusts.  There is therefore in their Lordships’ view no reason to draw any bright dividing line either between transmissible and non-transmissible (that is, discretionary) interests, or between the rights of an object of a discretionary trust and those of the object of a mere power (of a fiduciary character).  The differences in this context between trusts and powers are (as Lord Wilberforce demonstrated in In re Baden [1971] AC 424, 448 – 449) a good deal less significant than the similarities.  The tide of Commonwealth authority, although not entirely uniform, appears to be flowing in that direction.

However, the recent cases also confirm (as had been stated as long ago as In re Cowin 33 Ch D 179 in 1886) that no beneficiary (and least of all a discretionary object) has any entitlement as of right to disclosure of anything which can plausibly be described as a trust document.  Especially when there are issues as to personal or commercial confidentiality, the court may have to balance the competing interests of different beneficiaries, the trustees themselves, and third parties.  Disclosure may have to be limited and safeguards may have to be put in place.  Evaluation of the claims of a beneficiary (and especially of a discretionary object) may be an important part of the balancing exercise which the court has to
perform on the materials placed before it.  In many cases the court may have no difficulty in concluding that an applicant with no more than a theoretical possibility of benefit ought not to be granted any relief. (734 – 735)

54  In Avanes v Marshall (599), Gzell J, after considering a number of
authorities, concluded that the approach in Schmidt should be adopted by
Australian courts.  His Honour considered that the decision should not be
regarded as abrogating the trustee’s obligation to grant a beneficiary
access to trust accounts.  But that when it comes to inspection of other
documents there should be no longer be an entitlement as of right to
disclosure of any document.  It should be for the court to determine to
what extent information should be disclosed.

55  Some months later, in McDonald v Ellis [2007] NSWSC 1068,
Bryson AJ took a contrary view ([52]) and declined to follow Avanes v
Marshall
.  His Honour considered that the approach of Schmidt might be
appropriate where the interest of the beneficiary is no higher than those of
the potential objects of a discretionary trust – although New South Wales
authority was otherwise – but where the right was already vested in
interest it would be an unwarranted departure from established authority.
Bryson AJ considered that neither earlier judicial decisions nor policy
considerations supported the law as expressed in Schmidt.  It was a
departure from a well-established and relatively concrete rule, and, by
introducing discretion, would lead to ‘no certainty on so elementary a
matter as to whether or not a beneficial owner is entitled to information
about property in which the beneficial owner has an equitable interest’
[51].

56  Bryson AJ held ([46]) that the law in New South Wales was to be
found in the judgments of the majority in Hartigan v Rydge; that is, that
the starting point is that a beneficiary is entitled to see trust documents
and to have information about trust property.  Enforcement of the
beneficiary’s entitlement will be withheld only where it is necessary
because of some competing entitlement of the sort referred to in Re
Londonderry’s Settlement.

57  I, too, would respectfully decline to follow Avanes v Marshall
insofar as it might be thought to apply to a non-discretionary trust, where
the beneficiaries have a vested or contingent interest.  Schmidt was
concerned with the right of inspection of an object of a discretionary
power and, for the reasons expressed by Bryson AJ in McDonald v Ellis, I
would not apply what was said in Schmidt to a non-discretionary trust.  It
is unnecessary for present purposes to consider the position in relation to
discretionary trusts.  Nor do I think it is necessary to enter into the debate about whether a beneficiary’s right of inspection arises from a proprietary
interest of the beneficiary in the trust documents or from the general
doctrine that trustees are fiduciaries with a high obligation to account and
to provide information to the beneficiaries.

58  In the case of a non-discretionary trust, I take the law to be that a
beneficiary has a right – subject to exceptions – to inspect trust documents
used by the trustee in the administration of the trust.  An exception will
arise in the case of documents which are private to the trustee that may
evidence the reasons that the trustee has made his or her decision or
exercised a discretion, in circumstances where disclosure is not required
and has not been made by the trustee:  Hartigan v Rydge (434, 442, 445);
or where the document is the subject of a duty of confidence owed to a
third party:  see, for example, Hartigan v Rydge (433, 446); Schmidt
(734); Morris v Morris (1993) 9 WAR 150, 154; or where disclosure is
not in the interests of the beneficiaries as a whole:  Rouse v IOOF
Australia Trustees Ltd
(1999) 73 SASR 484, 499; or where the terms of
the trust deed give rise to an express or implied limit on a beneficiary’s
right of access to trust documents:  Hartigan v Rydge (446).

59  In the present case, the trust is not a discretionary trust.  During
Mrs Murray’s lifetime, Professor Schreuder, as trustee, is simply to invest
the funds in the Hackett Foundation and to pay the income to Mrs Murray.
The trust involves no exercise of discretion which could found an
exception to Mrs Murray’s right to inspect trust documents.  Nor is there
anything which might suggest a duty of confidence owed by
Professor Schreuder to a third party or arising from the terms of the trust.  Nothing has been put forward which could constitute a competing
consideration which might entitle Professor Schreuder to decline to permit
Mrs Murray access to the documents relating to the administration of the
trust.  In short, nothing has been advanced which might displace
Mrs Murray’s prima facie right as beneficiary to inspect the trust
documents.

60  In the circumstances, I am unable to see any basis upon which
Professor Schreuder is entitled to maintain, as against Mrs Murray, a
claim of legal professional privilege in respect of legal advice obtained by
him in respect of the administration of the trust.  Mrs Murray is entitled,
as a beneficiary, to inspect such advice.

61  It follows, in my view, that the claim by Professor Schreuder to legal
professional privilege must fail on that further ground.

Conclusion
70  I would order that, within such time as is specified, Professor
Schreuder file and serve an affidavit containing a list of all the legal
advice he has received, and the invoices he has received from his legal
advisors, in respect of the administration of the estate and, within such
further time as is specified, that he produce the documents referred to on
the list for inspection by Mrs Murray and her legal advisors.  I would hear
the parties on the time within which each of those steps is to be taken.’

See also:

Tags: Executors · legal professional privilege