The privilege of being a beneficiary

The Supreme Court of New Zealand (the Supreme Court) released its decision in Lambie Trustee Ltd v Addleman on 1 June 2021.^[1] Although this proceeding began as a general disclosure application, by the time it reached the Supreme Court, the question was one of privilege and when a trustee can resist disclosure of documents to a beneficiary on this basis. In light of the trend towards disclosure, including the presumptions of disclosure under New Zealand’s Trusts Act 2019 (the Act),^[2] it is critical that trustees are aware of the boundaries of privilege and why there are only limited occasions when it can be used as a shield.

Background

The case involves a dispute between two estranged sisters, Prudence Addleman and Annette Jamieson. In 1972, when Ms Jamieson was 19 years old, she dived into a pool at Paradise Beach in Sydney and broke her spinal cord, becoming a quadriplegic. She successfully sued the local authority that operated the swimming pool and received AUD1 million in 1981. Ms Jamieson’s father, Alexander Jamieson, held those funds for her benefit.

In the mid‑1980s, Ms Jamieson agreed that the accident funds could be used by her cousin’s company, Howick Parklands, in relation to the purchase of farmland in Howick for subdivision. This subdivision was very successful.

On 19 March 1990, the Lambie Trust (the Trust) was settled at the instigation of Mr Jamieson. The settlor named in the trust deed was Ms Jamieson’s cousin, Robert Palmer. The original trustees were Mr Jamieson, Anthony Jamieson, Palmer and Wayne Hanna, an accountant. In 1991, the shares held by Palmer in Howick Parklands were transferred to the Trust.

In 1992, Hanna resigned as a trustee. Palmer was removed later that year. Anthony was removed in 1993 and was replaced by accountant Donald Hargrave and solicitor Peter Kemps. In 2000, Mr Jamieson retired as a trustee and was replaced by Ms Jamieson. The trustees all retired in April 2006 and were replaced by Lambie Trustee. Ms Jamieson is the sole director and shareholder of Lambie Trustee.

The final beneficiaries of the Trust are Addleman, Ms Jamieson and two companies controlled by Ms Jamieson. The discretionary beneficiaries are the final beneficiaries, any child or remoter issue, wife, husband, widow or widower of any final beneficiary and any lawful charity object. The discretionary beneficiaries, therefore, include Addleman’s husband. Neither Addleman nor Ms Jamieson have any children.

Addleman only learned about the Trust in 2001 and did not discover she was a beneficiary until 2002, when she received a letter from one of the trustees at the time, Kemps. In the letter, Kemps advised Addleman that she was a discretionary beneficiary of the Trust and would be receiving a distribution of AUD4.25 million. Kemps provided that this sum represented ‘the full distribution of funds’ that Addleman would be receiving.

Addleman first requested trust documents in 2003. Kemps wrote to her solicitors and advised that he was obtaining independent legal advice as to the trustees’ obligations. In 2004, after further correspondence from Addleman’s solicitors, Kemps provided the trust deed and documents showing the changes in trustees.

Addleman did not raise the issue of disclosure again until 2014. Her solicitors then requested comprehensive information about the Trust, including copies of all financial statements since its inception. After further correspondence between Kemps and Addleman’s solicitors, the matter remained unresolved. Eventually, in June 2015, Addleman filed a claim in the High Court of New Zealand (the High Court) seeking trust documents and information.

The High Court

In the High Court, Addleman sought disclosure of a wide range of trust information, including financial statements, full details of the Trust’s income, capital, distributions and settlements, all resolutions and all minutes of meetings (redacted if necessary to exclude information about the trustees’ reasons for the exercise of discretion). Addleman also sought:

• all legal opinions and other advice obtained by the trustees for the purposes of the trust fund and funded from the trust fund, including all those that might be privileged as against third parties; and
• all other communications between the trustees and their legal advisors (but not advice directed to the trustees’ reasons for the exercise of discretion).

In relation to the legal advice, the High Court commented that ‘some of the documents sought may also be subject to solicitor‑client privilege’ but did not discuss whether this would have any impact on the disclosure application.^[3]

Applying the principles outlined by the Supreme Court in Erceg v Erceg,^[4] the High Court declined to order disclosure. The High Court considered there were seven major factors that lead to this conclusion. The Trust was settled with the accident funds Ms Jamieson received in 1981 for the primary purpose of ensuring Ms Jamieson’s welfare and financial security. Addleman was only included as a beneficiary on a contingent basis in case Ms Jamieson died at an early age. She had already received some disclosure and a final distribution. The High Court considered there was no suggestion of a breach of trust and there was a real prospect of further intrafamilial discord and litigation. The High Court was of the view that Ms Jamieson’s privacy should be respected and dismissed the application.

The Court of Appeal

Addleman appealed the High Court’s decision in the Court of Appeal of New Zealand (the Court of Appeal). She accepted that her request in the High Court had been overbroad and this was reduced in the Court of Appeal to the Trust’s accounts, minutes of trustee meetings (with the reasons for decisions redacted) and any legal advice or opinions paid for by the Trust. Addleman argued that the High Court’s reasons for declining the application in its entirety were wrong in fact or law.

As in the High Court, it was accepted that the principles in Erceg applied to the application.^[5] In outlining those principles, the Court of Appeal observed that ‘trustees have fundamental duties to administer the trust in accordance with the trust deed and to account to beneficiaries’.^[6] The Court of Appeal continued:^[7]

‘A beneficiary seeking to hold trustees to account may need access to documents to assess whether the trustees have acted in accordance with their obligations. The underlying principle is to identify the course of action most consistent with the proper administration of the trust and the interests of beneficiaries generally, not just the beneficiary seeking disclosure.’

The Court of Appeal considered that the High Court’s concern that some of the documents would be subject to solicitor‑client privilege was misplaced, commenting that this was ‘obviously not a good reason for declining to give any disclosure’.^[8] The Court of Appeal observed that legal advice or opinions obtained by trustees to guide them in their duties and paid for out of trust funds are trust documents created for the benefit of the beneficiaries.^[9] Although the privilege attaching to such communications may be asserted against third parties, this could not be asserted against the beneficiaries.^[10]

In contrast to the High Court’s findings on the evidence, the Court of Appeal found the Trust could not properly be regarded as a sole‑purpose trust or essentially Ms Jamieson’s trust. In addition, further evidence had been filed for the appeal, which threw doubt on whether the Trust was in fact funded solely from Ms Jamieson’s compensation payment.^[11]

The Court of Appeal allowed the appeal to the extent of the more narrowly confined disclosure sought by Addleman. It highlighted that Ms Jamieson was a beneficiary and controlled the sole trustee and two corporate beneficiaries. The only other beneficiaries were Addleman and her husband. If the basic trust documents were not disclosed to Addleman, there would effectively be no one who could hold the trustees to account. The trustees’ administration would ‘remain secret and beyond scrutiny’.^[12]

The Supreme Court

Lambie Trustee was granted leave to appeal the Court of Appeal’s finding that legal opinions and other advice be disclosed. The question before the Supreme Court was whether the Court of Appeal was correct to reject the applicant’s claims of legal advice privilege and litigation privilege.

Trustee information v personal information

As a starting point, the Supreme Court drew a distinction between ‘trustee information’, being information generated or held by the trustees for the purposes of a trust, and ‘personal information’, being information held by a trustee relating to a trust that is personal to the trustee.

Trustee information is susceptible to court‑ordered disclosure to beneficiaries, but disclosure will only be required if it is appropriate to ensure trustee accountability.^[13] Further, trustees who have legal professional privilege as against a beneficiary in relation to certain information may not be compelled to disclose that trustee information to the beneficiary.^[14]

Personal information, on the other hand, is not subject to court‑ordered disclosure, although it may have to be produced in discovery.^[15] Whether information is personal to the trustee is distinct from whether a trustee may claim legal professional privilege.^[16] That said, where the information consists of legal advice, some considerations, such as who paid for that advice, may be relevant to both issues.^[17] The Supreme Court noted that ‘[a]s a rough rule of thumb, advice paid for using trust money is most unlikely to be personal to a trustee … because trustees must not use trust funds for their own purposes’.^[18]

Based on the general information provided to the Supreme Court about the nature of the advice, it concluded that this all fell within the ambit of trustee information and it was therefore open to the Supreme Court to order that it be disclosed to Addleman.

Joint interest exception

The Supreme Court considered three broad categories of legal advice on appeal. First, legal advice given to the trustees relating to the general administration of the Trust, including the distribution to Addleman in 2002. Second, legal advice given to the trustees as to what documents should be disclosed to Addleman. Third, legal advice given to Lambie Trustee from June 2015, when the proceedings commenced, in connection with the litigation. The Supreme Court found that all the advice was undoubtedly covered by legal professional privilege as against third parties. However, the key question was whether Addleman had a joint interest in the advice, meaning that Lambie Trustee could not exercise privilege against her.^[19]

As highlighted by the Supreme Court, the joint interest exception first developed in respect of trust law and the ability of beneficiaries to obtain legal advice given to trustees relating to the trust’s administration.^[20] There is now a substantial body of case law applying the exception to disputes between trustees and beneficiaries.^[21] The Supreme Court outlined that the exception is founded on the assumption that advice to which it applies is obtained for the benefit of the beneficiaries.^[22] Where that assumption no longer applies, the joint interest on which the exception is based comes to an end.^[23] This generally occurs where the advice was obtained by the trustees in the context of hostile litigation with a beneficiary.

Applying these principles to legal advice relating to the general administration of the Trust, the Supreme Court found there was no basis on which Lambie Trustee could maintain a claim to legal professional privilege as against Addleman.

In relation to the second category, advice on disclosure to Addleman, the Supreme Court reviewed the correspondence between Kemps and Addleman’s solicitors. There was no mention of proceedings until Addleman’s solicitors’ letter in April 2004, which referred to issuing proceedings being one of ‘her options’, which ‘should not be necessary’.^[24] When the correspondence from Addleman’s solicitors recommenced in September 2014, they again referred to a formal application if the information was not forthcoming. In November 2014, they asked Kemps to confirm that his firm was authorised to accept service of any proceedings issued against the Trust, which Kemps did in his response of 19 November 2014.

The Supreme Court found that, with one exception, which involved an unusual fact pattern, all cases cited to them where it was found that the beneficiary did not have a joint interest in trustee‑commissioned legal advice concerned advice received after litigation had commenced or where it was very imminent. On the flipside, the authorities showed a general pattern that advice received before litigation is contemplated is subject to the joint interest exception. However, the Supreme Court commented that there was little discussion in these cases on the period between contemplation and commencement of litigation.^[25]

The Supreme Court held that for the joint interest exception not to apply, the advice must be sought for the dominant purpose of defending litigation:^[26]

‘Given the obligations of a trustee to act appropriately and in the interests of the trust as a whole, the starting point for the courts should be the assumption that trustees seeking advice in respect of contemplated litigation are looking for guidance as to the right course of action (in respect of which the joint interest exception will apply). And the courts can expect trustees not to seek advice as to how to resist litigation without having first sought advice (to which the joint interest exception will apply) as to the appropriate stance to take on the point at issue.’

The Supreme Court found that, although the possibility of proceedings had been mentioned in the letters from Addleman’s solicitors in April 2004 and September 2014, the primary subject matter of that correspondence was whether the proper administration of the Trust warranted the disclosure sought. On that basis, the Supreme Court considered it ‘difficult to resist the view that Mrs Addleman’s joint interest in the advice received by Lambie Trustee persisted up until the issue of proceedings in June 2015’.^[27] However, Lambie Trustee was given the opportunity to revert to the Supreme Court in relation to the advice received after November 2014 and before June 2015.

Finally, in relation to advice given to Lambie Trustee for the purpose of this litigation, the Supreme Court held that Addleman and Lambie Trustee no longer had a joint interest in the subject matter of the litigation. It was submitted for Addleman that the litigation was not hostile and related to the administration of the Trust in which the parties continued to share a joint interest. The Supreme Court expressed some sympathy for Addleman’s position, particularly given Lambie Trustee had aligned itself entirely with Ms Jamieson. However, despite its reservations, the Supreme Court held that Lambie Trustee was entitled to assert privilege in legal advice received after the proceedings commenced. From that point, the parties were clearly on different sides.

Trustees and Privilege

This case is the latest in a growing body of authorities solidifying a beneficiary’s right to rely on the joint interest exception. Prior to Addleman, this issue was considered by the England and Wales Court of Appeal (the English Court) in Dawson‑Damer v Taylor Wessing LLP, in the context of a subject access request under the UK Data Protection Act 1998.^[28] Although that case was not dealing with a disclosure request, the English Court similarly found that the trustee could not rely on privilege against the beneficiary while the joint interest subsisted.

The English Court determined that whether or not the joint interest exception applied was a matter of procedural law and not trust law. Whether the beneficiary had no automatic right to see those documents was beside the point. The question to be asked is whether disclosure could be resisted in legal proceedings in reliance on legal professional privilege.

These cases demonstrate that the means used by a beneficiary to obtain trust documents is irrelevant to the determination of privilege. If a beneficiary can demonstrate that the documents should be provided, privilege will only act as a shield to disclosure if the joint interest exception no longer applies, which, based on Addleman, can occur later than trustees may expect.

Practical Considerations for Trustees

Importantly, Addleman was decided before the introduction of the Act. The Act builds on the ability of beneficiaries to obtain information relating to trusts with the creation of two presumptions.

The first is a presumption to inform beneficiaries of basic trust information, including the existence of the trust, the details of the trustees and, importantly, confirmation that they are a beneficiary of the trust.^[29] Interestingly, under this presumption, Addleman would likely have learned she was a beneficiary much earlier than 2002, which was some 12 years after the Trust had been set up.

The Act also contains a second presumption that, if requested, trustees must provide beneficiaries with additional trust information.^[30] Trust information is widely defined to include:^[31]

‘any information –

(i) regarding the terms of the trust, the administration of the trust or the trust property; and

(ii) that it is reasonably necessary for the beneficiary to have to enable the trust to be enforced; but

does not include reasons for trustees’ decisions’.

This broad definition has the potential to capture the disclosure of legal advice paid for by the trustees personally, and not out of the trust fund, an area left unanswered by the Supreme Court.

It is understandable that these decisions combined with the introduction of the Act may be resulting in some anxiety for trustees, particularly if dealing with beneficiaries perceived as litigious or hostile. Importantly, there is no absolute rule that states if a beneficiary requests information, the trustees must provide it. As emphasised under the Act, both presumptions of disclosure are rebuttable.^[32]

Particular considerations for trustees when considering disclosure requests, both under the Act and case law, include the nature of the interest of the beneficiary requesting the information as well as the settlor’s expectations on disclosure.^[33] For this reason, when setting up trusts, settlors and legal advisors should consider limiting the discretionary beneficiaries to those intended to benefit to reduce the category of people able to request information. If individuals are to benefit in specific circumstances, such as the death of all discretionary beneficiaries, classes of beneficiaries may be important along with clauses in the trust deed to confirm the settlor’s expectation that information be shared with this class of beneficiary only in situations where they have a realised and actual interest rather than a contingent interest. A detailed letter of wishes explaining the settlor’s intentions on disclosure, and rationale for these, is helpful. Alongside this is the importance of ensuring that there is a beneficiary able to hold the trustees to account, i.e., someone who is not a trustee.

For trusts already in existence, trustees should review the list of beneficiaries against any guidance provided by the settlor when setting up the trust to consider if the beneficiaries reflect the settlor’s wishes and determine if amendments are appropriate to the beneficiaries to align the trust deed with those wishes.

Of particular interest in Addleman is that Addleman remained a beneficiary of the Trust, despite having received a ‘full distribution’ of her interest in the Trust in 2002, instead of being removed or surrendering her interest following receipt of this payment. One of the primary reasons for her initial information request in 2003 was to enquire whether she still had a beneficial interest in the Trust. When making final distributions, trustees should consider if steps can be taken to ensure the recipient is no longer included as a beneficiary of the trust to limit their access to future trust information.

For those trusts where litigation is a possibility, these steps may not be appropriate. Before taking legal advice, trustees may wish to discuss with their legal advisor who should be the instructing client, who should pay for the advice and whether oral advice can be provided.

There will undoubtedly be further litigation on the fringes of this issue, given it remains unclear whether:

• advice is protected from disclosure if the engaging client is a shareholder of a corporate trustee asking for advice on whether the directors are managing the company affairs prudently in the context of a potential trust issue;
• advice is protected if it is paid for by the trustees personally, instead of out of the trust fund; and
• oral advice is also disclosable and whether that is a viable and appropriate means of obtaining advice on the matter.

Ultimately, the decision is another timely reminder of the responsibilities held by a trustee and the importance of ensuring a trustee has the skills and experience needed to fulfil their duties to a high standard.