Legal advice and fiduciary privilege
When the trustees obtain legal advice on the administration of the trust, this advice has traditionally been considered “fiduciary information” and made available to beneficiaries if they so request. A difficulty arises when a beneficiary seeks to sue the trustees. The Trustees will not be willing to provide their legal advice to the “other party”, even if it is always “trusted information”.
The position has been clarified by the High Court. In Easton v NZ Guardian Trust, the High Court noted that there is a challenge between two important principles – the right of beneficiaries to receive trusted information and the right of individuals to receive legal advice in confidence.
The Court said the new Trust Act codified the duties of trustees. The right to see the trust information is not an absolute right, but can be refused if the Trustees can justify their refusal for one of the reasons set out in the Act. Otherwise, trusted information must be disclosed upon request. Surprisingly enough, a claim of legal lien is not one of the statutory grounds that trustees can use to withhold information.
In the event of a dispute between the beneficiaries, the duty of the trustees is to act impartially between them. The position changes where there is an anticipated litigation. Next, a trustee will need to decide whether it is in the best interests of all beneficiaries and of the trust as a whole to defend a claim brought by a beneficiary.
At this point, the court said their interests would have diverged. The beneficiary and the trustees are now adversaries and no longer have the common interest upon which the availability of information about the trust is based. Once an adversarial position is reached, the duty of the trustees to act in the best interests of the other beneficiaries and of the trust means that it is no longer appropriate to provide legal advice on the dispute to the disputing party. . The right to legal privilege becomes the priority interest.
This position does not apply only in a situation where the advice is directed to the primary purpose of the litigation (the traditional basis of “litigation privilege”). It also applies to legal advice on what trustees should do in light of complaints made by the potentially disputed beneficiary. What matters is the loss of the common interest to the point that a beneficiary who wishes to sue can be treated as “outside the tent”. The Court suggested that once a disagreement reaches this point, it might be prudent, for the sake of transparency, for the trustees to notify the disputing beneficiary that access to the privileged material will now be denied.
It should be noted that not all disputes will lead to a right to privilege. If the dispute is not contradictory, the privilege may not arise. A common situation is where there are differences between beneficiaries and the trustees go to court for instructions on what to do. But if that litigation reaches a stage where the dispute becomes adversarial, then the privilege will arise and require further legal advice to be denied.