Trusts Matters - edition 1

TRUST MATTERS – FEBRUARY 2018 1 Recovering costs and expenses: the scope of the trustee's contractual indemnity The trustee's contractual indemnity has come under the spotlight in two recent cases. Both should give comfort to trustees that the courts recognise the crucial importance to trustees of being able to claim costs and expenses under the contractual indemnity. However, it is equally clear that the court will never just sign a "blank cheque" in the trustee's favour. UBS v GLAS At the heart of UBS AG London Branch v GLAS Trust Corporation & Anor was the question of whether costs and expenses of an ad hoc committee of noteholders constituted " expenses properly incurred by the Note Trustee " for the purpose of its contractual indemnity. An extraordinary resolution of the noteholders had authorised the trustee to meet the ad hoc committee's costs and expenses. If the ad hoc committee's expenses were considered to be " expenses properly incurred by the Note Trustee " they would rank at the top of the pre-enforcement payment waterfall, and above the issuer swap counterparties, including UBS. In his judgment, Blair J made observations about the breadth of the trustee's indemnity which should be music to trustees' ears: "…In deciding whether particular expenses fall within the trustee's expenses clause, it should be kept in mind that such clauses are typically (and are in this case) widely drafted, and in the context of a financial transaction should be given a commercial and not artificially restricted meaning. This reflects the fact that the exercise of the trustee's powers may contain a substantial measure of judgment, may be controversial, and may have to be carried out speedily to enable resolution of the transaction. Of course, the position depends on the construction of the particular clause, but subject to that the trustee should be able to fulfil its duties with confidence that if it acts in a commercially reasonable manner, it will be entitled to indemnification. In the financial context, any other approach would risk frustrating the transaction…" However, the judge made it clear that the adoption by the trustee "en bloc" of the ad hoc committee's costs and expenses was inappropriate and "in effect surrendered the trustee's duty to form an independent view as to whether the expenses were ones which it could properly incur" . The court accepted that in principle a note trustee could adopt expenses incurred by third parties and that it could be "duplicative for the Note Trustee and its advisers to reinvent the wheel" . However, considerably more scrutiny of those costs and expenses was required by the trustee. In mid-September 2017 Stephenson Harwood LLP took over from Ropes & Gray LLP as legal adviser to GLAS Trust Corporation Limited on this transaction. Law Debenture v Ukraine The Law Debenture Trust Corporation p.l.c. v Ukraine related to (among other things) payment by Ukraine of the trustee's cost s, following the High Court's decision to grant summary judgment in favour of Law Debenture (as note trustee) in respect of non- payment of Eurobonds issued by Ukraine in 2013. The trustee sought summary judgment in respect of its costs of the proceedings under the indemnity in its favour in the trust deed. However, Ukraine argued that the court should make any costs order under Part 44 of the Civil Procedure Rules (i.e. by way of its power to award costs, such costs to be assessed by the costs judge). Ukraine's counsel argued that the trustee could not recover costs that had not been reasonably incurred or which were unreasonable in amount. The court stated that in its view, in the context of a financial transaction of the kind in this case, this meant "commercial reasonableness" and that full effect must be given to the parties' agreement that costs properly incurred are to be paid on a full indemnity basis. The court noted:

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