Analysis
Two applications were before the Court, involving the proceeds of personal injury actions that had been paid into the Court Funds Office following compromises. During each action and its compromise, the claimant was represented by a litigation friend: for OH, as a minor, and for AKB, lacking in litigation capacity.
OH’s litigation friend applied to the Court for payment of the proceeds of his compromise (just under £2m) to a trustee to hold them on the terms of a bare trust for his benefit. The trustee was to be a trust corporation that was incorporated and operated by his litigation solicitors.
After the date of the compromise of AKB’s claim (nearly £2.5m), an assessment was made that, although he had cognitive disability and impaired communication skill as a result of his brain injury, that was not affecting his ability to make a free and balanced decision and to communicate that decision in relation to the funds held in the Court Funds Office. Applications were made for a payment out of those funds and for the termination of the appointment of his litigation friend, on the ground that he had regained his mental capacity. In anticipation of the application for payment out, AKB created a trust, with a trust corporation formed by his litigation solicitors as the sole trustee.
Both trusts were in similar form and were of a type commonly known as personal injury trusts. The trustee was to hold the compromise sum for the claimant beneficiary absolutely, but the trustee had power to pay income as maintenance, was subject to a trust for accumulation and had a power of advancement. There was a trustee charging clause, with power for a corporate trustee to charge in accordance with its terms of business as published from time to time. The STEP Standard Provisions (2nd edition) were incorporated, without excluding provisions that appeared to be inappropriate in the present cases, such as powers to invest funds outside the jurisdiction, beyond the reach of the English Courts, and relieving the trustee of any duty to consult the beneficiary or to give effect to his wishes.
Held:
- 1)A litigation friend in the circumstances of these applications was not a mere cipher, lending his name to the application for formal purposes but devoid of all responsibilities. He or she was required to take all measures he or she saw fit for the benefit of the child or protected party, supplementing any want of capacity and judgment and guarding or safeguarding the interests of the child or protected party. The discharge of those obligations involved acquainting him or herself of the nature of the claim and, under proper legal advice, to take all due steps to further the interests of the child or protected party (applying dicta of Brightman J in Re Whittal [1973] 1 WLR 1027, at 1030, 1032).
- 2)Where a capable adult or a litigation friend, acting pursuant to advice, asked the Court to order a payment out of the Court Funds Office, the Court was not there simply to apply a rubber stamp; it must have been satisfied – and those acting on behalf of the applicant must have demonstrated it to the Court – that the applicant was able to weigh things up and to decide freely what to do. There was a concern when the fund was placed in the hands of trustees, who might have been acting for reward and with powers to distribute, apply and invest the fund outside the control of the Court. The focus of the Court’s enquiry was not whether the decision was a wise one, only whether it was a free and informed decision.
- 3)There was an irrebuttable presumption that a solicitor had influence over his client (Royal Bank of Scotland Plc v Etridge (No.2) [2001] UKHL 44; [2002] 2 AC 773, at para 18). When a successful claimant vested in his solicitor a large sum of money to which he had recently become absolutely entitled upon a bare trust for himself, subject to charging and other powers in the solicitor, that was a transaction that could not readily be accounted for by ordinary motives and called for an explanation. It gave rise to a rebuttable evidential presumption of undue influence on the part of the solicitor, who had the burden of adducing rebuttal evidence, which would typically demonstrate that the claimant had had independent advice such that the constitution of the bare trust was a spontaneous act undertaken in circumstances that enabled him to weigh matters up and to exercise his or her own free will.
- (a)If the litigation solicitor proposes a personal injury trust with £1m or more, where its in-house trust corporation will be trustee, a separate partner in the firm should, at the expense of the firm, instruct Chancery Counsel of not less than five years’ standing to provide written advice to the claimant or the litigation friend on the advantages and disadvantages of the proposed trust, both strategically and as to its provisions, and as to the trusteeship arrangements.
- (b)Semble, if the proposal is for £3m, so that the annual income may well be of the order of £75,000, serious thought ought to be given to the appointment of a ‘protector’, whose consent would be required to alter the remuneration of the trustee, the engagement and remuneration of investment advisers or managers and the exercise of any power that would deprive the beneficiary of income or capital to which he or she would otherwise be entitled as of right.
- 4)AKB satisfied the court that he was set on establishing a bare trust in the terms already declared and declined to review his decision. His application was allowed, and an order made for payment out to the trustee.
- 5)The Court was not satisfied that OH’s litigation friend’s support for the proposal in relation to his funds was the result of an unconstrained free choice, both as to the identity of the trustee and the exact terms of the trust. It was ordered that, once the procedure set out in (3)(a) above had been followed and the litigation friend acted on the advice, the application could be restored for directions.
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