Spencer & Ors v Fielder

These are Beddoe proceedings by the present trustees of the Airways Pension Scheme (“the Scheme”) for directions of the court in relation to their conduct of proceedings (“the Main Proceedings”) brought against them by British Airways plc (“BA”). For the purposes of this judgment, I shall use the expression “the Trustees” to include past trustees at the relevant time.

The relief sought is for the directions of the court as to whether the Trustees should defend the Main Proceedings with an indemnity out of the assets of the Scheme or, alternatively, apply to join a member of the Scheme as a defendant in the Main Proceedings, such member being indemnified out of the assets of the Scheme in respect of his or her costs of defending BA's claims.

The Scheme is a defined benefit occupational pension scheme established by a deed dated 1 October 1948. It is governed by that deed and the rules, as subsequently amended from time to time (“the Deed” and “the Rules”). BA is the current principal employer under the Scheme. The Scheme closed to new members on 31 March 1984, but remains open to accrual. As at 31 March 2012, which is the effective date of the last triennial actuarial valuation, it had 26,703 pensioners, 2,117 deferred members and 946 active members.

The Scheme is in deficit. The actuarial valuation of the Scheme as at March 2012 disclosed that the Scheme had a deficit relative to its statutory funding objective of £680 million (91.5 per cent funded) and £1.5 billion (82 per cent funded) on a solvency basis. The Trustees and BA have entered into various Scheme funding arrangements from time to time to address the deficit.

The Scheme has 12 individual trustees responsible for management of the Scheme and a custodian trustee, British Airways Pension Trustees Limited. Six of the Management Trustees must be employer-nominated trustees (“ENTs”) and six must be member nominated Trustees (“MNTs”). Five of the MNTs have to be pensioners and appointed by that class and one must be an active member appointed by the active members. The first claimant, Paul Spencer, who has never been employed by BA, is an ENT and has been the chairman of the Trustees since 2010. The other ENTs were senior executives of BA at the time of their appointment.

In the Main Proceedings BA seeks declarations that two decisions of the Trustees were invalid. The first was an amendment to rule 15 of the Rules permitting the Trustees to increase the annual rate of pensions in certain circumstances. The second was a decision, pursuant to that power, to grant pension increases for 2013. Those decisions were made in consequence of the Government's decision in 2010 to change the index on which annual Pension Increase Review Orders under the Social Security Act 1975 (“PIROs”) are based from the Retail Prices Index (RPI) to the Consumer Prices Index (“CPI”). Rule 15 of the Scheme provides for annual increases to be made to deferred pensions and pensions in payment by reference to annual PIROs. It was anticipated, as has indeed proved to be the case, that CPi was likely to be lower than RPI, with the consequence that there would be lower rates of future increases to deferred pensions and pensions in payment.

Between August 2010 and March 2011 the Trustees considered how they should respond to the change from RPI to CPI, with options ranging from doing nothing to entrenching RPI into the Scheme. Eventually, the Trustees decided to adopt an intermediate solution, namely to amend rule 15 pursuant to the power of amendment in clause 18 of the Trust Deed so as to introduce a provision requiring a review at least once a year, with power to grant discretionary increases, subject to a two-thirds majority of Trustees in office being in favour. That was effected by a deed of amendment dated 25 March 2011, which added a proviso to rule 15 (“the 2011 Amendment”).

The Trustees did not exercise the power to make discretionary increases in 2011 or 2012. On 28 February 2013 the Trustees decided to make an increase under the proviso to rule 15 of 0.2 per cent, subject to confirmation following completion of the 2012 actuarial valuation. That increase was made in the light of the gap of 0.4 per cent between RPI and CPI as at September 2012. On 26 June 2013 the Trustees confirmed their earlier decision. Following objection by BA the Trustees made a further decision at a meeting on 19 November 2013 to grant an increase of 0.2 per cent. There is some uncertainty as to whether the decision to make the increase of 0.2 per cent (“the 2013 Decision”) was made at the June meeting or the November meeting but nothing turns on that for present purposes. That increase has not been implemented pending determination of the Main Proceedings.

The Trustees have also confirmed to BA that they will not make any further discretionary increases pending the outcome of the Main Proceedings without first giving BA a minimum of 14 days' prior written notice of their intention to do so.

Clause 17(b) of the Deed provides for BA to indemnify the Trustees as follows (so far as relevant):

The Main Proceedings were commenced by BA against the present Management Trustees under CPR Part 8 by a claim form issued on 6 December 2013. Points of Claim were served in April 2014. They run to 84 pages and incorporate by reference a witness statement dated 5 December 2013 of Nick Smith, the chief financial officer of BA, which itself runs to 67 pages.

BA claims that the 2011 Amendment is invalid because the exercise of the amendment power in clause 18 of the Deed was for improper purposes. That is expressed in the following way in paragraphs 161 and 162 of the Points of Claim:

BA claims that the 2013 Decision was invalid on several grounds. In broad terms, BA's attack on the 2013 Decision falls under the following 4 heads: (1) the Trustees failed to give active or genuine consideration to the exercise of their discretion (paras 164-220 of the Points of Claim); (2) the Trustees exercised their power for improper purposes (paras 221-223 of the Points of Claim); (3) the decision (or decisions) was (or were) perverse and irrational (paras 224-229 of the Points of Claim); (4) the decision (or decisions) is (or are) invalid under the rule in Hastings Bass (paras 250-256 of the Points of Claim).

The defence in the Main Proceedings has been ordered to be served by 25 August 2014.

The present proceedings were commenced under CPR Part 8 by a claim form issued on 29 May 2014. The claimants are the Trustees, who are the same as the defendants in the Main Proceedings. The defendant to the present proceedings is Mark Owen Fielder, who is an active member of the Scheme and so has not benefited from the 2013 Decision and will not benefit from any exercise of the power to grant discretionary increases under the amended Rule 15 so long as he remains in BA's employment. As an active member, he is also a person who BA contends is prejudiced by the 2013 Decision insofar as that undermines the security of benefits under the Scheme, bearing in mind that the Scheme is already in deficit and the discretionary increase is unfunded.

In the claim form the Trustees seek the direction of the court as to:

In correspondence between Eversheds, the Trustees' solicitors, and Linklaters, BA's solicitors, BA has strongly objected to these Beddoe proceedings in principle and to the particular relief sought by the Trustees in the claim form. BA has not, however, appeared on the hearing of the application for directions. Nor has it made any written submissions to the court. BA was informed by a letter from Eversheds to Linklaters dated 20 May 2014 that the Trustees' application for directions was listed for 3 days floating from 10 July 2014. A copy of the claim form in the present proceedings was sent under cover of a letter dated 5 June 2014 from Eversheds to Linklaters. In that letter Linklaters were specifically asked whether BA was intending to make submissions on the hearing of the application for directions. In their reply dated 23 June 2014 Linklaters stated that BA had not yet decided whether it wished to make representations. They stated that Michael Tennet QC, BA's leading counsel in the Main Proceedings, would not be available on the dates listed for the hearing. I was informed by Mr Keith Rowley QC, for the Trustees, that Eversheds were informed by email yesterday morning that BA would not be attending the hearing.

BA has not requested an adjournment. It has not stated that BA's junior counsel in the Main Proceedings, Mr Sebastian Allen, is unavailable to attend the hearing of the Trustees' application.

At the outset of the hearing Mr Rowley handed to the court a draft minute of the order which the Trustees seek, namely that (1) they be authorised to defend the Main Proceedings by filing a defence in the Main Proceedings and taking such other steps as may be necessary for the conduct of their defence or as they may be advised by their legal advisors down to and including the completion of disclosure and inspection; (2) the costs of and incidental to their so doing be paid out of the Scheme's assets; (3) their costs of and incidental to the present Beddoe proceedings, up to the date of the order they seek, be paid out of the Scheme's assets; and (4) following the completion of disclosure and inspection, the Trustees restore these proceedings for further directions as to the conduct of the Main Proceedings and the costs incurred by the Trustees in relation to them. Accordingly, a costs indemnity is not at this stage sought by the Trustees in relation either to work already undertaken by them in the Main Proceedings or anything to be done after the completion of disclosure and inspection.

Mr Fielder does not object to an order in those terms but he specifically reserves his position as to whether or not, following service of a defence and the completion of disclosure and inspection in the Main Proceedings, it will be appropriate for the Trustees to continue to defend the Main Proceedings or to be indemnified out of the Scheme's assets in relation to any steps taken or to be taken by the Trustees other than those specifically covered in the present proposed order. I shall explain the basis for that reservation in due course.

As I have said, BA's objections to these proceedings and to the directions sought by the Trustees have been ventilated at some length in correspondence between Linklaters and Eversheds. The essence of BA's objections is that in the Main Proceedings the Trustees are facing serious criticism of their conduct, including allegations of conduct amounting to breaches of trust. BA says that the Trustees are in an analogous position to the third category described in the judgment of Kekewich J in Re Buckton (1907) 2 Ch 406 at 415 (adverse claims between beneficiaries where the unsuccessful party should usually bear the costs of all whom he has brought before the court) and that it cannot be right that the court in the present proceedings, to which BA is not a party, can, in advance of the hearing of the Main Proceedings, place the costs of the Main Proceedings ultimately on BA under its covenant to fund the Scheme. BA says that this is not a case in which it can possibly be predicted that, at the conclusion of the Main Proceedings, if BA is successful, the trial judge would order that the Trustees be indemnified out of the Scheme's assets. BA says that the Main Proceedings are internal hostile litigation and that the Trustees are no more entitled to the relief sought than they would be if the Main Proceedings had been brought by another member of the Scheme. BA relies on the statement of Hoffman LJ in McDonald v Horn [1994] ICR 685 at 697 that, before granting a pre-emptive costs application in ordinary trust litigation or proceedings concerning the ownership of a fund held by a trustee or other fiduciary, the court must be satisfied that the judge at the trial could properly exercise his or her discretion only by ordering the applicant's costs to be paid out of the fund.

In voicing its objection to these Beddoe proceedings and the relief sought by the Trustees, BA also relies on the indemnity provisions of clause 17. In correspondence between Eversheds and Linklaters the Trustees have repeatedly pressed BA to state whether or not BA considers that the Trustees are entitled to an indemnity under clause 17 in respect of their costs of the Main Proceedings. BA has been unwilling to commit itself on that issue at this stage. It takes the position that, until the conclusion of the Main Proceedings, it will not be possible to say whether or not the conduct of the trustees in relation to the 2011 Amendment and the 2013 Decision was such as to exclude the right of indemnity under clause 17(b), that is to say whether the allegations in the Main Proceedings are “attributable to a deliberate act or omission [by the Trustees which they knew was] legally wrong, or [were] reckless as to whether it [was] legally wrong or not.” BA says that, if relief is granted in the present proceedings, to which BA is not a party, that would, adversely to BA, render irrelevant any issues arising under clause 17. It also said that clause 17 goes to the question whether the relief sought in these proceedings is really necessary. BA reasons that either the Trustees' costs of the Main Proceedings fall within clause 17, in which case there is no need for the Trustees to obtain an indemnity in these Beddoe proceedings, or the conduct of the Trustees is such as to preclude any right of indemnity under clause 17, in which case the Trustees' conduct is such that they should not be entitled to indemnity at all.

BA has stated that it will not seek its costs of the Main Proceedings from the Trustees, irrespective of the outcome of the Main Proceedings. BA has stated that, in reality, therefore, the only costs in issue are the costs of the Trustees' advisors and they could be addressed in some form of contingency fee arrangement.

I do not accept those arguments by BA. The limited relief sought by the Trustees on the present hearing is eminently relief to which they are entitled. My reasons are as follows.

The starting point is that the Trustees are entitled to pay or to be reimbursed out of the Scheme's assets all expenses properly incurred by them when acting on behalf of the Trust. Section 31(1) of the Trustee Act 2000 so provides. To that extent, that section supplements or qualifies the provision in section 51(1) of the Senior Courts Act 1981 that, subject to the provision of any other enactment and to rules of court, the costs of and incidental to court proceedings shall be in the discretion of the court. Aside from section 31(1) of the Trustee Act 2000 , CPR 46.3 provides that, where a person is or has been a party to any proceedings in the capacity of trustee, and CPR 44.5 (dealing with the situation where costs are payable under a contract) does not apply, the general rule is that that person is entitled to be paid the costs of those proceedings, insofar as they are not recovered from or paid by any other person, out of the relevant trust fund as assessed on the indemnity basis.

There are obvious types of case in which trustees will not usually be entitled to be indemnified in respect of their costs under those provisions. One is if they are successfully sued for compensation for past breaches of trust. Another is where they take an unsuccessful partisan position in hostile litigation between rival claimants to a beneficial interest in the subject matter of the trust. Such examples were considered by Lightman J in Alsop Wilkinson v Neary [1996] 1 WLR 1221 . They are to be contrasted with cases where, whatever the form, the substance of the litigation is to clarify some matter of uncertainty in the administration of the trust or the conduct of the trustees in the litigation is otherwise in the best interests of the beneficiaries as a body rather than for the personal benefit of the trustees themselves. Often it is sought, as BA has done in the present case, to categorise trust litigation for this purpose into one or other of the three categories of case mentioned by Kekewich J in Re Buckton . As has been pointed out on numerous occasions, however, that categorisation is not some kind of statute and there are cases which do not fit easily within any of those categories: see, for example, Singapore Airlines Limited v Buck Consultants Limited [2011] EWCA (Civ) 1542 . Furthermore, as has also been pointed out, Kekewich J was not strictly addressing trustees' rights of indemnity at all. He was concerned with principles applicable to the costs of beneficiaries: Bertrand des Pallières v JP Morgan Chase & Co [2013] JCA 146, Jersey Court of Appeal , at paras. 30 and 31 (Nugee JA).

I have emphasised that what matters is whether, in substance, trustees who are parties to litigation are acting in the best interests of the trust rather than for their own benefit. It is clear, for example, that, depending on the precise facts, trustees may be entitled to an indemnity for costs even though incidentally they will secure a personal benefit from a successful claim or defence or where there are allegations of breach of trust: see, for example, Macedonian Orthodox Community Church St Petka Inc v The Diocesan Bishop of the Macedonian Orthodox Diocese of Australian and New Zealand [2008] HCA 42 .

Turning to the relevant facts here, it is perfectly clear, as Mr Jonathan Evans has himself submitted on behalf of Mr Fielder, that the Main Proceedings should not go undefended. The 2011 Amendment and the 2013 Decision will benefit the overwhelming majority of the members of the Scheme, that is to say some 29,000 pensioners and deferred members out of a total, including active members, of just under 30,000. Mr Rowley and the Trustees' two junior counsel, Mr Thomas Seymour and Mr Jonathan Hilliard, have written a 58-page joint opinion, which examines in detail the allegations in the Points of Claim. [redacted].

Further, it is important that the claims in the Main Proceedings are determined by the court in order to resolve the uncertainties about the validity of the 2011 Amendment and the 2013 Decision, to which BA's allegations give rise.

In the present case, BA's attack on the validity of the 2011 Amendment and the 2013 Decision inevitably involve allegations that the Trustees' conduct was incorrect. There is, however, no allegation of dishonesty or recklessness in the Points of Claim in the Main Proceedings. There is no claim for personal relief against the Trustees. There is no claim for compensation or for any injunctive relief. Nor, presumably for those reasons, has BA joined as defendants those persons who were Trustees at the time the 2011 Amendment was made and the 2013 Decision was taken but who have subsequently resigned as Trustees or whose term of office has come to an end. In substance, the allegations in the Main Proceedings are merely the legal vehicle for attacking the validity of the 2011 Amendment and the 2013 Decision. That is also reflected in the fact that the Main Proceedings were commenced by a Part 8 claim form pursuant to CPR Part 64 .

Some of the Trustees are pensioners or deferred pensioners. They will, therefore, personally benefit from a successful defence of the Main Proceedings. Their defence in the Main Proceedings is not, however, in substance for their personal benefit. They are but a minute portion of the 29,000 odd members who would benefit. The active members will also benefit from the clarification of the validity or otherwise of the 2011 Amendment and the 2013 Decision. Any personal financial benefit to the Trustees as a result of a successful defence to the Main Proceedings would, therefore, be incidental.

Accordingly, as Mr Evans submitted, the costs of serving a defence to the Main Proceedings and of disclosure and inspection must necessarily be incurred for the benefit of the members of the Scheme as a whole.

It is entirely unrealistic and unreasonable to expect, as BA has suggested in correspondence between Linklaters and Eversheds, that the Trustees should undertake the defence of the Main Proceedings without a protective costs order at this stage, even if, as matters stand at the moment, it is reasonable to anticipate that, whatever the outcome of the Main Proceedings, the trial judge would award the Trustees their costs out of the Scheme's assets insofar as they are not paid by anyone else. While it is true that BA has said that it will not claim its costs of the Main Proceedings from the Trustees, whatever the outcome at trial, the Trustees cannot be expected to take any risk at all of personal exposure to their own costs and expense of the litigation if they are litigating in substance for the benefit of the Scheme's members as a whole rather than their own personal benefit. The suggestion of BA that the Trustees should negotiate some kind of conditional fee agreement with their advisors is impractical and unrealistic for reasons given in correspondence by Eversheds and which it is unnecessary for me to repeat here. It is in any event an impractical suggestion in view of the time limit for serving a defence to the substantial Points of Claim by 25 August 2014.

There are, in the circumstances, only two practical possibilities: either the Trustees must defend the Main Proceedings and receive a protective costs order at this stage or a member of the Scheme who has not been involved in the 2011 Amendment or the 2013 Decision will have to do so in a representative capacity. Such a representative defendant would inevitably be entitled to a protective costs order in just the same way as the pension scheme members were entitled to such an order in McDonald v Horn . The fact that in that case they were to be claimants in the proceedings but in the present case the representative member would be a defendant to the Main Proceedings makes no difference.

Mr Evans has explained that, due to the constraints of time, Mr Fielder and his advisers are not in a position at the moment to express a final view on whether the Main Proceedings should be defended by the Trustees or a member acting in a representative capacity. He put Mr Fielder's dilemma in the following way. For the reasons I have given, if the Trustees are the only defendants to the Main Proceedings, they must be indemnified as to their costs. If BA were to succeed in the Main Proceedings, those costs would not be borne by the Scheme's assets if BA were liable to indemnity the Trustees in respect of those costs pursuant to clause 17. BA has, however, refused to confirm that clause 17 would apply to such costs and says that that issue can only be determined once the Main Proceedings have been tried and the conduct of the Trustees in relation to the 2011 Amendment and the 2013 Decision has been fully investigated. Accordingly, on BA's case, there remains a possibility, if the Trustees are left to defend the Main Proceedings on their own, that their costs will be borne by the Scheme's assets and not by BA.

If, on the other hand, a member acting in a representative capacity was made a defendant in the Main Proceedings, the Trustees would not have a protective order for costs, and it would be possible, depending on the outcome at trial, for the representative member defendant to argue that the Trustees, or some of them, should personally bear all or part of the costs of defending the Main Proceedings. In such circumstances, it would not matter if such costs were not covered by the clause 17 indemnity from BA. The downside, however, of a member acting in a representative capacity being added as a defendant to the Main Proceedings is that this would both delay the Main Proceedings and be likely to add to the costs of the Main Proceedings. In addition, such a member would probably not be in as good a position as the Trustees and their advisors, with all their long-standing knowledge and experience of the Scheme, to conduct the defence.

In the event, Mr Evans said that Mr Fielder considers that it is plainly in the best interests of the members as a whole that the Trustees should continue to have the conduct of the defence of the Main Proceedings at least for the purposes of serving a defence and taking matters down to the completion of disclosure and inspection. He submitted that it is important that the defence is served on time and that the Main Proceedings should be progressed speedily. Those objectives would not be possible if a representative member had to be added as a defendant to the Main Proceedings at this stage. They would also not be achieved if I were to adjourn the present claim for directions to enable Mr Fielder to consider his position further. Mr Evans was concerned that any delay in the service of the defence would be tactically unwise and might be perceived by BA as weakness. As has also been pointed out, a considerable time has now elapsed since the 2013 Decision and many of the pensioners are elderly. Any significant delay will undermine the prospect that they will live to see the benefit of the 2013 Decision or any other discretionary increase pursuant to the 2011 Amendment. Mr Evans has also pointed out that, according to the evidence, the costs of preparing and serving a defence in the Main Proceedings and for completing disclosure and inspection are a relatively small part of the overall anticipated costs of defending the Main Proceedings.

I see the force of Mr Evan's submissions. It is right that Mr Fielder should have the ability in the future, after completion of disclosure and inspection, to invite the court to reconsider the role of the Trustees in the Main Proceedings and their right to be indemnified as to their costs. In the light of those considerations, Mr Rowley's submissions, and for the reasons I have given earlier, I consider that it is appropriate to grant the limited relief sought by the Trustees.

During the course of the hearing, I expressed the view that there would be merit in resolving within the Main Proceedings the issue of whether or not the circumstances in which the 2011 Amendment and the 2013 Decision were made involved a deliberate act or omission of the Trustees, or any of them, which they (or he) knew was legally wrong or were (or was) reckless as to whether it was legally wrong or not within clause 17. I shall give the Trustees liberty, if so advised, to raise that issue in the Main Proceedings, and I direct that they be indemnified out of the Scheme's assets for the costs of doing so, again limited to the preparation and service of the appropriate statement of case and down to completion of disclosure and inspection.