England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		26 February 2010

MR. JUSTICE ARNOLD :

Introduction

1. On 10 November 2009 I gave judgment ("the first judgment", [2009] EWHC 2785 (Ch)) on an application by the Claimant ("the Present Trustee") for the determination of seven questions arising out of the purported conversion of the IMG Pension Plan ("the Plan") from a "final salary" scheme to a "money purchase" scheme by a deed dated 3 March 1992 ("the 1992 Deed").
2. As I recorded in the first judgment at [2], the Present Trustee was neutral in these proceedings. The First Defendant ("Mr German") is a deferred member of the Plan. During the trial I appointed Mr German to act as a representative beneficiary under an "issues-based" representation order pursuant to CPR rule 19.7(2)(d)(ii) i.e. to represent those beneficiaries in whose interests it would be to argue for particular answers to the questions raised. The Second Defendant ("IMG") is the Plan's Principal Employer. Although the point was not mentioned in the first judgment, because it was not necessary to do so, for present purposes it is important to note that the effect of the representation order so far as question 5 was concerned was that Mr German represented two classes of beneficiary. The first class was the class of existing active members as at the date of the 1992 Deed. The second class was the class of members who joined the Plan after the 1992 Deed, but before the coming into effect of a new Definitive Deed and Rules dated 30 December 2004 on 1 January 2005 ("the 2004 Deed"). The reason for this is that the effect of complete success by Mr German on question 5 would be that the Plan continued to be a final salary scheme until the 2004 Deed came into effect.
3. Broadly speaking, the effect of the first judgment was that I ruled in favour of Mr German on questions 1, 2, 4 and 6 and I ruled in favour of IMG on questions 5 and 7. (There turned out to be no real dispute on question 3.) Thus the first class of members represented by Mr German on question 5 benefit under my judgment, but the second class do not.
4. On 2 December 2009 I gave a supplemental judgment ([2009] EWHC 3410 (Ch)) in which I determined an additional issue that had arisen and ruled upon applications for permission to appeal. I granted IMG permission to appeal on questions 1, 2, 4 and 6. I granted Mr German permission to appeal on question 5 limited to arguing the legal consequences of the facts that I had found. I gave that permission because I considered it arguable that there was either no effective exercise by IMG of its power to appoint four new trustees who were appointed by a deed of appointment dated 2 March 1992 ("the New Trustees") or a failure on the part of the New Trustees to exercise their discretion to amend the Plan when executing the 1992 Deed in the manner that they should have done.
5. Counsel for Mr German made it clear when applying for permission to appeal that Mr German would only wish to appeal if IMG appealed. I was assured by counsel for Mr German during the hearing of the present application that in reaching that decision those advising Mr German gave careful consideration to the position of the second class of members represented by him with respect to question 5. Accordingly, paragraph 8(b) of my order dated 2 December 2009 provided that Mr German's permission to appeal was conditional upon IMG filing an appellant's notice and extended his time for filing his respondent's notice until 21 days after service of IMG's Appellant's Notice on him.
6. In the event, IMG did file an appellant's notice on 6 January 2010. Accordingly, Mr German wishes to file a cross-appeal. By consent, his time for doing so has been extended until 14 days after judgment on the present application.
7. Mr German's representation at first instance was funded by IMG under the terms of a costs agreement dated 10 September 2008. That agreement has now expired. IMG has agreed to fund Mr German's representation for the purposes of resisting IMG's appeal under a new costs agreement. IMG has not agreed to fund Mr German to pursue his proposed cross-appeal. Accordingly, Mr German has applied for a prospective costs order in the form of the model costs agreement set out in PD64 para 11. In short, Mr German seeks an order that IMG pay his costs of the cross-appeal to be assessed on the indemnity basis, and that he should not pay IMG's costs of the cross-appeal, regardless of the outcome of the cross-appeal. IMG opposes such an order being made.
8. It is common ground that I have jurisdiction to make a prospective costs order in respect of the costs of an appeal from this Court to the Court of Appeal, as held by Laddie J in Laws v National Grid plc [1998] 20 PBLR (1). It is also common ground that the jurisdiction extends to making an order that the costs be paid by IMG as the Principal Employer rather than out of the assets of the Plan, the Plan being a balance of cost scheme and moreover one that is now a money purchase scheme. There is a dispute between the parties, however, as to the principles to be applied in exercising my discretion as well as to how to exercise that discretion.

Previous case law

9. The leading authority on the principles to be applied to applications for prospective costs orders in pension fund cases is the decision of the Court of Appeal in McDonald v Horn [1995] 1 All ER 961. In that case the plaintiffs were members of an occupational pension scheme which provided final salary benefits. The plaintiffs commenced proceedings against their employers, the pension fund trustees and others alleging improper use of powers in the trust deeds and breaches of trust in the investment of trust funds. Initially the plaintiffs' action was financed by their trade union, but in due course that support was withdrawn. The plaintiffs then applied for a pre-emptive costs order requiring that their costs, and any costs which they might be ordered to pay to the defendants, should be paid on an indemnity basis out of the pension fund whether they won or lost. The judge granted the order down to the end of discovery and inspection. The defendants appealed, contending that the court had no jurisdiction to make the order, alternatively that the judge's exercise of his discretion was flawed. The Court of Appeal dismissed the appeal.
10. The principal judgment was given by Hoffmann LJ (as he then was). After setting out the background in sections (1)-(4) of his judgment, in section (5) he considered the statutory basis for the court's jurisdiction to deal with litigation costs in section 51 of what is now the Senior Courts Act 1981. He said that the decision of the House of Lords in Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 969 showed that the discretion conferred by section 51 was broad, but not untrammelled. As he said at 969d, "It must be exercised in accordance with the rules of court and established principles". In section (6) he dealt with the general principle which is applicable, namely that costs follow the event. Although the advent of the Civil Procedure Rules has modified the principles applicable to costs in various respects, this remains the general rule: see CPR r. 44.3(2)(a).
11. In section (7) of his judgment, Hoffmann LJ considered the special principle concerning payment of costs out of a fund under four sub-headings: (i) "Costs of trustees and other fiduciaries"; (ii) "Extension of special principle to beneficiaries"; (iii) "Extension of special principle to derivative action"; and (iv) "Extension of Wallersteiner to pension funds".
12. Under the first sub-heading, he noted that in the case of proceedings concerning a fund held on trust, the trustee is entitled to his costs out of the fund on an indemnity basis, provided that he has not acted unreasonably or in substance for his own benefit rather than that of the fund.
13. Under the second sub-heading, he noted that the courts had been willing in certain circumstances to extend to other parties to trust litigation an entitlement to costs in any event by analogy with that accorded to trustees. As he said at 970j – 971b:

"The classic statement of the principles upon which the court acts is by Kekewich J., who was acknowledged in his time as a master of Chancery procedure, in Re Buckton [1907] 2 Ch 406 at 413–415. While warning that it was 'well nigh impossible to lay down any general rules which can be depended on to meet the ever varying circumstances of particular cases', he said that trust litigation could be divided into three categories. First, proceedings brought by trustees to have the guidance of the court as to the construction of the trust instrument or some question arising in the course of administration. In such cases, the costs of all parties are usually treated as necessarily incurred for the benefit of the estate and ordered to be paid out of the fund. Secondly, there are cases in which the application is made by someone other than the trustees, but raises the same kind of point as in the first class and would have justified an application by the trustees. This second class is treated in the same way as the first. Thirdly, there are cases in which a beneficiary is making a hostile claim against the trustees or another beneficiary. This is treated in the same way as ordinary common law litigation and costs usually follow the event."

14. Hoffmann LJ went on to say at 971e - 972a (emphasis added):

"The court may sometimes feel sufficiently confident that the case is clearly within the first or second category to be able to make a prospective order that parties other than the trustees are to have their costs in any event. … This is not an interference with discretion because it is clear that the discretion can only be exercised in one way. …

I think that before granting a pre-emptive application in ordinary trust litigation or proceedings concerning the ownership of a fund held by a trustee or other fiduciary, the judge must be satisfied that the judge at the trial could properly exercise his discretion only by ordering the applicant's costs to be paid out of the fund."

15. He then held at 972b-e (emphasis added):

"If one applies these principles to the instant case, they do not in my judgment assist the plaintiffs. … This is hostile litigation if ever there was. … I do not think it likely that if this were ordinary trust litigation and the plaintiffs are unsuccessful, the judge would order their costs to come out of the fund. They therefore cannot rely upon Ord. 62 r. 6(2) as extended to beneficiaries by the principles in Re Buckton."

16. Under the third sub-heading, Hoffmann LJ said at 972f-g that in Wallersteiner v Moir (No 2) [1975] QB 373 the Court of Appeal had held that:

"a minority shareholder bringing a derivative action on behalf of a company could obtain the authority of the court to sue as if he were a trustee suing on behalf of a fund, with the same entitlement to be indemnified out of the assets against his costs and any costs he may be ordered to pay to the other party. The court said that the minority shareholder could make a Beddoe application in the same way as a trustee and so secure an assurance that he would not be personally liable for any costs."

17. Under the fourth sub-heading, he held that the principle established in Wallersteiner should be extended to cover a beneficiary suing on behalf of a fund in which he and many others have interests. His reasoning at 972j – 973e was as follows (emphasis added):

".. if one looks at the economic relationships involved, there does seem to me a compelling analogy between a minority shareholder's action for damages on behalf of the company and an action by a member of a pension fund to compel trustees or others to account to the fund. In both cases a person with a limited interest in a fund, whether the company's assets or pension fund, is alleging injury to the fund as a whole and seeking restitution on behalf of the fund. And what distinguishes the shareholder and pension fund member, on the one hand, from the ordinary trust beneficiary, on the other, is that the former have both given consideration for their interests. They are not just recipients of the settlor's bounty which he, for better or worse, has entrusted to the control of trustees of his choice. The relationship between the parties is a commercial one and the pension fund members are entitled to be satisfied that the fund is being properly administered. Even in a non-contributory scheme, the employer's payments are not bounty. They are part of the consideration for the services of the employee.

Pension funds are such a special form of trust, and the analogy between them and companies with shareholders is so much stronger than in the case of ordinary trusts, that, in my judgment, it would do no violence to established authority if we were to apply to them the Wallersteiner v Moir (No 2) procedure. Mr Sher QC, who appeared for the defendants, said that this court had no jurisdiction to do this. He referred us to the statement of the limits of the court's inherent jurisdiction over trusts in the decision of the House of Lords in Chapman v Chapman [1954] AC 429. But I say that the jurisdiction is to be found in s. 51 of the Supreme Court Act 1981, which is subject only to rules of court and established principles. For the reasons I have given, I think that no such rule or principle would be violated."

18. In section (8) of his judgment, Hoffmann LJ rejected the defendants' attack on the judge's exercise of his discretion. In this connection he said at 973e-g:

"The judge identified various factors which he regarded as material to the exercise of the discretion. He said that in the case of a pension fund the trust beneficiaries were not mere volunteers. They had contributed to the fund and had a moral right to be satisfied that it was being properly administered. The plaintiffs were bringing an action on behalf of the trust estate and should therefore enjoy the same right to an indemnity out of the fund as if they were trustees. As appears from what I have already said, I think that these are the features which, in combination, enable the case to be brought within the Wallersteiner principle. They are pre-conditions of the existence of the discretion rather than factors to be taken into account in its exercise"

19. In section (9) he made observations on the practice to be followed in pension fund cases, saying that the power to make a Wallersteiner order should be exercised with caution due to "the dangers of too easily making orders which allow minority shareholders to litigate at the cost of the company", but this did not mean undertaking a close examination of the merits of the dispute.
20. My attention was drawn to three first instance decisions since McDonald. The first is that of Rimer J (as he then was) in Laws v National Grid. That case concerned a surplus in the Electricity Supply Pension Scheme for National Grid. The trustees allocated 70% of the surplus to National Grid and 30% to fund benefit improvements. A Mr Laws and a Mr Mayes challenged this by complaints to the Pensions Ombudsman. The Ombudsman upheld the complaints, and the trustees and National Grid appealed to the High Court. Mr Laws and Mr Mayes applied for pre-emptive costs orders to enable them to resist the appeals.
21. Rimer J held that, if the case fell within the third class identified in Buckton, the applicants faced considerable difficulties. In that event, he could only make the order sought if he were satisfied that the judge hearing the appeals would order the applicants' costs to be paid out of the scheme assets; but he could not be so satisfied. He went on to hold, however, that that was not the end of the matter because the Court of Appeal in McDonald had held that a pre-emptive costs order could be justified in contributory pension scheme cases by analogy with derivative actions. He then noted that the analogy was not an exact one in the instant case because the applicants had not commenced actions in the High Court, but had instead complained to the Pensions Ombudsman and were now seeking to resist appeals. He continued:

"But I do not regard that difference as ruling the applicants out of court on their present application. The complaints to the Pensions Ombudsman can, in a sense, be regarded as the equivalent of a successful claim by the applicants in proceedings in the Chancery Division, and the present appeals can be regarded as the equivalent of appeals to the Court of Appeal by the trustees and NGC against the orders made in such proceedings. If the applicants could have obtained pre-emptive costs order to pursue an action for the benefit of the pension fund, I cannot see why in principle they could not equally apply for a like order so as to enable them to resist an appeal against the judgement they had obtained in such action. I understood both counsel to accept that they could."

22. Rimer J then considered whether to make the order sought and concluded that it was appropriate to do so. In reaching this conclusion, he addressed the four considerations set out in the following passage from the judgment of Lightman J in Alsop Wilkinson v Neary [1995] 1 All ER 431 at 437:

"The court has an exceptional jurisdiction in hostile litigation to make an order at an early stage in the proceedings regarding the ultimate incidence of costs. For the purpose of this application, all parties are agreed that the relevant principles are sufficiently set out in the judgment of Mary Arden Q.C. (sitting as a deputy High Court judge in the Chancery Division) in Re Biddencare Ltd [1994] 2 BCLC 160 and that the four relevant considerations for this purpose are (1) the strength of the party's case; (2) the likely order as to costs at the trial; (3) the justice of the application; and (4) any special circumstances. I would only add that since the decision of the Court of Appeal in McDonald v Horn, the second requirement has been tightened up and (save the presently recognised exceptions namely derivative actions and actions relating to pension funds), it must appear that the judge at the trial could properly exercise his discretion only by ordering that the applicants' costs be paid out of the trust estate."

23. The second decision is that of Carnwath J (as he then was) in Laws v National Grid. This was another decision in the National Grid proceedings and in related proceedings concerning the Electricity Supply Pension Scheme for National Power. In those proceedings a Mr Machin had been made a representative defendant to a claim by the trustees for a determination that they had correctly treated the surplus in that scheme. Both sets of proceedings had come before Robert Walker J (as he then was), who had reversed the Pensions Ombudsman's determinations in favour of Mr Laws and Mr Mayes in the National Grid proceedings and ruled in favour of the trustees in the National Power proceedings. Each of Mr Laws, Mr Mayes and Mr Machin appealed, and applied for pre-emptive costs orders in respect of the appeals.
24. In his judgment Carnwath J considered the judgment of Hoffmann LJ in McDonald in some detail. Having referred to the discussion of Buckton, he noted that the first and second classes in that case were concerned with non-hostile proceedings, seeking the guidance of the court on issues of difficulty in relation to the construction or management of the trust. Even in such cases pre-emptive orders were only made where it was clear that the trial judge would order costs out of the fund. He then said that the National Power proceedings at first instance could be categorised as non-hostile. He went on:

"However, as Mr Warren says, in the Buckton type of case the same considerations do not normally apply to an appeal. He referred me to what was said in Re Earl of Radnor's Will Trusts (1890) 45 ChD 423. The Master of the Rolls at 423 referred to the right of the trustees in that case to seek the opinion of the judge as to what was right to be done, but he continued:

…. but when they appeal to this court from him, being absolutely protected as trustees by his decision -- I do not say they are wrong in appealing, but they appeal to this Court under the ordinary conditions of Appellants, and they fail in the appeal; therefore this appeal must be dismissed with costs.

So one sees that where there is a genuine difficulty, trustees, and by analogy beneficiaries, may be able to seek authoritative guidance of the High Court at the expense of the fund, but once such guidance has been obtained from the High Court's decision, then in the absence of some special circumstances, such for example as difficulties arising from that decision itself, the parties have the authoritative guidance they need. The fact that they do not like it is not a reason for litigating further at the expense of the fund. That principle would apply equally in this case. The judgment provides the sort of clear guidance which is required under the Buckton approach, and the fact that some of the parties do not like it would not justify the cost of the appeal."

25. Carnwath J then turned to consider the Wallersteiner extension. After citing from the judgments of Buckley LJ and Lord Denning in that case, he quoted a number of passages from sections (7), (8) and (9) of Hoffmann LJ's judgment in McDonald.
26. Carnwath J next recorded a submission by Mr Warren, counsel for the employers, that Wallersteiner and McDonald were cases of alleged wrongdoing by those in control of the company or trust and had no relevance to an ordinary administration or construction case, but said that he did not think that Hoffmann LJ had in mind any such clear-cut criterion. He went to refer to the earlier decision of Rimer J and cited a section from his judgment, including the passage I have quoted in paragraph 21 above. He continued:

"Although that was based partly on a concession, no-one before me has argued that Rimer J's approach was wrong. Having reached that point, at least in the National Grid case, it seems to me impossible to argue that the McDonald principle is as narrowly confined as Mr Warren submits. Furthermore, once it has been decided that the case is of the kind which justifies a McDonald order at the first stage, it cannot be right, in my view, for the jurisdiction of the court (as opposed to the exercise of its discretion) to continue that order at a later stage depends on who won or lost. That, it seems to me, must depend on the nature of the case, and the circumstances will differ widely."

27. Carnwath J then turned to consider the cases before him, and concluded that it was appropriate to make the order sought by the applicants subject to a costs cap.
28. The third decision is that of Laddie J in Chessels v British Telecommunications plc [2002] PLR 141. In that case the trustees of the BT Pension Scheme had applied to the court for guidance. There were about 320,000 employees or former employees who were entitled to pensions under the scheme. The issues raised arose out of the fact that some members were formerly employed by the Post Office, which had been a government department, and thus they had civil service pension rights. In 1987 the civil service arrangements were revised, but the benefit of the former rules (referred to as "reserved rights") was preserved for those in what was called a "mobile grade". From 1990 to 1995 BT had reduced its workforce by means of an early release scheme which did not offer relevant members reserved rights. Four questions were raised for determination by the court, the second of which was what, if anything, was the BT equivalent of the civil service mobile grades. Two members were joined as representative defendants. One had left under an early release scheme and one was a current member. Both had the benefit of a pre-emptive costs order made by consent.
29. On the second question, BT argued that none of the relevant BT employees qualified as being of mobile grade while the representative members argued that all or most did. Both advanced the same fallback position, namely that the mobile grade was a reflection of a particular grade of seniority within the civil service and that BT employees of equivalent seniority were to be treated as being of the mobile grade for the purpose of the reserved rights. Jonathan Parker J (as he then was) ruled in favour of the mutual fallback position, and held that anyone at a BT grade equivalent to the EO grade in the civil service or above was entitled to reserved rights. This decision had an effect which had not been anticipated. Both the representative members had been employed in grades equivalent to EO or above. They were thus content with the judge's demarcation and had no interest in arguing for the interests of those in lower grades, referred to as "the excluded members". Thus the excluded members, estimated to number around 12,000, were left unrepresented. As a stop-gap measure, a Mr Cooper, who was a partner in the firm of solicitors who represented the two representative members, was joined as an additional defendant to represent the excluded members until a suitable representative excluded member could be found and joined.
30. Mr Cooper then applied to Laddie J (Jonathan Parker LJ having been elevated to the Court of Appeal) on behalf of the excluded members for permission to appeal and, if that was granted, for a pre-emptive costs order in respect of the appeal. It is important to note that the application for a pre-emptive costs order was made on the footing that, if no such order was made, Mr Cooper would not pursue the proposed appeal. It is also important to note that BT's response was that, if but only if permission to appeal was granted to Mr Cooper and pursued, it wanted permission to cross-appeal on the first and third questions which Jonathan Parker J had decided adversely to it. It was estimated that the effect of BT succeeding on the proposed cross-appeal would be to deprive about 5,000 members of increased benefits secured for them by Jonathan Parker J's judgment. Laddie J granted both Mr Cooper and BT permission to appeal, saying that he was prepared to assume in Mr Cooper's favour that he had substantial grounds.
31. Counsel for Mr Cooper submitted to Laddie J that he had a broad discretion under section 51 of the 1981 Act, while counsel for the trustees and BT submitted that the discretion could only be exercised in one way, namely to refuse the order sought. In the alternative they submitted that the court's discretion should be exercised against Mr Cooper. Laddie J appears to have accepted the primary submission of counsel for the trustees and BT. It is therefore important to try to understand the reasoning which led him to that conclusion.
32. Laddie J began at [35]-[37], by setting out section 51 of the 1981 Act, referring to Aiden v Interbulk and quoting the statement of Hoffmann LJ in McDonald that I have quoted in paragraph 10 above. At [38]-[42] he made some observations about the general principles relating to costs. At [43]-[44] he set out the order sought by Mr Cooper and considered its effect. At [45] he said that Hoffmann LJ's judgment in McDonald indicated that it was the relationship between the trust and the trustees was the proper starting point for an analysis of when and why pre-emptive costs orders can be made against the trust estate.
33. At [46]-[47] Laddie J considered applications by trustees under Re Beddoe [1893] 1 Ch 547 for pre-emptive indemnity out of the estate in respect of claims brought by the estate against third parties or claims by third parties against the estate. At [48] he referred to cases in which trustees sought guidance from the court as to their powers or duties. At [49] he observed:

"Mr Nugee helpfully referred to the first class of cases as 'external' and the second as 'internal'. In each the same principle applies namely that the trustees are indemnified out of the estate because they will be acting properly for and on behalf of and for the benefit of the estate as a whole."

34. At [50] Laddie J noted that Hoffmann LJ had pointed out in McDonald that the principles underlying the payment of the trustees' costs out of the estate had been extended to beneficiaries, and quoted his summary of Buckton. At [51] he commented:

"The guiding principle is that the special entitlement of the trustee to be indemnified out of the estate is extended to third parties where, in substance, they are performing the same function as the trustees or are assisting them to do so. Where that is the case, the third parties' costs are treated as necessarily incurred for the benefit of the estate."

35. At [52] he noted that Hoffmann LJ had explained in McDonald that the favourable costs treatment of trustees had been extended by analogy to other types of cases. In minority shareholders' actions, the minority were treated as if they were bringing proceedings on behalf of and for the benefit of the company. He continued:

"Similarly in McDonald v Horn itself, the principle was extended to actions for breach of trust brought by members of a pension scheme against the trustees. In such cases it is clear that if the members' allegations are true, the trustees themselves will not bring the proceedings on behalf of the estate. The members are therefore taking action for and on behalf of the estate and may be viewed as standing in the shoes of the trustees."

It may be noted that Laddie J did not quote, or refer to, Hoffmann LJ's reasoning which I have quoted in paragraph 17 above.

36. At [53], Laddie J said that two other points came out of McDonald, the second of which concerned whether such orders for indemnification should be made pre-emptively. He continued at [54]:

"As I have pointed out above in relation to litigation commenced by trustees on behalf of the trust against third parties, it is prudent, but not essential, for the trustees to seek a pre-emptive indemnification. That is part of the Beddoe application. Similarly, the fact that a third party may be entitled to indemnification does not, of itself, determine whether he should be entitled to it pre-emptively. This subject was addressed by Hoffmann LJ in McDonald v Horn [1995] 1 All ER 971d–972a: …"

He then set out the passage from which I have quoted in paragraph 14 above. It may be noted that Laddie J did not quote, or refer, the passage of Hoffmann LJ's judgment which I have quoted in paragraph 15 above.

37. Laddie J concluded as follows (emphasis added):

"55. It follows that a pre-emptive order indemnifying a third party should only be made where the court hearing the costs application is satisfied that no other order could properly be made by the court which is to hear the proceedings in respect of which the costs order is sought.

56. The question I have to decide is how the above principles apply to a case where what is sought by a group of beneficiaries is a pre-emptive costs order in respect of an appeal. Taking the last point first, for me to make such an order now it must be clear that an order for indemnification of the beneficiaries out of the fund, even if they lose the appeal, is the only order the Court of Appeal could make. I cannot be so satisfied. Although it is possible that the Court of Appeal may exercise its discretion to make such an order, I do not consider it to be inevitable or even particularly likely for the reasons set out below.

57. This case started life as an application by the trustees of BTPS for guidance as to how to interpret some of the rules of the scheme. All the parties agree that it was, as such, a classic Buckton 1 application in which it was appropriate to indemnify not only the trustees but also the representative defendants out of the fund. But the trustees have now received guidance from Jonathan Parker LJ. They have no desire nor need to take the matter further. They happen to believe that the judge was correct in his analysis. So the position now is that there is no requirement that further guidance be given by the court. It might be that such guidance would be necessary if the judgment was clearly and indubitably wrong, but Mr Topham goes nowhere near making any such suggestion. If that is right then even the trustees cannot assume that any appeal brought by them would be on the basis of an indemnity out of the fund (see In re Earl of Radnor's Will Trusts (1890) 45 Ch D 402, 423). If they were to appeal it would be at the risk of being ordered to pay the costs personally. The fourth defendant cannot be in a better position. On the contrary, the fourth defendant's position is worse. He cannot argue that the appeal has been rendered necessary by clear error of the judge, nor does he or can he say that he should be funded for any such appeal because the trustees' refusal to appeal is unreasonable or contrary to the interests of the beneficiaries of the scheme as a whole. These factors illuminate why the fourth defendant wants to appeal. It is to secure an interpretation of the rules of the scheme which would be more advantageous to a group of members, which happens to be small in number compared to the total number of members of the scheme. It is not to clarify the meaning of the rules for the benefit of the scheme as a whole. Any such appeal is most like hostile litigation of the Buckton 3 type.

58. It seems to me, with respect, that the approach adopted by Carnwath J in Laws v National Grid plc [1998] PLR 295 is correct and applies here as well: …"

Laddie J proceeded to quote the last paragraph of the passage which I have quoted in paragraph 24 above. It may be noted that he did not quote, or refer to, the remainder of Carnwath J's judgment. Nor did he refer to Rimer J's earlier judgment.

38. Before proceeding, it is perhaps worth pointing out, for the avoidance of confusion, that the terminology employed in these earlier cases is that of "pre-emptive" costs orders. That terminology has subsequently been replaced by that of "prospective" costs orders: see PD64 para. 6.3. This makes no difference to the principles to be applied.

What is the correct approach?

39. Before turning to the dispute as to the principles to be applied, it is convenient to begin with two points which are common ground. The first is that, even disregarding the fact that this is a pension fund case, the first instance proceedings fell within the first class of case identified in Buckton: it was a claim by a neutral trustee seeking the court's guidance. Mr German was joined as a representative beneficiary so that the court could be assisted by adversarial argument. Accordingly, if there had not been a costs agreement, the court would inevitably have exercised its discretion to order that Mr German be indemnified in respect of his costs. The order would most likely have been for IMG to pay the costs, rather than for the costs to be paid out of the Plan assets for the reasons identified in paragraph 8 above. An order for payment out of the Plan assets would have the result of requiring IMG to make extra contributions to the scheme pro tanto. The only difference would be to IMG's cash flow.
40. The second point is that, even where first instance proceedings fall within the first or second class identified in Buckton, the special principle which protects trustees and beneficiaries at first instance does not apply to appeals for the reasons articulated by Carnwath J in the passage I have quoted in paragraph 24 above.
41. Counsel for Mr German submitted, in summary, that the principles I should apply were those applied by Rimer and Carnwath JJ in the National Grid case. Accordingly, I should consider the four factors which Rimer J derived, via Lightman J's judgment in Alsop Wilkinson, from the judgment of Mary Arden QC (as she then was) in Biddencare. He submitted that it was not correct to apply the test applied by Laddie J in Chessels at [56], namely to ask whether the court is satisfied that the only order the Court of Appeal could make even if the appellant loses the appeal was for the appellant to be indemnified. He sought to distinguish the present case from Chessels on a number of grounds. He conceded that, if the correct test was that applied by Laddie J in Chessels at [56], Mr German could not satisfy it.
42. Counsel for IMG submitted, in summary, that the correct test was that applied by Laddie J in Chessels at [56]. In support of that submission he contended that there were two distinct lines of authority, (i) the Buckton line and (ii) the Wallersteiner and McDonald line. He argued that National Grid and Chessels showed that: (i) where there was hostile litigation or a hostile appeal and the Buckton line applied, a prospective costs order would only be made if the trial judge or the Court of Appeal could only properly exercise his or its discretion by ordering that costs be paid out of the trust fund; and (ii) the Wallersteiner and McDonald line only applied to pension fund cases in which the trustees were not neutral, but actively opposed the members who sought the prospective costs order. He submitted that the present case was on all fours with Chessels.
43. In my judgment counsel for Mr German is correct. I consider that Laddie J's reasoning in Chessels is difficult to reconcile with that of Rimer and Carnwath JJ in National Grid. I prefer the latter, since I consider it more accurately reflects the judgment of Hoffmann LJ in McDonald. My reasons are as follows.
44. The starting point is the passage in Hoffmann LJ's judgment which I have quoted in paragraph 15 above. This makes it clear that, if that case had been ordinary trust litigation, the principles stated in Buckton would not have justified a prospective costs order: it was hostile litigation and it was not possible to say that the trial judge could only properly exercise his discretion to order the plaintiffs to be indemnified.
45. It is clear from the passages in Hoffmann LJ's judgment which I have quoted in paragraphs 17 and 18 above that he was saying that a claim by a member of a pension fund to compel trustees or others to account to the fund was different to ordinary trust litigation for the reasons he gave. Accordingly, in such a case the court had a discretion to make a prospective costs order even though such an order could not be justified on Buckton principles for the reasons previously given.
46. It is also clear that Rimer and Carnwath JJ both understood McDonald in this way. As noted in paragraph 21 above, Rimer J held that the applicants could not justify a prospective costs order on Buckton principles, because he could not be satisfied that the judge would order their costs to be paid out of the scheme assets, but that that was not the end of the matter because of the Court of Appeal's decision in McDonald. It can be seen from paragraph 22 above that, in deciding whether to make an order on the basis of McDonald, he did not proceed on the basis that the applicants had to show that the judge would order their costs to be paid out of the scheme assets, but on the basis that he had a broader discretion to exercise. Moreover, he considered the position to be analogous to an appeal to the Court of Appeal (although he was considering the position of parties resisting the appeal and not pursuing it).
47. As can be seen from paragraph 24 above, Carnwath J again held that the applicants before him could not justify a prospective costs order on Buckton principles, because they were appealing from the High Court's determination and therefore he could not be satisfied that the Court of Appeal would order their costs to be paid out of the scheme assets. Again, however, that was not the end of the matter because of the Court of Appeal's decision in McDonald. As can be seen from paragraph 26 above, he went on to follow Rimer J's approach, no one having argued that it was wrong, and to reject the submission that McDonald was limited to cases of trustee wrongdoing. He then decided that it was appropriate to make the order sought.
48. If one considers Laddie J's reasoning in Chessels at [55]-[57], it can be seen that he treated the principles which apply to cases of ordinary trustee litigation, and in particular the principle that a prospective order will only be granted where the court is satisfied that the ultimate tribunal can only properly exercise its discretion to order an indemnity, as equally applicable to a claim or an appeal by a member in a pension fund case. For the reasons given above, I do not think that that is correct.
49. That is not say to that Laddie J reached the wrong conclusion. As he noted in the passage towards the end of [57] that I have italicised in paragraph 37 above, the proposed appeal was an appeal purely for the benefit of a small group of members. It can be seen from my summary of the facts that the group in question numbered about 12,000 out of a total of around 320,000. Moreover, if the appeal proceeded, it would expose around 5,000 other members to losing benefits gained under Jonathan Parker J's judgment as a result of a cross-appeal by BT that would otherwise not be brought. It follows that Laddie J was right to say that the proposed appeal was not for the benefit of the fund as a whole. In those circumstances he would have been justified in concluding that the threshold conditions for bringing the case within the McDonald principle were not satisfied. Alternatively, he would have been justified in exercising his discretion to refuse to make a prospective cost order.
50. In the present case, the situation is quite different. As noted above, so far as question 5 is concerned, Mr German represents not only the existing members as at the date of the 1992 Deed, but also those who joined after the purported conversion but before 1 January 2005. Thus Mr German represents the interests of the majority of the membership. Indeed, as counsel for Mr German submitted, one can regard the Plan as being divided into two sections, the first section comprising those who joined down to 31 December 2004 and the second section comprising those who joined after 1 January 2005. Mr German represents the vast majority of the members in the first section. He does not represent a small handful of existing deferred members as at 3 March 1992, but their interests are not affected by these proceedings anyway. If Mr German is successful on the proposed cross-appeal, then (subject to the further issues discussed below) the consequence will be that IMG will have to make increased contributions to the Plan for the benefit of all those represented by Mr German. In these circumstances Mr German can fairly be considered to be, as Hoffmann LJ put it, "a person with a limited interest in a … pension fund [who] is alleging injury to the fund as a whole and seeking restitution on behalf of the fund" .
51. Finally, I do not accept that the McDonald jurisdiction is limited to cases where the trustee is actively opposing the members as opposed to maintaining a neutral stance. In my judgment such a limitation is inconsistent with Hoffmann LJ's reasoning in McDonald and with Carnwath J's reasoning in Laws v National Grid. In any event, in relation to question 5, Mr German is attacking the actions of the Present Trustee's predecessors.
52. For these reasons, I consider that Mr German satisfies the threshold conditions for the exercise of the McDonald jurisdiction. I shall therefore apply the principles applied by Rimer and Carnwath JJ in National Grid. That said, I do not myself consider it particularly helpful to try separate out the four factors identified in the Alsop Wilkinson case. The key factor is the third one, and it seems to me that the other three factors are really aspects of it. I remind myself that, as Laddie J put it in Chessels at [59], "the court should be careful not to be generous with someone else's money".

How should the discretion be exercised?

53. Counsel for Mr German relied upon the following factors as supporting the making of the order sought:

i) The merits of the proposed cross-appeal.

ii) The fact that there will be an appeal to the Court of Appeal anyway, in respect of which IMG had agreed to pay Mr German's costs. Thus this application only relates to the increased costs of the parties having to argue the cross-appeal as well.

iii) The fact that Mr German is only cross-appealing because IMG appealed. If IMG had accepted this Court's judgment, so would have Mr German.

iv) The issues on the cross-appeal are closely related to, although distinct from, those on the appeal. In particular, the factual background is the same.

v) Success on the cross-appeal could result in a substantial financial benefit for a substantial number of members.

vi) If the order was not granted, Mr German would not be in a position to pursue the cross-appeal.

54. Although counsel addressed me at some length on (i), I do not think it is either possible or desirable for me to say any more than that I consider that the cross-appeal has a real prospect of success.
55. So far as (ii), (iii) and (iv) are concerned, I agree that these are factors which support the making of the order. It may be noted that, in this respect, the present case is the precise converse of Chessels.
56. I also agree that (v) favours the making of the order, but I shall return to this below. I shall consider (vi) below.
57. Counsel for IMG relied upon the following factors as supporting the refusal of the order sought:

i) Success on question 5 would not necessarily result in increased benefits for the members. Two points were left undecided in the first judgment (see [208] and [209]). Moreover, by agreement a further issue as to whether the members were barred by contract or estoppel had been carved out of the trial and would then require to be decided.

ii) The extra costs of the cross-appeal were likely to be substantial.

iii) IMG is a company of relatively modest resources. It would be unfair that IMG should have to pay for the risk of being saddled with a substantial liability, whereas the members could gamble on obtaining a substantial benefit at no cost to themselves.

iv) The order sought exposed IMG to immediate liability, whereas an eventual order for the costs of the cross-appeal to be paid out of the Plan assets would have a reduced impact on IMG's cash flow.

v) It had not been shown that the members could not find an alternative means of funding the cross-appeal.

58. I agree that (i) is a relevant consideration, and goes some way to neutralising Mr German's factor (v), but in my view it does not go all the way. None of those three issues have been decided. I have to approach the matter on the basis that they could be decided either way.
59. So far as (ii) is concerned, I am not persuaded that the extra costs of the cross-appeal are particularly substantial in context. IMG's evidence on this application reveals that it has already spent £1,882,263 (including VAT) on its own, the Present Trustee's and Mr German's representation in these proceedings. To that must in event be added the costs of IMG and Mr German, and perhaps the Present Trustee, on the appeal. The appeal is estimated at 2½ days. Adding the cross-appeal should only add ½ day, or at most 1 day, to the estimate. As a result of the limitation on the scope of Mr German's permission, the cross-appeal is confined to issues of law based on the facts found in the first judgment. In my view, the extra costs of the cross-appeal should be relatively small in the context of the total costs incurred and to be incurred by IMG.
60. As to (iii), I accept that IMG has relatively modest resources, but it is able to afford this litigation and there is no evidence that success by Mr German on question 5 will expose IMG to such a large liability that it will inevitably have to be placed in administration or liquidation. As for the one-sided nature of the risk, that is the inevitable effect of any prospective costs order.
61. I do not regard (iv) as a significant factor for the reasons discussed above.
62. IMG's factor (v) is the flip side of Mr German's factor (vi). There was some debate between counsel as to who bore the burden of proof on this question. I do not think it is satisfactory to resolve this aspect of the matter on the burden of proof. Taking a realistic view, I think it would be difficult for Mr German and those he represents to put in place an alternative funding mechanism, particularly in the time available. Accordingly, I consider that this factor favours Mr German and not IMG.
63. Looking at the matter in the round, I consider that it is likely, although not inevitable, that the Court of Appeal would order IMG to pay the costs of the cross-appeal in any event. Furthermore, I am satisfied that the justice of the case means that it is appropriate to exercise my discretion to make a prospective order now.

Conclusion

64. I shall make the order sought by Mr German.