The issue of whether a trustee’s right of indemnity can be excluded by trust instrument was considered by the Honourable Justice Debelle of the South Australian Supreme Court in MOYES & ANOR v J & L DEVELOPMENTS PTY LTD & ANOR (No 2) [2007] SASC 261 in a judgment delivered on 11 July 2007.

The trustee (J&L) had purchased land and then gone on to win an appeal in the Environment Court against a local Council decision declining its request to build a house on the land. The neighbours and the Council appealed further to the Supreme Court and succeeded in reinstating the original Council decision, ordering costs against J&L as trustee.

J&L refused to pay the costs. As trustee, J&L amended the trust deed so that it expressly stated: “the Trustees shall not be indemnified out of the Assets of the Trust Fund”. Soon after J&L resigned as trustee and was replaced as trustee by a new company, Palm Hills Pty Ltd, which became the new registered owner of the land and which promptly sold the land.

The question was whether the order for costs could be enforced against the sale proceeds of the land. Justice Debelle referred to a division of judicial opinion on whether a trustee’s right to indemnity against trust assets can be excluded by trust instrument. The right was either an inseparable incident incapable of being excluded or a matter akin to contract law: if a trustee is willing to disadvantage themselves in that way they should be free to do so.

The answer was found in the Victorian Trustee Act 1958, which provides:

A trustee may reimburse himself, or pay or discharge out of the trust premises, all expenses incurred in or about the execution of his trust or powers.

It was noted the provision was enacted not only in the interests of trustees and beneficiaries but also in the public interest, especially creditors. The trust amendment removing the indemnity was found to be void against public policy and inconsistent with the statute.

There is little doubt the same decision would be reached in Queensland with the corresponding provision being found in section 72 of the Trusts Act 1973

A trustee may reimburse himself or herself for or pay or discharge out of the trust property all expenses reasonably incurred in or about the execution of the trusts or powers.