Douglas v James (No. 2)

[2015] NSWSC 969

Supreme Court

New South Wales

Medium Neutral Citation:	Douglas v James (No 2) [2015] NSWSC 969
Hearing dates:	On the papers
Decision date:	22 July 2015
Jurisdiction:	Equity Division
Before:	McDougall J
Decision:	See at [65].
Catchwords:	COSTS – where defendants (and cross-claimant) wholly unsuccessful – delinquency – where one cause of action time-barred – where another dropped in substance at the hearing – where defence evidence voluminous and largely irrelevant – usual result of assessment on the indemnity basis – whether ‘probate exception’ applies – where non-adversarial approach was available to trustees but not utilised – consequence that proceedings were needlessly adversarial   COSTS – submitting appearances – where defendant filed a submitting appearance less than a fortnight before the hearing – where defendant highly active in preparation for, and support during, litigation – consequence that submitting defendant to be treated as an active defendant for costs purposes
Legislation Cited:	Succession Act 2006 (NSW) Uniform Civil Procedure Rules 2005 (NSW)
Cases Cited:	BE Australia WD Pty Ltd (Subject to a deed of company arrangement) v Sutton (2011) 82 NSWLR 336 Clocchiatti v Pierobon [2014] NSWSC 488 Douglas v James [2015] NSWSC 299 Re Buckton; Buckton v Buckton [1907] 2 Ch 406 Kisimul Holdings Pty Ltd v Clear Position Pty Ltd (No 2) (2014) 86 NSWLR 645 Murdocca v Murdocca (No 2) [2002] NSWSC 505 Oshlack v Richmond River Council (1998) 193 CLR 72 Seller v Jones [2014] NSWCA 19
Category:	Costs
Parties:	Zeta Kathleen Douglas (First Plaintiff / First Cross-Defendant / First Respondent) Marea Gilbert (Second Plaintiff / Second Cross-Defendant / Second Respondent) David James (First Defendant / Cross-Claimant / Applicant) Janina Kik (Second Defendant / Sixth Cross-Defendant / Sixth Respondent) Trudy James (Third Defendant / Fifth Cross-Defendant / Fifth Respondent) Lyn Ison (Third Cross-Defendant / Third Respondent) Angela Webber (Fourth Cross-Defendant / Fourth Respondent) John Croce Palmieri (Seventh Cross-Defendant / Seventh Respondent)
Representation:	Counsel: L Ellison SC (Plaintiffs) R Dubler SC and M Dolenec (Defendants) Solicitors: Adrian Holmes Lawyer (Plaintiffs) Kekatos Lawyers (Defendants)
File Number(s):	2014/107434

Judgment

1. HIS HONOUR:   I gave judgment in these proceedings on 25 March 2015 ([2015] NSWSC 299). In that judgment, I concluded that the plaintiffs succeeded, and were in substance entitled to the relief sought; and that the cross-claim failed. I made substantive orders accordingly, but reserved the question of costs.

2. The parties have now put on detailed submissions, including in reply, on the question of costs. They accept that the question may be dealt with “on the papers”. Having regard to the detailed submissions, I propose to do so.

Nature of the proceedings

3. To give content to what follows, and to enable some understanding of the issues, I set out [1] to [20] of my first judgment:

[1]   HIS HONOUR:   These proceedings concern complex testamentary trusts created by the will of the late Stanley Edward Douglas. The specific question for decision is whether the first defendant (Mr James), as “Appointor” for the “Capital Protected Trust” (CPT) created by the will, had the power to remove and appoint trustees of the CPT.

The parties

[2]   The first plaintiff is the widow of the late Mr Douglas. The second plaintiff is one of his four daughters. The third defendant is another daughter. The other two daughters are cross-defendants. For convenience, and without intending to be either patronising or disrespectful, I shall refer to the family members as “Stan”, “Zeta”, “Marea”, “Trudy”, “Lyn” and “Angela” respectively. Lyn and Angela took no active part in the proceedings.

[3]   Mr James is Trudy’s husband, and hence the son-in-law of Stan and Zeta.

[4]   The second defendant (Ms Kik) was a friend of Stan and Zeta (although I suspect that the friendship between Ms Kik and Zeta may have cooled since Stan’s death). Ms Kik was, she said, someone in whom Stan reposed trust and confidence.

[5]   Mr John Palmieri, a solicitor who had performed work for Stan from time to time, and who had drafted Stan’s previous will, was also a cross-defendant.

The will

[6]   Stan’s will was made on 4 May 2011. The solicitor who drafted it was Mr Samuel Roberts.

[7]   The will was of great length (some 30 pages) and greater complexity. It appointed Mr Palmieri as executor. The substantive provisions of the will created the CPT and a number of “Beneficiary Controlled Testamentary Trusts” (BCTTs). Clause 2.6 provided that, in the events that have happened, Zeta, Marea and Ms Kik were to be the trustees of the CPT:

2.6   Subject to clause 20.7 (“Appointment and Removal of Trustees”) in Part C, my wife Zeta Kathleen Douglas of [a residential address] (“Zeta Kathleen Douglas”), my daughter Marea Gilbert of [a residential address] (“Marea Gilbert”) and my friend Janina Kik of [a residential address] (“Janina Kik”) shall be the Trustees of the Capital Protected Trust created at clause 10 of this Will.

[8]   Although it is of no particular significance, cl 2.5 provided that, for each BCTT, the “Primary Beneficiary” (if nominated and determined in respect of that trust) or that person’s nominee should be the trustee.

[9]   For each category of trust, there was provision for an “Appointor”. Thus, for the CPT, cl 10.4 of the will provided:

10.4   My son-in-law David James shall be the Appointor of the Capital Protected Trust created by this clause and:

(a)   shall have the power to nominate any person or persons or company to act together or in his place as Appointor, and may place such conditions or restrictions on such nomination (and may make such nomination revocable or irrevocable) by any notice in writing to the Trustee, or by Will;

(b)   in the case of more than one Appointor, if the nomination is otherwise silent, they shall act jointly;

(c)   a successive Appointor, if the nomination is otherwise silent, shall also have the power to nominate a successor or alternate Appointor as if they were the initial Appointor,

(d)   the Appointor or any person nominated or appointed to become the Appointor either presently or at some subsequent time, may by notice in writing given to the Trustees of the Capital Protected Trust, resign or renounce such office and such resignation or renunciation shall take effect irrevocably upon such notice being given.

[10]   Apart from the functions described in cl 10.4, the only function that the will expressly gave to the Appointor of the CPT was that described in cl 10.7(a):

10.7(a)   [The Trustees] may distribute, apply or allocate all or any part of any capital gain to or for the benefit of Zeta Kathleen Douglas, or with her consent and the consent of the Appointor in respect of the Capital Protected Trust to any other discretionary beneficiary identified in this clause;

[11]   For each BCTT, cl 20.6 covered the question of who should be the “Appointor”:

20.6   The Appointor of the Beneficiary Controlled Testamentary Trust shall be determined as follows:

(a)   the Primary Beneficiary, shall be the initial Appointor or Appointors, and shall have the power to nominate any person or persons or company to act together or in place of the initial Appointor, and may place such conditions or restrictions on such nomination (and may make such nomination revocable or irrevocable) by any notice in writing to the Trustee, or by Will;

(b)   in the case of more than one Appointor, if the nomination is otherwise silent, they shall act jointly;

(c)   a successive Appointor, if the nomination is otherwise silent, shall also have the power to nominate a successor or alternate Appointor as if they were the initial Appointor,

(d)   the Appointor or any person nominated or appointed to become the Appointor either presently or at some subsequent time, may by notice in writing given to the Trustee of the Beneficiary Controlled Testamentary Trust, resign or renounce such office and such resignation or renunciation shall take effect irrevocably upon such notice being given.

[12]   There was no express, or stand-alone, power to appoint or remove trustees of the CPT. There was however an express power (cl 20.7) to appoint and remove trustees of each BCTT. The extent of that power requires further consideration. I set out that subclause, so far as it is relevant:

20.7   (a)   subject to paragraph (d) of this subclause, the Primary Beneficiary, or a person (including a company) nominated by the Primary Beneficiary, shall be the initial Trustee or Trustees;

(b)   the Appointor (other than an Ineligible Person) may exercise the power to appoint such other person as he, she or they choose to be an additional or replacement Trustee and may subsequently remove the person as a, or the, Trustee;

[13]   It is not necessary to go to the definitions of all the defined terms (which are those italicised and given initial capital letters).

[14]   Clause 27.3 of the will contained a large number of definitions. Of present relevance, it defined for each of the BCTTs and the CPT, the “Appointor”. It also defined the concept “Power of Appointment”, although there was no express provision in the will giving anyone in terms (that is, using the precise phrase) such a power.

[15]   I set out those definitions:

27.3   (a)   “Appointor” in respect of a Beneficiary Controlled Testamentary Trust, shall be determined in accordance with clause 20.6 (“Appointment and Resignation of Appointor”);

(b)   “Appointor” in respect of the Capital Protected Trust, shall be determined in accordance with clause 10.4;

…

(p)   “Power of Appointment” means the power to appoint,

remove or replace the trustee of a trust;

[16]   Those (and all other) definitions were expressed to be “[s]ubject to cl 27.2”. Clause 27.2 said, in effect, that where there was a particular definition in any other part of the will, that definition should apply to the clause in which it appeared, not withstanding any inconsistency between that definition and one of the cl 27.3 definitions.

The impugned transactions

[17]   On 6 June 2013, Mr James, purporting to exercise a power of appointment given to him by the will, gave notice that he had removed Marea as a trustee of the CPT and appointed himself in her place. He purported to confirm that exercise by a document described as “Deed of Appointment and Removal of Trustee” also dated 6 June 2013. Although the deed purported to remove Marea as a trustee, she was not a party to it. Nor were the other trustees at the time, Zeta and Ms Kik.

[18]   On 22 January 2014, Mr James again purported to exercise a power of appointment under the will. On this occasion, he purported to remove Zeta as a trustee of the CPT and to appoint Trudy in her place, on the basis that Trudy would act as one of the three trustees (Ms Kik and Mr James being the other two). There was no deed relevant to this purported exercise of power.

The issues in dispute

[19] Zeta and Marea contend that Mr James had no power to remove them as trustees of the CPT and to appoint others (i.e., himself and Trudy) in their places. Mr James contended that the will on its proper construction did give him that power. Alternatively, he contended that the will should be rectified to give him such a power. The claim for rectification was brought only under the general law. It did not rely on the limited power of rectification given by s 27 of the Succession Act 2006 (NSW).

[20]   In arguing the case for Mr James and the other defendants, Mr Dubler of Senior Counsel, who appeared with Ms Dolenec of Counsel for them, submitted that there were three questions to be decided:

(1)   whether, on the proper construction of the expression “Appointor of the Capital Protected Trust”, it should necessarily be implied, reading the will as a whole, that the person who from time to time held the office of Appointor to the CPT should have the power to appoint and remove trustees of that trust?

(2)   Alternatively, whether, again on the proper construction of that expression in the context of the will as a whole, such a power should be read into the will in some way, by supplying additional words?

(3)   Whether rectification under the general law is available, and if it is, should be ordered?

The costs orders sought

4. The plaintiffs seek orders that:

1. the first and second defendants (Mr James and Ms Kik) pay their costs of the summons; the plaintiffs seek no order for costs of the summons against the third defendant (Trudy).

2. The cross-claimant (Mr James) pay their costs of the cross-claim.

3. The costs payable to the plaintiffs be assessed on the indemnity basis.

4. To the extent that the plaintiffs are not indemnified for their costs by satisfaction of the preceding orders, they have recourse to the assets of the Capital Protected Trust (CPT).

5. Neither Mr James, Ms Kik or Trudy have recourse to the assets of the CPT for their own costs or for the costs that (as to the first two) they may be ordered to pay to the plaintiffs.

6. There be no order for costs against or in respect of the other parties, namely the third cross-defendant (Lyn), the fourth cross-defendant (Angela), and the seventh cross-defendant (Mr Palmieri).

5. I have suggested (by silence) at subpara (2) above that the plaintiffs do not seek an order that Ms Kik pay their costs of the cross-claim. It has to be said that the plaintiffs’ submissions on this point are less than clear. However, Ms Kik was not a cross-claimant. It is difficult to see how, in that circumstance, any order could be made in the plaintiffs’ favour (as cross-defendants) against her in respect of the cross-claim.

6. The defendants’ primary submission is that the costs of all parties (on the summons and amended cross-summons) be “paid of [sic] the estate”, on a submitting basis for those defendants who did in fact file submitting appearances. I assume, although it is not really relevant, that the reference to “the estate” should mean “the assets of the CPT”. I make that assumption because the dispute concerned the CPT specifically, not the estate as a whole. In practical terms that assumption is irrelevant. The assets of the CPT are more than ample to pay any conceivably appropriate amount of costs that might be made, should the defendants’ submissions be upheld.

The parties’ submissions

The plaintiffs’ submissions

7. The plaintiffs submitted (correctly) that Mr James was an active defendant and cross-claimant, who failed on all issues.

8. As to Ms Kik, the plaintiffs accepted that she was a necessary party (because she was and is one of the trustees of the CPT). However, the plaintiffs submitted, Ms Kik took an active part on all issues in the proceedings, and although invited to file a submitting appearance when the summons was served on her on 15 April 2014, did not do so until 10 months later (and less than a fortnight before the hearing), on 25 February 2015.

9. The plaintiffs pointed to numerous matters appearing both from Ms Kik’s affidavit evidence and from her cross-examination to show that she was active in giving instructions to retain lawyers to represent the defendants, and to oppose the plaintiffs’ claim: on the basis that there would be “no negotiation” and that “we would proceed with rectification”. Ms Kik did not challenge the factual accuracy of this aspect of the plaintiffs’ submissions.

10. The plaintiffs pointed out that they were seeking to defend their role as trustees of the CPT and thus, they submitted, “acting in the interests of the CPT, not themselves”. Further, in relation to the rectification sought by the cross-claim, the plaintiffs submitted that they were effectively acting in the place of the executor (Mr Palmieri), who was not joined as a cross-defendant until very late in the day.

11. For those reasons, the plaintiffs submitted, they would be entitled to be indemnified out of the assets of the CPT, on the indemnity basis, to the extent that any costs order made in their favour did not provide complete indemnity.

12. As to the claim that Mr James (as defendant and cross-claimant) and Ms Kik (as defendant) pay their costs (of the whole proceedings, and of the summons, respectively) on the indemnity basis, the plaintiffs pointed to what they said was relevant “delinquency” that justified the making of such an order. They submitted that the case, both in defence of the summons and on the cross-claim, was conducted in wilful disregard of the known facts or clearly established principles of law (Seller v Jones [2014] NSWCA 19 at [58]). The plaintiffs relied on the following matters:

1. both the original cross-summons and the amended cross-summons sought rectification under the general law and under s 27 of the Succession Act 2006 (NSW); but the application for “statutory rectification” was not made within 12 months of Stan’s date of death (s 27(2)).

2. The defendants acknowledged by their outline document dated 5 March 2015 that Mr James needed to adduce positive evidence to overcome the statutory time bar, but never provided any such evidence (that is to say, Mr James never put on any evidence to show why it was that the time bar should be extended (s 27(3)).

3. The claim for statutory rectification was not abandoned until the commencement of the hearing, at a time when the plaintiffs (as cross-defendants) had been put to “substantial time and cost… in addressing the claims”.

4. The claim for rectification under the general law was, as the cross-claimant’s senior counsel recognised at the hearing, one which, on the authorities, was not available; although it was not formally dropped, it was pressed only in a formal fashion.

5. The affidavits served by the defendants were very largely irrelevant; the plaintiffs noted that in the course of the hearing I observed, and senior counsel for the defendants agreed, that “99% of the affidavit evidence is irrelevant and should never have been committed to paper”.

6. For example, Ms Kik’s primary affidavit comprised 159 paragraphs and exhibited 222 pages of documents; eight only of those paragraphs were read, and none of the documents was tendered or relied upon. By way of further example, Mr James’ principal affidavit comprised 61 paragraphs and exhibited 70 pages of documents, of which two paragraphs were read, and none of the documents was tendered or relied upon.

7. Some five months before the summons was filed, the plaintiffs had proposed a practical resolution “to avoid further dispute or litigation between the parties”. That resolution involved the restoration of Zeta, Marea and Ms Kik as trustees of the CPT, for Mr James no longer to be a trustee, and for him not to exercise any power of appointment or removal in respect of the CPT.

8. That outcome, the plaintiffs submitted, was substantially identical to the outcome of the proceedings, but was not accepted, in circumstances where it was unreasonable for Mr James not to do so.

9. Ms Kik was aware of that proposal at an early stage, and (as she said in her affidavit) was resolutely opposed to it.

13. The plaintiffs opposed the order that Mr James and Ms Kik should have recourse to the assets of the CPT, on the basis that it was wholly unreasonable for them to have taken the stand that they did.

14. It was unclear, when the plaintiffs made their submissions in chief on costs, whether Trudy sought an order for substantive costs. It appeared from the defendants’ submissions on costs that she did. In those circumstances, the plaintiffs submitted, their argument in respect of Mr James and Ms Kik’s application for costs out of the assets of the CPT applied equally to Trudy.

The defendants’ submissions

15. The defendants submitted that the litigation ought not be regarded as adversary litigation. Thus, they submitted, the ordinary rule (UCPR r 42.1), that costs follow the event, should not apply. Instead, they submitted, the principle often applied in probate litigation (“the probate exception”), that costs should be paid out of the estate where “the fault that occasioned the litigation lies at the door of the testator (in other words, if the testator was the cause of the litigation)” (Clocchiatti v Pierobon [2014] NSWSC 488 at [79]) should be applied by analogy.

15. That principle was appropriate, the defendants submitted, because it was the terms of the will that caused, or gave rise to, the litigation. Since Stan must be taken (by reason of his execution of the will) to have known and approved of its contents, it was in essence his act, in making a will in the terms that he did, that, on the defendants’ submission, gave rise to the litigation.

16. Mr James relied on the submissions just summarised in support of his claim that the CPT should bear all parties’ costs of his cross-claim.

17. Alternatively, the defendants submitted, if their primary submission were rejected:

1. Mr James should pay the plaintiffs’ costs, but only on the ordinary basis;

2. Mr Kik should not be ordered to pay any costs, and on the contrary should have indemnity for her costs from the assets of the CPT (she being at all material times a trustee of that trust); and

3. Mr James should be ordered to pay the costs of the plaintiffs, as cross-defendants, on the amended cross-summons, again on the ordinary basis; and

4. There should be no order as to the costs of the other parties.

Does the probate exception apply?

19. I accept that there is a principle often applied in probate litigation, to the effect stated by White J in Clocchiattu (see at [15] above), where the circumstances make it appropriate to do so. The plaintiffs did not suggest that there was no such principle. However, the plaintiffs submitted, it had no application in the present case.

20. The probate exception applies (or may be applied) where someone opposes a suit for grant of probate and, the opposition being well-founded by reason of some act or omission of (or “fault” attributable to) the testator, has an order for costs in their favour accordingly. Since there was no contested suit for probate, nor any challenge to the validity, of Stan’s will, the probate exception does not apply in its terms. That, no doubt, is why the defendants say it should be applied by analogy.

21. I see no reason why the exception should be applied by analogy. The will said what it said. Although, as I said in my first judgment at [36], the drafting was defective, the will was capable of being given meaning. Further, the meaning given to it was that which, plainly, the relevant words of the will carried. As is apparent from what I said at [20], the best case for the defendants was that words should be implied into the relevant provisions of the will, or that additional words should be supplied; and the stronger (although unsuccessful) argument for the defendants on this best case was based on reference to intrinsic evidence.

22. No doubt, it was the difficulty in maintaining any of those approaches to construction that caused Mr James to propound the claims that he did for rectification. Those claims were, as to statutory rectification, hopeless in the absence of any evidence to justify extension of the time for making it and, in the case of the claim for rectification under the general law, hopeless on the authorities as they stand and for many years have stood.

23. Further, and more substantially, there was not one shred of evidence to justify Mr James in interfering in the way that he did (or purported to do) with the administration of the CPT. There were apparently differences of opinion or personality between Zeta and Marea on the one hand, and Ms Kik on the other. For all I know it may be that Ms Kik disapproved of some aspects of what Zeta and Marea wished to do, in the exercise of their powers as trustee.

24. However, there is no evidence to show that Zeta and Marea were acting in breach of trust, or to the detriment of other beneficiaries, or even unwisely. Nor was there any evidence to suggest that the administration of the CPT had been frustrated because of some deadlock between the trustees (bearing in mind the apparent need, to which I referred at [143] of my first judgment, for unanimity of decision). On the contrary, such evidence as there is that the administration of the trust was impeded suggests that it was the actions of Mr James (after his several coups d’état) and Ms Kik, in withholding documents, that caused difficulties in the administration of the CPT.

25. Mr James was no doubt a friend and confidant of Stan. Presumably, that is why Stan appointed him to the role of “Appointor” (a role which, in the event, proved to be all but bereft of function). But regardless, and even if Mr James had the power of appointment for which he contended, there was no evidence that sought to justify his exercise of that power.

26. Thus, even if the probate exception should be regarded as capable of extension by analogy, I do not think that the facts in the present case come anywhere near justifying its application.

Principles relevant to construction proceedings

27. In re Buckton; Buckton v Buckton [1907] 2 Ch 406, Kekewich J was concerned with the proper construction of gifts in a will. His Lordship dealt with that at 410. There was then a dispute as to costs. Kekewich J dealt with that at 413.

28. His Lordship observed that “costs are so largely in the discretion of the judge that it is more difficult to secure uniformity in that department than in any other, and it is well nigh impossible to lay down any general rules which can be depended on to meet the ever varying circumstances of particular cases”. He then, at 414-415, stated three categories of case, and what he saw as being in general the costs outcome appropriate in each category.

29. The three categories of case identified by Kekewich J were:

1. trustees ask the Court to construe the trust instrument, or to decide some question that has arisen in the administration of the trust; his Lordship said that in such cases, “I regard the costs of all parties as necessarily incurred for the benefit of the estate and direct them to be… paid out of the estate”.

2. In the second class of case, there is again a question of construction, or administration, but the application is made by beneficiaries for some reason or other; in such cases, his Lordship said, “I extend the operation of the same rule as is observed in cases of the first class”: obviously, because “the application is necessary for the administration of the trust, and the cost of all parties are necessarily incurred for the benefit of the estate regarded as a whole”.

3. The third class of case differed “in form and substance from the first, and in substance, though not in form, from the second”. That was a class where “the application is made by a beneficiary who makes a claim adverse to other beneficiaries, and… takes advantage of the convenient procedure by originating summons to get a question determined which… would strictly fall within the description of litigation”. In such cases, his Lordship said, “when once convinced that I am determining rights between adverse litigants I apply the rule which ought, I think, to be rigidly enforced in adverse litigation, and order to the unsuccessful party to pay the costs”.

30. In Murdocca v Murdocca (No 2) [2002] NSWSC 505, Campbell J referred to Buckton at [71], and reviewed subsequent decisions on the point. His Honour concluded at [77]:

When the litigation falls into the third category identified by Kekewich J, the court is not, in substance, exercising the same jurisdiction as it used to carry out the administration of estates. It is concerned only with who, out of the parties before it, should pay the costs of any other of the parties before it. In so deciding, the court does not need to be concerned about whether any of those parties are entitled to be indemnified, in whole or in part, for any costs order which might be made against them from any estate. The ordinary principles concerning costs in adversary litigation, including the practice whereby costs follow the event, operate. (However, when a court is making an order that an executor pay the costs of adversary litigation it might on occasions be appropriate to note that the executor appeared to be justified in putting the opposite party to proof of his claims, and in being a party to the proceedings – see Adam v Mullen, Holland J, (Supreme Court of NSW, 15 December 1976, unreported), extracted in Ritchie’s Supreme Court Practice, Practice Decisions page 8547-8548.

31. In BE Australia WD Pty Ltd (Subject to a Deed of Company Arrangement) v Sutton (2011) 82 NSWLR 336, Campbell JA (with whom McColl JA agreed) returned to the question of costs in construction cases at [209] and following. His Honour said at [213]:

The form of the proceedings, as inter partes litigation, is not decisive of how the costs of that litigation should be dealt with. Courts exercising equity jurisdiction encounter a variety of situations where a fund is being administered subject to the control of the court, and a question arises about the proper manner in which that fund should be administered. Such a situation can arise concerning administration of deceased estates, concerning administration of trusts, concerning company liquidations, concerning administration of the estates of incapable people, and concerning DOCAs. In those situations, whether the costs of the court deciding the question that has arisen should be treated as costs of administration of the fund is significantly influenced by whether the proceedings are in substance adversarial ones. While where the costs should fall in litigation is always a matter of discretion, very commonly costs are paid from the fund for non-adversarial proceedings, and by the loser for adversarial proceedings: In re Buckton; Buckton v Buckton [1907] 2 Ch 406 at 414-5; In re Halston; Ewen v Halston [1912] 1 Ch 435; In re Cunningham; Sproule v Quested (1914) 31 WN (NSW) 44 at 45; O'Brien v Ritchie (1931) 48 WN (NSW) 85 at 86; Murdocca v Murdocca (No 2) [2002] NSWSC 505 esp at [71]-[78]; Re Jay-O-Bees Pty Ltd [2004] NSWSC 818; (2004) 50 ACSR 565 at [106]-[107].

32. If there were a real question as to the extent of Mr James’ powers as Appointor, he could have brought it before the Court by way of summons. For that matter, Ms Kik could have done the same, in her capacity as trustee.

33. Mr James and Ms Kik could not possibly have thought that their view, of the content and scope of the powers appurtenant to Mr James’ role as Appointor, was anything other than a matter of dispute. There had been correspondence to and fro, between the disputants, at least from the time that Mr James first purported to exercise the powers that he claimed to have, by removing Marea as a trustee. Had Mr James then applied to the Court for advice as to the proper construction of the relevant provisions of the will (or had Ms Kik done so), they might well have been in a position to bring themselves within the first or second of the categories stated by Kekewich J, and to argue that the costs of all necessary parties were properly incurred for the benefit of the estate (or of the CPT). They did not do so.

34. Instead, Mr James persisted in asserting his claimed powers, and in purporting to exercise them. He did so in the face of opposition, knowing that the persons affected by what he was doing asserted that he did not have the right to do as he did. As I have said already, there is no suggestion that what Mr James did was in some way necessary to prevent depletion of the CPT’s assets, or some form of maladministration. It may be – I do not know – that in some way Mr James and Ms Kik thought that what Mr James was doing (with the active support and encouragement of Ms Kik) was seeking to uphold (at least their understanding of) Stan’s intentions. If that were their view, there was a proper way for them to test the question and have it resolved. They did not do so. The obvious inference is, and I draw it, that they chose to proceed in what was essentially an adversarial fashion.

35. In those circumstances, I do not think that the beneficial costs orders ordinarily made in the first or second class of construction summons are applicable in the present case.

Exercise of the cost discretion

36. I turn to the discretion conferred by UCPR r 42.1. That discretion, as I see it, is unaffected either by the probate exception or by the considerations properly applicable when trustees or beneficiaries ask the Court to decide questions relevant to the construction of a trust instrument or the administration of a trust estate, in effect for the benefit of the estate and beneficiaries generally. Thus, the starting point is that costs should follow the event unless the Court orders otherwise.

37. I see no reason to order otherwise. As will be clear from what I have said, this is a case where Mr James, knowing that his right to do so was challenged, persisted in purporting to exercise what he said were the powers given to him as Appointor. He forced Zeta and Marea into a position where they had two choices. One was to accept what he had done, even though they did not agree that he had the power to do it (nor had they wanted it done). The other was to approach the Court, to vindicate their rights. That latter choice was the very course of action that Mr James in effect invited.

38. In the circumstances of this case, I see no reason why costs should not follow the event. That applies both to the summons and to the cross-claim.

Costs against Ms Kik?

39. Ms Kik was offered the opportunity to file a submitting appearance. As I have said, it took her ten months to decide to do so. Between service of the summons and filing of the submitting appearance, Ms Kik actively promoted and supported the defendants’ case. She was in a real sense a defendant who took an adversarial position in opposition to the plaintiffs’ case.

40. Ms Kik submitted that, as a trustee, she was entitled to indemnity from the assets of the CPT. She relied on UCPR r 42.25:

42.25 Costs of trustee or mortgagee

(cf SCR Part 52A, rule 42)

(1)   Subject to subrule (2), a person who is or has been a party to any proceedings in the capacity of trustee or mortgagee is entitled to be paid his or her costs in the proceedings, in so far as they are not paid by any other person, out of the fund held by the trustee or out of the mortgaged property, as the case may be.

(2)    The court may order that the person’s costs not be so paid if:

(a)    the trustee or mortgagee has acted unreasonably, or

(b)   in the case of a trustee, the trustee has in substance acted for his or her own benefit rather than for the benefit of the fund.

41. Essentially for the reasons just given, this is an appropriate case to make an order under sub-r (2), that Ms Kik’s costs not be paid out of the assets of the CPT. True it is that she was a trustee of the CPT, and hence a necessary party. However, as I have pointed out, it had been open to her, once she became aware that there was a dispute between Mr James on the one hand and Zeta and Marea on the other as to the extent of the former’s powers as Appointor, to seek the Court’s assistance. She did not do so. Instead, as I have said, she took steps actively to support what Mr James was doing.

42. Again, when the summons was served upon Ms Kik, it was open to her to file a submitting appearance. That was pointed out to her in the email under cover of which the summons was served. She chose not to do so. She remained as an active defendant for some ten months. Over that time, she took an active part in promoting, directing and seeking to advance the defendants’ case. When finally, less than a fortnight before the hearing, Ms Kik did file a submitting appearance, substantially all pre-hearing costs would have been incurred. On the plaintiffs’ side, those costs included what would have been the very substantial costs of reading and considering her voluminous and substantially irrelevant affidavit. On her side, they would have included the costs of preparing that affidavit.

43. Ms Kik has not pointed to any proper interest that she, as a trustee of the CPT, had in supporting Mr James’ purported exercise of the powers that he claimed to have. Ms Kik has not suggested that Mr James’ actions were in some way necessary or desirable for the protection of the trust assets or the interests of beneficiaries as a whole. In those circumstances, the obvious inference is that she acted from private and undisclosed motives, thus taking her actions outside the character of actions done as a trustee and for the benefit of the trust.

44. It follows, in my view, that Ms Kik should not be indemnified out of the assets of the CPT, and an order should be made accordingly pursuant to r 42.25(2).

45. I am not sure if Mr James sought some application by analogy of the principles embodied in r 42.25(1). If he did, then for the reasons just given, amplified by what I have said earlier as to his conduct, I would not extend the benefit of that principle to him.

46. Although Ms Kik did not expressly rely on the filing of a submitting appearance as a relevant factor in costs, nonetheless it might be thought that, at least from the time that submitting notice was filed and served, no order (or further order) should be made against her.

47. The effect, on costs, of a submitting appearance was considered by the Court of Appeal in Kisimul Holdings Pty Ltd v Clear Position Pty Ltd (No 2) (2014) 86 NSWLR 645. In that matter, the Court (Beazley P, Barrett and Gleeson JJA) noted at [10] that there was no rule of Court or other provision dealing with the costs consequences of filing a submitting appearance. Thus, their Honours said at [11], [12]:

[11] Since no corresponding provision is now in force, rule 42.1 of the Uniform Civil Procedure Rules requires that costs follow the event unless it appears to the court that some other order should be made. The making of some other order lies within the discretion conferred on the Court by s 98 of the Civil Procedure Act 2005 (NSW).

[12] Since the prima facie position under rule 42.1 is that the respondent should pay the appellant's costs in this Court, the issue is whether, in the principled exercise of the s 98 discretion, the Court should make an order that deprives the appellant of that prima facie entitlement.

48. At [14], their Honours noted that the question of costs (that is to say, the manner of exercise of the r 42.1 discretion) must be undertaken “according to an appraisal of the circumstances of the case”.

49. The undoubted power of the Court to make a costs order against a party who had filed a submitting appearance was considered in Seller. In that case, the primary judge had made a costs order against a defendant who had filed a submitting appearance.

50. On the appeal, McColl JA (with whom Ward JA agreed) noted that the rule providing for the filing of a submitting appearance did not impose any limitation on the Court’s costs discretion under r 42.1. At [59], her Honour said that in considering whether to make a costs order against a defendant who had filed a submitting appearance, the Court should take into account “the contextual circumstances of the litigation and the conduct of the parties”, including “the role adopted by the parties to the proceedings”. In the result, her Honour held that there had been no miscarriage of the costs discretion.

51. In the same case Basten JA (with whom Ward JA also agreed, and who himself agreed with the orders proposed by McColl JA), said at [92] that “it was the activities of Mr Seller [the submitting defendant] which had created the need for the litigation: in those circumstances there was no error on the part of the primary judge in making Mr Seller, as a party to the proceedings, jointly and severally liable for the costs of the proceedings”.

52. In my view, taking into account Ms Kik’s role in promoting the litigation and seeking to advance the cause of Mr James in it, there should be no limitation imposed on her costs liability simply by reason of her belated filing of a submitting appearance.

Indemnity costs

53. I have set out at [12] above the principal matters on which the plaintiffs rely in support of their claim for indemnity costs. Those submissions should be accepted. I note that, to the extent that the submissions asserted matters of fact, the defendants’ submissions did not cavil with the asserted facts.

53. I accept of course that the general principle is that although costs are supposed to indemnify a successful litigant for the prosecution or defence of a claim made by or against it, the indemnity is normally partial, because costs are normally awarded on the ordinary basis. It is commonplace that an order for costs on this basis will not in fact recoup the litigant for all the costs that it has, reasonably, spent in vindicating its position.

54. The compensatory function of costs was identified by McHugh J in Oshlack v Richmond River Council (1998) 193 CLR 72 at [67]:

The expression the "usual order as to costs" embodies the important principle that, subject to certain limited exceptions, a successful party in litigation is entitled to an award of costs in its favour. The principle is grounded in reasons of fairness and policy and operates whether the successful party is the plaintiff or the defendant. Costs are not awarded to punish an unsuccessful party. The primary purpose of an award of costs is to indemnify the successful party. If the litigation had not been brought, or defended, by the unsuccessful party the successful party would not have incurred the expense which it did. As between the parties, fairness dictates that the unsuccessful party typically bears the liability for the costs of the unsuccessful litigation. Although his Honour dissented in the result in that case, I do not think that his statement of principle at [67] can be doubted.

56. In the same case, Gaudron and Gummow JJ, in joint reasons, pointed to the need for “relevant delinquency” if an order for, among other things, indemnity costs is to be made. Their Honours said at [44]:

It may be true in a general sense that costs orders are not made to punish an unsuccessful party. However, in the particular circumstance of a case involving some relevant delinquency on the part of the unsuccessful party, an order is made not for party and party costs but for costs on a "solicitor and client" basis or on an indemnity basis. The result is more fully or adequately to compensate the successful party to the disadvantage of what otherwise would have been the position of the unsuccessful party in the absence of such delinquency on its part.

57. In my view, the cumulative effect of the unchallenged factual matters relied upon by the plaintiffs, summarised at [12] above, is properly characterised as involving “some relevant delinquency” on the part of Mr James and Ms Kik. That conclusion is amplified by the matters to which I refer at [21] to [25], and at [32] to [34] above.

58. Viewed in context, Mr James took the course of action that he did:

1. when, on the evidence, it was neither required nor justified on the basis of any threat to the assets or administration of the CTP or the interests of beneficiaries;

2. knowing that his power, or authority, to do what he purported to do was very much contested by the plaintiffs;

3. in circumstances where he did not approach the Court to have the question of power resolved but, rather, purported to exercise it regardless, thereby forcing the plaintiffs to choose between submitting to what they saw was an unauthorised exercise of power or coming to this Court to protect their position.

59. I do accept that the question of construction was not so obvious that, properly advised, Mr James and Ms Kik should have realised that it was bound to be resolved adversely to them. However, that was a question that could have been decided by a summons for construction. Mr James and Ms Kik did not take that approach. On the contrary, as I have said, Mr James effectively invited the plaintiffs to take the course which they did, and Ms Kik actively supported him in the ensuing litigation.

60. Although I accept that the case based on construction was not hopeless, the same cannot be said for the claims for rectification. At least so far as statutory rectification is concerned, Mr James as cross-claimant could not even get to first base unless there was evidence justifying extension of time within which to make the claim. As the plaintiffs submitted and I accept, there was no such evidence.

61. Further, there is the fact that Mr James and Ms Kik filed a very substantial amount of evidence which was not relevant to any issue in the litigation as it was conducted. I have referred already to the exchange between me and their senior counsel at the hearing. The plaintiffs must have incurred substantial costs referable to that evidence. They should never have been required to do so.

62. Finally, and acknowledging that there is some repetition in what I am about to say, at no time did Mr James or Ms Kik seek to justify the actions that Mr James had taken by reference to protection of the assets of the CTP or the interests of beneficiaries, or by reference to the proper administration of the CTP. Again, if there were a real threat to the CTP or its assets, or to the interests of the beneficiaries, it was open to Mr James or Ms Kik to commence their own proceedings to have the question of the extent of his powers clarified. They did not do so.

63. In all the circumstances, I conclude that the plaintiffs should have their costs on the indemnity basis.

A limitation on costs

64. The judgment I gave on 25 March 2015 has not resolved all issues in dispute (other than costs) between the parties. On 27 March 2015, when I gave directions for submissions on costs, the plaintiffs filed in court a notice of motion seeking to join other parties and to agitate further questions. By consent of the parties, that notice of motion has been dealt with by another Judge of the Court. The costs orders that I am about to make must necessarily exclude any costs referable to that notice of motion. To avoid doubt, the costs the subject of those orders should be payable forthwith (UCPR r 42.7(2)).

Orders

65. I make the following further orders:

1. Order the defendants to pay the plaintiffs’ costs of the proceedings up until and including 27 March 2015, and the costs of the application for costs, but excluding any costs referable to the plaintiffs’ notice of motion filed in Court on 27 March 2015.

2. Order the cross-claimant to pay the first and second cross-defendants’ costs of the cross-summons.

3. Order that the costs payable under orders (1) and (2) be assessed on the indemnity basis, and be payable forthwith.

4. Order that the defendants and cross-claimant not have recourse to the assets of the Capital Protected Trust established by the will of the late Stanley Edward Douglas, made on 4 May 2011, or otherwise to the assets of the estate of the late Stanley Edward Douglas:

1. to indemnify themselves for costs payable by them pursuant to orders (1) and (2); or

2. to recoup costs payable by them as defendants and cross-claimant up until and including 27 March 2015 or in respect of the application for costs.

5. Make no order as to the costs of the other parties to the proceedings up until and including 27 March 2015.

**********

Decision last updated: 22 July 2015