El Sayed v El Hawach

[2015] NSWCA 26

Court of Appeal

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

El Sayed v El Hawach [2015] NSWCA 26

Hearing dates:

10 February 2015

Decision date:

26 February 2015

Before:

Beazley P; Gleeson JA; Leeming JA

Decision:

1. Appeal dismissed.

2. Cross-appeal allowed.

3. Order 6 made on 20 December 2013 be set aside.

4. Vary order 7 made on 20 December 2013 by deleting the word “otherwise”.

5. Vary order 8 made on 20 December 2013 by deleting the words “75% of”.

6. Order that the appellants/cross-respondents pay the costs of the respondents/cross-appellants of the appeal and cross-appeal.

Catchwords:

TRUSTS AND TRUSTEES - "discretionary trust" - appointor purported to exercise powers inconsistently - standing - whether eligible beneficiaries of discretionary trust had standing to bring derivative action - where proceedings had been brought against eligible beneficiaries - where eligible beneficiaries claimed to have become trustee and appointor - whether special circumstances established - eligible beneficiaries had standing

TRUSTS AND TRUSTEES - fiduciary duties - whether purported appointment of eligible beneficiary who acted as trustee's solicitor as appointor a breach of duty - obligation to consider scope of fiduciary obligations - no breach established

Legislation Cited:

Supreme Court Act 1970 (NSW), s 75

Cases Cited:

Alexander v Perpetual Trustees WA Ltd [2004] HCA 7; 216 CLR 109
Australian Securities and Investments Commission v Carey [No 6] [2006] FCA 814; 153 FCR 509
Barescape Pty Limited as trustee for The V’s Family Trust & Anor v Bacchus Holdings Pty Limited as trustee for The Bacchus Holdings Trust & Anor (No 9) [2012] NSWSC 984
Beach Petroleum NL v Kennedy [1999] NSWCA 408; 48 NSWLR 1
Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606
Bray v Ford [1896] AC 44
Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; 192 CLR 226
Deutsch v Deutsch [2012] VSC 227; 6 ASTLR 386
Ex parte Hebburn; Re Kearsley Shire Council (1947) 47 SR (NSW) 416
Highland v Labraga (No 2) [2005] NSWSC 1212
In re Coomber; Coomber v Coomber [1911] 1 Ch 723
In re Skeats’ Settlement (1889) 42 Ch D 522
In the Matter of X (Trust) [2012] JRC 171
Kearns v Hill (1990) 21 NSWLR 107
Lewis v Condon [2013] NSWCA 204; 85 NSWLR 99
Pearson v Commissioner of Taxation [2001] FCA 1427; 116 FCR 357
Rigg v Sheridan [2008] NSWCA 79
Sharpe v San Paulo Railway Company (1873) LR 8 Ch App 597
Warman International Ltd v Dwyer [1995] HCA 18; 182 CLR 544

Texts Cited:

P Finn, Fiduciary Obligations Law Book Company, 1977
G Thomas and A Hudson, The Law of Trusts Oxford University Press, 2nd ed, 2010

Category:

Principal judgment

Parties:

Khaled El Sayed (1st Appellant and 1st Cross-Respondent)
M E Asset Investments Pty Ltd (2nd Appellant and 2nd Cross-Respondent)
Sayed El Hawach (1st Respondent and 1st Cross-Appellant)
Victoria Lahoud (2nd Respondent and 2nd Cross-Appellant)
Brady Street Developments Pty Ltd (3rd Respondent)

Representation:

Counsel:
W Chan (Appellants and Cross-Respondents)
R Horsley (Respondents and Cross-Appellants)

Solicitors:
Clamenz Lawyers (Appellants and Cross-Respondents)
Horowitz & Bilinsky Solicitors (Respondents and Cross-Appellants)

File Number(s):

2014/00015760

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity Division

Citation:

[2013] NSWSC 1755

Date of Decision:

20 December 2013

Before:

Pembroke J

File Number(s):

2012/266799

HEADNOTE

[This headnote is not to be read as part of the judgment]

Brady Street Developments Pty Ltd (‘BSD’) was incorporated on 24 December 2008. Its sole director and shareholder is Ms Victoria Lahoud, and at all times, its sole function has been to act as trustee of the Brady Street Developments Trust (‘BSD Trust’). The deed establishing the BSD Trust was created by Mr Fayad, an accountant, who was the settlor and original appointor of the trust. The trust deed established a familiar form of ‘discretionary trust’, distinguishing between ‘named beneficiaries’ (of which there were two – Ms Victoria Lahoud and Mr Ahmad El Sayed), and ‘eligible beneficiaries’ (described by reference to a relationship with either named beneficiary, and including Mr Hawach, Ms Lahoud’s husband, and Mr Khaled El Sayed, Mr Ahmad El Sayed’s father).

The trust deed conferred an absolute discretion on the trustee to accumulate income, or to distribute any part of the income and/or capital to named beneficiaries or eligible beneficiaries. The appointor was empowered to remove the trustee or appoint an additional or replacement trustee at any time. The appointor was also empowered to appoint a person as an additional or replacement appointor. Three of the trustee’s powers (namely a broadly worded power to vary the terms of the trust, and separate powers to nominate additional eligible beneficiaries and to bring forward the vesting date from the date specified in the deed) could only be exercised with the appointor’s consent.

By deed dated 28 September 2011 (‘2011 Deed’), Mr Fayad purported to resign as appointor and appoint Mr Hawach as the new appointor of the BSD Trust. While Mr Hawach had acted from time to time as the solicitor for the trustee, the 2011 Deed was drafted by solicitors external to Mr Hawach’s office. Notwithstanding his having executed the 2011 Deed, by deed dated 2 August 2012 (‘2012 Deed’), Mr Fayad purported to replace himself as appointor with Mr Khaled El Sayed. The 2012 Deed also purported to remove BSD as trustee and replace it with M E Asset Investments Pty Ltd (‘MEA’).

BSD commenced proceedings against MEA and Mr Khaled El Sayed in September 2012, seeking inter alia declarations that the 2012 Deed was ineffective. Mr Khaled El Sayed and MEA cross-claimed, joining Mr Hawach and Ms Lahoud. The cross-claim included a claim that Mr Hawach’s procuring the appointment of himself as appointor was in breach of fiduciary duty, because of his positions as (a) BSD’s solicitor and (b) and eligible beneficiary. The primary judge found that the appointment of Mr Hawach as appointor pursuant to the 2011 Deed was invalid, as a consequence of his breach of fiduciary duty. However, his Honour also held that Mr Fayad had validly resigned in 2011, such that Mr Fayad’s purported appointment of Mr Khaled El Sayed as appointor, and MEA as trustee under the 2012 Deed was ineffective. His Honour doubted the correctness of Lewis v Condon [2013] NSWCA 204; 85 NSWLR 99 as to standing, but considered that Mr Khaled El Sayed and MEA had standing by reason of authorities relating to granting declarations.

On appeal, Mr Khaled El Sayed and MEA contended that the 2011 Deed was wholly ineffective, with the result that the 2012 Deed was effective. By their cross-appeal, Mr Hawach and Ms Lahoud challenged the finding of breach of fiduciary duty, and the standing of Mr Khaled El Sayed and MEA to bring the proceedings. The cross-appellants also argued that Mr Khaled El Sayed and MEA, as discretionary objects under a discretionary trust, did not have standing to bring proceedings against a third party where a trustee is unwilling or unable to do so, even if special circumstances exist, contrary to the Court of Appeal’s conclusion in Lewis v Condon [2013] NSWCA 204; 85 NSWLR 99, which they sought leave to challenge.

Held by the Court, dismissing the appeal and allowing the cross-appeal:

1. Mr Khaled El Sayed and MEA had standing to seek a curial determination of their disputed claims that they were the appointor and trustee of the BSD Trust, in special circumstances where the trustee was unwilling to bring proceedings: at [38], [40]-[43].

2. A discretionary object might, in special circumstances, bring a derivative proceeding against a third party: at [45]-[54].

Lewis v Condon [2013] NSWCA 204; 85 NSWLR 99, followed

Highland v Labraga (No 2) [2005] NSWSC 1212; Deutsch v Deutsch [2012] VSC 227; 6 ASTLR 386; Pearson v Commissioner of Taxation [2001] FCA 1427; 116 FCR 357; In the Matter of X (Trust) [2012] JRC 171; Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; 192 CLR 226, considered and applied

3. Restrictions on standing are not able to be side-stepped by reference to the broad jurisdiction to grant declaratory relief in s 75 of the Supreme Court Act 1970 (NSW): at [56].

4. It is necessary to analyse the scope of the fiduciary obligations a person is subject to when determining whether a breach of duty has arisen: at [62]-[63].

In re Coomber; Coomber v Coomber [1911] 1 Ch 723; Warman International Ltd v Dwyer [1995] HCA 18; 182 CLR 544, considered and applied

5. The rule that a person in a fiduciary position is not, unless otherwise expressly provided, allowed to put himself or herself in a position where interest and duty conflict is flexible, must be applied realistically to a state of affairs which discloses a real conflict of duty and interest and not to some theoretical or rhetorical conflict: at [64].

Bray v Ford [1896] AC 44; Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606; Rigg v Sheridan [2008] NSWCA 79, considered and applied

6. A solicitor’s fiduciary obligation derives not from his or her status but from the terms of his or her retainer. A precise description of a solicitor’s duties is required in order to establish a conflict between that solicitor’s fiduciary duties to their client and their personal interests: at [65].

Beach Petroleum NL v Kennedy [1999] NSWCA 408; 48 NSWLR 1, applied

7. There was no breach of fiduciary obligation in Mr Hawach becoming the appointor of the trust, even assuming the appointor owes fiduciary duties, in circumstances where it was plain that the trustee could act self-interestedly, there was no suggestion that the appointor’s power had been exercised, or had even been considered to be exercised, and the trust assets had been acquired by Mr Hawach: at [67]-[71].

In re Skeats’ Settlement (1889) 42 Ch D 522; P Finn, Fiduciary Obligations Law Book Company, 1977, referred to

1. THE COURT: This litigation concerns the control of the trustee of a trust known as the Brady Street Developments Trust (BSD Trust), which was the vehicle for a mixed residential and commercial property development at Merrylands in western Sydney. The trust deed established the office of appointor, whose main powers were replacing the trustee and appointing a new appointor. The original appointor executed two inconsistent deeds in 2011 and 2012. By the first, the appointor resigned and appointed the first respondent and cross-appellant as new appointor. By the second, the appointor again resigned but this time appointed the first and second appellants and cross-respondents as new appointor and new trustee.

2. The critical issue by the end of the trial was whether the first deed ought be set aside for breach of fiduciary duty. The primary judge found there was a breach of fiduciary duty, set aside the appointment of the new appointor pursuant to the first deed, but confirmed the efficacy of the original appointor’s resignation, with the result that the second deed was ineffective. All parties have appealed.

3. For the reasons which follow, the cross-appeal should be allowed and the appeal dismissed. The result is that the first deed was entirely effective, and the second wholly ineffective.

Parties

4. The respondents (and cross-appellants) are Mr Sayed El Hawach (also known as Mr Sid Hawach), his wife Ms Victoria Lahoud and Brady Street Developments Pty Ltd (BSD). Ms Lahoud is the sole director and shareholder of BSD. BSD was established as the original trustee of the BSD Trust. The first deed mentioned above, executed in 2011, purported to appoint Mr Hawach as the new appointor of the BSD Trust.

5. The appellants (and cross-respondents) are Mr Khaled El Sayed and M E Asset Investments Pty Ltd (MEA). Mr Khaled El Sayed’s daughter Mouna is the sole director and shareholder of MEA. The second deed mentioned above, executed in 2012, purported to appoint Mr Khaled El Sayed as the new appointor and MEA as the new trustee.

The BSD Trust

6. It is unnecessary for the purpose of resolving the issues on the appeal, which are significantly narrower than those litigated at first instance, to summarise in any detail the factual background leading up to the establishment of the BSD Trust. It is sufficient to note that the primary judge found that Mr Khaled El Sayed had sought, in the period between 2002 and 2008, but without success, to develop the land at Merrylands known as 128 Woodville Road and 16 Brady Street: at [16]-[17].

7. The development took place on two adjoining parcels of land, described as the “JSR Land” and “K&K Land”. A company controlled by Mr Khaled El Sayed had acquired the K&K Land, and acquired and exercised an option to purchase the JSR Land. However, the company never completed the purchase of the JSR Land and in November 2007 a liquidator was appointed. Mr Hawach negotiated with the mortgagee of the JSR Land, and caused it to be acquired by Ms Lahoud for $810,000 on 13 March 2009.

8. Mr Hawach also negotiated with the mortgagee of the K&K Land, and caused BSD to acquire it for $475,000 on 31 July 2009, although the transfer was not registered until December 2009.

9. BSD was incorporated on 24 December 2008. At all times, its sole function has been to act as trustee of the BSD Trust.

10. The deed establishing the BSD Trust was prepared by Mr Osman Fayad, an accountant, who was stated to be the settlor and appointor. The trust distinguishes between “named beneficiaries” and “eligible beneficiaries”. The two “named beneficiaries” were Ms Victoria Lahoud and Mr Ahmad El Sayed, Mr Khaled El Sayed’s son. The schedule describes broad classes of “eligible beneficiaries” by reference to a relationship with either named beneficiary. Thus eligible beneficiaries include the spouse, parents, children, grandchildren, brothers and sisters, nieces and nephews, uncles and aunts, children’s spouses, grandchildren’s spouses and the spouses of certain other relatives, of either named beneficiary. Eligible beneficiaries also included companies of which any of the foregoing were shareholders or directors, trustees of trusts in which any of the foregoing had an interest, partners in any partnership of any beneficiary, and charities and other legal entities nominated by the trustee.

11. The deed conferred an absolute discretion on the trustee to distribute any part of the trust income to named beneficiaries or eligible beneficiaries. The trustee was empowered to accumulate income, although if the trustee failed to exercise its discretionary power to distribute or accumulate income prior to 30 June in any financial year, the income was held in trust for the named beneficiaries or their next of kin who were alive on 30 June. The trustee was also empowered to make distributions of capital to a named beneficiary or a member of a class of eligible beneficiaries at any time before the vesting date.

12. The appointor was empowered to remove the trustee or appoint an additional or replacement trustee at any time. The appointor was also empowered to appoint a person as an additional or replacement appointor. Three of the trustee’s powers (a broadly worded power to vary the terms of the trust, and separate powers to nominate additional eligible beneficiaries and to bring forward the vesting date from the date specified in the deed, namely, 2088), could only be exercised with the appointor’s consent. But the trustee’s powers to distribute or accumulate income and to distribute capital prior to the vesting day could be exercised unilaterally by the trustee in the exercise of its absolute discretion.

13. In short, the trust deed established a familiar form of “discretionary trust” with broad powers conferred on the trustee, answering Meagher JA’s description in Kearns v Hill (1990) 21 NSWLR 107 at 109 that “the trustees are furnished with the most ample powers of management and disposition of the settled fund coupled with maximum flexibility in the use of those powers”. In light of the submissions made on standing and breach, it is convenient to note four uncontroversial points immediately.

14. First, the term “discretionary trust” bears a meaning “disclosed by a consideration of usage rather than doctrine” and is used in a way that is “descriptive rather than normative”: Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; 192 CLR 226 at [8] (Brennan CJ, Toohey, Gaudron, McHugh and Gummow JJ); Australian Securities and Investments Commission v Carey [No 6] [2006] FCA 814; 153 FCR 509 at [19] (French J).

15. Secondly, as is common, the trust deed described the eligible objects of a favourable exercise of discretion by the trustee as beneficiaries (the two “named beneficiaries” and the class of “eligible beneficiaries”). The two named beneficiaries had some rights over and above the eligible beneficiaries which did not depend on an exercise of power by the trustee (in particular, they were default beneficiaries in respect of undistributed income), although those rights were defeasible by an exercise of power by the trustee.

16. Thirdly, the BSD Trust was established such that the sole director and shareholder of the trustee was also one of the two named beneficiaries, Ms Lahoud. There was no suggestion, nor could there be, that BSD’s obligations as trustee precluded it from making distributions in favour of the named beneficiary Ms Lahoud, or to eligible beneficiaries connected with Ms Lahoud by family or corporate ties. It is obvious that the terms of the original trust exclude the ordinary rule that a trustee must not place itself in a position of conflict. One of the examples given by Professor Thomas of the implied exclusion of the rule against conflict is “where an original trustee is included as a beneficiary or an object in whose favour certain powers may be exercised”: G Thomas and A Hudson, The Law of Trusts Oxford University Press, 2nd ed, 2010, para 10.126.

17. Fourthly, an exercise of the appointor’s powers was not necessary in order for the whole of the trust assets to be distributed by the trustee to any named beneficiary or eligible beneficiary at any time. Conversely, an exercise of the appointor’s powers was not of itself sufficient to cause the distribution of any part of the trust estate. As noted above, the only unilateral powers enjoyed by the appointor were to appoint an additional or replacement appointor, or an additional or replacement trustee.

18. The inclusion of the two named beneficiaries is explained by the commercial context. Mr Hawach had caused the land to be acquired by BSD and his wife, and in March 2010 Ms Lahoud transferred the JSR Land to BSD for a consideration of $500,000. Moreover, in March 2010, BSD entered into a construction contract with AK Property Group NSW Pty Ltd, a company controlled by Mr Ahmad El Sayed, the other of the two named beneficiaries of the BSD Trust.

19. The primary judge found that Mr Ahmad El Sayed was included as a named beneficiary against the possibility that he or his father or other members of his family might contribute capital or lend funds to the development, in which case they would expect a distribution from the trustee. But no loan or capital contributions were made, and the primary judge found that in those circumstances no distributions were to be made to Mr Khaled El Sayed or his family. There was no challenge to the finding that his Honour had “no doubt that Mr El Sayed knew that [he would get nothing] as the unfortunate consequence of his inability to make the financial contribution to the purchase of either the JSR Land or the K&K Land” at [30]. That finding was fatal to a case run at first instance based on estoppel, and its dismissal by the primary judge was not challenged on appeal. It is relevant to one aspect of the cross-appeal.

The 2011 and 2012 Deeds

20. By deed dated 28 September 2011 (2011 Deed), whose validity was challenged at first instance and on appeal, Mr Fayad resigned as appointor and appointed Mr Hawach as the new appointor. The document occupied a single page, and contained three operative provisions:

“1.1   The Resigning Appointor hereby resigns as Appointor of the Trust with effect from the date of execution of this Deed and agrees that henceforth all powers and discretions accorded to the Appointor by the Deed of Trust shall be exercised by the Incoming Appointor.

1.2   The Resigning Nominator hereby appoints and the Incoming Appointor accepts appointment as Appointor of the Trust with effect from the date of execution of this Deed.

2   The Trustee hereby acknowledges the resignation of the Resigning Appointor and the appointment of the Incoming Appointor.”

It was signed by Mr Fayad, Mr Hawach and Ms Lahoud as sole director of BSD.

21. It is necessary to say something of the circumstances in which the 2011 Deed was executed. The primary judge described Mr Hawach at [45] as “the trust’s solicitor”. On the appeal, Mr Hawach complained of the looseness of that description. It was admitted on the pleadings that Mr Hawach had, since its creation, acted from time to time as the solicitor for the trustee. There was no evidence of any general retainer, or indeed of any particular retainer. It was said from the bar table, without objection, that Mr Hawach had acted on the conveyances of various of the lots in the development as they were sold. The Court was not taken to any evidence of a retainer, say, to advise as to the making of distributions or any other exercise of power by the trustee, and it was said without objection that there was no evidence to that effect.

22. His Honour recorded at [45] the unchallenged evidence of Ms Lahoud that she was advised by BSD’s accountant that Mr Fayad should be removed as appointor, because his conduct had brought about an audit for GST by the Australian Taxation Office. His Honour found that the accountant was unwilling to accept the role of appointor, but that Mr Hawach was willing to do so.

23. In written and oral submissions on appeal, Mr Hawach emphasised the findings of the primary judge that the decision was that of Ms Lahoud, that Mr Hawach gave no advice as to the removal of Mr Fayad as appointor, and that the documents were drawn up by solicitors external to Mr Hawach’s office on instructions from the accountant. However, reading the judgment as a whole discloses a finding that it was Mr Hawach, not his wife Ms Lahoud, who “instigated the decision” because “Mr Hawach had lost trust and confidence in Mr Fayad and no longer wanted him to have anything to do with the trust”: see at [45] and [46]. Any doubt about the role of Mr Hawach is dispelled by the findings at [46] and [51] that “[Mr Hawach] instigated the decision because of his dissatisfaction with Mr Fayad, but the decision was formally made by his wife as the sole director of BSD, on advice from BSD’s accountants” and that “In the circumstances that prevailed in September 2011, Mr Hawach was justified in seeking and obtaining the resignation of Mr Fayad as appointor”.

24. Notwithstanding his having executed the 2011 Deed, by deed dated 2 August 2012 (2012 Deed), Mr Fayad purported to replace himself as appointor with Mr Khaled El Sayed. The deed also purported to remove BSD as trustee and replace it with MEA (whose sole director and shareholder was Mr Khaled El Sayed’s daughter, as noted above). The 2012 Deed was, once again, a single page. It contained some other minor and presently irrelevant provisions varying the terms of the trust deed.

The proceedings at first instance

25. BSD commenced proceedings against MEA and Mr Khaled El Sayed in September 2012, seeking inter alia declarations that the 2012 Deed was ineffective. Mr Khaled El Sayed and MEA cross-claimed, joining Mr Hawach and Ms Lahoud. The cross-claim was ultimately amended to include a claim that Mr Hawach’s procuring the appointment of himself as appointor was in breach of fiduciary duty, because of his positions as (a) BSD’s solicitor and (b) an eligible beneficiary. The cross-claim, in the form it took until final addresses, sought:

“An order that the purported appointment on or about 28 September 2011 of [Mr Hawach] as [appointor of the BSD Trust] be declared void.”

26. During final address, the primary judge granted leave to expand the declaration sought to:

“An order that the deed dated 28 September 2011 be declared void.”

27. The effect of the amendment was to challenge the validity not merely of the appointment of Mr Hawach as appointor, but also the resignation of Mr Fayad.

28. The primary judge found that the appointment, pursuant to the 2011 Deed, of Mr Hawach as appointor was invalid, as a consequence of his breach of fiduciary duty. However, his Honour revoked leave to expand the declaratory relief sought, for reasons given at [47]-[51]. His Honour’s reasons were that he had only “reluctantly” allowed the amendment, that he had “no hesitation in rejecting Mr Fayad’s evidence that he did not read the deed or know what he was signing”, and that although Mr Fayad was “evasive and clearly partial”, it was clear that “the last thing Mr Fayad now wants is to be reinstated to the position of appointor of the trust”: at [49]. (To anticipate what follows, that was not something for which either party contended.) The seeming effect of revoking leave was that the primary judge did not consider whether the partial rescission ultimately ordered was warranted. Instead, having found a breach of fiduciary duty, his Honour granted the whole of the relevant orders sought in the form that had been sought prior to the late amendment.

29. The consequence of finding that Mr Fayad had validly resigned in 2011, coupled with the abandonment or rejection of other aspects of Mr Khaled El Sayed’s case, was that the 2012 Deed was ineffective to appoint MEA as trustee and Mr Khaled El Sayed as appointor.

30. Finally, in order to explain aspects of the cross-appeal and the notice of contention, it is necessary to mention the way in which the primary judge addressed standing (the following overview is elaborated later in these reasons). The cross-claim had been brought by Mr Khaled El Sayed and MEA, the putative new appointor and new trustee respectively. Neither was a named beneficiary, although both were eligible beneficiaries. The primary judge considered that there were special circumstances conferring standing upon the objects of a discretionary power to enforce the terms of trust, in accordance with Lewis v Condon [2013] NSWCA 204; 85 NSWLR 99, although his Honour doubted the correctness of that decision. His Honour also considered at [62] that the “jurisdiction to grant declaratory relief pursuant to Section 75 of the Supreme Court Act is, in my view, sufficiently wide and discretionary”. However, his Honour did not grant declaratory relief; he merely set aside the appointment of Mr Hawach as appointor.

Issues on appeal

31. By their appeal, Mr Khaled El Sayed and MEA contended that the 2011 Deed was wholly ineffective, was voidable on the application of the trustee and was rescinded ab initio by Mr Khaled El Sayed, with the result that the 2012 Deed was effective. They also challenged the revocation of leave to amend granted in final address, and advanced a claim on appeal of non-disclosure to Mr Fayad.

32. By their cross-appeal, Mr Hawach and Ms Lahoud challenged the finding of breach of fiduciary duty. They also challenged the standing of Mr Khaled El Sayed and MEA to bring the proceedings. They acknowledged that in special circumstances, a beneficiary could bring a derivative proceeding against a third party where a trustee was unwilling or unable to do so, in accordance with what was stated in Alexander v Perpetual Trustees WA Ltd [2004] HCA 7; 216 CLR 109 at [55]-[56]. However, they said that Mr Khaled El Sayed and MEA were not “beneficiaries stricto sensu”, but were merely discretionary objects, to whom the principle did not apply. They contended that Lewis v Condon was clearly wrong and ought not to be followed (and, properly, advised the Court so that a view could be taken whether a bench of five should sit – an invitation which was considered and declined prior to the appeal being listed for hearing). The cross-appellants also challenged the primary judge’s finding of special circumstances, and the availability of the jurisdiction to grant declarations given the factual findings of the primary judge to the effect that there was no entitlement to distributions given the failure on the part of Mr Khaled El Sayed to contribute funds to the development.

33. By a notice of contention, the appellants contended that there were special circumstances by reason of Mr Khaled El Sayed being the potential appointor of the trust. They maintained that there was no bright-line distinction in respect of the standing of a (fixed) beneficiary and a discretionary object, so long as special circumstances were shown.

34. Thus it may be seen that the appeal sought to expand the relatively limited relief ordered at first instance. The cross-appeal challenged two logically anterior aspects: standing and breach. It is appropriate therefore first to address the cross-appeal.

Standing

35. The primary judge addressed standing at [59]-[63]. His Honour, with respect correctly, regarded himself as bound by this Court’s decision in Lewis v Condon. However, his Honour stated that the question was controversial and gave qualified endorsement to the cross-appellants’ submission that Lewis v Condon had expanded the principle wrongly and without adverting directly to the fact that it was doing so. The cross-appellants sought leave to contend that Lewis v Condon was wrongly decided.

36. Secondly, his Honour stated – but without articulating their nature – that there were special circumstances for the purposes of the principle explained in Lewis v Condon. The cross-appellants submitted that “there was no clear or reasoned finding of special circumstances”, and to the contrary, his Honour should have found that there were no special circumstances.

37. Thirdly, as a separate basis for concluding there was standing, his Honour referred to the broad jurisdiction to grant declaratory relief pursuant to s 75 of the Supreme Court Act 1970 (NSW), and considered that there were:

“no sound practical reasons, in the unique circumstances of this case, why I should refrain from exercising my discretion to grant the declaration sought Mr El Sayed and to make consequential orders, if I am otherwise satisfied that I should do so. Even though Mr El Sayed is merely the object of a discretionary power, he has a sufficiently 'real' or 'true' interest to merit the exercise of discretion. This is clearly a case, if ever there were one, where there are justifiable special circumstances. BSD cannot be expected to bring this claim. I reject the defence to cross-claim based on the supposed lack of standing of Mr El Sayed. He is entitled to declarations and orders invalidating the appointment of Mr Hawach as appointor pursuant to the trust deed” (at [63]).

38. The cross-appellants challenged the exercise of discretion to grant declarations, given the findings that only if financial contribution were made by Mr Khaled El Sayed to the development would any distributions be made to him or his family. They said:

“His Honour failed to have regard to those matters in exercising his discretion. Those findings compel the diametrically opposite conclusion: that the first appellant had no remaining interest in the Trust, no basis for expecting anything from it, and therefore no sufficient interest to obtain a declaration.”

39. Notwithstanding the reasoning on the broad jurisdiction to make a declaration, in fact no declaratory relief at all issued at the suit of Mr Khaled El Sayed or MEA. Instead, his Honour “set aside the appointment of Sayed El-Hawach as appointor pursuant to the trust deed dated 24 December 2008”. Indeed, that order clashed with the first declaration made at the instance of Mr Hawach, which was a declaration that the 2011 Deed “is valid and effective”.

40. Mr Khaled El Sayed and MEA had standing to bring these proceedings, but not for the reasons given by the primary judge.

41. His Honour, with respect correctly, recognised that the critical question at the conclusion of the trial was whether the 2011 Deed which purported to make Mr Hawach the appointor was effective. If it was ineffective and liable to be set aside, then the 2012 Deed, appointing Mr Khaled El Sayed as appointor and MEA as trustee, was claimed to be valid.

42. On any view, Mr Khaled El Sayed and MEA, whose claims that they were the appointor and trustee of the BSD Trust were disputed, had standing to seek a curial determination of that dispute. The proposition that their status as appointor and trustee differentiated Mr Khaled El Sayed and MEA from other eligible beneficiaries may not have been advanced at first instance (neither sides’ written submissions addressed it, and the oral submissions were not transcribed). However, it was squarely advanced on appeal by the appellants’ notice of contention.

43. Mr Khaled El Sayed was not merely an eligible beneficiary (as the father of the named beneficiary Mr Ahmad El Sayed). He also claimed to be the appointor, by reason of the claimed breach of fiduciary duty when Mr Hawach accepted the position as appointor. Similarly, MEA was not merely an eligible beneficiary, but also claimed to be the trustee, and for the same reason. The trustee was controlled by Mr Hawach’s wife, and was unwilling to bring proceedings against him. In those special circumstances, Mr Khaled El Sayed and MEA had standing to have a court determine whether their claimed status as appointor and trustee, turning on a claim of breach of fiduciary duty by Mr Hawach, was valid.

44. How could that not be so? The original plaintiff was the trustee BSD, which not only was unwilling to sue Mr Hawach, but had instead commenced proceedings seeking declarations against Mr Khaled El Sayed and MEA that the 2012 Deed was invalid. Part of their response was to claim that the 2012 Deed was valid because the 2011 Deed was invalid. That was a defence which they were entitled to advance in response to the claims made and relief sought by BSD. It would be highly unsatisfactory if Mr Khaled El Sayed and MEA were only permitted to advance those claims by way of defence, but were unable themselves to obtain declarations binding BSD and Mr Hawach in the event that their claims proved to be well-founded.

45. The only answer provided by Mr Hawach was that the claimed breach of fiduciary duty was weak. As it was put orally, “I suggest in my submissions and I would suggest now that if an attack was made on the decision of the trustee to appoint Mr Hawach it would be unlikely to succeed.” That submission presupposed success on a separate ground in the cross-appeal. It does not advance an argument as to absence of standing to assume that the claim would ultimately fail.

46. Accordingly, because the correctness or otherwise of Lewis v Condon would make no difference to the outcome of the appeal, the Court indicated during the hearing, after the completion of submissions made by the cross-appellants, that leave to reopen that decision would not be granted. Nevertheless, because of the doubt expressed by the primary judge as to the correctness and the absence of authority for the result in Lewis v Condon, it is desirable to say the following.

47. Although the parties at first instance and on appeal approached the issue on the basis that their researches disclosed no authority on whether a discretionary object, as opposed to a “beneficiary stricto sensu”, to use the language of the respondents, might in special circumstances bring a derivative proceeding, there is ample authority for the proposition.

48. The reserved decision of Young CJ in Eq in Highland v Labraga (No 2) [2005] NSWSC 1212 is squarely on point. The question was whether proceedings brought by Mrs Highland, who was one of many possible beneficiaries under a trust, but of whom his Honour said that “it would not take a jury long to find that, in practice, she would probably be its principal beneficiary”, had standing to bring proceedings (the proceedings were in probate, but his Honour said that that was immaterial). Young CJ in Eq, as he then was, approached the question by reference to chancery practice, an area in which that judge’s views are to be accorded considerable weight. After referring to a beneficiary’s right to bring derivative proceedings in special circumstances, his Honour said at [16] and [19]:

“In my view one can marry the two principles I have been discussing and say that a beneficiary (or at least a prominent beneficiary) under a discretionary trust may bring a derivative action to enforce the trust’s rights where there exists substantial impediment to the trustee prosecuting the proceedings.

...

I would note that my view that Mrs Highland had standing is in line with modern authority on the subject of access to the courts that it is wiser not to block actions on technical points of standing, but rather to strike out unmeritorious proceedings if they arise.”

49. In Deutsch v Deutsch [2012] VSC 227; 6 ASTLR 386, there was separate consideration of the question of standing by persons who “for the most part” were “mere objects of discretionary trusts” to bring a claim of breach of duty to the corporate trustee in circumstances where the trustee was deadlocked. Hargrave J considered at [41] that:

“In my opinion, Robert and the other plaintiffs have sufficient standing to bring the main proceeding against Erwin, alleging breaches of his fiduciary duties to the corporate trustees. This is because each of the corporate trustees is deadlocked. Clearly, Erwin would not authorise the corporate trustees to bring proceedings against him personally.”

50. Although it was said that the proper course would have been to appoint a new trustee with power to act, that did not prevent the determination of the proceedings brought by the beneficiaries on their merits.

51. In Pearson v Commissioner of Taxation [2001] FCA 1427; 116 FCR 357 a Full Court of the Federal Court considered whether Mrs Pearson, who was one of two “primary beneficiaries” of the Jancy Trust, could bring a derivative action (an appeal from a decision by the Administrative Appeal Tribunal adverse to the trustee). The decision concerned the income of the trust estate, and the provisions in the trust deed concerning capital are not disclosed by the Court’s reasons. As to income, the trustee had an absolute discretion to distribute income to a wide class of beneficiaries, in default of which the trustee held income on fixed trust for Mrs Pearson and the other primary beneficiary. That is to say, the position of Mrs Pearson appears to have been relevantly comparable to that of a “named beneficiary” under the BSD Trust.

52. Emmett J (as his Honour then was) expressed a preliminary view that Mrs Pearson could bring the proceedings at [48]:

“I can see no policy reason as to why a derivative action should not be available to a beneficiary in respect of an appeal to the Federal Court under the Administration Act. Rather than require a multiplicity of proceedings, where the Federal Court has adequate equitable jurisdiction, there are good policy reasons why a beneficiary should be entitled to bring a derivative action in the name of the beneficiary against the Commissioner by way of enforcing the right of appeal of a trustee, so long as the trustee is joined as a respondent.”

53. However, in circumstances where it had not been shown that the trustee had been asked to do so and had refused, his Honour considered that it was clear that the proceeding would not be permitted to continue, and so refrained from expressing a concluded view: at [48]-[52]. The other members of the Full Court, Tamberlin and Mansfield JJ, followed the same approach: at [12]-[14].

54. The Jersey Royal Court in In the Matter of X (Trust) [2012] JRC 171 went so far as to make an order that the objects of a discretionary trust which brought a derivative action should have their costs borne out of the trust fund. The Court rejected the proposition that there was a general principle that a discretionary object had a right to bring a derivative action at the expense of the trust fund: at [23], but proceeded on the basis that there was standing.

53. What was held in Lewis v Condon on appeal, and in the reserved first instance decisions of Highland v Labraga (No 2) and Deutsch v Deutsch, and said in obiter dicta by a Full Court in Pearson v Commissioner of Taxation, aligns with principle. The cross-appellants’ submissions relied on a precise use of “beneficiary”, but, as is plain from the deed and the decisions referred to above, the term is often used more loosely. What is more, just as there are mistakes and there are mistakes (in the words of Jordan CJ in Ex parte Hebburn; Re Kearsley Shire Council (1947) 47 SR (NSW) 416 at 420), so too there are discretionary trusts and discretionary trusts. Thus the same trust deed may make the same persons discretionary objects in respect of distributions of capital, and fixed objects in respect of distributions of income. The discretion may be broadly or narrowly cast, and the class of discretionary objects may be narrow or broad. It is easy to contemplate a trust with a single discretionary object (for example, following the making of a compensatory payment in respect of an injured child). That is one reason why, as noted above, a unanimous High Court said in Chief Commissioner of Stamp Duties (NSW) v Buckle at [8] that: “‘Discretionary trust’ has no fixed meaning and is used to describe particular features of certain express trusts”. Once it is acknowledged that a beneficiary of a fixed trust may, albeit in special circumstances, bring a derivative action, there would seem to be no sound basis for concluding that in no circumstances could a discretionary object be permitted to bring a derivative action.

54. None of the foregoing, and nothing in Lewis v Condon, is to be read as authorising a discretionary object to commence derivative proceedings on behalf of a trustee in the absence of special circumstances. Courts have long expressed concerns against the prospect of numerous claims being commenced or threatened in such circumstances: see for example Sharpe v San Paulo Railway Company (1873) LR 8 Ch App 597 at 610. Nor is it to be inferred that Mr Khaled El Sayed and MEA would have been permitted to bring proceedings if they were merely eligible beneficiaries, rather than being eligible beneficiaries who also claimed that Mr Hawach’s breach of fiduciary duty entitled them to be the trustee and appointor. Indeed, it might be doubted that either would be able to establish special circumstances absent the 2012 Deed. The requisite special circumstances in Lewis v Condon were identified at [110]:

“Louise was not the only person with a presently vested interest in the trust property (cf Re Louis Contini Foundation Trust [2004] NSWSC 881). Nonetheless, as a “second corpus beneficiary”, in circumstances where the “first corpus beneficiary” had disclaimed all interest in the trust property, she was the person best placed to advance the claim if Robana was unwilling or unable to do so.”

57. The named beneficiary, Mr Ahmad El Sayed – who enjoyed some valuable rights which were not dependent upon a positive determination by the trustee – would be “the person best placed to advance the claim” if the trustee were unwilling or unable to do so. If some other eligible beneficiary sought to bring a derivative action, it would at the very least be desirable, if not essential, for there to be evidence explaining why the named beneficiary (who was more directly affected by both the alleged breach and the costs of the litigation) was not bringing the claim.

58. Finally, the approach taken by the primary judge to s 75 of the Supreme Court Act should not be followed. Restrictions on standing are not side-stepped by reference to the broad jurisdiction to grant declaratory relief, and then making an order setting aside an appointment.

59. For those reasons, the conclusion of the primary judge on standing may be upheld, but only by reason of the notice of contention.

Breach of fiduciary duty

60. The primary judge found that there was a breach of fiduciary duty by Mr Hawach in 2011, when Mr Fayad resigned as appointor and Mr Hawach became the appointor in his place. It will be recalled that the primary judge found that Mr Hawach instigated the decision to remove Mr Fayad, which was formally implemented by his wife Ms Lahoud, without further involvement by Mr Hawach save for agreeing to be appointor.

61. The primary judge found that from 28 September 2011, Mr Hawach became subject to fiduciary duties in two separate capacities: as solicitor for the trustee and as appointor under the trust. His Honour found that both of those duties might conflict with his personal interest as a member of one of the classes of eligible objects: at [57]. His Honour concluded:

“His personal interest might cause or contribute to him exercising his powers as appointor under the trust deed, or his duties as solicitor for the trustee, in a manner designed to advantage him or his family. On the particular facts of this case, I do not think that the possibility of any such conflict is remote or fanciful. By making himself appointor, Mr Hawach heightened the risk and breached one of the primary obligations of a fiduciary.”

62. Accordingly his Honour concluded that it was a breach of duty for Mr Hawach to have allowed himself to become the appointor.

63. That reasoning cannot be sustained, for these reasons. First, to the extent that the reasoning pointed to the possibility of a conflict between Mr Hawach’s interest as an eligible beneficiary, and his fiduciary obligations as solicitor, it was at best peripheral. Mr Hawach was both an eligible beneficiary and acted from time to time for the trustee, both before and after the 2011 Deed was executed. What changed after the execution of the 2011 Deed was that Mr Hawach became the appointor, and it was that additional status that was essential to determining whether or not the 2011 Deed should be set aside.

64. Secondly, there is no analysis at all of the scope of the fiduciary obligations to which Mr Hawach was subject. Instead, the gravamen of the reasoning is that because Mr Hawach owed fiduciary obligations as solicitor and as appointor, and there was found to be a possibility of conflict which was not remote or fanciful, there was breach. In Warman International Ltd v Dwyer [1995] HCA 18; 182 CLR 544 at 559-560, the High Court approved Fletcher Moulton LJ’s statement in In re Coomber; Coomber v Coomber [1911] 1 Ch 723 at 728-729:

“[I]n some minds there arises the idea that if there is any fiduciary relation whatever any of these types of interference is warranted by it. They conclude that every kind of fiduciary relation justifies every kind of interference. Of course that is absurd. The nature of the fiduciary relation must be such that it justifies the interference. There is no class of case in which one ought more carefully to bear in mind the facts of the case ... than cases which relate to fiduciary and confidential relations and the action of the Court with regard to them.”

65. The authorities insisting upon paying close attention to the scope of the relevant duties are helpfully collected in Barescape Pty Limited as trustee for The V’s Family Trust & Anor v Bacchus Holdings Pty Limited as trustee for The Bacchus Holdings Trust & Anor (No 9) [2012] NSWSC 984 at [138]-[141]. What was required in the present case was a precise consideration of the two fiduciary offices held by Mr Hawach.

66. Thirdly, the primary judge cited the “inflexible rule” stated by Lord Herschell in Bray v Ford [1896] AC 44 at 51 that a person in a fiduciary position is not unless otherwise expressly provided allowed to put himself in a position where his interest and duty conflict. Of course, Lord Herschell acknowledged both in the passage cited by the primary judge, and in the passage immediately following, that the rule might be relaxed. As Upjohn LJ said of it in Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606 at 636 and 638, the rule is flexible, and “must be applied realistically to a state of affairs which discloses a real conflict of duty and interest and not to some theoretical or rhetorical conflict”. The Australian appellate authorities supporting the explanation in Boulting were collected in Rigg v Sheridan [2008] NSWCA 79 at [41]. As noted above, it is quite plain that the controller of the trustee BSD, Ms Lahoud, was entitled to cause the trustee to act in a way which favoured her personal interests, including by causing BSD to distribute trust property to herself. That is the critical fact against which her husband’s becoming the appointor falls to be assessed.

67. Fourthly, the reasons of the primary judge record the conclusion that there was a possibility of conflict between the self-interest of Mr Hawach as eligible beneficiary, and the duty owed by him as appointor (and solicitor). But what evidence if any sustained that conclusion? In relation to the asserted potential conflict between duty and interest arising out of the solicitor client relationship, the imprecision implicit in the description of Mr Hawach as “the trust’s solicitor” stands in the way of the necessary analysis. A solicitor’s fiduciary obligation derives not from his or her status, but from the terms of his or her retainer: Beach Petroleum NL v Kennedy [1999] NSWCA 408; 48 NSWLR 1 at [188]. As noted above, all that was established on the pleadings was that from time to time, Mr Hawach acted for the trustee to sell development lots.

68. Even if the undoubtedly fiduciary obligations owed by Mr Hawach as solicitor when he acted for the trustee from time to time were relevant to the 2011 Deed, there was no basis in the evidence for any non-fanciful possibility of conflict between interest and duty.

69. Much more important than the fact that Mr Hawach acted for BSD from time to time to the question whether there was a breach of fiduciary duty in executing the 2011 Deed is the fact that Mr Hawach became the appointor. This appeal is not the occasion fully to explore the obligations owed by an appointor. Instead, let it be assumed, favourably to the appellants, and as appears to have been assumed at first instance, that he thereby became subject to fiduciary obligations, in accordance with what was said in In re Skeats’ Settlement (1889) 42 Ch D 522 (noting that Professor Finn regarded this as controversial and indeed a “cause for confusion”: P Finn, Fiduciary Obligations Law Book Company, 1977, pp 273).

70. The principal powers of the appointor were to appoint another person as appointor, to remove and replace the trustee, and to consent or not consent to any amendments of the trust deed proposed by the trustee.

71. There is no suggestion that Mr Hawach’s powers as appointor were ever in fact exercised. There was no need for any exercise of his powers as appointor for the distribution of the whole of the income and capital of the trust. Indeed, there is no suggestion on the evidence that there was ever any consideration of Mr Hawach exercising the powers of appointor.

72. Nevertheless, the primary judge found that Mr Hawach’s personal interest “might cause or contribute to him exercising his powers as appointor under the trust deed … in a manner designed to advantage him or his family”: at [57]. His Honour did not regard the possibility of such a conflict as remote or fanciful, but did not provide any instance of how that conflict might occur at the level of detail. It is to be recalled that this was a trustee which was owned and controlled by Mr Hawach’s wife, who was one of the two named beneficiaries. His Honour did not explain how the exercise of the powers as appointor might result in an advantage to Mr Hawach or his family. There is no suggestion in the evidence that Mr Hawach might, for example, wish to remove his wife as trustee, with a view to procuring a new trustee who might more readily make a distribution to him or at his direction. The position would be different if the interests of Mr Hawach and Ms Lahoud were not aligned, but again there is no suggestion of that in the evidence.

73. Finally, it is to be recalled that the assets of the trustee had been acquired by substantial payments made by Mr Hawach. This was a case where it was plain that the trustee could act self-interestedly. In those circumstances, there was no breach of fiduciary obligation in Mr Hawach, who had provided funds for the property development and who was the husband of the owner and controller of the trustee, becoming the appointor. The finding of breach of fiduciary duty should be set aside. That is sufficient to resolve the whole of the appeal and cross-appeal.

Remaining matters

74. It follows that three remaining matters may be addressed concisely. First, the appellants advanced a case on appeal that there was non-disclosure by Mr Hawach to Mr Fayad of the breach of fiduciary duty. The absence of demonstrated breach is fatal to the submission. (That is far from being the only defect in a submission which was neither advanced at first instance nor was the subject of factual findings.)

75. Secondly, the appellants’ challenge to the decision to revoke leave after judgment was reserved, seemingly without notice to any party, likewise does not arise. That is as well, for there is some difficulty in doing so. How the application was put, and the timing and terms on which it was allowed, is not apparent from the record.

76. Thirdly, the order made by his Honour was in substance one of partial rescission of the 2011 Deed. The appellants contended that the order disclosed error, because the resignation of Mr Fayad was inextricably linked with and dependent upon the appointment of Mr Hawach. That submission has evident force, nor is it an answer to say that “the last thing Mr Fayad now wants is to be reinstated to the position of appointor of the trust”, because of the 2012 Deed. However, there being no breach of fiduciary duty established, it is both unnecessary and inappropriate to address the question of appropriate remedy.

Orders

77. For those reasons, the cross-appeal should be allowed and the appeal dismissed. Although the cross-appellants were not wholly successful on all issues, costs should follow the event. Accordingly, the Court’s formal orders are:

1.    Appeal dismissed.

2.    Cross-appeal allowed.

3.   Order 6 made on 20 December 2013 be set aside.

4.   Vary order 7 made on 20 December 2013 by deleting the word “otherwise”.

5.   Vary order 8 made on 20 December 2013 by deleting the words “75% of”.

6.    Order that the appellants/cross-respondents pay the costs of the respondents/cross-appellants of the appeal and cross-appeal.

**********

Amendments

23 July 2015 - References to In re Skeats Settlement (1889) corrected.

[28] - "he found" and "that" deleted, "and" inserted in the third sentence.

[30] - "s" deleted, "Section" inserted in the second last sentence.

[31] - "was" inserted in the first sentence.

[76] - "that" deleted in the third sentence.

Decision last updated: 23 July 2015