In the Estate of Wenham (No 2)
[2023] SASC 135
SUPREME COURT OF SOUTH AUSTRALIA
(Testamentary Causes Jurisdiction)
IN THE ESTATE OF WENHAM (No 2)
[2023] SASC 135
Judgment of the Honourable Justice Stanley
26 September 2023
SUCCESSION - PROBATE AND LETTERS OF ADMINISTRATION - COSTS - GENERAL PRINCIPLES
SUCCESSION - PROBATE AND LETTERS OF ADMINISTRATION - COSTS - WHERE LITIGATION CAUSED BY TESTATOR, EXECUTOR OR INTERESTED PERSONS - GENERALLY
On 31 March 2023 I delivered judgment on an application by the executor of the deceased’s estate (the applicant) for advice and direction, pursuant to s 69 of the Administration and Probate Act 1919 (SA). The application related to a water licence granted to the deceased under the Natural Resources Management Act 2004 (SA). The need for advice and direction arose in relation to a dispute over the proper construction of the deceased’s will (the will) and whether the water licence was the subject of a specific bequest pursuant to clause 3.5 of the will, or whether it fell into the residue of the deceased’s estate. This was a question in issue between the two beneficiaries under the will, the first respondent, Mr Dalitz and the second respondent, Mr Hanak. This turned on the proper construction of the will.
The will did not expressly refer in terms to the water licence.
The water licence was found to be the subject of a specific bequest pursuant to clause 3.5 of the will. As a result, Mr Dalitz is entitled to the water licence in accordance with the will.
At issue before this court is the costs of the application. The issue of costs is problematic because in early 2021 the executor made a premature distribution of part of the residue, being land at Yankalilla, to Mr Hanak. As a result, the remaining assets in the residuary estate are inadequate to satisfy the costs incurred by the executor in bringing the s 69 application. In the meantime, Mr Hanak has disposed of the Yankalilla property to his daughter.
Each of the executor and the beneficiaries seek orders in their favour for the costs of the application.
The executor seeks the following orders:
1. The second respondent pay the applicant’s costs of the application for advice and direction, to be agreed or taxed on a standard costs basis, and that the applicant otherwise be indemnified out of the estate of the Deceased for those costs on an indemnity basis.
2. The difference between the costs paid or payable on the standard costs basis by the second respondent to the applicant and the applicant’s entitlement to costs on the indemnity basis be a charge in favour of the applicant upon Water Licence 118583-0.
3. Liberty to the applicant to apply in these proceedings to a Master of the Court for orders relating to the issues of the “personal assets” and other claims for reimbursement described in the Affidavit of Jodi Scott Hanak affirmed 1 August 2022 (FDN 4) and that of 10 November 2022 (FDN 14).
Mr Dalitz seeks the following orders:
1. That the second respondent pay the first respondent his costs of the application pursuant to s 69 of the Act on a standard costs basis.
2. The second respondent pay the applicant’s costs of the application pursuant to s 69 of the Act, to be agreed or taxed on a standard costs basis.
3. In the alternative, the Court should order that the second respondent pay the applicant’s costs of the application pursuant to s 69 of the Act on an indemnity basis.
Mr Hanak seeks the following orders:
1. That the costs of the applicant and the first and second respondents should be paid out of the estate by applying part of the undistributed asset comprising the water licence to meeting those costs.
2. In the alternative, the applicant and the first and second respondents should bear their own costs.
Held:
1. Mr Hanak should pay Mr Dalitz’s costs of the s 69 application to be agreed or taxed on the standard costs basis;
2. That Mr Hanak pay the executor’s costs of the application for advice and direction on an indemnity basis;
3. That the executor is not entitled to recover his costs and expenses of administering the estate of the deceased by a charge over the water licence 118583-0; and
4. That the executor be granted liberty to apply in these proceedings to a Master of the Court for orders relating to the issues of the “personal assets” and other claims for reimbursement described in the affidavit of Jodi Scott Hanak affirmed 1 August 2022 (FDN 4) and that of 10 November 2022 (FDN 14).
Administration and Probate Act 1919 (SA) s 69; Natural Resources Management Act 2004 (SA); Supreme Court Act 1935 (SA) s 40; Uniform Civil Rules 2020 (SA) r 194, referred to.
Calcino v Fletcher [1969] Qd R 8; Di Benedetto v Kilton Grange Pty Ltd [2017] VSCA 119; Fielder v Burgess [2014] SASC 98; In Re Reeve’s Trusts (1877) 4 Ch D 841; In the Estate of Wenham [2023] SASC 44; Pohlner v Pfeiffer (1964) 112 CLR 52; Public Trustee v Taylor (No. 2) [2020] SASC 213; Rigby v Tiernan [2016] VSC 352, considered.
IN THE ESTATE OF WENHAM (No 2)
[2023] SASC 135Testamentary Causes Jurisdiction
STANLEY J:
Introduction
On 31 March 2023 I delivered judgment on an application by the executor of the deceased’s estate (the applicant) for advice and direction, pursuant to s 69 of the Administration and Probate Act 1919 (SA) (the Act). The application related to a water licence granted to the deceased under the Natural Resources Management Act 2004 (SA). The need for advice and direction arose in relation to a dispute over the proper construction of the deceased’s will (the will) and whether the water licence was the subject of a specific bequest pursuant to clause 3.5 of the will, or whether it fell into the residue of the deceased’s estate. This was a question in issue between the two beneficiaries under the will, the first respondent, Mr Dalitz and the second respondent, Mr Hanak.
The significance of the constructional choice was that if the licence was the subject of a specific bequest it formed part of the inheritance of Mr Dalitz, but if it fell into the residue of the deceased’s estate, the residual beneficiary was the deceased’s son, Mr Hanak.
The will did not expressly refer in terms to the water licence. At the hearing of the application counsel for each of the beneficiaries put submissions as to the proper construction of the will. Each sought a construction of the will by which he would inherit the water licence.
I found that the water licence was the subject of a specific bequest pursuant to clause 3.5 of the will. As a result, Mr Dalitz is entitled to the water licence in accordance with the will.
The question now arises of the costs of the application pursuant to s 69 of the Act. The issue of costs is problematic because in early 2021 the executor made a premature distribution of part of the residue, being land at Yankalilla, to Mr Hanak. As a result, the remaining assets in the residuary estate are inadequate to satisfy the costs incurred by the executor in bringing the s 69 application. In the meantime, Mr Hanak has disposed of the Yankalilla property to his daughter.
The transfer to Mr Hanak occurred after a settlement agreement reached between the respondents at a mediation in August 2020, prior to the disclosure to Mr Hanak of the existence of the water licence. Mr Hanak agreed to contribute up to $116,000 to the residue of the estate to pay its outstanding expenses and legacies in order to avoid the sale of the Yankalilla property. The executor transferred the Yankalilla property to Mr Hanak after receiving $89,514.18.
The contest as to costs
Each of the executor and the beneficiaries seek orders in their favour for the costs of the application.
The executor seeks the following orders:
1. The second respondent pay the applicant’s costs of the application for advice and direction, to be agreed or taxed on a standard costs basis, and that the applicant otherwise be indemnified out of the estate of the Deceased for those costs on an indemnity basis.
2. The difference between the costs paid or payable on the standard costs basis by the second respondent to the applicant and the applicant’s entitlement to costs on the indemnity basis be a charge in favour of the applicant upon Water Licence 118583-0.
3. Liberty to the applicant to apply in these proceedings to a Master of the Court for orders relating to the issues of the “personal assets” and other claims for reimbursement described in the Affidavit of Jodi Scott Hanak affirmed 1 August 2022 (FDN 4) and that of 10 November 2022 (FDN 14).
Mr Dalitz seeks the following orders:
1. That the second respondent pay the first respondent his costs of the application pursuant to s 69 of the Act on a standard costs basis.
2. The second respondent pay the applicant’s costs of the application pursuant to s 69 of the Act, to be agreed or taxed on a standard costs basis.
3. In the alternative, the Court should order that the second respondent pay the applicant’s costs of the application pursuant to s 69 of the Act on an indemnity basis.
Mr Hanak seeks the following orders:
1. That the costs of the applicant and the first and second respondents should be paid out of the estate by applying part of the undistributed asset comprising the water licence to meeting those costs.
2. In the alternative, the applicant and the first and second respondents should bear their own costs.
Power and principles
The Court’s power to award costs is conferred by s 40 of the Supreme Court Act 1935 (SA) and r 194 of the Uniform Civil Rules 2020 (SA).
I explained the principles in relation to costs in judicial advice cases in Public Trustee v Taylor (No. 2) in the following terms:[1]
[1] [2020] SASC 213 at [11]-[17].
The authors of Williams, Mortimer and Sunnucks explain the approach to costs in an action instituted for directions sought from a court for the determination of a question of law arising in the administration of an estate. Costs will be determined in accordance with the following classifications set out in Re Buckton:
(1) Where the action is reasonably brought by the representative for the guidance of the court, the costs of all parties will usually be treated as necessarily incurred for the benefit of the estate and an order made for payment out of it.
(2) Where such an action is reasonably commenced by a person other than the representative, a similar costs order will usually be made.
(3) Where the action seeks similar relief but is hostile, the usual approach to costs in hostile litigation apply.
(4) Where the issue is being pursued by a beneficiary and a third party, in circumstances where, had it not been for the third party, the costs would have fallen into category (2), the costs should be shared amongst the parties. Where a beneficiary's unreasonable conduct led to substantial costs being incurred by a personal representative in applying to the court, it is appropriate for that beneficiary to bear those costs rather than them falling on the estate and therefore the beneficiaries generally.
In 2014 in Fielder v Burgess , Kourakis CJ observed that the probate costs rule is arguably anachronistic in modern times in which there is a greater concern with a need for proportionality in litigation and it may soon be necessary to reconsider it.
Kourakis CJ set out his reasons for this observation in the following terms:
There is a long line of authority to the effect that where probate litigation has been caused, or contributed to, by the way in which the testator made his testamentary intentions known it is appropriate that costs be ordered to be paid out of the estate (the probate costs rule). The authorities are conveniently collected in the judgment of Gray J in Hall v Carney (No 2).
The principle has a long lineage, but it is perhaps so long that it has become something of an anachronism. For centuries before the judicature reforms of the 19th century, grants of probate were the concern of the Ecclesiastical Court. Ecclesiastical courts operated according to forms of Roman law with an inquisitorial judge rather than common law style juries. These courts claimed jurisdiction over substantive matters that concerned salvation and church order including sexual misconduct, determinations and annulment of marriage, defamation and the personal estates of deceased persons. It is perhaps not surprising that an inquisitorial jurisdiction which was concerned with public rectitude adopted such a costs principle.
The application of the costs rule in probate cases was recently considered in the English case of Shovelar v Lane. In that case a husband and wife, who each had children from previous marriages, made mutual wills leaving their residuary estate to the other if he or she survived 30 days, failing which it fell to their children, grandchildren and other relatives. The husband survived the wife and later made a new will that made no provision for his wife's descendants. Following the husband's death, the wife's descendants brought a claim against both the executors of the husband's estate and descendants. The claimants successfully relied on the doctrine of mutual wills, claiming that the executors held the husband's estate on constructive trust for those entitled under his earlier will. On the question of costs, the defendants submitted that the Judge should apply the rule in probate actions being that if a testator were the cause of litigation then the costs ought to come out of the estate. The Judge rejected this submission and held that the claimants were entitled to have their costs paid by the defendants. The claimants appealed against certain terms of the costs order and the defendants cross-appealed against the Judge's conclusion that the costs should not be paid out of the estate.
The Court of Appeal, dismissing the cross-appeal, held:
The probate rule is rooted in the inquisitorial exercise that was conducted by the ecclesiastical courts and the Probate Division where the court had to be satisfied of the validity of the will before it could pronounce for the will and admit it to probate. The effect of mutual wills upon the distribution of the estate under a later will which is admitted to probate is a matter for the Chancery Division applying the law of trusts; it is not a matter of probate law and practice. The nature of that litigation is not inquisitorial: it is adversarial and, not infrequently, very adversarial as the two families disunited by death battle for their perceived true inheritance …
The judge was entitled to find, indeed right to find, that “the contention between the parties was not unlike any other hostile litigation and not such that would enable the court to move away from the general rule” … The reasons she gave in para 39 of her judgment which I have also cited at para 28 above is beyond challenge: there would be a plain injustice if the claimants were deprived of any benefit of their success (compare In re Evans, decd [1986] 1 WLR 101). The challenge by the defendants as to what had been said and done and the legal consequences of that behaviour do not provide a reason for departing from the general rule that costs follow the event.
It follows that in my judgment [the judge] was fully entitled to order the defendants to pay the claimants' costs.
In my view, the legal policy underlying the decision of the Court of Appeal is applicable to probate cases beyond mutual wills claims of the kind considered in Shovelar v Lane. It is not obvious to me why a testator's fault in the making of a will should result in a loss to the successful beneficiary in litigation over the estate. True it is there is a public element to the resolution of disputes over estates. It is for that reason that the probate costs rule is generally framed in terms of applying when there are reasonable grounds to require the person propounding a doubtful will or contending for a particular construction of an ambiguous provision to make out their case before a judge in a contested hearing.
However, the bottom line is that the disputes are between private parties advancing competing claims to the testator's bounty for their private financial benefit. Of even greater contemporary significance is the effect of the old probate costs rule on parties to litigation of this kind. The probability of the payment of the costs of all parties out of the estate irrespective of the result gives the parties little incentive to make appropriate decisions as reasonable self-funded litigants about their prospects of success, and the proportionality of the expense incurred in bringing or defending proceedings.
I cannot see any utility in putting the beneficiaries to the expense of a contested hearing and depleting the estate in cases in which the ultimate result of litigation is clear notwithstanding the suspicion or ambiguity clouding the will.
[citations omitted]
As I observed in In the Estate of Istvan Molnar (No. 2) those considerations find expression in the terms of supplementary r 195 which provided:
When there are a number of separately represented parties, the Court will exercise its general discretion as to costs under rule 263 of the Rules as appropriate in the circumstances of a particular case, but having particular regard to—
(a)ordering costs against parties who have not succeeded;
(b)ordering costs in the light of whatever offers have been made under rule 187 of the Rules;
(c)not giving full costs to separately represented parties when they could properly have been jointly represented;
(d)awarding less than full costs when the amount in issue is relatively small.
Subsequently, in Roche v Roche & Anor (No 2), Kourakis CJ returned to this topic noting that since Fielder v Burgess there have been further judicial warnings that the probate exception might be invoked more sparingly. He said:
In Barbon v Tessar (Barbon) McMillan J ordered that an unsuccessful defendant pay the plaintiff's costs. McMillan J said:
Looked at objectively, I am satisfied that the defendant knew of these matters or had the means of knowing them, yet she still made the decision to initiate the proceeding. In my view, knowing of these matters or having the means of knowing them, the defendant did not have reasonable grounds for challenging the validity of the deceased's will.
The usual exceptions in the probate rules for costs not following the event should not apply to the defendant's costs in this proceeding. In reality, the litigation has been adversarial litigation instituted by the defendant against the plaintiff and she has been unsuccessful. The usual rules as to costs should apply, that is, the defendant should pay the plaintiff's costs of the proceeding.
In the matter of In the Estate of Frances Ponikvar (Deceased) (No 2) a defendant opposed an application for a copy Will to be admitted to probate. The defendant proceeded on the basis that the presumption of revocation had not been rebutted. Stanley J found that ‘there was strong evidence that rebutted the presumption against revocation. Nonetheless, Ms Novak pressed ahead in opposing the application’. Stanley J ordered that Ms Novak pay 25 percent of the applicant's cost of the trial on a party/party basis because she had pressed ahead against the weight of that evidence.
…
A person will not be penalised for invoking this Court's supervisory jurisdiction in probate when the circumstances call for an investigation into the validity of a testamentary document. However, a person who challenges a testamentary disposition will risk an adverse costs order for persisting in an unmeritorious action after the discovery of evidential material which largely dispels any reasonable concerns. If a party ignores the weight of that evidential material and prosecutes an ultimately unmeritorious case to trial, the usual order that costs follow the event will be made. Exceptions from the ordinary order will not be made to allow beneficiaries a forum in which to air family disputes with impunity.
[citations omitted]
I returned to this matter in Craker v Craker & Ors (No 3) adopting the principles considered in the above authorities and applying the approach I took in Molnar (No. 2).
The statements of principle found in these authorities reflect the third and fourth categories in Re Buckton.
The executor’s contentions
The executor submits that he is entitled to payment of his costs from the estate. His costs are testamentary expenses as they are expenses incurred in relation to obtaining judicial advice and direction from the Court. An executor is empowered to seek advice and direction from the Court as part of his role in administering an estate. In these circumstances he submits he has a right of indemnity by the estate. That right is only precluded where a court finds that the expenses incurred were the result of the executor’s misconduct. The executor submits that even if there has been some dilatoriness on his part in the administration of the estate, or an error of judgment in the distribution to Mr Dalitz of part of the estate, being the Yankalilla property, resulting in a significant depletion of the residue, this does not constitute relevant misconduct. In any event, the Court is concerned with the costs of the s 69 application, not the administration of the estate generally. The s 69 application had to be brought irrespective of any delay or failure on the part of the executor to otherwise distribute the water licence. These matters do not have any logical or causative relationship to the costs incurred in bringing the s 69 application.
However, by way of compromise, the executor contends that the second respondent pay his costs of the s 69 application to be agreed or taxed on a standard costs basis, and that the executor otherwise be indemnified out of the estate for the balance of those costs on an indemnity basis, and that that difference be a charge in favour of the applicant upon the water licence. The executor submits that the circumstances of the case support costs being charged against the licence given the first respondent’s failure to disclose the licence during the course of mediation and the failure of the second respondent’s claim that he was entitled to inherit the licence in accordance with the will. Finally, the executor submits that in accordance with the relevant principles Mr Hanak, having engaged in unsuccessful adversarial litigation in pursuit of his own interest, should pay Mr Dalitz’s costs.
The first respondent’s contentions
Mr Dalitz also submits that his costs in respect of the s 69 application should be paid by Mr Hanak. He should do so on the basis that the purpose of the application was to determine who had the benefit under the will of the water licence. This was in effect a dispute between private parties advancing competing claims to the testator’s bounty for their private financial benefit. It was, in effect, adversarial litigation. Mr Hanak having been unsuccessful and Mr Dalitz successful, costs should follow the event.
Mr Dalitz submits that Mr Hanak should pay the executor’s costs of the s 69 application to be agreed or taxed on a standard costs basis. However, he submits that the Court should reject the executor’s claims that he otherwise be indemnified out of the estate for those costs on an indemnity basis and that difference be a charge in favour of the executor upon the water licence.
Mr Dalitz submits that the executor is not entitled to a full indemnity in respect of the testamentary expenses incurred in pursuing the s 69 application because the executor’s misconduct is the reason the residuary estate is not in a position to indemnify the executor. This is due to his premature distribution of part of the residuary estate to Mr Hanak, namely, the Yankalilla property. As the residuary estate cannot presently indemnify the executor due to his own misconduct, he should not have a right of indemnity against the water licence, being the only substantial asset still in the estate. Mr Dalitz submits that the choice of asset to be burdened with an order for indemnity is not at large and effect should be given to the old order of assets in the exercise of the Court’s discretion on costs. In the circumstances it is neither equitable or principled for the burden of costs of the action to fall on Mr Dalitz, being the beneficiary of the water licence. To do so would be to reward the executor’s default and to punish Mr Dalitz who is the successful party on the s 69 application.
The second respondent’s contentions
Mr Hanak submits that the executor, being guilty of misconduct, is entitled to be indemnified only for his proper costs and should have recourse to the water licence to meet that indemnity. Further, the respondents’ costs should be paid by the estate from the water licence. In the alternative, there should be no order for costs or an order that the parties bear their own costs.
He submits that the water licence is an item of personal property, an asset of the estate, not referred to or expressly disposed of by the will, and not formally disclosed to the Court until 8 November 2022, and only informally disclosed in May of 2021. Accordingly, the existence of the water licence was not disclosed at the time of a mediation and settlement agreement reached between the beneficiaries on 18 August 2020. As an asset of the estate not specifically given, the water licence is available to the executor to meet the liabilities of the estate. The licence not having been distributed, it remains available to defray the expenses of administration and the costs of the s 69 application.
While Mr Hanak concedes he was acting in his own interests, the need for the s 69 application arose from the deficiencies in the drafting of the will. The application was a necessary incident of the administration of the estate. It was not pure inter partes litigation per se. The defect in the will necessitated the application. It was not driven by Mr Hanak. The failure of the will to deal with the water licence meant that the application was required in any event. Notwithstanding the outcome of the s 69 application, the water licence remains an undistributed asset and should remain available to meet the costs of the application.
Consideration
Should the executor be deprived of his right to indemnity?
It is convenient to commence with a consideration of whether the executor is entitled to an indemnity in respect of the costs incurred in bringing the s 69 application. In this regard it is important to understand that the application for costs is for the costs of the s 69 application, not the broader costs of the administration of the estate. An executor is normally entitled to costs out of the estate in litigation relating to the administration of the estate unless they have been guilty of misconduct. An executor is entitled as of right to indemnity out of the estate for expenses properly incurred, that is, all costs except those which are of an unreasonable amount or have been unreasonably incurred. The concept of proper expenditure excludes conduct demonstrating want of prudence or diligence.
Expenses and liabilities that are improperly incurred, such as acting beyond power, in bad faith, or exercising power with an absence of care and diligence that a person of ordinary prudence should exercise, are excluded from the right of indemnity, and should be borne by the trustee personally. In cases of doubt, the estate should bear the executor’s costs.[2]
[2] Rigby v Tiernan [2016] VSC 352 at [110]-[111].
The learned authors of Jacobs’ Law of Trusts in Australia[3] give as instances of misconduct: trustees causing unnecessary applications to be made to the court, or causing litigation through unreasonable conduct, or having failed in the proceedings before the court to prevent unnecessary expense. Such misconduct may result in the loss of the right to indemnity and may even result in the executor being ordered to pay the costs of the other parties.
[3] J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (LexisNexis Butterworths, 8th ed, 2016) 535.
In Di Benedetto v Kilton Grange Pty Ltd[4] the Victorian Court of Appeal said that instances of costs, expenses and liabilities not having been properly incurred include where the executor has acted beyond power, in bad faith or without the care and diligence expected of a person of ordinary prudence. Similarly, an executor is not entitled to an indemnity where a liability is incurred as a result of conduct on the part of the executor in breach of his or her duty to administer the estate with reasonable diligence and care. On the other hand, a mere error of judgment may not suffice to show improper conduct. The standard of care is that which might be expected of an executor as objectively but not over zealously enforced. What is proper or improper for this purpose is to be answered by reference to the duty with which the executor was required to comply or the power the executor was intending to exercise.[5]
[4] [2017] VSCA 119.
[5] Di Benedetto v Kilton Grange Pty Ltd [2017] VSCA 119 at [64].
In this case the executor was confronted by a dispute between the beneficiaries, Mr Dalitz and Mr Hanak, as to the proper construction of the will and the entitlement to the water licence in accordance with the will. In circumstances where Mr Hanak would not consent to the transfer of the water licence to Mr Dalitz and was insisting on its transfer to him, I consider the conduct of the executor in seeking advice and direction pursuant to s 69 was reasonable and appropriate. There was nothing improper in the executor incurring the costs of and incidental to that application. Each of the beneficiaries claimed an entitlement to the water licence. It was a reasonable exercise of the executor’s powers to decide the competing claims by seeking the advice and direction of the Court. As Mr Hanak conceded, the application was inevitable.
The criticism of the executor’s conduct in transferring the Yankalilla property to Mr Hanak is not relevant. Whatever legitimate criticism can be made of the executor’s conduct in that regard, it is conduct that forms part of his general administration of the estate and is not materially relevant to him bringing the s 69 application. The Yankalilla property was transferred to Mr Hanak in early 2021. The s 69 application was instituted in July 2022. I reject the submission that there is some logical connection between the transfer of the Yankalilla property and the need for the s 69 application. That submission proceeds from the unproven and unprovable premise that, if the existence of the water licence had been disclosed earlier to Mr Hanak, some different settlement agreement would have been reached between him and Mr Dalitz. That would have avoided the need for the transfer when it occurred. Even if that were so, it would not have avoided the need for the executor to obtain advice and direction in relation to how the water licence was disposed of pursuant to the will.
In any event, to the extent it might be thought relevant to the s 69 application, I consider that the executor’s conduct in failing to disclose the existence of the water licence and prematurely transferring the Yankalilla property, is properly characterised as mere errors of judgment which do not suffice to show improper conduct. His conduct in relation to either matter was not motivated by any consideration of his own interests. On the contrary, it has left him potentially exposed to having to meet his own costs. To the extent there is any doubt as to the proper characterisation of his conduct, the estate is to bear his costs.[6]
[6] Rigby v Tiernan [2016] VSC 352 at [111]
In his affidavit of 7 November 2022 the executor explains his failure to disclose the existence of the water licence earlier. He deposed that, while he was aware of the existence of the water licence by November 2017, he did not understand that the licence was an asset separate and distinguishable from the land on which it ran. Accordingly, he did not realise that it was an asset that had to be discretely disclosed.
The transfer of the Yankalilla property prior to the resolution of the proper construction of the will exposed the executor to the very risk that has now been realised, namely, that the residuary estate would be left without sufficient funds to meet the indemnity. That outcome was not in the interests of the executor. I do not infer that he acted with the intention or was reckless as to whether that would be the ultimate result of him undertaking a partial distribution of the residue. With the benefit of hindsight that outcome was inimical to the interests of the executor, such that the only rational inference is that it was the result of an error of judgment on his part. There is no reason to think that the executor would have transferred the Yankalilla property if he had known that the consequence would be that there would not be adequate funds left in the residue to meet the indemnity.
For these reasons I do not accept that the executor is guilty of misconduct. Accordingly, I consider that there is no proper basis upon which the executor should be deprived of his indemnity for the costs of and incidental to the s 69 application.
Who should pay the costs?
Mr Hanak submits that any costs should be paid by the estate from the undistributed asset, being the water licence. I do not accept this submission.
First, because Mr Hanak has no entitlement to costs. On the contrary, Mr Hanak is liable for Mr Dalitz’s costs of the s 69 application. He was pursuing his own private financial interest in propounding a construction of the will under which he would inherit the water licence. It was a dispute between private parties advancing competing claims to the testator’s bounty.[7] While I accept that the need for the application lay in the defective drafting of the will, the reason the application was needed does not detract from the fact that Mr Hanak took his chance on litigating the construction of the will for his private financial benefit. That was plainly self-interested litigation. His position is no different from any ordinary self-funded litigant. In contesting the construction of the will he took his chance on securing a favourable outcome. That the outcome was unfavourable to him is the reason that costs should abide the event in accordance with the principles set out in Public Trustee v Taylor (No. 2).[8]It would be unreasonable and contrary to the usual order that costs follow the event for Mr Hanak’s costs to be met from the water licence, in circumstances where Mr Dalitz succeeded and he failed on the application to determine who was entitled to the licence.
[7] Fielder v Burgess [2014] SASC 98 at [57]-[62]; Public Trustee v Taylor (No. 2) [2020] SASC 213 at [11]-[17].
[8] [2020] SASC 213 at [11]-[17].
Second, because in any event, the submission of Mr Hanak proceeds from a false premise. That premise is that the water licence is available to meet costs of the administration as it is an asset of the estate not specifically given. That submission is contrary to the Court’s decision in In the Estate of Wenham.[9] Clause 5.2(p) of the will provides that an asset of the estate not specifically given is available to the executor to meet the liabilities of the estate. As I have found, the water licence was specifically given. It was the subject of a specific bequest to Mr Dalitz under clause 3.5 of the will. That premise being false undermines the submission upon which it depends. The water licence is not available pursuant to the terms of the will to meet the costs of the estate.
[9] [2023] SASC 44.
To order that Mr Hanak’s costs be paid out of the licence would be to deprive Mr Dalitz of part of the fruits of his success on the application. In the circumstances Mr Hanak should pay Mr Dalitz’s costs of the s 69 application to be agreed or taxed on the standard costs basis.
The executor submits that his costs should be paid by Mr Hanak, to be agreed or taxed on a standard costs basis. He also submits that he should otherwise be indemnified out of the estate for the remainder of his costs. I do not accept the executor’s submission. Rather, I accept Mr Dalitz’s submission that the executor’s costs of the application should not be paid out of the water licence.
That the application required the construction of the will to determine who inherited the water licence does not mean that the costs of the executor should be charged on the water licence. That would be contrary to settled authority. Pohlner v Pfeiffer[10] is a will interpretation case. It concerned a clause in a will dealing with a gift of leasehold property and certain personalty on the property. The High Court allowed an appeal against a costs order made against a particular asset of a deceased estate. Menzies J, with whom Dixon CJ, Kitto, Taylor and Windeyer JJ agreed, said that in such a case, costs should be paid out of the residuary estate, not out of some particular asset of the estate. In my view that is the approach that should occur here.
[10] (1964) 112 CLR 52.
As a matter of general principle there is no residue in a deceased’s estate until the entire costs of the administration are paid.[11] While the executor’s costs in relation to the s 69 application are testamentary expenses for which he is entitled to be indemnified, the difficulty in which the executor now finds himself has been caused by his premature distribution out of the residue of the Yankalilla property to Mr Hanak before the completion of the administration of the estate.
[11] In Re Reeve’s Trusts (1877) 4 Ch D 841, 844 per Jessel MR.
I consider it would be inequitable and unprincipled for the executor’s indemnity to be met from the water licence in circumstances where the need to charge the water licence in favour of the executor results from the executor’s default in prematurely distributing the Yankalilla property to Mr Hanak leaving a shortfall in the residue of the estate. That results in there being insufficient funds to satisfy the executor’s indemnity. But for the premature distribution of the Yankalilla property, that asset would have fallen into the residue and been available to pay the executor’s indemnity. In my view the proper course is for Mr Hanak to pay the executor’s indemnity because, in the ordinary course, the executor’s costs would have been paid from the residue of the estate. As Mr Hanak is the sole residual beneficiary the executor should look to him to recover his costs on the basis of an indemnity. That is reasonable given the executor would ordinarily have been entitled to an indemnity out of the assets comprising the residuary estate, namely, the Yankalilla property which has been transferred to Mr Hanak. As a result, Mr Hanak would be placed in the same position he otherwise would have been in, according to the terms of the will, prior to the premature distribution of the Yankalilla property.
Accordingly, I would order that Mr Hanak pay the executor’s costs of the application for advice and direction on an indemnity basis.
If the executor is unable to recover a full indemnity from Mr Hanak he may have other remedies available. However, he should not have an entitlement to recover his costs and expenses of administering the estate by a charge over the water licence given that his inability to do so is a result of his own conduct. That would be to punish Mr Dalitz for the executor’s mistake.
In any event, given the basis for the exercise of the costs discretion it is unnecessary to make any order based on the old order of assets.[12]
[12] Calcino v Fletcher [1969] Qd R 8, 22-23.
The administration of the balance of the estate
The executor seeks an order that he be granted liberty to apply in these proceedings to a Master of the Court for orders relating to the issues of the “personal assets” and other claims for reimbursement described in the affidavit of Jodi Scott Hanak affirmed 1 August 2022 (FDN 4) and that of 10 November 2022 (FDN 14). I do not understand the respondents to oppose the making of this order.
Conclusion
I would make the following orders:
1.Mr Hanak should pay Mr Dalitz’s costs of the s 69 application to be agreed or taxed on the standard costs basis;
2.That Mr Hanak pay the executor’s costs of the application for advice and direction on an indemnity basis;
3.That the executor is not entitled to recover his costs and expenses of administering the estate of the deceased by a charge over the water licence 118583-0; and
4.That the executor be granted liberty to apply in these proceedings to a Master of the Court for orders relating to the issues of the “personal assets” and other claims for reimbursement described in the affidavit of Jodi Scott Hanak affirmed 1 August 2022 (FDN 4) and that of 10 November 2022 (FDN 14).
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