McNee v Lachlan McNee Family Maintenance Pty Ltd (No 2)
[2020] VSC 753
•16 November 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
TRUSTS, EQUITY AND PROBATE LIST
S CI 2017 03714
| LACHLAN THOMAS McNEE by his litigation guardian WILLIAM DEREK McNEE | Plaintiff |
| v | |
| LACHLAN McNEE FAMILY MAINTENANCE PTY LTD (ACN 169 763 044) | First Defendant |
| - and - | |
| NEVE ANEIRA GOULD | Second Defendant |
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JUDGE: | MOORE J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | On the papers |
DATE OF JUDGMENT: | 16 November 2020 |
CASE MAY BE CITED AS: | McNee v Lachlan McNee Family Maintenance Pty Ltd (No 2) |
MEDIUM NEUTRAL CITATION: | [2020] VSC 753 |
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COSTS – Trusts – Removal of trustee – Where beneficiary successfully applied for removal of trustee – Costs follow the event – Whether the former trustee is entitled to an indemnity for its costs and costs that it has been ordered to pay – Where trust deed extends indemnity to circumstances where the trustee has only acted in good faith – Where former trustee has acted in good faith – Former trustee indemnified from the trust fund – Whether former trustee unreasonably rejected offer to settle controversy as to costs – Where offer proposed that parties bear their own costs and the former trustee forgo its indemnity – Rejection of offer was not unreasonable – Parties bear their own costs of the costs submissions – Supreme Court Act 1986, s 24 – Supreme Court (General Civil Procedure) Rules 2015, r 63.26 – Oshlack v Richmond River Council (1998) 193 CLR 72, applied – Nolan v Collie (2003) 7 VR 287, considered – Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) (2001) 188 ALR 566, applied – Wareham v Marsella (No 2) [2020] VSCA 118, considered – Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435, applied – Chen v Chan [2009] VSCA 233, applied.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | B Petrie | Jeremy Johnson & Associates Lawyers |
| For the First Defendant | M McKenzie | Fogarty Oliver & Rothschild |
| For the Second Defendant | S Linden |
HIS HONOUR:
On 19 May 2020, I delivered judgment in this matter in favour of the plaintiff, Lachlan McNee, and foreshadowed that I would order that the first defendant be removed as trustee of the Lachlan McNee Family Maintenance Trust (the trust).[1]
[1]McNee v Lachlan McNee Family Maintenance Pty Ltd [2020] VSC 273.
On 5 June 2020, I ordered, amongst other things, that the first defendant be removed as trustee and that the President of the Law Institute of Victoria appoint an independent third party to fill the office of trustee. I also ordered the parties to file submissions on the question of costs and on the question of the first defendant’s claim to an indemnity from the trust. Submissions were duly filed.
Costs of the trial
The parties’ positions
Lachlan sought an order that the defendants pay his costs on a standard basis up to and including the trial, including the filing of subsequent written submissions. Lachlan sought an order that the defendants be jointly and severally liable in respect of costs.
The first defendant, the former trustee, sought an order that the plaintiff’s litigation guardian, William McNee, pay the defendants’ costs on an indemnity basis.
The second defendant, Neve Gould, also sought an order that Mr McNee pay the defendants’ costs. In the alternative, she submitted that there should be no order as to costs.
The parties’ submissions
The conduct and outcome of the litigation
Lachlan submitted that he was successful on each issue that the Court was asked to determine and costs should follow the event. He submitted that there was nothing which warranted a departure from the usual rule.
The former trustee submitted that Mr McNee’s role in setting up the trust, varying the trust deed, interfering with the trust’s operation, and his conduct as the plaintiff’s litigation guardian, warranted an order that he pay the defendants’ costs on an indemnity basis.
Lachlan’s proposal that Mr McNee be appointed trustee and the abandonment of that proposal
The former trustee submitted that the costs implications of the proceeding should be separately considered for what was described as the proceeding’s three distinct stages of litigation.
(a) In the ‘first stage’, Lachlan sought the appointment of Mr McNee as trustee. This was subsequently abandoned. The former trustee submitted that, in light of this abandonment and the Court’s findings, Mr McNee should never have been put forward as the proposed substitute trustee and the defendants’ resistance of Lachlan’s application was justified. It was said that the former trustee had a fiduciary duty to resist the appointment of Mr McNee as trustee. Moreover, the defendants were successful in their resistance. It was said that Lachlan and his litigation guardian ‘saw the folly of their claim and ceased to pursue it’. The former trustee submitted that the defendants were entitled to their costs on an indemnity basis in relation to the first stage.
(b) The ‘second stage’ was said to have begun with Lachlan’s filing of an amended originating motion on 15 May 2018. In this document, Lachlan sought the appointment of an independent third party, including State Trustees, as trustee in the alternative to Mr McNee. Lachlan also sought a declaration that Ms Gould’s right to reside in the trust property had ceased. The former trustee asserted that the defendants ‘rightly’ resisted these claims. Lachlan, on the first day of trial, sought and was granted leave to further amend his originating motion. In this amendment, Lachlan no longer sought the appointment of Mr McNee as the substitute trustee, and instead called for the appointment of an independent trustee. He also no longer sought a declaration in relation to Ms Gould’s right of residence. It was said that ‘the plaintiff in substance conceded defeat’ in relation to his application as it had been cast. Therefore, the defendants had been successful in this stage of the proceeding and they were entitled to costs on an indemnity basis.
(c) In the ‘third stage’ of the proceeding, following the filing of the further amended originating motion, it was said that ‘[i]n substance the defendants agreed to an independent person playing a key role in the management of the trust.’ The former trustee submitted that ‘there was significant acceptance by the defendants of the final proposal put by the McNee camp’. The former trustee submitted that it ‘did not resist the involvement of an independent trustee’ and that ‘[t]here was the issue of whether [Ms Gould] could remain a director’ of the trustee company. It was said that ‘[t]he discussion as to the actions of the parties, their respective roles and the complexities of the trust deed and the legislation applying was properly and usefully exposed in the manner in which the case was heard.’ The former trustee submitted that Mr McNee should therefore pay the defendants’ costs.
Lachlan rejected the former trustee’s description of the above three stages of the litigation.
Ms Gould submitted that Mr McNee should pay the defendants’ costs, also for reasons related to Lachlan’s amendments to his originating motion. It was submitted that the amendments to the originating motion were major changes to Lachlan’s case. Only on the first day of the trial did Lachlan solely seek the appointment of an independent third party as trustee. It was also the first time that Mr McNee had given an undertaking to pay all of the reasonable costs that would be incurred by the new, independent trustee. Until then, the primary relief sought by Lachlan was an order that Mr McNee, or an independent third party, be made trustee of the trust. As Mr McNee had not previously undertaken to pay the costs of a new independent trustee, the appointment of an independent trustee was said to have been unviable.
Ms Gould submitted that Mr McNee should never have been put forward as a potential new trustee given his conduct in procuring the mortgage over the trust property to secure a loan that was at least partially for his own personal use, the inconsistency of his evidence relating to that matter, and the fact that the loan secured by the mortgage was only repaid shortly before the trial commenced.
The former trustee submitted that its breaches of trust were procured or caused by Mr McNee, and that this was another reason why it would have been inappropriate for Mr McNee to become trustee. The former trustee submitted that:
The actions of the trustee in resisting McNee’s attempt to become the trustee is not only not a breach of trust, or lacking in good faith; On the contrary it is a proper and fundamental fiduciary duty to prevent the trustee obligations falling to the man whose actions were almost solely the cause of the very breaches complained of.
In response to this submission and the former trustee’s submissions regarding his amendments, Lachlan submitted that the application for Mr McNee to be appointed trustee was not a major part of his case. Lachlan submitted that it was an incidental and secondary aspect of his case, and its abandonment was in keeping with the obligation under the Civil Procedure Act 2010 to identify the real issues in dispute. It was also submitted that the defendants barely engaged with this issue prior to the trial, and its abandonment was of no consequence to the manner in which the defendants conducted their cases.
Lachlan submitted that the defendants’ opposition to his application for the removal of the former trustee was not truly due to his initial proposal for Mr McNee to be appointed as trustee. He pointed out that the defendants failed to appear at a directions hearing approximately one month before the trial without explanation or excuse. It was said that it would be absurd for the defendants to submit that they should be indemnified in respect of their costs when they had failed to properly engage with the issues in dispute. Moreover, when, at trial, Lachlan indicated that he would not press his application for Mr McNee to be appointed as trustee, the defendants did not suggest that they had incurred costs thrown away.
Lachlan also submitted that any suggestion that Mr McNee should never have been proposed as trustee, and that costs should flow from the abandonment of that proposal, was misconceived, as the Court never decided whether Mr McNee was suitable to act as trustee. It was said that the Court is unable to determine the question of costs on that basis.
Lachlan’s claim for a declaration and the abandonment of that claim
Ms Gould submitted that another change to Lachlan’s case at trial was the abandonment of his claim for a declaration in relation to her right of residence.
Lachlan submitted that the abandonment of the application for a declaration was consistent with identifying the real issues in dispute. Lachlan also submitted that the Court observed that ‘[t]he trust deed gives [Ms Gould] a conditional right to occupy the property’.
Lachlan’s reliance on new grounds for the removal of the former trustee at trial
Ms Gould submitted that the major changes to Lachlan’s case manifested themselves not only in the amendments to the originating motion, but also in the arguments put at trial. Prior to trial, only two reasons had been advanced as to why the former trustee should be removed, and both of these were rejected. The ultimately successful bases for the removal application only appeared in Lachlan’s closing written submissions.
Lachlan submitted that the complaint that he relied on new grounds to justify the removal of the former trustee was misconceived, because it was an application commenced by originating motion and supported by affidavit and viva voce evidence. It was not a pleaded case. These new grounds were identified after the close of evidence. Lachlan was vindicated in pressing many of these grounds. Lachlan submitted that Ms Gould, despite her complaint, had not identified what further evidence or steps she could or would have taken had these grounds been identified earlier.
Offers and counter-offers
The former trustee annexed to its written submissions a counter-offer made by Ms Gould and Lachlan’s rejection of it. The former trustee claimed that this correspondence evidenced the defendants’ agreement ‘to an independent person playing a key role in the management of the trust’. In reply, Lachlan annexed the entire chain of correspondence and summarised it as follows:
On 11 November 2019 at 2.04pm, the Plaintiff offered to settle the matter on the basis the Former Trustee be removed, that the President of the LIV nominate a substitute trustee, that Ms Gould refrain from exercising any power of appointment, that Mr McNee pay the fees and expenses of the new trustee, and that there be no order as to costs;
By an email sent on 11 November 2019 at 4.40pm, counsel for Ms Gould rejected the above offer and made a counter-offer. The counter-offer was conditional upon the Plaintiff making a payment to both defendants in the sum of $60,000. The counter-offer did not set out any identifiable basis on which the defendants claimed an entitlement to such a sum;
By an email sent on 11 November 2019 at 6.52pm, the Plaintiff repeated its earlier offer, agreed to other incidental matters with some minor variation, and offered to pay the Defendants’ costs in the sum of $20,000 (the Plaintiff’s Financial Offer). The offer to pay the Defendants’ costs was a commercial offer only in the interests of settling the matter, and was made in the absence of the Plaintiff having any obligation to make such a payment;
By an email sent on 12 November 2019 at 10.41am, Ms Gould in effect repeated her earlier offer, but sought the payment of both Defendants’ costs in the sum of $50,000. That offer was rejected.
Lachlan submitted that the former trustee’s partial production of the chain of offers and counter-offers was misleading and that this was a matter that the Court could consider in exercising its discretion as to costs.
Lachlan submitted that, in light of the Court’s reasons and delivery of judgment in his favour, it was evident that the defendants’ rejections of his offers were unreasonable. Lachlan has done better in the proceeding than the defendants’ counter-offer. It was said that this was a basis to deny awarding both of the defendants their costs, even if they were so entitled.[2] Moreover, Lachlan submitted that his offers support his claim for an order that his costs be paid on a standard basis.
[2]Grbavac v Hart [1997] 1 VR 154, 160.
Settled Land Act submissions
Lachlan submitted that the former trustee raised the issue of the application of the Settled Land Act 1958 (the Act), premised on the submission that Ms Gould had a life interest in the trust property, ‘notwithstanding that this was not a matter for the Former Trustee itself to press’. As a result, all parties were required to file detailed written submissions on the Act. Lachlan submitted that the Court found that the relevant section of the Act did not apply where the trustee is a corporate entity, and therefore it was a ‘non-issue’. It was submitted that the former trustee was responsible for raising an issue that the Court did not need to determine. Lachlan also submitted that the former trustee’s increased estimate of costs due to preparing submissions regarding the Act was significant and unexplained. It was said that the Court was entitled to take these matters into account in exercising its discretion as to costs.
The former trustee submitted that the Court resolved the issue regarding the Act by requiring that the new trustee be a corporate entity. Therefore, the discussion of the Act was said to have been helpful to the Court.
Mr McNee’s alleged eligibility to be awarded costs
Lachlan referred to Re Chambeyron Pty Ltd (No 2),[3] where Robson J observed that a litigation guardian can recover all costs incurred on behalf of the party that they represent in relation to the proceeding in which the litigation guardian has acted, and ordered that the unsuccessful parties pay the costs incurred by a successful party’s litigation guardian.[4]
[3][2018] VSC 410.
[4]Ibid [161], [164].
Mr McNee’s alleged liability to pay for costs
Both of the defendants submitted that Mr McNee should pay their costs. Both said that the Court has jurisdiction to make a costs order against a non-party, such as a litigation guardian.[5] They submitted that the Court has the power to award costs against the effective litigant, or the person who has managed or financed the proceeding.[6] Ms Gould submitted that Lachlan does not have the means to pay costs. She also submitted that Mr McNee had an interest in the subject of the litigation and played an active role in its conduct. Therefore, it was in the interests of justice that costs be awarded against Mr McNee.
[5]Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965, 980; Shah v Karanjia [1992] 4 All ER 792, 799.
[6]Knight v FP Special Assets Ltd (1992) 174 CLR 178, 192, 202; Flinn v Flinn [1999] 3 VR 712, 760 [160].
Lachlan submitted that only in very rare and limited situations will a successful party be required to pay an unsuccessful party’s costs. Lachlan referred to Konstandellos v Harplex Pty Ltd, where it was said that:[7]
What can be gleaned from the authorities is that, where a party seeks an order that a successful party, especially a defendant, be deprived of their costs, there must be good reason to do so, or there must be special or unusual circumstances. However, where an unsuccessful party seeks an order that the successful party pay its costs, there must be compelling reasons, or exceptional circumstances to make such an order.
[7][2018] VSC 702, [33].
Lachlan submitted that there were no strong or exceptional reasons which would justify a costs order against Mr McNee. Moreover, there were no compelling reasons to deprive Lachlan of his costs in the proceeding.
The former trustee’s financial situation
The former trustee submitted that it had no funds and is in debt due to the conduct of this proceeding. Any costs order against it will therefore be hollow. The former trustee submitted that the Court should consider the possibility of making the new trustee responsible for the payment of the former trustee’s debt. This debt should be considered to be a proper expense of the new trustee, which Mr McNee has undertaken to pay.
Ms Gould’s alleged lack of liability for costs
Lachlan submitted that there was no basis for Ms Gould’s liability to be diminished on the basis that the relief sought against her was incidental. Ms Gould was the controlling mind of the former trustee and her opposition to Lachlan’s application caused him to incur significant costs.
Ms Gould submitted that there was no basis for Lachlan to seek costs against her. The primary dispute in the proceeding was between Lachlan and the former trustee. The only reason why Ms Gould was a party to the proceeding was because Lachlan sought to amend the terms of the trust deed to replace her as appointor as an incident of replacing the trustee. Imposing liability on Ms Gould because she was the controlling mind of the former trustee would be a conflation of their legal identities.
The former trustee also submitted that, if Ms Gould is jointly and severally liable for Lachlan’s costs, she ‘will be subjected to further demands and possibly bankruptcy and the like from [Mr] McNee’.
Consideration
The Court’s jurisdiction in relation to costs is conferred by s 24(1) of the Supreme Court Act 1986. The Court’s general discretion in relation to costs must be exercised judicially and in accordance with Order 63 of the Supreme Court (General Civil Procedure) Rules 2015.
In Oshlack v Richmond River Council, McHugh J discussed the meaning of the expression, the ‘usual order as to costs’. His Honour observed that it:[8]
…embodies the important principle that, subject to certain limited exceptions, a successful party in litigation is entitled to an award of costs in its favour. The principle is grounded in reasons of fairness and policy and operates whether the successful party is the plaintiff or the defendant. Costs are not awarded to punish an unsuccessful party. The primary purpose of an award of costs is to indemnify the successful party. If the litigation had not been brought, or defended, by the unsuccessful party the successful party would not have incurred the expense which it did. As between the parties, fairness dictates that the unsuccessful party typically bears the liability for the costs of the unsuccessful litigation.
[8]Oshlack v Richmond River Council (1998) 193 CLR 72, 97 [67].
Lachlan was successful in obtaining the relief that he sought. The former trustee unsuccessfully resisted Lachlan’s claim and should pay Lachlan’s costs on a standard basis, subject to one matter that I will come to shortly in the next paragraph. I am unpersuaded by the defendants’ arguments in favour of deviating from the usual order as to costs for the following reasons.
First, save in relation to one matter, I reject the suggestion that the defendants have incurred costs thrown away due to Lachlan’s amendments to his originating motion. From when the originating motion was filed, Lachlan has always sought the removal of the former trustee. The former trustee has, at almost all times, opposed its removal. Ms Gould’s complaint that Lachlan, after the close of evidence in closing submissions, relied on grounds for removal that did not appear in the originating motion, is without substance. Lachlan is right to say that this was not a pleaded case, and he was free to make use of the evidence that emerged at trial in advancing his claim for relief. However, the defendants may have incurred costs thrown away on one matter: Lachlan’s claim for a declaration regarding Ms Gould’s rights under the trust deed. Lachlan abandoned this claim at a late stage in the litigation, on the first day of trial. The defendants should not have to bear their own costs incurred in preparing to defend that claim, and Lachlan should pay those costs on a standard basis.
Secondly, I reject the suggestion that the former trustee enjoyed real success at the stages that it identified in its submissions. It was apparent from those submissions that it opposed its removal primarily on the basis that it did not agree with the identities of the various replacement trustees proposed by Lachlan. The former trustee did not explain why it had elided the application for its removal with the appointment of the new trustee. Contrary to what the former trustee may have believed, the crux of this dispute was the removal application and that ought to have been its sole concern. Its opposition to the identity of the proposed trustees was an inappropriate basis for resistance. Generally speaking, an impartial trustee facing calls for its removal should not be concerned with the identity of its replacement. That should be the concern of the beneficiaries and the Court. To that end, I do not consider that the former trustee was successful or vindicated when Lachlan amended his originating motion to change the identity of the proposed replacement trustee. Moreover, the offers and counter-offers made in November 2019 only reinforce the conclusion that the former trustee was unsuccessful at trial.
Thirdly, I do not accept that the former trustee was right to resist the application for its removal until at least the first day of trial, when Mr McNee gave an undertaking to pay the reasonable costs of an independent trustee. This argument appeared to rely on the following propositions:
(a) it was highly unlikely that the Court would have appointed an independent third party to be trustee, because the trust’s lack of liquid funds to indemnify the trustee would have made it unlikely that an independent third party could be found to take office;
(b) presumably, the only people willing to take on the burden of trusteeship without an indemnity would have been the former trustee and Mr McNee;
(c) this would have presented a stark, binary choice between allowing the former trustee to remain in its office or effectively appointing Mr McNee; and
(d) the application to remove the former trustee was doomed to fail as the Court would have preferred it to stay in office rather than appoint Mr McNee.
The evidence does not support any of these propositions. Indeed, the argument fails at the first proposition. Any replacement trustee would have had a charge against the trust fund for its reasonable expenses.[9] The sole asset of the trust fund – the house – was more than sufficient to cover these costs. If an independent trustee had been appointed and Mr McNee had not undertaken to pay their costs, Lachlan would have had to have found some way of reimbursing the trustee. Had Lachlan not have been able to reimburse the trustee, the trustee could have sold the house and reimbursed itself. Such a course may have appeared unattractive to all involved in this litigation, but it would have been a viable option nevertheless. It is unnecessary to say anything about the second to fourth propositions in the circumstances. For the same reasons as those that I have just explained, and given that I will order that the former trustee be indemnified out of the trust fund as I explain later, I do not consider that a costs order against the trustee would be hollow.
[9]Chief Commissioner of Stamp Duties (NSW) v Buckle (1992) 196 CLR 226, 245–7 [47]–[51].
Fourthly, I am not persuaded by the former trustee’s argument that Mr McNee should bear the costs of the proceeding because he was the settlor and persuaded the former trustee to mortgage the trust property. The former trustee is ultimately legally responsible for its conduct in administering the trust and in conducting the litigation as trustee, not Mr McNee. Ms Gould only pressed for Mr McNee to pay her legal costs. As I am not satisfied that Mr McNee should pay those costs, and Ms Gould has not pressed to be indemnified out of the trust fund, I will make no order as to her costs other than that outlined in [35].
Lastly, I make the following brief observations about the other arguments raised by the parties concerning the costs of the trial. I do not consider that it would be appropriate in the circumstances to make an order that the costs of this proceeding be borne by the incoming trustee. The former trustee chose to resist the removal application and was unsuccessful. The former trustee appeared to suggest that it would be fair for the incoming trustee to bear the consequences of its unsuccessful resistance because those costs would be paid by Mr McNee. For the reasons I have outlined, I do not consider that to be fair.
It is also not appropriate that the defendants, jointly and severally, pay Lachlan’s costs. The former trustee is a company. Ms Gould is a director of the former trustee. This alone does not provide a basis to make her jointly and severally liable for the costs of the trial. Lachlan did not articulate why the corporate veil should be pierced. Moreover, the former trustee’s resistance to Lachlan’s application for its removal was the cause of the ongoing controversy that had to be resolved by this Court. Ms Gould’s personal role in this proceeding as the second defendant was necessitated by Lachlan’s application for a declaration affecting her rights under the trust deed, an application which was eventually abandoned. Ms Gould, in her capacity as the second defendant, did make arguments in favour of the former trustee continuing in office. As a person with rights under the trust, she was entitled to do so. Without more, however, and in the circumstances, I do not consider that there is any reason to make Ms Gould jointly and severally liable for the costs of the trial.
The former trustee’s indemnity
The parties’ positions
Lachlan sought an order and declaration that the former trustee is not entitled to an indemnity out of the trust estate for its costs of the proceeding, nor its liability to pay Lachlan’s costs.
The former trustee sought an order that, in the event that its costs are not paid by Mr McNee, it be indemnified in respect of its costs out of the trust fund.
Ms Gould submitted that there should be an order that the former trustee is entitled to an indemnity from the trust fund in respect of its costs and any costs that it is ordered to pay.
The parties’ submissions
The relevant provisions
All of the parties referred to cl 13 of the trust deed:
RIGHT TO INDEMNITY
13. Provided the Trustee shall have acted in good faith the Trustee:
13.1Shall be entitled to be indemnified out of the Trust Fund for all debts damages obligations or other liabilities incurred arising or awarded by or against the Trustee in the execution of any power duty discretion or authority hereunder and in respect of all actions claims demands and costs whatsoever relating to or concerning the Trust Fund.
13.2Shall be entitled to reimbursement from the Trust Fund for all moneys expended and debts incurred in or about the administration of this Trust.
The parties also referred to r 63.26 of the Supreme Court (General Civil Procedure) Rules 2015 (the Rules):
Trustee or mortgagee
Unless the Court otherwise orders, a party who sues or is sued as trustee or mortgagee shall be entitled to the costs of the proceeding out of the fund held by the trustee or out of the mortgaged property in so far as the costs are not paid by any other person.
Ms Gould noted that cl 12.2 of the trust deed may be relevant:
LIMITATION OF LIABILITY OF TRUSTEE
12.This Trustee shall not be liable responsible or accountable for under this Deed or in respect of this Trust:
…
12.2Any breach of duty or trust whatsoever unless it shall be proved to have been committed made or omitted in personal, conscious, fraudulent bad faith by the Trustee charged to be so liable.
Both defendants submitted that the usual principle is that a trustee will be entitled to an indemnity for their properly incurred costs. Ms Gould submitted that, at general law, a trustee has a right of indemnity against the trust fund in respect of debts properly incurred by the trustee in the course of trust business,[10] and that this is reflected in r 63.26 of the Rules. The former trustee appeared to suggest that it should be indemnified from the trust fund because its actions met the description of having benefitted the trust and its expenditure was reasonably incurred. It also submitted that, as a general principle, the costs of an application to appoint a trustee are met by the trust fund. Ms Gould referred to a case, in the context of the right of indemnification of a company liquidator, where it was held that exercising the discretion to deny the indemnity should be done ‘with great caution and only in exceptional circumstances’.[11]
[10]Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth (2019) 93 ALJR 807, 819 [29]–[31] (Kiefel CJ, Keane and Edelman JJ); 829 [83] (Bell, Gageler and Nettle JJ); 838 [130] (Gordon J).
[11]SingTel Optus Pty Ltd v Weston (Costs) [2012] NSWSC 1002, [14].
Lachlan submitted that, notwithstanding the terms of the trust deed and the Rules, I should exercise my discretion to deny the former trustee an indemnity from the trust fund. It is convenient to separately consider the various submissions made by the parties about the major issues that were said to bear on the exercise of my discretion.
The former trustee breached its duties
Lachlan submitted that the former trustee should not be entitled to an indemnity, despite the terms of cl 13 of the trust deed and r 63.26 of the Rules, because it breached its duties of trust.[12]
[12]McNee v Lachlan McNee Family Maintenance Pty Ltd [2020] VSC 273, [33]–[46], [50]–[53], [58].
Ms Gould submitted that there is precedent for costs to be paid out of trust assets where a trustee has been removed for breaches of duty.[13] It was submitted by Ms Gould that the breaches of duty relied upon by Lachlan in calling for the defendants to pay costs without indemnity were substantially caused by Mr McNee’s conduct. The former trustee submitted that ‘any real moral turpitude arising in this unfortunate series of events can be sheeted home to [Mr] McNee.’
[13]Titterton v Oates (1998) 143 FLR 467.
The former trustee’s costs were not properly or reasonably incurred
Lachlan also submitted that the Court should deny the former trustee an indemnity because its costs in this proceeding were not properly or reasonably incurred.
The construction of cl 13 of the trust deed and its relevance
Lachlan submitted that the right of indemnity in cl 13 should be qualified in the same way that it is at general law. That is, that it should be limited to expenses which are ‘properly’ or ‘reasonably’ incurred.[14]
[14]Nolan v Ollie (2003) 7 VR 287.
Ms Gould rejected this submission. Ms Gould noted that the indemnity under cl 13 of the trust deed is a more extensive indemnification than that at general law, as expenses only have to be incurred in good faith, not properly incurred. It was said that it was entirely permissible for the trust deed to extend the right of indemnity beyond that which exists under the general law.[15] She submitted that, even ‘[t]hough she had serious failings by reason of a lack of understanding of the Trustee’s duties, there was no dishonesty or bad faith’. She also submitted that, in relation to the mortgage of the trust property, Mr McNee’s conduct was ‘far more blameworthy’ than her own.
[15]Tolhurst Druce & Emmerson (a firm) v Maryvell Investments Pty Ltd (in liq) [2007] VSC 271.
Ms Gould referred to the Court of Appeal’s decision in Wareham v Marsella (No 2),[16] dealing with the question of costs after the appellants had unsuccessfully attempted to appeal an order of a trial judge removing them as trustees of a self-managed superannuation fund.[17] The trustees accepted that they should have to pay the costs of the respondent, but submitted that they should be indemnified in respect of these costs from the trust fund. They relied on the following clauses of the trust deed in that case:[18]
[16][2020] VSCA 118.
[17]Wareham v Marsella [2020] VSCA 92.
[18]Wareham v Marsella (No 2) (n 16) [5].
11.1 Limitation of Liability – General
Subject to clause 11.2 the Trustee shall not be liable for or in respect of any claim, liability, cost, loss, damage or expense whatsoever or howsoever incurred or arising out of any act or omission in connection with this Deed or the Fund or the exercise or performance of the Trustee’s powers, discretions and duties.
11.2 Liability for Certain Conduct
Clause 11.1 shall not exempt the Trustee from, and the Trustee shall not be liable for, any claim, liability, cost, loss, damage or expense which is a result of an act or omission by the Trustee involving:
(a)the Trustee failing to act honestly in any matter concerning the Fund;
(b)the Trustee intentionally or recklessly failing to exercise, in relation to any matter affecting the Fund, the degree of care or diligence that the Trustee was required to exercise; or
(c)the Trustee incurring liability for a monetary penalty under a civil penalty order.
11.3 Indemnity of Trustee
(a)The Trustee shall be indemnified out of the Fund for and in respect of all liabilities whatsoever or howsoever arising incurred by the Trustee in the exercise or purported exercise or attempted exercise of the trusts, powers, authorities and discretions vested in the Trustee pursuant to this Deed or by the Act.
(b)This indemnity shall not extend to any liability of the Trustee arising in circumstances described in clause 11.2.
The Court of Appeal decided that the costs incurred as a result of unsuccessfully pursuing the appeal were not incurred ‘in the exercise or purported exercise or attempted exercise’ of the trusts, powers, authorities and discretions. The Court explained that:[19]
In the present case, the conclusion is inescapable that, in pursuing the appeal, the appellants acted in their own self-interest rather than in the execution of the trust. No question arose as to the proper interpretation of the trust deed or the nature of the trustees’ duties under the deed. The only issue was whether the exercise of the discretion to pay the death benefit in favour of the first appellant had miscarried and, if so, whether the trustees should be removed. Success in the appeal would have restored the death benefit to the first appellant, or at least have enabled the appellants to remain in place as trustees. There was no advantage to the trust in either of those outcomes. At best, its interest in the appeal was neutral. The only relevant interest of the trust was in having the death benefit properly administered, and that was facilitated by the trial judge’s judgment. In seeking to displace that judgment, the appellants undertook adversarial litigation for their own purposes.
[19]Ibid [20].
Ms Gould submitted that the wording of the indemnity clause in the present case is materially different to that in Wareham, as it extends to any ‘liabilities…in respect of all actions claims demands and costs whatsoever relating to or concerning the Trust Fund’, not just those incurred in the exercise of trusts, powers, authorities or discretions under the trust deed.
The former trustee’s conduct in the proceeding solely advanced Ms Gould’s interests
Lachlan also submitted that the duty of a trustee’s counsel is to assist the Court and not to argue on behalf of a beneficiary.[20] It was said that, throughout the proceeding, the former trustee had attempted to advance Ms Gould’s personal interests. The following matters were said to support this contention:
[20]Nangus Pty Ltd v Charles Donovan Pty Ltd (in liq) [1989] VR 184.
(a) The solicitor for the former trustee was, until a week before the trial, also the solicitor for Ms Gould, and had been acting for Ms Gould in her separate family law proceedings;
(b) The former trustee’s counsel, on several occasions, asserted that Ms Gould had a life interest in the trust property, and led evidence from Ms Gould for the apparent purpose of establishing that she had a life interest, when this was not relevant to the proceeding;
(c) The former trustee’s counsel, in written opening submissions, submitted that Ms Gould was a beneficiary of the trust, which was contrary to what had been stated by Ms Gould’s own counsel;
(d) The former trustee’s counsel led evidence from Ms Gould and cross-examined Mr McNee regarding Ms Gould’s rights as a parent;
(e) The former trustee’s counsel made submissions that were contrary to its own interests by, for example, suggesting that an ‘elderly solicitor’ should be appointed as an independent trustee.
The former trustee submitted in response that it was necessary and proper for it to make submissions regarding the personal rights of Ms Gould. It was submitted that the former trustee had an obligation to put relevant matters going to the nature of the rights of occupants under the trust to the Court.
Ms Gould submitted that Lachlan introduced many of these family law proceeding issues into the present proceeding by seeking the removal of the former trustee on the basis of Ms Gould’s mental capacity and relationship with Lachlan. It was also Lachlan who had introduced these matters in seeking declaratory relief as to Ms Gould’s right of residence in the property. Ms Gould submitted that Lachlan had not established that the former trustee conducted the litigation for the benefit of Ms Gould. Ms Gould also submitted that the reference to an ‘elderly solicitor’ had been misconstrued and was made in the context of appointing a new trustee.
The former trustee unsuccessfully and unjustifiably resisted the application
Lachlan also submitted that, when a trustee is removed from its position by court order, it will generally not be indemnified by the estate in respect of their costs and may be ordered to pay the costs of all of those involved in the action.[21] Relying on Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand, Lachlan submitted that this may occur where there has been a breach of trust.[22] He also submitted that this may occur even where misconduct has not been proven.[23] Lachlan noted that the proceeding was adversarial in nature and was necessitated by the former trustee’s refusal to retire from its position. For these reasons, it was said that the former trustee should not be indemnified in respect of its costs of the proceeding.
[21]Palairet v Carew [1863] 55 ER 222; Attorney-General v Murdoch [1856] 69 ER 910.
[22]Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar the Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66, 116 [151] (‘Macedonian Orthodox Community Church’).
[23]Hancock v Rinehart(Costs) [2016] NSWSC 11.
Ms Gould submitted that Lachlan’s reliance on Macedonian Orthodox Community Church was misplaced, as that case concerned the construction and application of the Trustee Act 1925 (NSW) and the procedure for a trustee seeking judicial advice; a significantly different situation to the present case.
In any case, it was submitted by the former trustee and Ms Gould that the former trustee was justified in resisting Lachlan’s application, for the reasons set out earlier in [10]–[12].
The interests of the primary beneficiary
Lachlan submitted that it would not be in his interests, as the primary beneficiary of the Trust, for the former trustee to have its costs and expenses of this proceeding paid out of the trust estate.
Consideration
I consider that the former trustee should be indemnified for its costs and those that it has been ordered to pay out of the trust fund for the following reasons.
The former trustee has a right of indemnity and reimbursement under cl 13 of the trust deed. Despite Lachlan’s submissions, I see no reason why the terms of cl 13 should be read as if they reflect the equitable rules governing trustees’ indemnities. Those terms clearly do not mirror the equitable rules. Clause 13 extends the scope of the trustee’s indemnity in that expenses need not be ‘properly incurred’. Therefore, the question is whether the former trustee’s conduct falls within the terms of cl 13.
Clause 13.1 provides a broad indemnification to the trustee. It is not limited to costs incurred in the execution of any power, duty, discretion or authority under the trust deed. It also provides that the trustee, having acted in good faith, will be indemnified out of the trust fund ‘for all debts damages obligations or other liabilities incurred arising or awarded by or against the Trustee…in respect of all actions claims demands and costs whatsoever relating to or concerning’ the trust fund. Lachlan’s submissions alleging that the former trustee did not act for a proper purpose in defending the litigation were beside the point. Leaving the requirement of good faith aside for the moment, the costs that the former trustee incurred in defending the application and the costs that it has been ordered to pay are clearly related to or concerned the trust fund, and do not need to arise due to the execution of the trust under the trust deed. To that end, the present case is distinguishable from Wareham v Marsella (No 2).[24]
[24]Wareham v Marsella (No 2) (n 16).
Clause 13.2 also provides that the trustee, having acted in good faith, is entitled to reimbursement from the trust fund for all moneys expended and debts incurred in or about the administration of the trust. Again, leaving aside the requirement of good faith, the costs of the former trustee and the costs that it has been ordered to pay are clearly ‘moneys expended’ or ‘debts incurred’ about the administration of the trust, given that the litigation concerned the removal of the former trustee.
The meaning of the phrase ‘good faith’ in the trust deed is a matter of construction. None of the parties meaningfully engaged with how the phrase was properly to be construed. Both counsel for the former trustee and Ms Gould submitted that it should be a test of honesty. Justice Finkelstein also held that ‘good faith’ involved a test of honesty in construing a clause similar to cl 13 in Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq),[25] drawing upon the meaning of ‘good faith’ in the context of the proper exercise of a trustee’s discretion, set out by McGarvie J in Karger v Paul.[26] Justice Finkelstein suggested that if the trustee did not believe that it was acting in interests of the beneficiaries, or if the trustee was indifferent to the beneficiaries’ position, the trustee would be acting dishonestly.[27]
[25](2001) 188 ALR 566, 606–7 [151]–[153].
[26][1984] VR 161, 164.
[27]Ibid 607 [152].
The phrase ‘bad faith’ has been used in the context of a trustee’s equitable indemnity. A trustee is indemnified for costs that have not been shown to be improperly incurred. Costs will be improperly incurred if they are the product of a particular act that is done outside of power or in bad faith, or involves an absence of the care and diligence that a person of ordinary prudence should exercise.[28] It seems uncontroversial from Nolan v Collie that the opposite of ‘bad faith’ is ‘good faith’,[29] and that an act done in good faith requires honesty.[30] The trust deed in question here was drafted years after this clear statement of the equitable position regarding a trustee’s indemnity. Reading the trust deed as a whole, there is no reason to think that the phrase ‘good faith’ in cl 13 was intended to have a different meaning from that used in the equitable doctrine.
[28]Nolan v Collie (n 14) 308 [53] (Ormiston JA, Batt and Vincent JJA agreeing).
[29]See ibid 305 [49] and 307–8 [53].
[30]Ibid 305–6 [49] citing Re Beddoe [1893] 1 Ch 547, 562 (Bowen LJ).
Moreover, it appears that the phrase ‘good faith’ bears the same meaning in both the doctrine regarding trustees’ indemnities and the doctrine regarding a trustee’s exercise of discretion. I adopt the same test as Finkelstein J in Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) in determining whether the former trustee acted in good faith: did the trustee think or believe that it was acting in the interests of the trust in defending the litigation in the manner in which it did? If the former trustee did not believe that it was acting in the interests of the trust, or if it failed to have regard to the interests of the trust, then it would not have acted in good faith.
I accept Lachlan’s submission that the former trustee was, objectively speaking, acting in either its own interest or Ms Gould’s interest in defending the proceeding. The former trustee’s own submissions detailed that it resisted Lachlan’s application because it did not agree with the identity of the proposed replacement trustee and thought that Mr McNee was unsuitable to fill that office. I have already said that I consider that this was an inappropriate basis for resisting the application in the circumstances. I consider that the former trustee was, on multiple occasions throughout the trial, attempting to advance Ms Gould’s interests under the trust. In particular, the former trustee raised the fact that orders in the County Court proceeding referenced a life interest; examined Ms Gould regarding conversations that she had had with Mr McNee regarding a life interest; and raised the matter of the Settled Land Act1958 on the basis that Ms Gould might have a life interest in the property. Counsel for the former trustee, presumably acting under instructions, gave a striking example of a lack of impartiality in closing oral submissions, explaining that I should not remove the trustee company and end her control of the trust for the following reason:
…on [Ms Gould’s] behalf, I invite the court to look after her in this way and not cast her aside in the way that would otherwise result. I invite the court to look at the difference for her as a mother and as a property owner, having had eight years of looking after Lachlan and looking forward to re-establishing that relationship, and she would like to have some say in that home that’s her home.
It was not proper for the former trustee to make that submission. Such remarks are not becoming of an impartial trustee who is concerned with protecting the best interests of the trust.
However, although the former trustee’s conduct of the litigation was misguided, I accept the former trustee’s submission that it acted in good faith. I accept that it honestly thought that it should remain in that office and that it raised the arguments in relation to Ms Gould’s interests because the trustee believed that this was in the interests of the trust. The former trustee successfully defended Lachlan’s application in relation to the grounds for removal identified prior to trial. The former trustee’s submissions regarding costs went to some lengths to articulate why its conduct in defending the litigation was proper. Although mostly misconceived, the former trustee was not dishonest, nor did it act without regard to the interests of the trust. Although it objectively failed to act in the interests of the trust, I consider that this was the product of it misunderstanding its role as trustee, its subjective view of Lachlan’s best interests and its disquiet at Mr McNee’s involvement in the trust and the litigation. Lastly, the former trustee was legally represented and I presume that it acted on legal advice. I am satisfied that the former trustee, when acting in its own or Ms Gould’s interests as I have just detailed, genuinely believed that those interests coincided with those of the trust.
Finally, to the extent that Lachlan’s submissions should be construed as suggesting that I should exercise my discretion to deny the former trustee an indemnity despite the terms of cl 13, he has not properly articulated why I should adopt that course. That the former trustee may not have been entitled to an indemnity under equitable rules does not, by itself, warrant the displacement of the result reached under cl 13 by exercising my discretion to reach a different result. The Court of Appeal has recently stated that, where the Court is called upon to exercise its discretion as to costs despite the terms of an indemnity under a trust deed, ‘it cannot be doubted that the contract in question would at least play a significant role’.[31] Lachlan’s submissions leave the trust deed behind entirely. The settlor saw fit to extend the trustee’s indemnity in this trust deed, even to instances where the trustee did not act for a proper purpose or where the trustee breached their duties. In the absence of a clear explanation as to why the trust deed should not govern the question of the indemnity, I do not consider it appropriate to exercise my discretion so that the result differs from that which would be reached under the trust deed.
[31]Wareham v Marsella (No 2) (n 16) [13].
Costs of the costs submissions
Submissions
Lachlan submitted that an order should be made for the defendants to pay the costs of preparing his submissions on costs on an indemnity basis. After judgment had been handed down, Lachlan made an offer to the defendants that each party bear their own costs, conditional on the former trustee not invoking its prima facie right to an indemnity for its costs and expenses of the proceeding. Lachlan’s solicitor, in the letter making the offer, stated that ‘[f]urther circumstances, which will be the subject of written submissions if necessary, disentitle the First Defendant to claim any indemnity in this proceeding’. No further information was given about the disentitling conduct. It was said that this offer was reasonable. The defendants did not respond to the offer and were therefore taken to have rejected it.
Ms Gould submitted that the defendants’ rejection of this offer was not unreasonable. She submitted that it was for Lachlan to demonstrate that the defendants had acted unreasonably, and he had not done so. Ms Gould submitted that the offer had been open for one day, and involved the former trustee waiving its right to an indemnity in respect of all of its costs and expenses at all stages of the proceeding. It was said that Lachlan did not explain why the former trustee should agree to that course of action, particularly when the former trustee successfully opposed Lachlan’s claim for Mr McNee to be appointed as trustee.
Consideration
The Court of Appeal in Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) summarised the relevant considerations for determining the question of costs where a party has failed to do better than a settlement offer that they rejected.[32] The question is whether it was unreasonable for the defendants to reject Lachlan’s offer.
[32](2005) 13 VR 435, 440–443 [17]–[29].
I consider that the defendants did not act unreasonably in rejecting Lachlan’s offer. Although the former trustee has done worse than the offer in that it must pay Lachlan’s costs, it has also done better, in that it has been successful in obtaining an indemnity from the trust fund. Accepting the offer and foregoing an indemnity would have been a significant compromise on the part of the former trustee. This is especially the case where the trust deed plainly conferred a broad indemnity on the former trustee, and the former trustee clearly thought that it was entitled to the benefit of it. The offer did not explain why the former trustee was not entitled to an indemnity. In the event, Lachlan’s solicitor was incorrect. I have determined that the former trustee should be indemnified for both its costs and those that it has been ordered to pay.
Given that I have decided that the defendants’ rejection of Lachlan’s offer was not unreasonable, the question of these costs falls to be decided according to the usual principles. There were two primary issues in dispute in this controversy as to costs: the costs of the trial and the former trustee’s indemnity. Each side has been successful on one issue. They have therefore enjoyed mixed success.
In Chen v Chan, the Court of Appeal summarised the principles relevant to such circumstances:[33]
[33][2009] VSCA 233, [10].
…
(3)Where there is a multiplicity of issues and mixed success has been enjoyed by the parties, a Court may take a pragmatic approach in framing the order for costs, taking into consideration the success (or lack of success) of the parties on an issues basis. Generally, if such an order is made, it is reflected in the successful party being awarded a proportion of its costs but not the full amount.
(4) A court may, when fixing costs in a claim where there has been mixed success, take into account complications which it considers will arise in the taxation of costs, as part of its consideration of the overall interests of justice.
(5) Where a Court determines to make an order apportioning costs, then it does so primarily as ‘a matter of impression and evaluation’, rather than with arithmetical precision, having considered the importance of the matters upon which the parties have been successful or unsuccessful, the time occupied and the ambit of the submissions made, as well as any other relevant matter.
…
Lachlan has succeeded in obtaining an order that the former trustee pay his costs. The defendants were always highly unlikely to succeed in obtaining an order that the plaintiff pay their costs in circumstances where the plaintiff was successful at trial. However, Lachlan opposed the indemnification of the former trustee. This was contrary to the terms of the trust deed. The former trustee has succeeded in obtaining an order that it be indemnified out of the estate in relation to its costs and Lachlan’s costs. Both of these issues were of significant importance. Both sides overreached in the orders that they sought regarding costs. In the circumstances, I consider that each party should bear their own costs of the costs submissions.
Disposition
The Court will make the following orders:
(a) The former trustee pay Lachlan’s costs of and incidental to the proceeding, except for those in respect of the submissions on costs, on a standard basis;
(b) Lachlan pay the defendants’ costs of and incidental to the proceeding regarding his abandoned claim for declaratory relief on a standard basis;
(c) The former trustee has a right of indemnity from the trust fund in respect of the costs that it has been ordered to pay and its costs of the proceeding, except for those in respect of the submissions on costs;
(d) Each party bear their own costs in respect of the submissions made on costs; and
(e) There be no other order as to Ms Gould’s costs.
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