Pacella v Sherborne [No 2]
[2010] WASC 186
•23 JULY 2010
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: PACELLA -v- SHERBORNE [No 2] [2010] WASC 186
CORAM: BLAXELL J
HEARD: 27 NOVEMBER 2009
DELIVERED : 23 JULY 2010
FILE NO/S: CIV 2496 of 2008
MATTER :Section 45 of the Administration Act 1903 and the Will and Estate of the late EDDA BERNADETTE PACELLA
BETWEEN: EMIDIO VINCENZO PACELLA
Plaintiff
AND
MARY ELISE SHERBORNE
First DefendantLUKE PACELLA
JASMYN LAURA PACELLA (by her guardian ad litem RAYLENE PATRICIA PACELLA)
Second Defendants
FILE NO/S :CIV 2353 of 2009
BETWEEN :MARY ELISE SHERBORNE
Plaintiff
AND
EMIDIO VINCENZO PACELLA
Defendant
Catchwords:
Succession - Wills and estates - Executors and trustees - Determination of questions arising in respect of will and administration of estate - Whether earnings on the investment of contingent legacy formed part of the residuary estate - Whether investment in a market linked fund was a breach of trust - Whether delays in investment amounted to a breach of trust - Proper construction of clause in will providing for remuneration of executor - Whether executor and trustee also entitled to commission
Legislation:
Administration Act 1903 (WA), s 45
Trustees Act 1962 (WA), s 98
Result:
Various questions determined
Category: B
Representation:
CIV 2496 of 2008
Counsel:
Plaintiff: Mr M S Macdonald
First Defendant : Mr P J Mugliston
Second Defendants : No appearance
Solicitors:
Plaintiff: Macdonald Rudder
First Defendant : Lawton Gillon
Second Defendants : No appearance
CIV 2353 of 2009
Counsel:
Plaintiff: Mr P J Mugliston
Defendant: Mr M S Macdonald
Solicitors:
Plaintiff: Lawton Gillon
Defendant: Macdonald Rudder
Case(s) referred to in judgment(s):
Bray v Ford (1896) AC 44
Clay v Clay [1999] WASCA 8; [1999] 20 WAR 427
Hungerfords v Walker (1989) 171 CLR 125
In the Will of Shannon [1977] 1 NSWLR 210
Murdocca v Murdocca (No 2) [2002] NSWSC 505
Parnell v Hinkley [2007] WASC 102
Re Abrahams [1911] 1 Ch 108
Re Churchill [1909] 2 Ch 431
Re Duke of Norfolk's Settlement Trusts [1982] 1 Ch 61
Re Jones [1932] 1 Ch 642
Re Medlock (1886) 55 LJ Ch 738
Re Pollock [1943] 1 Ch 338
Re Selby‑Walker [1949] 2 All ER 178
Re the Will of Stratton [1981] WAR 58
Wharton v Masterman [1895] AC 186
BLAXELL J: The two originating summonses in these matters have been heard together as they both relate to the administration of the will and estate of the late Edda Bernadette Pacella (Mrs Pacella). Shortly prior to her death (on 7 July 2001) Mrs Pacella executed a will which appointed Mary Elise Sherborne (Ms Sherborne) as her executor and trustee. The major (and residuary) beneficiary under the will was her only child, Emidio Vincenzo Pacella (Mr Pacella). Mrs Pacella also made bequests to her two grandchildren (the second defendants) which were contingent on them attaining the age of 25 years.
In the course of administration of the estate various disputes arose between Mr Pacella and Ms Sherborne concerning the way in which the estate was being administered. In essence, Mr Pacella alleged that there were unnecessary delays in administration, that the assets of the estate were being mismanaged, and that there had been wrongful payments out of the estate (including executor's fees to Ms Sherborne).
These disputes were never resolved and they became dormant for a long period. However, on 7 November 2008 Mr Pacella issued an originating summons seeking a determination of numerous discrete issues under s 45 of the Administration Act 1903 (WA). On 28 July 2009 Ms Sherborne issued a separate originating summons seeking a determination under s 98 of the Trustees Act 1962 (WA) of her entitlement to commission as executor.
The second defendants were joined to the proceedings because their interests were potentially affected by some of the orders applied for. However, they have filed notice of their willingness to abide by the decisions of the court on all issues other than any which involve payment of costs or other sums out of the moneys set aside for their contingent bequests.
I now set out my findings in respect of the various matters requiring determination.
The general factual background
The following facts are largely common ground. To the extent that they are not common ground, they are my findings based upon the admissible affidavit materials before me and the oral evidence that I have heard.
At the date of her death, Mrs Pacella lived alone in a house at Highgate which was the only substantial asset of her estate. Her direct descendants and only immediate family were her son, Mr Pacella, and his two children Luke Pacella (born 28 November 1989) and Jasmyn Laura Pacella (born 3 April 1993).
In the months leading up to her death Mrs Pacella was terminally ill, and wanted to execute a will. Despite her intention that Mr Pacella would inherit the bulk of her estate, she wished to appoint an independent executor. To this end, arrangements were made for Ms Sherborne to visit Mrs Pacella at her home on a date during May 2001. These arrangements were made via a mutual acquaintance, Andrew Martin.
Ms Sherborne had been admitted to practice as a solicitor in Western Australia in 1984. From 1988 to 2000 she practised under the name of Richard S Haynes & Co, and a substantial part of that practice (approximately 40%) involved probate and administration of estates. Her secretary and law clerk in that practice was her mother Maureen Mackay (referred to in the affidavits as 'Maureen').
On 3 April 2000 Ms Sherborne ceased private practice and became employed by the Australian Taxation Office. From that time she worked as a technical officer in the Product Rulings area of Aggressive Tax Planning. After commencing that employment she ceased work in all private matters other than the matter the subject of the present proceedings. As from 1 July 2001 Ms Sherborne ceased to hold a practising certificate.
Ms Sherborne had never met Mrs Pacella but agreed to visit her because Andrew Martin (who was a friend of her uncle) told her that Mrs Pacella was terminally ill and needed someone to be her executor. Ms Sherborne was accompanied on that visit by Maureen. Mrs Pacella informed Ms Sherborne of her family circumstances and the reasons why she did not want her son to be the executor of her estate. (It is unnecessary to go into the detail of what Mrs Pacella told Ms Sherborne. Although I accept the evidence of that conversation, it is not evidence of the truth of what was said, but evidence of the circumstances in which Ms Sherborne became executor). In broad terms, Mrs Pacella wished to appoint an independent executor in order to ensure that the bequests that she proposed to make to her grandchildren would ultimately be received by them.
Ms Sherborne agreed to become Mrs Pacella's executor, and there was then a discussion about the fees that would be charged for her work in that capacity. In that regard, Ms Sherborne explained (and it was agreed) that her fees would not be a percentage of the estate's value, but would be charged 'at a modest rate on a time spent basis'.
Mrs Pacella also asked Ms Sherborne to recommend a solicitor to draft the will for her. Ms Sherborne recommended Carmelo Grasso, a solicitor with whom she was acquainted and who (like Mrs Pacella) was of Italian background. Arrangements were made for Mr Grasso to visit Mrs Pacella, and as a result the latter executed a will on 28 May 2001. (Ms Sherborne was present when the will was executed, and the witnesses were Mr Grasso and Maureen).
Under the will there were numerous specific bequests of minor items or small amounts of money. There were also bequests of $30,000 to each of Mrs Pacella's two grandchildren contingent upon them attaining the age of 25 years. The residue of the estate was devised and bequeathed to Mr Pacella.
Mrs Pacella died on 7 July 2001 and a grant of probate of the will was obtained from the Supreme Court (by Milsteed Grasso as solicitors for Ms Sherborne) on 10 December 2001. The only substantial asset was Mrs Pacella's house at Highgate, and the estate did not present Ms Sherborne with any unusual difficulties or complexities in its administration.
However, from the start of the administration there were difficulties in the relationship between Ms Sherborne and Mr Pacella. Mr Pacella was clearly not pleased that his mother had appointed Ms Sherborne as executor, but she was reliant upon him to perform some of the more mundane tasks involved in the administration. In this regard, Mr Pacella kept a check on the empty house, forwarded Mrs Pacella's mail to Ms Sherborne, and also distributed to beneficiaries the various items the subject of specific bequests. Mr Pacella also took it on himself to pay the funeral expenses and some of his mother's bills because of the lack of ready cash in the estate.
In the course of these dealings a number of issues arose between Ms Sherborne and Mr Pacella. Most of these issues were of a minor nature, but there was also disagreement on whether or not the house should be rented pending sale. Mr Pacella was worried that the empty house would be burgled, and also wanted to bring in some rent to help the estate meet its liabilities. Ms Sherborne on the other hand was unable to execute a lease agreement pending the grant of probate, and was concerned about potential difficulties in evicting tenants at the time of sale.
A burglary in fact occurred during October 2001, and Mr Pacella then took it on himself to organise that the house be occupied. He arranged for some friends to temporarily reside in the house rent free. When Mr Pacella informed Maureen that he had placed tenants in the house, Ms Sherborne wrote to him (by letter dated 21 January 2002) telling him that this could not be done.
Mr Pacella also suggested to Ms Sherborne that he should keep the house and give each of his children an interest in it in lieu of their monetary bequests. Ms Sherborne indicated that she probably would not agree to this arrangement but asked that he provide her with a more specific proposal (which she never received). There was also an issue concerning a small mortgage on the house which secured a loan by the ANZ Bank to Mr Pacella. Mr Pacella wished to refinance this loan instead of having the estate pay it out.
The relationship between Ms Sherborne and Mr Pacella soon became strained. Ms Sherborne was 'distressed and unhappy' in having to deal with Mr Pacella and considered that he was belligerent, argumentative, and always trying to find fault in everything she did. From Mr Pacella's perspective he did not understand why the house could not be rented until sale, was unhappy with delays in the finalisation of the estate, and frustrated by the lack of progress.
Ms Sherborne first took steps towards selling the house in September 2001 when she obtained three appraisals as to its value. Although probate was granted on 10 December 2001, Ms Sherborne did not appoint agents to sell the house until 2 April 2002. The house was eventually sold under a contract of sale dated 30 May 2002 for a price of $390,000. Settlement of the sale took place on 25 July 2002, and following discharge of the mortgage the net proceeds were $343,997.59.
In the meantime, Mr Pacella had engaged solicitors (Macdonald Rudder) to take up with Ms Sherborne his concerns about the administration of the estate. By a letter dated 17 May 2002 Macdonald Rudder enquired of Ms Sherborne the 'reason for the delay', and sought an explanation why the property had not been rented pending sale.
Macdonald Rudder's letter of 17 May 2002 also referred to the fact that Ms Sherborne was employed by the Australian Taxation Office and suggested that she may be 'too busy to devote the necessary time to administer the estate'. It queried whether she had a 'potential conflict of interest in working for the Taxation Office on the one part and yet advising the estate on tax matters'. The letter further suggested that she was not entitled to charge for any professional services even if 'permitted so to do by your contract of employment with the Australian Taxation Office'. Ms Sherborne was asked to advise the basis on which she claimed any entitlement to remuneration as executor. The letter also gave notice that her reply 'may be showed to third parties/your employer/complaint bodies'. The letter went on to state:
Lastly please advise us whether you are involved in the drawing of the will and if so under the supervision of which solicitor as we envisage we will need to write to that solicitor setting out our concern as to the naming of a 'stranger' as executrix who was/is not a certified legal practitioner.
Ms Sherborne did not respond to this letter which she understandably considered to be 'threatening in tone and content'. However, it precipitated her decision to engage the services of Messrs Kott Gunning, solicitors, to assist in the administration of the estate. From that time on, most of the work in administering the estate was performed by Messrs Kott Gunning. Ms Sherborne also dealt with the funds of the estate in accordance with recommendations by Kott Gunning.
The proceeds from the sale of the house were paid into a Kott Gunning trust account which did not earn any interest. Mr Pacella received advances out of those proceeds of $90,000 in July 2002, and $150,000 on 10 January 2003. On 21 January 2003, the sum of $60,000 (being the total of the bequests to Mrs Pacella's grandchildren) was placed in an interest‑bearing account with Home Building Society. On 28 April 2003 those monies were transferred to an account with the 'Perpetual Select Investment Fund' which was a 'balanced fund' managed by Perpetual Trustees Australia Ltd. Ms Sherborne made this investment on the basis of advice from a financial adviser recommended by Kott Gunning.
On 8 April 2003 Kott Gunning forwarded to Mr Pacella a 'final' statement of receipts and payments for the estate. The payments included $6,633 paid to Ms Sherborne for executor's fees, and $8,317.30 paid to Kott Gunning in respect of their fees and disbursements. After payments to debtors and to pecuniary legatees, a balance of $18,095.25 remained in the trust account. This balance was paid to Mr Pacella on 6 May 2003.
At Mr Pacella's request, Ms Sherborne prepared an itemised account of her executor's fees, which was forwarded by Kott Gunning on 29 August 2003. The fees had been charged on the basis of the time spent on each of numerous itemised tasks. The hourly rates charged were $120 for Ms Sherborne, and $90 for Maureen.
By letter dated 6 October 2003 Macdonald Rudder advised Ms Sherborne that Mr Pacella had 'lost all confidence' in her. The letter outlined his continuing complaints and requested a response to the earlier correspondence of 17 May 2002. The letter also sought a 'proper accounting' of the affairs of the estate, and listed a total of 30 requisitions for further information in respect of the particularised items in Ms Sherborne's account for executor's fees. The letter demanded the immediate return of the $6,633 paid for these fees and stated that Mr Pacella would claim interest at the rate of 6% per annum compounding monthly if this did not occur. The letter also sought information as to how the contingent bequests to the grandchildren had been invested. Ms Sherborne did not respond to this letter.
On 13 October 2003 Macdonald Rudder sent another letter to Ms Sherborne seeking an undertaking that she would not use the moneys held in trust for the grandchildren 'to remunerate yourself or pay for legal advice or otherwise'. Millsteed Grasso replied to this letter on Ms Sherborne's behalf stating that 'there is no other money which our client has any intention of taking out from the estate'. On 12 November 2003 Macdonald Rudder responded:
We take your letter of 31 October 2003 as an undertaking that Ms Sherborne will not touch these funds until the residual beneficiary has been paid in accordance with the will.
The costs that had been paid to Kott Gunning were taxed in the Supreme Court. On 9 December 2004, following a three day taxation hearing, the costs (then totalling $9,817.30) were allowed at $3,411, with $6,406.30 being taxed off. Kott Gunning were also ordered to pay Mr Pacella's costs of the taxation fixed at $5,100 (out of a total of $8,749 costs payable by him to Macdonald Rudder).
After the exchange of correspondence between Macdonald Rudder and Millsteed Grasso during October and November 2003, nothing further occurred between the parties for a period of more than four years. In that regard, the administration of the estate had been completed by May 2003, and Ms Sherborne's only residual obligations were as trustee of the funds held on trust for the two grandchildren. Notwithstanding those obligations there were no communications between Ms Sherborne and the grandchildren during that period.
The moneys in trust incurred a taxation liability which required an annual tax return. For the purposes of lodging each return, Ms Sherborne engaged the services of Kott Gunning who in turn appointed accountants to prepare the same. Notwithstanding Ms Sherborne's earlier undertaking, the costs of Kott Gunning and the accountants, as well as the tax liability in each year were met out of the moneys held on trust. (In this regard, it is relevant to note that there was no residual cash in the estate, because the whole of the balance remaining had been paid to Mr Pacella in May 2003). In respect of the five taxation returns lodged between 2003 and 2007, the payments from the trust moneys totalled the following amounts:
•Accountant's fees - $1,034
•Kott Gunning's fees - $2,783
•Tax payable - $523.08
On 21 April 2008 Macdonald Rudder wrote to Ms Sherborne on behalf of not only Mr Pacella, but also Mrs Pacella's two grandchildren. The letter claimed that she had failed to account to the grandchildren for the investment of their $60,000 and demanded a full accounting for each financial year of the investment. The letter also called on Ms Sherborne to resign forthwith as trustee and to assign that role to the children's parents or another trustee.
On behalf of Mr Pacella, Macdonald Rudder's letter of 21 April 2008 also resurrected a number of issues that had been referred to in their letters of 17 May 2002 and 6 October 2003, and raised some new issues. This letter resulted in a three‑way exchange of correspondence between Millsteed Grasso, Kott Gunning, and Macdonald Rudder. It is clear from the contents of that correspondence that Mr Pacella's concerns about his children's trust moneys were in part precipitated by the general fall of the stock market at that time. In that regard, his solicitors noted that in July 2007 the value of the investment in the Perpetual Select Investment Fund had been approximately $94,000, but that it had 'almost certainly diminished' since then. Macdonald Rudder expressed the view that the investments should be immediately liquidated and placed in an interest‑bearing account with a bank.
Unfortunately the issues between the parties were not resolved by that correspondence and subsequent negotiations, and the present proceedings were commenced. It is clear that when entering into the litigation, both sides of the dispute were well aware that the costs of doing so would be disproportionate to the moneys in issue. Regrettably, commonsense did not prevail.
The provisions of the will
The will was executed by Mrs Pacella on 28 May 2001, and was witnessed by Carmelo Grasso and Maureen Mackay. As originally drafted, cl 2 of the will had appointed 'my solicitor Mary Sherborne' to be 'executrix and trustee of this my will'. However, at the time of execution Mrs Pacella crossed out the words 'my solicitor' and initialled that alteration.
The will made a total of 20 bequests of small items (such as figurines, crystal ware, or framed photographs) or small amounts of money to 15 different beneficiaries. Clause 24 then made the following bequests to Mrs Pacella's two grandchildren:
I STATE that I want to leave a BEQUEST to my two Grandchildren. They are LUKE PACELLA and JASMYN LAURA PACELLA. I GIVE to each of them the sum of $30,000.00 but only on condition that each receives his/her share upon attaining the age of 25 years. In the meantime that money is to be kept invested by the Trustee. In the event that either of the children fail to live to the age of 25 years then the share of that child shall be given to the surviving child. In the event that both children fail to live to the age of 25 years then the BEQUEST shall go to my Son EMIDIO VINCENZO PACELLA. I do however wish to point out that I give express power to my Trustee in her complete discretion to pay out for either of the children during the time they are minors and when they have not qualified for their contingent share all or part of the contingent $30,000.00 for each of them for the benefit, advancement and education of each of them.
Clause 25 of the will made the following provision in respect of the residuary estate:
I GIVE DEVISE AND BEQUEATH the residue of my Estate to my Son EMIDIO VINCENZO PACELLA. It has been explained to me that this means that he gets everything else which is not mentioned. This includes (without limiting anything else) the furniture and also the money from the sale of the house.
Clause 31 provided as follows:
I DIRECT that my executor shall be allowed to charge a reasonable remuneration for all work done by her for the administration of the Estate.
The matters requiring determination
Mr Pacella's originating summons raises numerous discrete questions or matters for determination, and it is necessary to set out the relief claimed in full:
1.What is the proper construction of clause 24 of the Will of the late Edda Bernadette Pacella? Specifically, should any interest or income earned on or capital gain of the fund of $60,000 therein referred to (Fund) go to the grandchildren named therein as part of the gift, or does it belong to the plaintiff as the sole beneficiary of the residuary estate?
2.Was it a breach of trust by the defendant to invest the Fund with Perpetual Select Investments in a market linked investment that attracts capital gains and losses?
3.If all interest, income and capital gain earned on the Fund belongs to the plaintiff:
(a)The defendant be ordered to pay to the plaintiff that return;
(b)If the said return is less than interest on the Fund at the rate of 6% per annum compounding monthly as from and including 26 July 2002 until payment, the defendant be ordered to pay the difference to the plaintiff.
3.1In the alternative to paragraph 3:
(a)if interest is payable on the Fund to the grandchildren, the defendant be ordered to pay to the Estate, interest on the Fund at the rate of 6% per annum compounding monthly as from and including 26 July 2002 until payment less any interest and other income earned by the defendant on the Fund;
(b)if capital gain on the Fund is payable to the plaintiff and there has been a capital gain, the defendant be ordered to pay that capital gain to the plaintiff.
4.Is the defendant, as executor of the estate of the late Edda Bernadette Pacella, (Estate) entitled by clause 31 of the Will to charge the Estate for work done by her in administering the Estate without an order of this honourable court?
5.If no to the previous question:
(a)The defendant be ordered to pay to the plaintiff $6,633 together with interest thereon at the rate of 6% per annum compounding monthly as from and including 20 March 2003 until payment;
(b)Is the defendant entitled to a commission under section 98 of the Trustees Act and if so what is the quantum of that commission?
6.If the defendant is entitled to charge the Estate without an order of this honourable court:
(a)Was the amount charged by the defendant reasonable in all the circumstances;
(b)The defendant pay to the plaintiff all fees paid to her that are determined to be unreasonable together with interest thereon at the rate of 6% per annum compounding monthly as from and including 20 March 2003 until payment.
7.Did the defendant breach her duty to the beneficiaries of the Estate to preserve the assets of the Estate or was the defendant otherwise guilty of a devastavit in engaging the services of solicitors Kott Gunning to engage accountants for the Estate to lodge tax returns, and to pay taxation on behalf of the Estate for the financial years ending 30 June 2003, 2004, 2005, 2006 and 2007?
8.If yes to the previous question, the defendant be ordered to pay to the plaintiff $2,971.80 together with interest at the rate of 6% per annum compounding monthly on:
(a)$685.30 as from and including 17 February 2005;
(b)$794.35 as from and including 26 October 2005;
(c)$752.40 as from and including 29 November 2006;
(d)$739.75 as from and including 23 November 2007;
until payment.
9.Did the defendant breach her duty to the beneficiaries of the Estate to preserve the assets of the Estate or was the defendant otherwise guilty of a devastavit in failing to invest the proceeds from the sale of the residence at 5 Turner Street Highgate the property of the Estate in an interest bearing account pending distribution?
10.If yes to the previous question the defendant be ordered to pay to the plaintiff interest at the rate of 6% per annum compounding monthly on:
(a)$150,000 as from and including 26 July 2002 to and including 8 January 2003;
(b)$60,000 as from and including 26 July 2002 to and including 19 May 2003;
(c)$18,095.25 as from and including 26 July 2002 to and including 17 April 2003.
…
12.The defendant be ordered not to deal with the Fund or any other money of the Estate otherwise than pursuant to an order of this Court.
13.The defendant be ordered to pay the costs of this application personally.
(It should be noted that the dispute the subject of par 11 of the originating summons has been resolved by agreement).
Ms Sherborne's originating summons seeks a determination pursuant to s 98 of the Trustees Act 1962 (WA) of her entitlement to commission for administering the estate. This raises the same issue as itemised in par 5(b) of Mr Pacella's originating summons.
Question 1: The proper construction of cl 24
By cl 24 of the will Mrs Pacella bequeathed the sum of $30,000 to each of her grandchildren, but 'only on condition that each receives his/her share upon attaining the age of 25 years'. Pending the fulfilment of that contingency, 'that money' was to be 'kept invested' by the trustee. Clause 24 also provided the trustee with the discretion to pay out for either of the children 'during the time they are minors and when they have not qualified for their contingent share' all or part of the contingent $30,000 for the 'benefit, advancement and education of each of them'.
The issue of construction that arises is whether the testator intended that the earnings (being the income and capital gains) on the investment of each contingent sum was to vest with the grandchild upon attainment of the age of 25 years, or whether those earnings were to go to Mr Pacella as the beneficiary of the residual estate.
As to the principles of construction that apply, I respectfully adopt the following succinct summary of those principles by Master Newnes (as he then was) in Parnell v Hinkley [2007] WASC 102:
The Will should be so construed as to give effect to the intention of the testator, such intention being gathered from the language of the Will, read in the light of the circumstances in which the Will was made. The language employed in the Will should be read in the sense which the testator appears to have attached to the expressions used, albeit it is not to be construed on the basis of what it is suspected the testator intended, other than as expressed in the terms of the Will: Fell v Fell (1922) 31 CLR 268 at 273; WA Trustee, Executor & Agency Co Ltd v Birkbeck (1921) 23 WALR 27 at 29, 31 - 32; Perrin v Morgan [1943] AC 399 at 406, 414 - 415, 416, 420; Borlaug v The University of Western Australia [2001] WASCA 425 at [15]. The overriding consideration is the language used by the testator and the Court can neither ignore the plain meaning of words nor unnecessarily introduce words to give effect to an intention that is not expressed: In re Crocombe (decd) [1949] SASR 302 at 315.
The proper approach is first to construe the Will having regard to its actual language, content and circumstances, and only to have regard to canons of construction and other decisions on the meaning of a word or phrase in the case of ambiguity: WA Trustee, Executor & Agency Co Ltd v Birkbeck (supra); Perrin v Morgan (supra); Borlaug v The University of Western Australia (supra). In Perrin v Morgan, Viscount Simon LC said:
'… the duty of a judge who is called on to interpret a will containing ordinary English words, is not to regard previous decisions as constituting a sort of legal dictionary to be consulted and remorselessly applied whatever the testator may have intended, but to construe the particular document so as to arrive at the testator's real meaning according to its actual language and circumstances.'
As each will is to be construed having regard to its own particular language, content and circumstances, the meaning given to a word or expression in other cases will often be of little assistance. That will particularly be so where the will to be construed has been drawn by a layperson who is unlikely to have been aware of the meaning given in other cases: see Re Taylor; Taylor v Tweedie [1923] 1 Ch 99 at 105, 109 - 110; Perrin v Morgan (supra) at 407; In re Crocombe (decd) (supra) at 315; Borlaug v The University of Western Australia (supra) at [45] - [48]. Accordingly, where a testator has made a will without professional assistance, the expressions used in the will should not be construed literally and technically: Re Taylor; Taylor v Tweedie (supra). And where it is appropriate to consider the meaning of a word given in an earlier case, regard must be had to any change in circumstances or in the use of language: Perrin v Morgan (supra) at 417 - 41. [12] - [14]
Notwithstanding the above, I consider it appropriate before construing the language of the will, to examine the general rules of construction that apply to provisions concerning pecuniary legacies. As a general rule, interest on a legacy is payable only from the date when the legacy itself becomes payable. (Which is usually one year after the date of death of the testator). Interest on a contingent or future legacy only begins to run when the contingency happens, or the future time arrives (Murdocca v Murdocca (No 2) [2002] NSWSC 505 [22].
However, there are a number of exceptions to this general rule. Legacies which are payable immediately upon the death of the testator attract interest from the date of death (Re Pollock [1943] 1 Ch 338, 340). A further exception is when a parent or person in loco parentis gives a legacy to an infant. Unless the will otherwise provides for the maintenance of the child, the law presumes in these circumstances that there is an intention to maintain, and interest runs from the date of death (Re Abrahams [1911] 1 Ch 108, 115; Re Jones [1932] 1 Ch 642, 646; Murdocca [22]). Interest also runs from the date of death on a contingent legacy to an infant 'stranger', provided that the testator clearly intended that it provide for the maintenance of that infant (Murdocca [22]; Re Jones (646 ‑ 647); Re Churchill [1909] 2 Ch 431, 433).
As to what constitutes an intention to maintain an infant, it has been held that a direction in a will empowering the trustees to apply a contingent legacy 'towards the advancement in life' of a beneficiary did not amount to an intention to maintain. However, with the addition of the words 'or otherwise for the benefit of such beneficiary' there was an intention to maintain (Re Churchill 434). Furthermore, a direction to apply the whole or any part of a legacy 'for the purpose of the education' of a beneficiary is equivalent to an intent to maintain (Re Selby‑Walker [1949] 2 All ER 178, 179).
Another exception to the general rule occurs when there is a direction in a will that a contingent legacy be set aside and invested by the trustee. In these circumstances an executor and trustee acts in two different capacities, one as executor and the other as trustee. In effect, the legacy is deemed to be paid to the trustee for purposes of investment, and interest accordingly runs from the date of payment (Re Pollock 340). In such event:
Any such interest and any income produced by the investment representing the legacy follow the principal, and if the event happens, the income or the interest, as the case may be, goes to the person to whom, in that event, the capital of the legacy goes. (Pollock 340 ‑ 341)
In Re Medlock (1886) 55 LJ Ch 738, it was held in similar circumstances that all of the 'additions' which might accrue to the legacy as a result of investment formed part of the fund set aside:
That thing which is given in the event is the fund so set apart, and where the fund is set apart why should it not carry with it all of its accretions? (739)
Turning now to the actual language and content of the will in the present case, it is significant that after bequeathing to each grandchild the sum of $30,000, Mrs Pacella directed that 'in the meantime that money is to be kept invested by the trustee'. This clearly amounted to a direction that each sum be set aside for the purposes of investment by Ms Sherborne in her capacity as trustee.
Furthermore, the trustee was given the complete discretion to make payments out of each invested sum for the 'benefit, advancement and education' of each grandchild. This power of the trustee to maintain each child was not limited to infancy, but also extended to the period when 'they have not qualified for their contingent share'.
In my view, these provisions in cl 24 clearly indicated an intent that each sum was to be invested for the benefit of the legatee rather than for the residuary beneficiary. Such a construction is consistent with each $30,000 legacy being described not only as 'that money' but also as each child's 'contingent share'. It is also consistent with the wording of cl 25 which devised and bequeathed the residue of the estate to Mr Pacella. In this regard the testator stated: 'This means that he gets everything else which is not mentioned'. (The bequests and their investment having been mentioned, the proceeds of that investment fell outside the residuary bequest).
Furthermore, my proposed construction of cl 24 based on the actual language used is the same as that which would be arrived at by applying the principles in Re Churchill; Re Selby‑Walker; Re Pollock, and the other authorities I have referred to.
For these reasons I find that on a proper construction of cl 24 Mrs Pacella intended that each of her grandchildren upon attaining the age of 25 years would receive not only the $30,000 which had been invested in the meantime, but also the income from, and any capital accretion of that investment.
Questions 2 and 3: Whether there was a breach of trust in investing each legacy in a market linked investment
Mr Pacella has a valid interest in this question because he is contingently entitled to the two legacies in the event that each of his two children fails to live to the age of 25 years. He contends that there was a breach of trust by Ms Sherborne in investing the moneys in a fund linked to the stock market, because this put the capital and income at 'significant risk'. He further contends that the purpose of the trust and the need to maintain the real value of the capital required that the funds be invested in an interest‑bearing bank account.
Section 17 of the Trustees Act provides that a trustee may invest trust funds in 'any form of investment' (unless expressly prohibited from doing so by the trust instrument). However, when exercising that power of investment, a trustee (in Ms Sherborne's circumstances) must:
[E]xercise the care, diligence and skill that a prudent person would exercise in managing the affairs of other persons. (s 18(1) Trustees Act)
Unless there is an inconsistency with the trust instrument, a trustee exercising a power of investment is also subject to any duties, rules and principles of law or equity that ordinarily apply (s 19(1) Trustees Act). These duties will almost always include the duty to invest the trust funds in investments which are not speculative or hazardous. Sometimes there will also be a duty to take advice before investing the funds.
Section 20 of the Trustees Act lists a total of 15 factors that a trustee 'may take into account' when exercising a power of investment. Relevant to the present case, these matters include:
(a)the purposes of the trust and the needs and circumstances of the beneficiaries;
(b)the desirability of diversifying trust investments;
…
(d)the need to maintain the real value of the capital or income of the trust;
(e)the risk of capital or income loss or depreciation;
(f)the potential for capital appreciation;
(g)the likely income return and the timing of income return;
(h)the length of the term of the proposed investment;
(i)the probable duration of the trust;
(j)the liquidity and marketability of the proposed investment during, and on the determination of, the term of the proposed investment;
(k)the aggregate value of the trust estate;
…
(m)the likelihood of inflation affecting the value of the proposed investment or other trust property;
(n)the costs (including commissions, fees, charges and duties payable) of making the proposed investment
The present powers of investment under the Trustees Act are very wide, and were introduced by way of amendments in 1997 which were part of Australia‑wide uniform legislation. Under the previous statutory regime, trustees had been limited to a list of authorised trustee investments (including term deposits in bank accounts) of a very conservative nature. The new statutory regime provides trustees with unlimited powers of investment, and the only significant restriction on those powers is the obligation to exercise the care, diligence and skill of a prudent person in managing other persons affairs. A trustee is also expected to have regard to the factors in s 20 which are consistent with modern theories and practices of careful fund management.
In the present case Ms Sherborne (after taking expert advice) chose to invest the trust moneys in a 'balanced fund' managed by a reputable and long‑established trustee company. The evidence shows that the sum invested was $60,720.61 from which 'entry fees' of $1,821.62 were deducted. It is a notorious fact that the term 'balanced fund' signifies a mix of stocks, bonds and other investments which reflect a balance between growth and safety of the fund. Such a fund by its very nature allows a small or modest sum to be invested in a diversity of investments. The sum invested also can be readily liquidated at any time.
In the present instance there is material before me to show that the Perpetual Select Investment Fund was regularly reviewed by the fund manager to 'help reduce the volatility of the investment', and to avoid 'over exposure' to any particular asset class. The fund was also regularly reviewed and reweighted to ensure that it met a particular 'benchmark'. As at 15 March 2007, that benchmark required the assets of the fund to be in the following categories:
•Australian fixed interest - 18%
•International fixed interest - 12%
•Real estate - 12.5%
•Australian shares - 30%
•International shares - 20%
100%
In my view there was nothing untoward about the nature of the investment in the Perpetual Select Investment Fund, and having regard to the purpose of the trust it was also broadly compatible with the criteria as set out in s 20. There is no basis for the contention that an investment in anything other than an interest‑bearing bank account was a breach of trust.
The evidence does not persuade me that by placing the funds in that investment, Ms Sherborne failed to exercise the care, diligence and skill that a prudent person would exercise in managing the affairs of other persons. Accordingly, I find that there was no breach of trust by Ms Sherborne in that respect.
In light of my finding in respect of question 2, questions 3(a), 3(b) and 3.1(b) fall away. The question 3.1(a) (to the extent that it seeks interest from 26 July 2002) can be conveniently considered in conjunction with questions 9 and 10.
Questions 4 and 5 - Did clause 31 of the will entitle Ms Sherborne to charge for work done without an order of the court?
Section 98 of the Trustees Act provides the court with a discretion to allow payment to a trustee out of the property of any trust, of such 'commission or percentage' for that person's services as is just and reasonable. This statutory provision aside, the general rule is that executors and others with fiduciary duties cannot derive any profit or advantage from their position, unless expressly authorised to do so by the trust instrument (Clay v Clay [1999] WASCA 8; [1999] 20 WAR 427 [73]; In the Will of Shannon [1977] 1 NSWLR 210; Re the Will of Stratton [1981] WAR 58, 60). The underlying reason for this rule is to ensure that the interest and duty of a trustee are not put into conflict (Bray v Ford (1896) AC 44, 51 ‑ 52).
The right of an executor or trustee to remuneration under a provision in a will is not a contractual right. It derives from the freedom of testamentary disposition and the testator's power to direct how his or her property should be dealt with (Re Duke of Norfolk's Settlement Trusts [1982] 1 Ch 61, 77). In this regard, testamentary provision by way of legacy, commission or otherwise for remuneration of executors for their pains and trouble in administering a deceased's estate is considered to be bounty of the testator (Shannon 216).
In the present case, Mr Pacella contends that cl 31 of the will should be construed as allowing Ms Sherborne to be remunerated only for her work as a solicitor. It is said that this is so because at the time that the will was made, Ms Sherborne was known by Mrs Pacella to be a practising solicitor (but not Mrs Pacella's solicitor). However, prior to Mrs Pacella's death Ms Sherborne ceased to hold a practising certificate, and it is said that she therefore cannot claim remuneration under cl 31.
In my view, there is no merit in these submissions. The words of cl 31 make no reference to the executor being remunerated on a professional basis or at any particular rate. The executor was simply allowed a 'reasonable remuneration for all work done by her for the administration of the estate'. Furthermore, Mrs Pacella must have known that her estate was of a nature which would not require the executor to deal with any legal complexities, and that the administrative work would be largely clerical in nature.
By deleting the words 'my solicitor' in cl 2, Mrs Pacella also made it clear that she was not engaging Ms Sherborne as executor in any legal capacity. In any event the fact that Ms Sherborne subsequently ceased to hold a practising certificate did not prevent her performing her duties as executor, or disentitle her from claiming 'reasonable remuneration' under cl 31 for the work that she did. This is because the work involved was not of a character that could only be performed by a qualified legal practitioner.
However, it is significant that cl 31 allowed remuneration only for work done 'for the administration of the estate'. This provision was also for the benefit of Mrs Pacella's 'executor' as distinct from her 'executrix and trustee' (as appointed in cl 2). It is also significant that the work required in respect of the trusts created by cl 24 was to be performed by Ms Sherborne in her separate capacity as 'trustee'.
It follows in my view that the right of remuneration in cl 31 was restricted to the work to be done by Ms Sherborne in her capacity as executor. Any entitlement to commission or other remuneration for her work done as Mrs Pacella's trustee can only arise by way of an order of the court.
Before I deal with question 5(b), and with Ms Sherborne's application for a determination whether she is entitled to payment of commission under s 98 of the Trustees Act, it is appropriate that I address the remaining questions in Mr Pacella's originating summons.
Question 6: Was the amount charged by Ms Sherborne reasonable in all of the circumstances?
Ms Sherborne, claimed, and was paid out of the estate, for 'executor's fees' the sum of $6,633. That payment was made prior to 8 April 2003, and in my view could not have related to any work done by Ms Sherborne in her capacity as trustee. (All that had happened in that regard was that the sum of $60,000 was deposited in an interest‑bearing account with Home Building Society).
I accept that the work done up until April 2003 (and in respect of which the remuneration was claimed) was as set out in annexure 'MES 34' to Ms Sherborne's affidavit sworn 22 May 2009. I consider that the rates claimed for that work ($120 per hour for Ms Sherborne and $90 per hour for Maureen) were reasonable, and accordingly find that the quantum of remuneration charged was reasonable.
Ms Sherborne has made no further claim for executor's fees, and accordingly the question whether she is entitled to any remuneration for work done in administering the estate after April 2003 needs to be considered in conjunction with her claim for commission under s 98 of the Trustees Act.
Questions 7 and 8: Was there a failure to preserve the assets of the estate by engaging Kott Gunning to lodge tax returns?
As trustee of the funds invested with the 'Perpetual Select Investment Fund', Ms Sherborne received an annual statement from the fund manager which contained the information necessary for lodgement of a tax return. On each such occasion between 2003 and 2007 she forwarded that statement to Kott Gunning, who then instructed an accountant to prepare the tax return. For performing that service each year, Kott Gunning rendered fees which ranged between $514 and $776.
To my mind, it is self‑evident that there would have been no extra work (and no difficulty) for Ms Sherborne if she had sent the financial statement directly to the accountant herself. The involvement of Kott Gunning in this simple clerical task was completely unnecessary and resulted in the depletion of the trust funds set aside for the grandchildren by a total of $2,783.
I consider that it is also self‑evident that this was a wasting of the assets (known in law as a devastavit) for which Ms Sherborne is personally liable, and for which she must answer out of her own pocket (Williams, Mortimer & Sunnucks: Executors, Administrators and Probate (16th ed) 710, 713). Ms Sherborne is also liable to reimburse the trust fund for the income and capital appreciation that the $2,783 would have earned and/or to pay interest (under s 32 of the Supreme Court Act 1935 (WA)) in respect of those payments. However, with regard to the remaining deductions, the tax liabilities obviously had to be met out of the trust fund, and I consider that it was also reasonable for Ms Sherborne to pay the accountant's fees.
Questions 9 and 10: Was there a failure to preserve the assets of the estate by delaying investment of the proceeds from the sale of the house?
Mr Pacella claims that there were unnecessary delays in obtaining probate, in selling the house, and in investing the proceeds of that sale. Probate was obtained in December 2001 or approximately five months after Mrs Pacella's death, and I am not persuaded that this was an excessive period of delay in 2001. In September 2001 Mrs Sherborne received three written appraisals as to the value of the house, and two of those were significantly less than the price ultimately obtained in May 2002. It is obvious that there was a rising market at the time, and I am not persuaded that the estate suffered any loss as a result of any delay in sale.
However, as from 25 July 2002 there was a delay in investing the proceeds of sale. The proceeds were placed into a Kott Gunning trust account which did not earn any interest, and the bulk of them remained there for approximately six months until January 2003 when $150,000 was advanced to Mr Pacella, and $60,000 (being the trust fund for the grandchildren) was placed into an interest‑bearing account with Home Building Society.
There were no outstanding significant debts of the estate or any other reason why it was necessary to retain the bulk of the funds in the Kott Gunning trust account. There was also no reason why advance arrangements could not have been made to invest the bulk of the proceeds immediately following their receipt on 25 July 2002.
There is a general rule of equity which imposes a duty on trustees to invest any trust funds in their hands in respect of which the testator has not directed an immediate disposition (Wharton v Masterman [1895] AC 186, 197). Accordingly, it is negligent of an executor to keep money dead in his or her hands when there is no apparent reason or necessity, and the court will charge the executor with interest. But a valid claim to interest only arises in a clear case of improper retention of balances to a substantial amount (Williams, Mortimer & Sunnucks 61).
In the present instance, it was reasonable for Ms Sherborne to retain some limited funds in the Kott Gunning trust account to meet any further liabilities or any unexpected debts of the estate which might have emerged. In my view, the balance of $18,095.25 which was ultimately paid to Mr Pacella in May 2003 was ample for this purpose.
The evidence does not disclose any apparent reason why Ms Sherborne considered it necessary to retain the sum of $150,000 until 10 January 2003 when it was distributed to Mr Pacella. Furthermore, there was no good reason why the sum of $60,000 could not have been deposited in an interest‑bearing account by 26 July 2002 instead of 21 January 2003. Accordingly, I am satisfied that it was negligent of Ms Sherborne to allow these amounts to remain dead in the trust account for approximately six months. I find that she is liable to the estate for interest in respect of each amount, and that the interest on the latter sum should be paid into the grandchildren's trust account.
Whether Ms Sherborne is entitled to additional remuneration by way of commission under s 98 of the Trustees Act
As from 30 May 2002, a large proportion of the work done by Ms Sherborne was instructing and liaising with Kott Gunning. From that point on it was Kott Gunning who performed most of the administrative work on Ms Sherborne's behalf, and in effect, there was a partial 'doubling up' of their fees on top of any remuneration that she might claim. The evidence does not enable me to determine the extent of this overlap.
In these circumstances, it is necessary to determine whether, in the course of administering the estate, it was reasonable for Ms Sherborne to engage Kott Gunning's services. Ms Sherborne took this step because of the letter dated 17 May 2002 from Macdonald Rudder which amongst other things suggested that she should renounce the executorship in favour of Mr Pacella. The letter suggested that she had no entitlement to remuneration because of her lack of a practising certificate and her employment with the Australian Taxation Office. It further alluded to 'some concern' about the circumstances of the preparation of the will because a 'stranger' had been named as executrix who was not a certified legal practitioner. Ms Sherborne was given seven days to respond to the letter and was told that her reply 'may be shown to third parties/your employer/complaint bodies'.
In my view, the wording of this letter was inappropriate and unwise because it was capable of being construed as a threat to cause problems for Ms Sherborne (inter alia with her employer) if she did not renounce her position as executor. Ms Sherborne was under no obligation to renounce that position, and I consider that in all of the circumstances she was justified in engaging Kott Gunning to assist with the continuing administration of the estate. In that regard, the hostility of the residuary beneficiary towards her as executor combined with the seriousness of the issues raised in his solicitor's letter made it appropriate to engage independent solicitors in the administration.
Under s 53 of the Trustees Act Ms Sherborne had authority to engage agents to do any act required to be done in the administration. Nevertheless, the evidence establishes that Ms Sherborne failed to ensure that the quantum of fees charged by Kott Gunning was reasonable, which resulted in the assets of the estate being temporarily depleted by sums totalling $6,406.30 for periods of up to 18 months. Ms Sherborne made no attempt to have the costs taxed and left it to Mr Pacella to undertake that exercise (at a net cost to him personally of $3,649). Notwithstanding the outcome of that taxation, Ms Sherborne continued to engage Kott Gunning for unnecessary clerical work (in her capacity as trustee as distinct from executor). As a result there was a wasting of the assets of the trust for which she was responsible.
Ms Sherborne has not given any indication of the remuneration and/or the quantum or percentage of commission that she might claim beyond the executor's fees that she received in April 2003. The allowance of commission under s 98 of the Trustees Act is discretionary and in my view, the above factors weigh very heavily against the exercise of that discretion in the present case. A refusal to allow additional remuneration will also compensate the estate (and the residuary beneficiary) for the costs and trouble of dealing with the consequences of Ms Sherborne's neglect.
For these reasons question 5(b) in Mr Pacella's originating summons will be answered in the negative, and the application in Ms Sherborne's originating summons will be dismissed. I also find that any claim for further remuneration under cl 31 of the will would not be reasonable.
The orders that should be made
Ms Sherborne is liable to reimburse the estate and/or the grandchildren's trust fund as a result of the determinations I have made in respect of questions 7, 8, 9 and 10 of Mr Pacella's originating summons. The evidence before me is insufficient to quantify what that total reimbursement should be, and rather than refer the issue to a registrar for determination I propose to hear further from the parties.
With regard to the interest component(s) of the calculation I rule that that should be at the compound rate of 6% per annum. Simple interest almost always under compensates the injured party's true loss, and a compound rate is appropriate when moneys are withheld or misapplied (Hungerfords v Walker (1989) 171 CLR 125, 148).
I have listed the matter for further brief submissions as to the orders that might be appropriate. In the meantime, I encourage the parties to endeavour to agree on a minute of such orders.
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