Refalo v Gatt (No 2)

[2021] NSWSC 1677

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

Refalo v Gatt (No 2) [2021] NSWSC 1677

Hearing dates:

On the papers

Decision date:

20 December 2021

Jurisdiction:

Equity

Before:

Robb J

Decision:

As to the issue of the date for the valuation of the subject property, see [55]-[57] below. As to the issue of the costs of the determination of prayers 1 to 3 of the statement of claim, see [75] below. As to the costs of discontinuance see [96]-[97] below.

Catchwords:

SUCCESSION — Construction — Where wills silent as to date of valuation of property in estate subject to testamentary option exercisable by beneficiaries — Where executors had not implemented the process for determination of value required by the wills — Where the parties had nonetheless implemented part of the valuation process — Where the Court has suggested a pragmatic approach to the determination of the valuation date resulting from the parties’ conduct — Where no point of principle

COSTS — Where plaintiffs and defendants are both beneficiaries and executors under wills — Where the proceedings were required to determine the proper construction of the wills in circumstances where that issue was uncertain — Where the Court has ordered that the costs incurred by the parties are proper testamentary expenses— Where the Court has ordered that the costs of all parties be paid out of the estates of the testators on the indemnity basis

COSTS — Where plaintiffs propose to discontinue part of proceedings — Consideration of the principles

Legislation Cited:

Succession Act 2006 (NSW)

Uniform Civil Procedure Rules 2005 (NSW)

Cases Cited:

In re Tennant; Mortlock v Hawker (1942) 65 CLR 473

Murdocca v Murdocca (No 2) [2002] NSWSC 505

Perpetual Trustee Co Ltd v Baker [1999] NSWCA 244

Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 625; [1997] HCA 6

Re Tankard [1942] Ch 69

Re the Estate of Hodges; Shorter v Hodges (1988) 14 NSWLR 698

Refalo v Gatt [2021] NSWSC 926

Shorten v Shorten (No 2) [2003] NSWCA 60

Warton v Yeo [2015] NSWCA 115

Category:

Consequential orders

Parties:

Joseph Refalo (first plaintiff)
Sonia Margaret Attard (second plaintiff)
Joyce Doris Bugeja (third plaintiff)
Elizabeth Josephine Gatt (first defendant)
Mary Sultana (second defendant)
Kitty Cassar (third defendant)
Frances Chircop (fourth defendant)

Representation:

Counsel:
M Meek SC and P J Muscat (first to third plaintiffs)
J Needham SC and T Catanzariti (first to fourth defendants)

Solicitors:
Uther Webster & Evans (first to third plaintiffs)
Finn Roache Lawyers (first to fourth defendants)

File Number(s):

2021/139701

Judgment

1. The Court delivered its primary judgment in these proceedings on 28 July 2021: Refalo v Gatt [2021] NSWSC 926.

2. For the purposes of these reasons, I will assume that the reader has knowledge of the primary judgment.

3. The parties are the seven children and the executors of the wills of their deceased parents. The parents died on 7 September 2018 and 4 June 2019. The wills of the parents were in materially identical terms. The property the subject of the present dispute was owned equally by both parents so the equivalent terms of both wills will govern the outcome of the proceedings.

4. In prayers 1 to 3 of the statement of claim filed on 18 May 2021, the plaintiffs sought declarations concerning the proper construction of a provision contained in the wills, being clause 5(b), and orders to give effect to the provision as construed by the plaintiffs. In substance, the plaintiffs contended that clause 5(b) gave all of the executors a testamentary option to acquire individual properties in the estates. The right of acquisition was on the basis that the properties would be acquired on equal terms as between the executors who exercised the option (the buyer executors). In that event the buyer executors would have to enter into a contract to buy the property from the executors who did not elect to retain the property (the seller executors). Clause 5(b) also contained a provision for the determination of the price for the property that involved the buyer and seller executors nominating separate valuers to determine the value of the property, with any disagreement between the valuers being resolved by a valuer nominated by the chosen valuers acting as umpire. This relief was resisted by the defendants.

5. The Court made an order expediting the hearing of the plaintiffs’ claims in prayers 1 to 3 and those claims were heard by me on 22 July 2021.

6. For the reasons given in the primary judgment, the plaintiffs’ claim succeeded. That meant that the Court accepted that clause 5(b) of the wills operated as a testamentary option that could be exercised by the buyer executors. However, clause 5(b) did not clearly specify the rights of the buyer executors or how they were to be exercised.

7. The purpose of these reasons is to decide a number of disputes between the parties concerning the orders that should be made in these proceedings.

8. At a directions hearing held on 8 September 2021, orders were made for the provision of draft short minutes of order and submissions in respect of orders that were not agreed by the parties. Those short minutes of order and submissions have been provided.

Orders proposed by plaintiffs

9. The plaintiffs have asked the Court to make the following orders consequently upon the findings in the primary judgment:

1.   That the parties within 7 days of these orders direct their respective valuers, namely Ms Lyn Savage of Lyn Savage Valuations for the Plaintiffs ( the Plaintiffs’ Valuer) and Mr Dennis Rylaarsdam of Lunney Watt & Associates Pty Ltd (“the Defendants’ Valuer”) (together the “Valuers”) to meet by no later than 21 August 2021 to determine a value of Edgewood Park as at 10 August 2020 (“ The Value”) and if those Valuers cannot agree on The Value, to agree on the identity of a third valuer as umpire, (the “Third Valuer”) and jointly appoint the Third Valuer to determine The Value.

2.   The Plaintiffs and Defendants’ Valuers and the Third Valuer (if appointed) are to be provided with a copy of these orders within 7 days of the date of these orders.

3.   The Parties are to pay the costs of their respective valuers themselves.

4.   If a Third Valuer is appointed, the Third Valuer is to be appointed by the Plaintiffs and Defendants’ Valuers, with the Third Valuer’s fee to be paid equally by the parties within 48 hours of the date of the Third Valuer issuing an invoice for the valuation and such valuation is to be determined by the Third Valuer within three (3) weeks from the date of the Third Valuer’s appointment.

5.   That the parties within 7-days of the date of these Orders, by providing N Panos & Co with a copy of these orders retain N Panos & Associates to prepare a Contract for Sale for Edgewood Park, nominating the Plaintiffs in their capacities as the Trustees of their respective Testamentary Trusts as identified in the Wills dated 26 September 2016 of the late Charlie Refalo and the late Jane Refalo (the “Wills”) as the Purchasers and the parties in their capacities as the Executors nominated pursuant to the Wills as the Vendors, with the current Law Society standard terms and conditions as determined by N Panos & Associates to include:

(a)   a time for completion of six (6) weeks with a two (2) week Notice to Complete;

(b)   a 10% deposit payable on exchange;

(c)   be subject to the current tenancies;

(d)   that an amount equal to the Purchasers’ 3/7 interest in the Edgewood Park net of CGT and conveyancing fees and GST (if any) be taken into consideration on the payment of the purchase price on settlement with a credit for that amount to be allowed on settlement; and

(e)   that an amount equal to the defendants’ 4/7 interest in Edgewood Park net of CGT and conveyancing fees and GST (if any) be paid to the defendants on settlement.

6.   The Parties are to direct the Valuers and/or Third Valuer, to notify the parties and Mr Panos of N Panos & Associates of The Value within three (3) weeks from the date of the Third Valuer’s appointment or by 28 days after the date of these orders or as otherwise agreed, if the Valuers agree on the Value.

7.   The parties are to do all acts and things necessary to effect the exchange of the Contract for Sale of Edgewood Park within seven (7) days of Mr Panos being notified of The Value.

8.   Order that the costs of N Panos & Associates in respect of the sale of Edgewood Park be costs of the Estates.

9.   That the Defendants pay the Plaintiffs’ costs of the determination of Orders/Prayers 1, 2 and 3 of the Plaintiff’s Statement o claim on an ordinary basis as agreed or assessed.

10.   Liberty to apply on 24 hours’ notice in relation to the implementation of these Orders.

10. The defendants initially opposed draft order 1, insofar as it identified valuers who were respectively appointed by the plaintiffs and the defendants who had provided valuations of the subject property before the hearing. The defendants proposed that order 1 be amended in a way that would enable the defendants to nominate a new valuer. However, the defendants advised in par 1 of their 19 September 2021 submissions that they accepted that the valuers named in the orders should be the valuers who provided valuations before the hearing.

Valuation date for subject property

11. Draft order 1 provides that the valuation of the subject property is to be determined as at 10 August 2020. That is the date when the plaintiffs exercised the testamentary option. However, clause 5(b) of the wills is silent as to the date as at which the value of the subject property is to be determined. The defendants submitted that draft order 1 should be amended so that the valuers determine “the current value”, which I understand would have the effect that the value would be determined as at the date that the valuers, either on the basis of agreement between the existing valuers, or as determined by the third valuer as umpire, complete the valuation task in the future.

12. Clause 5(b) of the wills is in the following terms:

5.   I direct my Executors as follows:

…

(b)   If a property is an asset of my Estate or an asset of either a company in which I had a shareholding or a family trust and some executors wish to sell the property and others do not the following procedure is to apply:

(1)   The Executors who wish to keep the asset are to contract to buy the asset with such Contract to contain the usual settlement time and terms and conditions within twelve (12) months of a written request by the other Executors at a price being determined as per subclause (2);

(2) A.   the price will be the value determined by two independent valuers (one to be appointed by the purchasing executor and trustee; the other by my remaining executors) for the purpose of the sale; or

B.   if those valuers cannot agree, the value determined by an umpire who is a third independent valuer to be appointed in writing by the first two valuers before they enter on the valuation.

13. The plaintiffs submitted that, in the absence of a date being specified in the wills concerning the time at which a property is to be valued, the preferable construction to give certainty to the operation of the wills is the date that the buyer executors communicated their wish to retain the subject property to the seller executors. If that were not the case, then there would be no identified date for the determination of the value, and depending upon the manner in which clause 5(b) was implemented by the seller executors – particularly if uncooperative executors disputed the operation of the provision and protracted litigation was required to resolve any dispute – the determination of the value of the property as at some later date, when the valuation process was actually implemented, could yield a result that was inconsistent with the intent of the wills. Indeed, in a rising real estate market, uncooperative seller executors who resisted selling a property to other executors would be rewarded proportionately to the length of their resistance.

14. The plaintiffs submitted that, if the Court did not accept their submission that the subject property was required, on the proper construction of the wills, to be valued as at the date the testamentary option was exercised, then the date of valuation should be governed by s 45 of the Succession Act 2006 (NSW), which provides:

45 Effect of referring to a valuation in a will

(1)   This section applies if—

(a)   there is an express or implied requirement in a will that a valuation of property be made or accepted for a purpose, and

(b)   either—

(i)   the will does not provide an effective method of valuation, or

(ii)   the method of valuation is not provided for by a law of New South Wales or of another place.

(2)   The reference to the valuation in the will is to be construed, to the extent the method of valuation is not provided for as mentioned in subsection (1) (b) (i) or (ii), as if the reference were a reference to a valuation of the property at the date of the testator’s death made by a competent valuer.

(3)   Subsection (2) does not apply if a contrary intention appears in the will.

15. The defendants responded by submitting that clause 5(b) of the wills contemplates that a series of events must take place before the buyer executors are in a position to enter into a contract with the seller executors. There must be a grant of probate (otherwise there would be no executors), the property must be transmitted to the executors, each executor must decide whether to inform the other executors that the executor wishes to keep a property, and then the other executors must decide whether to inform the remaining executors that that executor also wishes to retain the property. There will not necessarily be a single date on which all executors who wish to retain the property inform all of the executors who do not wish to do so of their decision. There was in fact a single date in this case, but over a period, individual executors could elect to retain the property and the end of the period could only be known when all of the executors had elected to be a buying executor or a selling executor. Once the classes of buyer and seller executors had been determined, the process of appointing valuers, the determination of value, the attempt of the valuers to agree the value, and in the absence of agreement the appointment of an independent umpire, and the determination of the value by that umpire would take further time.

16. The defendants therefore submitted that the flaw in the plaintiffs’ argument that the value of the subject property had to be determined as at the date of the plaintiffs’ election, being 10 August 2020, was that it assumed that there could only be one such date, whereas, if six out of the seven executors elected to retain a particular property, there could be six such dates.

17. The defendants relied upon the decision of the High Court in In re Tennant; Mortlock v Hawker (1942) 65 CLR 473, although the subject matter of that decision is quite remote from the present circumstances. In that case, a will containing a term that divided the corpus of the estate between a class of beneficiaries contained a hotchpot clause. That meant that a beneficiary who had received an advance from the testator before his death had to notionally account to the estate for the amount advanced before the division was made. In that way, the beneficiaries in the class would share equally irrespective of whether some beneficiaries had received advances before the testator's death, and some had not. Where a will contains a hotchpot clause and some beneficiaries have received an advance by the provision of property other than money, a problem can arise as to how to value the advance for the purposes of dividing the estate. The issue is as to when the valuation of the property advanced should be made. It may make a difference if the value is to be determined as at the date of the advance or at the date of division of the property by the executor or some other time.

18. As Dixon J said at 488: "… In the absence of any other indication there must be a valuation as at the date of the gift." I take that to be the date of the advance.

19. The High Court, in the course of discussion, also considered the situation where, after the death of the testator, the executor has made a specific appropriation of property in favour of one beneficiary, before the division of the corpus is made between all beneficiaries entitled to share. As Rich J suggested at 483: "there is no reason… why capital distributions should not be made on the basis of the value of what is distributed at the time when it is distributed, notwithstanding that the estate may have depreciated in value since the testator's death".

20. These examples are not, however, in my view of great relevance to cases in which beneficiaries are given testamentary options to acquire parts of the testator's estate under a contract with the executor on the basis of the value of the relevant property. They concern the problem of how to value property advanced or appropriated to one beneficiary at a time before the executor is in a position to divide the estate between all of the beneficiaries who are entitled to share. The value of the property given to the one beneficiary may change between the date of receipt and the later date of the division of the estate by the executor. The present case involves a different problem, being how to determine the price of property that is part of the estate, when the will gives a beneficiary an option to purchase it. The beneficiary will be bound to complete the purchase from the time of the exercise of the option, and if there is a delay in determining the value, the beneficiary may become bound to pay a higher price than the value of the property at the time of the exercise of the option.

21. Dixon J at 489, made the following more general observations:

The question would appear to be one for which the answer should be sought in the provisions of the will. For the meaning and operation of the will should determine when the proportions in which the estate is to be distributed should be ascertained. If the matter is not one to which the testator expressly adverts and the plan upon which his dispositions are constructed does not imply an answer, then it may be necessary to invoke some presumption or some general rule. But in principle the question is one rather of interpretation than of administration. For it goes to the nature of the dispositions intended.

22. That suggests that, subject to cases in which s 45 of the Succession Act must be applied because a will does not provide for an effective method of valuation, the issue of the timing of the determination of the value of property will always depend upon the proper construction of the wills.

23. On that subject, Rich J said at 482:

…In general, that method of administration should be adopted which is most calculated to produce a fair result in the circumstances of the particular case, subject to two considerations, first that the provisions of the controlling instrument may, by accident or design, require the adoption of a particular method or preclude the adoption of another, and, second, that the use of a simple method which produces a reasonable approximation to fairness is to be preferred to attempts to achieve meticulous accuracy if they involve elaborate actuarial computations, valuations, or applications to the court…

24. The defendants also relied upon the following additional statement of Rich J at 487:

It is desirable that estates should be administered and distributed, so far as possible, in accordance with their actual position and results, and that the rights of beneficiaries should not be regulated by estimates made at arbitrarily fixed periods unless the provisions of the controlling document or the necessities of the case so require.

25. Insofar as it is relevant to determine the approach that "is most calculated to produce a fair result in the circumstances of the particular case", in my view it is proper to assume that a testator will have in mind when considering the terms of his or her will that by and large land in this country appreciates in value over time. That consideration, applied to the wills under consideration in the present case, would suggest that, if the subject property is required to be valued as at the date of death of the testator, that would advantage the executors who are buyers over the executors who are sellers. That is because the value of the property is likely to have increased by the time the buyers are required to complete the contract. Contrary to the clear intent of the wills that all seven executors are to share equally, the seller executors, who are either unable to participate in the purchase or do not want to own the property jointly with the buyer executors, will receive a lesser share of the estate. On the other hand, the reverse result will occur if the seller executors are able to prolong the sale process and the property is required to be valued as at the time when the contract for sale is ultimately entered into. The value of the property is likely to have increased after the time when the buyer executors were required to commit themselves to the purchase. The fairest result is likely to occur if the price is the value of the property at the time the buyer executors become bound to buy it, and the contract for sale is completed with reasonable expedition.

25. In these circumstances, it is necessary for the Court to look closely at the terms of the wills to see whether the problem can be resolved on the basis of its proper construction.

26. Clause 3 of the wills, which appointed the parties as joint executors, does not expressly deal with the obligation of the executors to pay the testators' debts and testamentary expenses. Nonetheless, the executors will be under a duty to do so: Re Tankard [1942] Ch 69 at 72. To the extent that there may be insufficient cash in the estate, the executors will be obliged to sell property in order to raise the funds necessary to pay debts and testamentary expenses.

27. Clause 4(a) provides for the payment of substantial cash legacies to the 21 grandchildren of the testators. Again, unless sufficient cash is available, that gift will oblige the executors to sell property.

28. Then, crucially, clause 4(b) (being the second (b)) is a gift of residue in the following terms:

All the rest and residue of my Estate is to be divided into seven (7) equal shares and an equal seventh share settled on each of the seven (7) Trusts I establish pursuant to this Will.

30. The point is that the gift of residue imposes upon the executors an obligation to divide the whole of the estates into seven equal shares and then to settle one share on each of the seven trusts.

31. In the absence of the unanimous agreement of the seven executors, as the sole beneficiaries entitled to residue, the second clause 4(b) will oblige the executors to realise the value of the assets in the estates by sale.

32. Clause 5(a)(1) empowers the executors in their absolute discretion to sell and convert into money any part of the real and personal estate, but it also grants a power to the executors "to retain all or any part of my estate in the same form and condition or invested in the same manner as it may exist at the date of my death" without being responsible for any loss occasioned thereby.

33. It is not necessary at this time to determine the relationship between the power granted to the executors to retain parts of the estate and the obligation on the executors to divide the residue into seven equal shares and settle those shares on each of the trusts. It is sufficient to note that, subject to the application of any other relevant provision in the wills, it will be necessary for the executors to realise the value of the residue before they are able finally to execute the wills by settling equal shares of the value of the residue on the seven testamentary trusts.

34. It is in this context that it is necessary to return to a consideration of the working of clause 5(b)(1) of the wills. The starting point is that, at some time, the executors will need to turn their minds to the need to realise the value of the residue in order to settle equal shares on each of the seven testamentary trusts.

35. In this context, the chapeau to clause 5(b) contemplates that "some executors wish to sell the property and others do not". The application of the clause will require the executors who wish to retain a particular property to advise the other executors of that choice. If they do not, then at some time all of the executors will have to sell the property in order to distribute the residue.

36. I have found in the primary judgment that clause 5(b) has the effect of giving the buyer executors a testamentary call option. However, the provision does not expressly say so, and it does not contain a precise mechanism for the buyer executors to exercise the option. There would be no purpose for the provision to be included in the wills, if a distinction was made between buyer and seller executors, but the former had no means of compelling the latter to sell them the selected property.

37. If some executors identify themselves as being buyer executors, then clause 5(b)(1) will apply. It will be convenient for the purposes of exposition to set out the provision again:

The Executors who wished to keep the asset are to contract to buy the asset with such Contract to contain the usual settlement time and terms and conditions within twelve (12) months of a written request by the other Executors at a price being determined as per subclause (2).

38. This provision expressly contemplates that it is the seller executors who will give a written request to the buyer executors. It is not clear from the wills why the buyer executors were not given an express testamentary call option, by the giving of notice to the seller executors. It may be that the testators assumed that their children would cooperate with each other in implementing the clear intent of the wills. Once the executors had divided themselves into buyers and sellers, they would determine the price in accordance with the wills and then enter into and complete a contract for sale. However, because the wills required the property in the estates to be realised so that the residue could be distributed to the seven trusts, there needed to be a mechanism that prevented the buyer executors from procrastinating and delaying the execution of the wills. That is at least a sensible reason why clause 5(b)(1) empowers the seller executors to control the process of sale by giving to the buyer executors a written request, which will initiate the 12-month period referred to in the provision.

39. Clause 5(b) does not grant to the seller executors a testamentary put option. An option of that type would enable some executors to oblige others to buy property within the estates. The written request referred to in clause 5(b)(1) can only be given once the executors have divided themselves into buyers and sellers, which, as I have observed, will require some form of notification of intent from the former to the latter. It may be apt to describe clause 5(b) as granting to all executors who choose to exercise it an implied testamentary call option, subject to an express right in the seller executors to initiate the 12-month period by giving a written request to the buyer executors.

40. In relation to the defendants’ submission, referred to above, that each of the buyer executors can decide at separate times to participate in the purchase of a particular asset in the estate, it should be noted that clause 5(b) speaks of the “Executors who wished to keep the asset” and the “other Executors” as if they fall into two classes, and the individual executors are not treated separately. This seems to require the executors to caucus and to decide which class they are in, and then to act as a group.

41. If the seller executors deliver a written request to the buyer executors, then those executors are required to enter into a contract to buy the property within 12 months of the making of the written request. Unfortunately, clause 5(b)(1) is unclear as to whether the buyer executors are required to enter into the contract within 12 months, or whether they are required to complete the contract within that period.

42. Once the seller executors trigger the sale process, then it becomes necessary for the price to be determined. That is to occur in accordance with clause 5(b)(2). The wording in clause 5(b)(1), "with such Contract to contain the usual settlement time and terms and conditions at a price being determined" suggests, as a matter of the ordinary meaning of the words used, that the price is to be determined by a process of valuation commencing at the time when the seller executors deliver the written request to the buyer executors.

43. Under clause 5(b)(2)A, independent valuers must be appointed by the buyer executors and the seller executors to carry out valuations. Under clause 5(b)(2)B, if those valuers cannot agree, the value must be determined by an umpire who is a third independent valuer to be appointed in writing by the first two valuers before they enter on the valuation.

44. Clause 5(b) does not make it clear whether the valuation is to be as at the date of the written request made by the seller executors or whether it is to be at the date that the two independent valuers make their valuations. That may not make much of a difference, as it is implied that all executors will act with reasonable expedition to appoint the independent valuers promptly. It is unlikely to make much of a difference if the valuation is made as at the date of the written request or a month or so later.

45. On balance, I prefer the construction of clause 5(b) whereby the value is to be as at that date that the independent valuers complete their valuations reasonably shortly after the date of the written request by the selling executors. That is because there is an element of artificiality about valuers determining a valuation as at the date a month or two before the date of inspection of the property.

46. Although this analysis of the meaning of clause 5(b) is justifiable on the basis that it is supported by the wording of the provision, it gives rise to the difficulty that, in this case, the seller executors did not give the written request that the provision expressly contemplates will trigger the process of determining the price by reference to the value of the subject property. The seller executors did not do so because they, as the defendants in these proceedings, have unsuccessfully challenged the right of the buyer executors to exercise the testamentary call option.

47. Clause 5(b) does not provide that the time for the commencement of the valuation process is the time when the buyer executors exercise the testamentary call option. If that is the correct construction of the provision, then “as at 10 August 2020” is not the correct date for the determination of the value of the subject property that should be inserted into draft order 1.

48. However, it is equally the case that the defendants are not entitled to have “the current value” inserted in draft order 1, instead of the date proposed by the plaintiffs. Clause 5(b)(1) gave the defendants an express right to initiate the valuation process by giving the written request but they did not do so. I am satisfied that it is an implied requirement of clause 5(b)(1) that the written request is given by the defendants within a reasonable period after the plaintiffs have bound themselves to buy the subject property by the exercise of the testamentary call option. The defendants were not entitled to dispute the plaintiffs’ right to buy the subject property, and then, after the delivery of judgment in favour of the plaintiffs, to trigger the commencement of the valuation process, with the risk that the plaintiffs will be required to pay a higher price than if the requirements of the wills had been satisfied by the defendants.

49. As it has happened, notwithstanding the dispute that arose between the parties, they in fact implemented the first part of the valuation process that is required by clause 5(b)(2)A. The plaintiffs’ valuer valued the subject property at $12,400,000 as at 2 September 2020 and the defendants’ valuer adopted a value of $12,040,000 as at 4 February 2021. Those valuations were obtained and served on the basis that they had been prepared in accordance with the requirements of the wills. That course was taken notwithstanding the existence of the dispute between the parties and I cannot see why it does not bind them. The parties’ respective valuations will stand as their implementation of clause 5(b)(2)A, unless and until some order is made by a competent court declaring the valuations to be ineffective. No such application has been made by the parties. I cannot see why any present doubts as to the date for valuation required by the wills should affect the fact that the parties commissioned valuations in performance of the requirements of the wills.

50. Furthermore, insofar as clause 5(b)(2)B requires that, in the absence of agreement between the two independent valuers, the value is to be determined by an umpire, that logically can only mean that the third valuer is required to review the valuations of the two independent valuers, and probably with the assistance of the umpire's own assessment of value, to decide what the value of the subject property was. As the third valuer is required to be an umpire, he or she must at least have regard to the reasoning of the two original independent valuers.

51. However, whatever approach may be required of the umpire, the proper construction of the wills must require that the resultant determination of value be as at the date of the original two valuations. It is unlikely to matter if the two original valuations are at slightly different dates, provided that the length of time between them is not material.

52. It is necessary for the Court to determine the appropriate terms of order 1 that is now to be made.

53. It will obviously be necessary to replace the words "by no later than 21 August 2021", as suggested by the plaintiffs, with "no later than 28 days after the date of these orders or as otherwise agreed", as suggested by the defendants.

54. The issue that is more problematic is the date at which the valuation is to be made. I have explained above why it should not be "the current value" as suggested by the defendants, and also that it is strictly not "as at 10 August 2020" as suggested by the plaintiffs.

55. As the defendants did not give to the plaintiffs the written request contemplated by clause 5(b)(1), the mechanism established by the wills to determine the date of commencement of the valuation process failed. In the absence of the parties having nonetheless commissioned valuations in accordance with clause 5(b)(2)A, the Court would have to resolve the difficult question of what date was implied by the terms of the will in the absence of a written request being made. That need has been obviated by the conduct of the parties in commissioning valuations in accordance with the wills, and by that conduct they must be taken to have accepted that the determination of the value of the subject property as at the date of the valuations amounted to satisfactory compliance.

56. In the circumstances, the only sensible course in my view is for the order to provide for the date of valuation to be 16 November 2020, which is about halfway between the dates of the two valuation reports.

57. As the parties have not been given an opportunity to comment on this proposed resolution of the dispute, I will give the parties seven days from the commencement of the new law term to advise my Associate if they wish the matter to be relisted for the purpose of the Court receiving submissions as to the date to be inserted in draft order 1.

Costs of determination of prayers 1 to 3

58. As I have noted above, the primary judgment determined the plaintiffs’ claims in prayers 1 to 3 of their statement of claim.

59. As the plaintiffs substantially succeeded on those claims, they seek an order for the payment of their costs by the defendants. They do so on the basis that the litigation was essentially adversarial litigation between the two groups of executors, who had divided themselves into buying and selling executors, so that the proper approach for the Court was to apply the general rule stated in Uniform Civil Procedure Rules 2005 (NSW) (UCPR) r 42.1 that the costs of the issues litigated at the hearing should follow the event.

60. The defendants submit that the proper order for costs is that the defendants’ costs should be paid on the indemnity basis as to 50% out of the estates of each of their parents. That is on the ground that the defendants were sued as executors, so that the defendants’ cost of the proceedings were reasonably incurred by them in connection with the administration of the estates of the testators.

61. The defendants also relied upon the principle that the Court does not apply the general rule in probate matters to the effect that costs follow the event, and may order that the costs of the parties to probate proceedings be paid out of the estate of the deceased, where the manner in which the testator has left his or her affairs has created uncertainty in the proper administration of the estate and it is reasonably necessary for the parties to contest those issues in order to facilitate that administration.

62. The defendants relied upon the often-cited statement of the relevant principles by Powell J (as his Honour then was) in Re the Estate of Hodges; Shorter v Hodges (1988) 14 NSWLR 698 at 709, as follows:

Costs are, of course, in the discretion of the court, but that discretion, being a judicial, and not an unfettered, one must be exercised in accordance with established principle.

The general principle to be applied in adversary litigation is that costs follow the event, those costs being taxed on a party and party basis. However, over the years, a number of exceptions to this general rule have come to be recognised. In the field of probate litigation, two such exceptions have come to be recognised, they being:

1. where the testator has, or those interested in residue have, been the cause of the litigation, the costs of unsuccessfully opposing probate may be ordered to be paid out of the estate;

2. if the circumstances led reasonably to an investigation in regard to the document propounded, the costs may be left to be borne by those who respectively incurred them: see, eg, Mitchell and Mitchell v Gard and Kingwell (1863) 3 Sw & Tr 278; 164 ER 1280; Orton v Smith (1873) LR 3 P & D 23; Wilson v Bassil [1903] P 239; Spiers v English [1907] P 122; Kenny v Wilson; In the Estate of Holtam; Gillett v Rogers (1913) 108 LT 732.

To these exceptions to the general principle should, perhaps, be added the principle that, although a legal personal representative may be entitled to recover from a party to litigation costs only on a party and party basis, he, as a fiduciary, retains the right to an indemnity from the estate, and, thus, may have recourse to the estate for any difference between his costs on a trustee basis and the costs recovered from a party.

While, in the present case, I do not think that the Deceased can be regarded as having been “the cause of the litigation”, in the sense in which that phrase seems to have been used in the cases (see, eg, Orton v Smith); nonetheless, it seems to me that the facts were such as might be said “to lead reasonably to an investigation”. This being so, it seems to me that the appropriate course to adopt in regard to costs is to make no order, but, instead, to leave them to those by whom they were incurred.

63. In that case, where his Honour considered that the facts reasonably justified an investigation, the costs were not ordered to be paid out of the estate, but the parties were left to bear their own costs.

64. In Perpetual Trustee Co Ltd v Baker [1999] NSWCA 244, Giles JA and Brownie AJA said:

[13] Costs are in the discretion of the Court, and the established principle on which the discretion as to costs will normally be exercised is that costs follow the event. In probate litigation, in particular, however, exceptions have been recognised, one being that where the testator has been the cause of the litigation the costs of unsuccessfully opposing probate may be ordered to be paid out of the estate, and another being that if the circumstances led reasonably to an investigation concerning the testator's will the costs may be left to be borne by those who incurred them (see for example In the estate ofHodges: Shorter v Hodges (1988) 14 NSWLR 698 at 709).

[14] The two exceptions tend to overlap. As was said by Santow J in In the estate of Moyle: Moyle v Moyle (18 June 1988, unreported), if a testator is by his mental frailty and other circumstances in a position where the circumstances reasonably call for investigation of the validity of the will "in one sense the testator, though usually with no sense of blameworthy fault, has by his or her conduct caused the litigation to occur". A party reasonably but unsuccessfully propounding or challenging the will, and so bringing about the necessary investigation, should no more have to bear his own costs than pay the costs of the other party. So it has been said that where the conduct and habits and mode of life of a testator have given ground for questioning his testamentary capacity the costs of the unsuccessful party should be paid out of the estate, as distinct from being left to be borne by that party (Davies v Gregory (1873) 3 P & D 28; Roe v Nix (1893) P 55; In the will of Millar (1908) VLR 682), and the costs of both sides in testamentary capacity cases have often been allowed out of the estate (In the will of Severs (1887) 13 VLR 572; Phillips v Dundas (Smith J, VSC 4 December 1995, unreported); Redroff v Miegoch (Santow J, NSWSC, 22 April 1996, unreported); Re Ryan: Williams v Ryan (1998) VSC, 109; In the will of Ryan: Williams v Ryan (Byrne J, VSC, 23 October 1998, unreported); cf Middlebrook v Middlebrook (1963) 26 ALJR 216 where Dixon CJ and McTiernan, Taylor and Owen JJ ordered that the parties bear their own costs but Menzies J would have ordered that the costs be paid out of the estate).

65. In Shorten v Shorten (No 2) [2003] NSWCA 60, Mason P, with agreement of Meagher and Sheller JJA, expressly approved the statement of principle by Powell J that is extracted above.

66. It does not seem to me that these authorities are relevant in the present case because the dispute does not concern the validity of the deceased parents’ wills and whether any circumstances of their way of life or conduct gave rise to reasonable doubt about the validity of their wills or reasonably warranted investigation on that subject.

67. More germane are the authorities that justify payment of an executor’s costs out of the estate when the litigation is necessary to resolve a genuine question about the proper construction of the will. In such a case, the executor’s costs will generally be a testamentary expense for which the executor is entitled to indemnity out of the estate. In Murdocca v Murdocca (No 2) [2002] NSWSC 505 at [41], Campbell J (as his Honour then was) held that testamentary expenses of an executor included “costs of any application to the Court as to the interpretation of a will.” Ward JA (with whom Emmett JA agreed at [86]) said in Warton v Yeo [2015] NSWCA 115:

[74] Clause 6 of the will provides for the trustee to pay all just debts, funeral and testamentary expenses out of the residue. The balance is then to be distributed to the residuary beneficiaries in the specified shares. Expenses properly incurred in the construction of a will, that is, expenses that need to be incurred to enable the proper administration of the estate, are testamentary expenses (see, eg, Murdocca v Murdocca (No 2) [2002] NSWSC 505 at [40]-[42] and the authorities cited therein). Generally, that is so whether or not they are incurred by the executor or by other parties, such as beneficiaries.

68. The plaintiffs responded by submitting that the defendants had mischaracterised their role in the litigation as being executors joined in circumstances where they were entitled to have the benefit of a determination by the Court of the proper construction of a doubtful provision in a will. The plaintiffs referred to the fact that prayer 1 in the statement of claim sought a declaration that, on the proper construction of the wills, the plaintiffs, having made an election on behalf of the testamentary trusts of which they were beneficiaries, were entitled to retain the subject property, and the defendants as executors were bound by the election to comply with the process in clause 5(b) of the wills. The plaintiffs also referred to pars 19 and 20 of the statement of claim, but it is significant that both of those paragraphs commence with the words: “Upon its true construction, clause 5(b) of the wills…”

69. The essence of the position taken by the defendants at the hearing as to the proper construction of the wills is as set out in the primary judgment in the following terms:

18   The defendants say that clause 5(b) does not apply, because all of the parties wish to keep Edgewood Park, albeit that the defendants wish to do so on different terms than the plaintiffs. The defendants also deny that clause 5(b) creates any testamentary option, principally by reason of the inclusion of the words "of a written request by the other Executors" in clause 5(b)(1). They say that, in fact, on the proper construction of clause 5(b), it is they, rather than the plaintiffs, who have the right to decide, by means of the written request referred to, whether or not the parties as executors should sell Edgewood Park to the plaintiffs.

70. I am satisfied, upon a review of the passages in the primary judgment dealing with the history of the correspondence between the parties, that the defendants believed that the construction of the wills for which they contended was reasonably open, and I would infer that they conducted the defence on the basis of legal advice to that effect.

71. It may sometimes be difficult, in cases where executors have a beneficial interest in the estate, to determine whether they have pursued litigation in order to further their own personal interests, or whether their conduct should fairly be accepted as being a proper performance of their executorial duties, notwithstanding the consequential personal benefit that success in the proceedings will afford them. At one end of the spectrum, the executors may in reality be using the resources of the estate to pursue personal benefit. At the other end, the executors’ duty to properly administer the estate may oblige the executors to prosecute the proceedings, in circumstances where the natural consequence of a particular outcome will be to benefit the executors. Executors should not be prejudiced in respect of their right of indemnity from the estate for their costs of properly administering it, when they cannot avoid a collateral benefit to themselves from a particular outcome. Each case will depend upon its own facts.

72. In the present case, I am satisfied that there was sufficient doubt as to the proper construction of the relevant terms of the wills both to justify the plaintiffs as executors in prosecuting the proceedings and the defendants as executors in defending them. As I have noted, the relief sought by the plaintiffs involved a declaration as to the relevant effect of the wills, and the material allegations were as to their proper construction.

73. The complexity of the reasoning contained in this and the primary judgment, concerning what I consider to be the proper construction of the relevant provisions in the wills, demonstrates in my view that the issue was truly controversial and arguable either way. The essential difficulty in the wording of clause 5(b) is, if my reasoning is correct, that what it in fact created was a testamentary call option exercisable by the buying executors, without expressly providing for the act of exercise. The express provision of a right in the selling executors to deliver a written request to trigger the obligation of the buyer executors to enter into a contract created an appearance that the seller executors had a put option, when that was obviously inconsistent with the intent of the wills. The effect of the wording is not clear, and only emerges when clause 5(b) is understood in the context where all of the executors must sell the residue of the estates in order to divide it into seven equal shares, in order to settle those shares on the seven testamentary trusts established by the wills for the benefit of each of the executors. To give effect to clause 5(b), it is necessary to read in steps that are not expressed.

74. Furthermore, the uncertainty in the proper construction of the wills has led to confusion and to the apparent failure of the parties to implement the process established by clause 5(b) in a manner that has enabled the clear identification of the date at which the subject property was required to be valued. That has led to the Court recommending the pragmatic solution to that particular problem that is suggested above.

75. This reasoning justifies the conclusion that both the plaintiffs and the defendants, all being executors, were justified in commencing and defending these proceedings as a proper incident of their duties as executors, so that the costs of all parties should be paid as to 50% each out of the estates of the two deceased parents.

Costs of discontinued proceedings

76. The plaintiffs sought additional relief in prayers 4 to 6 of the statement of claim for the purpose of giving effect to a provision in the wills that they claimed obliged the executors to appoint the first plaintiff to manage the real estate in the deceased parents’ estates, and to provide sufficient funds to enable the first plaintiff to maintain the real estate until it was either sold or transmitted in accordance with the parents’ wills.

77. The plaintiffs pleaded this claim in pars 40 to 49 of their statement of claim, based upon clause 6(c) which provides:

I direct:

…

(c)   that my Executors are to appoint my son Joseph Refalo to manage my real estate and to provide sufficient funds so that my real estate is properly maintained until such real estate is either sold or transmitted in accordance with the terms of this my Will…

78. By their defence, the defendants said that they were ready, willing and able to appoint the first plaintiff to manage the real estate, but added:

the Defendants have been seeking for Sellable Real Estate to be sold, but the Plaintiffs have failed to authorise the sale of the Sellable Real Estate;

some of the proposed expenditure was for improvements and upgrades and not for maintenance;

the written leases for some of the properties expressly provide that the tenants are responsible for maintenance, not the landlord;

it is a conflict of interest and a breach of fiduciary duties for [the first plaintiff] to spend the estate’s money maintaining, upgrading or improving property that the Plaintiffs including [the first plaintiff] wish to purchase.

79. Thus, the defendants did not resist appointing the first plaintiff to manage the real estate, but they claimed that they should not, as executors, be obliged to provide all of the funds sought by the plaintiffs, for the reasons set out in their defence.

80. On 8 July 2021, the Court made the following relevant orders in these proceedings by consent of the parties:

1.   That the Defendants execute the attached Authority in accordance with clause 6(c) of the Will of Jane Refalo who died on 7 September 2018, and the Will of Charlie Refalo (also known as Carmel Refalo) who died on 4 June 2019 both dated 26 September 2016 (the “Wills”).

2.   The Court notes that there is still an issue between the parties as to the meaning of “maintenance” in clause 6 of the will and whether in any event the tenant is responsible for the works pursuant to the lease between the deceased registered proprietors and Hanover Lodge Pty Ltd and that the parties will seek further directions on 22 July 2021 in relation to that issue and whether “maintenance” includes the following works:

(a)   Replacement of ducted air-conditioning unit;

(b)   Repair ceiling where air-conditioner leaked into the hallway of residence;

(c)    The repair of absorption trenches;

(d)    The replacement of steel and fencing posts, damaged due to rust, wood rot and termites (approximately 50% to 60% of posts require replacement);

(e)   Replace rusted unusable portions of gutters and downpipes to sheds, building and stables (that is the portions not already replaced by the tenant, Hannover Lodge Pty Ltd);

(f)   Replace timber posts in open bay shed damaged from termites; and

(g)   Termite inspection and treatment is live termites found.

…

5.   Orders that the matter for consideration at the Expedited Hearing of this matter is the construction of clause 5(b) of the Wills only.

81. The attached authority referred to in order 1 was an order appointing the first plaintiff in accordance with the directions given in clause 6(c) of the wills.

82. The date of 22 July 2021 referred to in order 2 was the date of the hearing.

83. Early in the hearing, at T 6.8, during submissions on the admissibility of certain evidence that led the Court to consider what issues were before the Court for determination, I said: “Prayer 4 seeks a declaration on the proper construction of the wills. Now that relates to clause 6(c). So that's probably not before the Court.” At T 6 .20, senior counsel for the plaintiffs said that the observations that I had made, which included the one that I have just extracted, articulated his understanding of the matter, following from the order for expedition and order 5 made on 8 July 2021. Senior counsel for the defendants did not demur from this position. The hearing then continued to deal with prayers 1 to 3 of the statement of claim. As I understand it, nothing more was said or done about the issues raised by clause 6(c) of the wills.

84. It appears from this history of the proceedings that although some orders were made by consent on 8 July 2021 that related to the issues raised by clause 6(c) of the wills, those orders did not exhaust the claim, so that it remained live and was not dealt with at the hearing on 22 July 2021.

85. By par 43 of the plaintiffs’ 22 September 2021 submissions, the plaintiffs advised the Court that they now propose to discontinue the balance of the substantive relief claimed in prayers 4 to 6 of their statement of claim.

86. UCPR r 12.1 provides in relation to the discontinuance of proceedings by a plaintiff:

(1)   The plaintiff in any proceedings may, by filing a notice of discontinuance, discontinue the proceedings, either as to all claims for relief or as to all claims for relief so far as they concern a particular defendant—

(a)    with the consent of each other active party in the proceedings, or

(b)    with the leave of the court.

87. As I understand it, the plaintiffs have not yet formally filed a notice of discontinuance. The Court would give the plaintiffs leave to do so if they wish to have it. That would leave the question of costs of the relevant part of the proceedings to be dealt with.

88. The plaintiffs acknowledged that UCPR r 42.19 provides:

(1)   This rule applies to proceedings that are discontinued by the plaintiff, as referred to in rule 12.1.

(2)   Unless the court orders otherwise or the notice referred to in rule 12.1(2) otherwise provides, the plaintiff must pay such of the defendant’s costs as, at the date on which the notice of discontinuance was filed, had been incurred by the defendant in relation to each claim in respect of which the proceedings have been discontinued…

89. If the plaintiffs formally discontinue the balance of the proceedings, then they will be required to pay the defendants’ costs of that part of the proceedings unless the Court orders otherwise. The plaintiffs submitted that the Court should order otherwise because the plaintiffs, as the discontinuing parties, have obtained practical extra-curial success, and in that circumstance the proper exercise of the Court’s discretion will usually be to make no order as to costs: see Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 625; [1997] HCA 6.

90. Paragraph 8 of the plaintiffs’ reply submissions asserts that “on the face of the pleadings, one of the major issues for the Plaintiffs was determined in their favour by the making of Consent Orders”. I take this to mean that the plaintiffs’ position is that the making of order 1 on 8 July 2021 constituted “practical extra-curial success” on the part of the plaintiffs in respect of their claim based upon clause 6(c) of the wills. It does not appear that the plaintiffs’ success on the claim in prayers 1 to 3 is relevant to this submission. The plaintiffs submitted that, as there has been no hearing on the merits of the clause 6(c) claim, and none of the evidence was read or tested, the Court should make no order as to the parties’ costs of this part of the proceedings, because the Court was not in a position, absent a hearing, to decide whether or not the making of order 1 on 8 July 2021 the Court had resolved the real issue between the parties.

91. The defendants responded by submitting that, as they pleaded in their defence, they were always willing to appoint the first plaintiff to manage the real estate. The issue was whether clause 6(c) of the will obliged them to provide funds to the first plaintiff, having regard to the matters pleaded in the defence that I have set out above.

92. It is difficult for the Court to resolve this dispute, as it does not have evidence concerning the circumstances in which the parties agreed to the Court making the consent orders on 8 July 2021. Order 1 obliged the defendants to execute the appointment of the first plaintiff, but that was not an issue, as the defendants had not resisted making that appointment. Order 2 was formulated in terms of a notation by the Court “that there is still an active issue between the parties as to the meaning of “maintenance” in clause 6 etc.” The expression “still an active issue” suggests that what followed was the only remaining issue, and that the balance of the plaintiffs’ claim to enforce clause 6(c) had been abandoned by the plaintiffs, with the consent of the defendants, in circumstances where the Court was not asked to make any order for costs in relation to the part of the claim that was abandoned. However, order 2 clearly preserved the issue concerning the meaning of “maintenance” in clause 6. If the plaintiffs discontinue the balance of their proceedings, it will be that issue that remains unresolved by judicial determination.

93. As I understand it, Hannover Lodge Pty Ltd was a lessee of the subject property, so that, when the plaintiffs become registered proprietors of that property, they will be able to exercise any rights of the lessor under the lease against the lessee.

94. The Court has no means of knowing the extent, in reality, to which the success that the plaintiffs have had in these proceedings has had the result that the issues that were preserved by order 2 made on 8 July 2021 amounted to “practical extra-curial success” on the plaintiffs’ part.

95. If the truth is that the plaintiffs have achieved that level of success, then the conventional response of the Court would be to make no order as to the parties’ costs of any part of the claim based upon clause 6(c) of the wills. It appears that the parties have settled the claim insofar as it related to order 1 made on 8 July 2021, and also that part of the balance of the claim that was implicitly abandoned by agreement by reason of order 2. Consequently, the Court would not make any order for costs in respect of those parts of the claim.

96. That leaves the balance of the claim preserved by order 2. The plaintiffs have not yet formally discontinued that part of their claim. If they do so, the conventional response of the Court would be to order that the plaintiffs pay the defendants’ costs of that part, unless as a result of further proceedings on the costs issue, the plaintiffs were able to satisfy the Court that, in fact, the success on their claims that they did achieve had obviated the need to pursue the preserved part of the claim to enforce clause 6(c).

97. Given that the Court has decided that the costs of both sets of parties should generally be paid on the indemnity basis out of the two estates, it would be unfortunate if the parties were unable to resolve by agreement this residual costs issue, as it is unlikely to be cost-effective for the parties to engage in the contest that would be necessary to enable the Court to decide the issue.

98. The parties should confer for the purpose of agreeing, if possible, those parts of the short minutes of order necessary to complete these proceedings that are set out above at [9] that were in issue in the light of these reasons for judgment. If necessary, the parties may arrange with my Associate for the proceedings to be relisted to resolve any outstanding issues.

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Amendments

28 February 2022 - correction to date in par 56

Decision last updated: 28 February 2022