Segal v Osborne (No 2)

[2016] NSWSC 1328

Supreme Court

New South Wales

Medium Neutral Citation:

Segal v Osborne (No 2) [2016] NSWSC 1328

Hearing dates:

On the papers

Date of orders:

19 September 2016

Decision date:

19 September 2016

Jurisdiction:

Equity

Before:

Darke J

Decision:

See paragraph [55].

Catchwords:

EQUITY – Trusts and trustees – Powers, duties, rights and liabilities of trustees – Whether trustees entitled to recover costs of proceedings on indemnity basis – Whether trustees entitled to recover costs from trust assets – Whether trustees should first seek to recover costs from unsuccessful plaintiff – Whether trustees should then have recourse to unsuccessful plaintiff’s notional share of trust assets

 

PROCEDURE – Costs – Third defendant applied for joinder to proceedings – No relief sought against third defendant – Limited participation in proceedings by third defendant – Whether unsuccessful plaintiff should pay third defendant’s costs

  PROCEDURE – Costs – Whether unsuccessful plaintiff should indemnify other beneficiary for costs paid out of other beneficiary’s notional share of trust assets

Legislation Cited:

Civil Procedure Act 2005 (NSW), ss 3, 98
Conveyancing Act 1919 (NSW), s 66G
Trustee Act 1925 (NSW), s 59(4)
Supreme Court Act 1970 (NSW), s 76
Uniform Civil Procedure Rules 2005 (NSW), r 42.25

Cases Cited:

Balkin v Peck (1998) 43 NSWLR 706
Bovaird v Frost [2009] NSWSC 917
Cochrane v Cochrane (1985) 3 NSWLR 403
Commonwealth Bank of Australia v Segal [2016] NSWSC 1016
Commonwealth Bank of Australia v Segal (No 2) [2015] NSWSC 656
Drummond v Drummond [1999] NSWSC 923
Fay v Moramba Services Pty Ltd [2010] NSWSC 725
Foord v Brock [2005] NSWCA 156
Frost v Bovaird [2012] FCAFC 60
Grizonic v Suttor [2011] NSWSC 471
In re Beddoe; Downes v Cottam [1893] 1 C
In re Jones; Christmas v Jones [1897] 2 Ch 190
Miller v Cameron (1936) 54 CLR 572
National Trustees Executors and Agency Company of Australasia Ltd and anor v Barnes (1941) 64 CLR 268
Nissen v Grunden (1912) 14 CLR 297
Northey v Juul [2014] NSWSC 464
Registrar-General v Gill [1994] NSWSC 261; (2015) 17 BPR 33, 709
Segal v Barel (No 2) [2013] NSWCA 148
Segal v Osborne [2016] NSWSC 941
Warton v Yeo [2015] NSWSC 115

Texts Cited:

J D Heydon, M J Leeming and P G Turner, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies, (5th ed 2015, LexisNexis Butterworths)

Category:

Costs

Parties:

Phillip Segal (Plaintiff)
Michael Osborne (First Defendant)
Margaret Colleen Hole (Second Defendant)
Elie Barel (Third Defendant)

Representation:

Counsel:
A Cornish (Plaintiff)
S Chapple (First and Second Defendants)
C Gleeson (Third Defendant)

  Solicitors:
Low Doherty and Stratford (Plaintiff)
Osborne Lawyers (First and Second Defendants)
Leigh Johnson Lawyers (Third Defendant)

File Number(s):

2014/342038

Publication restriction:

None

Judgment

Introduction

1. I delivered my judgment in this matter on 7 July 2016: Segal v Osborne [2016] NSWSC 941. On that occasion, I ordered that the plaintiff’s Amended Statement of Claim be dismissed and that costs should follow the event. I directed that, if the parties could not reach agreement concerning the appropriate orders for costs, the parties should agree upon a timetable for the making of brief written submissions on that question.

2. The parties have agreed upon a timetable and have filed submissions regarding the question of costs. These submissions concern, in large part, whether and in what manner costs should be drawn from the remaining proceeds of the sale of the North Bondi property at issue between the parties. These proceeds (“the trust assets”) are held on trust in equal shares for the plaintiff (Dr Phillip Segal) and the third defendant (Mr Elie Barel) by the first and second defendants (“the trustees”), who were appointed as trustees for sale of the property pursuant to s 66G of the Conveyancing Act 1919 (NSW) by the Court of Appeal: Segal v Barel (No 2) [2013] NSWCA 148.

3. The trustees seek orders that their costs of the proceedings be paid on an indemnity basis out of the trust assets. The trustees further argue that it is appropriate that these costs be charged upon Dr Segal’s share of the trust assets in the first instance, and that, to the extent that Mr Barel’s notional share of the trust assets is required for payment of any costs order, Dr Segal should indemnify Mr Barel.

4. Mr Barel generally supports the orders sought by the trustees. He additionally seeks orders that the costs of the trustees include costs resulting from Dr Segal’s delay in completing his purchase of the property, and that such costs not be drawn from Mr Barel’s share of the trust assets. Mr Barel also seeks an order that Dr Segal pay Mr Barel’s costs of his application to be joined to the proceedings, of his appearance and representation during the hearing, and of his submissions as to costs.

5. Dr Segal acknowledges that costs should follow the event and that he should pay the trustees’ costs of the proceedings on the ordinary basis. Dr Segal resists, however, any order that these costs be paid on an indemnity basis, that costs should be recoverable from the trust assets, or that Dr Segal should be required to indemnify Mr Barel in respect of any costs drawn from Mr Barel’s notional share of the trust assets. Dr Segal also resists the additional orders sought by Mr Barel.

Ordinary or Indemnity Costs

6. Dr Segal submits that deficiencies in the trustees’ performance of their duties “warrant the deprivation of the indemnity that the Trustees would or may otherwise enjoy”.

7. Trustees will ordinarily be entitled to an indemnity against all proper costs, charges and expenses incidental to the execution of the trust, including legal costs: National Trustees Executors and Agency Company of Australasia Ltd and anor v Barnes (1941) 64 CLR 268 (“Barnes”) at 274 (Starke J), 277 (Williams J); Fay v Moramba Services Pty Ltd [2010] NSWSC 725 at [4]. This principle of indemnity is recognised by the general law. It also has equivalents in statute and in the Uniform Civil Procedure Rules (UCPR). In particular, s 59(4) of the Trustee Act 1925 (NSW) provides that:

A trustee may reimburse himself or herself, or pay or discharge out of the trust property all expenses incurred in or about execution of the trustee’s trusts or powers.

8. Similarly, UCPR r 42.25(1) provides that:

Subject to subrule (2), a person who is or has been a party to any proceedings in the capacity of trustee or mortgagee is entitled to be paid his or her costs in the proceedings, in so far as they are not paid by any other person, out of the fund held by the trustee or out of the mortgaged property, as the case may be.

9. The general law rule is, however, subject to certain exceptions (Drummond v Drummond [1999] NSWSC 923 at [43]-[44]), including circumstances of impropriety (In re Jones; Christmas v Jones [1897] 2 Ch 190 at 197) or a lack of honest conduct (Miller v Cameron (1936) 54 CLR 572 at 578-579). Similarly, exceptions to trustees’ entitlements under UCPR r 42.25(1) are set out in r 42.25(2):

The court may order that the person’s costs not be [paid in accordance with UCPR r 42.25(1)] if:

(a) the trustee or mortgagee has acted unreasonably, or

(b) in the case of a trustee, the trustee has in substance acted for his or her own benefit rather than for the benefit of the fund.

10. Dr Segal suggests that the trustees breached their duties “by failing to give due consideration to whether Mr Barel should have been permitted to continue in occupation of the [p]roperty and, if so, then on what terms”. As Dr Segal correctly notes, I found in the substantive proceedings that the trustees’ duties “required them to give due consideration to whether Mr Barel should continue in occupation and, if so, on what terms”, and that in discharging those duties the trustees “ought to have ascertained that, following their appointment, Mr Barel had no right of occupation, and thus it was open to them to seek an occupation fee”: Segal v Osborne (supra) at [132].

11. However, I am not satisfied that this breach is of sufficient magnitude to warrant departure from the general rule, having regard both to the fact that no loss was suffered by the trust estate as a result of this breach and to the (minimal) scale of the breach in itself. The trustees’ error of judgment (in failing to inquire further into the rights and obligations of Mr Barel) was one issue among many in the litigation and did not ultimately prove dispositive to the outcome. The breach could not be described as (and has not been alleged to be) impropriety or dishonest conduct of the kind found in previous authorities to warrant a departure from the ordinary rule permitting indemnity, nor (on the more limited basis contended by the plaintiff) to warrant costs on the ordinary basis rather than the indemnity basis. This breach also cannot be said to satisfy either of the criteria for dispensing with UCPR r 42.25(1) set out in subclause (2).

12. Although it has previously been observed that “if the trustee has resisted a claim but has been found guilty of breach of trust, the trustee’s costs of resisting the action should be paid by the trustee as the penalty for breach of trust” (Northey v Juul [2014] NSWSC 464 at [96]), I do not believe that such a result would be appropriate in the present case. The source of this principle – Kekewich J’s assertion that “if an action is brought for the purpose of making the executor or administrator liable for breach of trust, and he has been found guilty of a breach of trust, and costs have been incurred in resisting the action, it is only right that, when those costs have been ascertained, the executor or administrator should pay them as part of the penalty for the breach of trust” (Inre Jones; Christmas v Jones (supra) at 197) – presupposes liability for breach of trust. There was no such liability in the present case owing to the lack of resulting loss. These observations ought to be interpreted as part of a broader discussion on the part of Kekewich J emphasising the right of trustees to indemnity for costs “if they have been incurred without impropriety or fraud, or if they do not partake of that monstrosity to which I have alluded” (Inre Jones; Christmas v Jones (supra) at 198; see also Nissen v Grunden (1912) 14 CLR 297 at 310 (Griffith CJ)). The trustees’ conduct in the present case may be considered equivalent to “[a] mere erro[r] of judgment which fall[s] short of negligence or unreasonableness” (Inre Beddoe; Downes v Cottam [1893] 1 Ch 547 at 562), and hence as being of insufficient gravity to warrant personal loss to the trustees.

13. Dr Segal further suggests that the trustees may have failed to exercise due care in supervising the property during their period of trusteeship. As Dr Segal acknowledges, I made no conclusive findings as to whether there was a want of due care in this regard: Segal v Osborne (supra) at [127]. Taking Dr Segal’s claim at its highest, even if breach were proven in this regard this breach would, again, not be sufficient to warrant a departure from the general rule, as expressed either at general law or under the UCPR. This conclusion, as above, takes account both of the fact that no damage was suffered and the limited nature of the breach.

14. I therefore do not accept that the propositions advanced by Dr Segal are sufficient, individually or cumulatively, to displace the general rule that trustees are entitled to be reimbursed from the trust assets for all charges and expenses incurred in the execution of the trust. This entitlement extends, in this case, to recovery of the costs of these proceedings on an indemnity basis. This entitlement is not ousted by the failure of the trustees to seek judicial advice prior to defending the substantive proceedings: Grizonic v Suttor [2011] NSWSC 471 at [60]; Bovaird v Frost [2009] NSWSC 917 at [32].

Recovery of Costs from Trust Assets

15. Dr Segal’s counsel noted Brereton J’s observation in Grizonic v Suttor (supra) at [57] that “[i]f the trustees are not able to recover all the costs from the beneficiary then – absent misconduct on their part – they will ordinarily be allowed to recover the deficiency, on an indemnity basis, from the trust assets” (emphasis added). Brereton J expressed the same principle in equivalent terms in Fay v Moramba Services Pty Ltd (supra) at [4]: “[T]o the extent that the defendants [as trustees] do not recover full indemnification of their costs from the plaintiffs, they are entitled to be indemnified by the trust estate” (emphasis added).

16. Dr Segal argues that it is not suggested that he is incapable of paying the trustees’ costs. It is further argued that such inability is required for costs to be recovered from the trust estate.

17. As a general rule, “where trustees are sued by beneficiaries complaining of some act or omission, the trustee is entitled to defend his or her conduct as an incident of administration and to be indemnified in respect of the costs of so doing”: Fay v Moramba Services (supra) at [4]. This rule is normally expressed in absolute terms, and has been expressed not solely as a right of indemnification but as a right to indemnity from a particular source: “[a] trustee is entitled to be indemnified out of the trust estate against all his proper costs, charges and expenses incident to the execution of the trust” (Barnes (supra) at 277 (Williams J)). This statement of principle is, however, qualified by the principles outlined, and the remedy ordered, by the High Court in Barnes.

18. In Barnes (supra), Williams J (with whom Rich ACJ agreed at 273) provided for retention of costs from the assets of the estate insofar as such costs were not recoverable from the unsuccessful plaintiffs (who were beneficiaries under the trust): Barnes (supra) at 280. Starke J, concurring with the majority, similarly observed (at 276) that the executors, having succeeded in defending the claim brought by the beneficiaries of the trust in issue, “should exhaust their remedies against the plaintiffs already mentioned [the unsuccessful beneficiaries] before resorting to the estate of the testatrix”. The principles identified in Barnes with regard to indemnification from estate assets have been cited and applied in the context of trusts: see Grizonic v Suttor (supra) at [57].

19. This principle sits somewhat strangely in light of the fact that the two forms of trustees’ rights of indemnity (against the trust property itself and, additionally, against beneficiaries personally) are traditionally expressed as alternatives (see Balkin v Peck (1998) 43 NSWLR 706 at 710), rather than with the former presupposing non-recovery under the latter (in respect of legal costs). Trustees’ entitlements are also generally expressed in terms of a “right of indemnity out of trust assets in respect of legal costs”, rather than by reference to the conditional nature of such indemnity: see Frost v Bovaird [2012] FCAFC 60 at [47]. Nonetheless, the principle in Barnes has not been disapproved by any subsequent decision of the High Court.

20. The principles arising from Barnes (supra), as well as their contemporary application in light of UCPR 42.25(1), were considered by Slattery J in Northey v Juul (supra). As Slattery J noted at [131], the High Court’s findings in Barnes were reached “essentially after the inconvenience of enforcing the costs orders was established” (see Barnes at 275 (Starke J) and 279-280 (Williams J)). Despite Williams J’s observation (at 280 in Barnes (supra)) that the orders “should… provide that the trustees should recover as much as their costs as possible under this order in the first instance, and that, in so far as they are not recovered thereunder, the trustees should be authorized to retain them as between solicitor and client, first out of the shares of the nine beneficiaries [that is, against the instigators of the proceedings] and, after these shares have been exhausted, out of those of the twenty-eight”, Slattery J emphasised (at [131] in Northey v Juul (supra)) that “[t]he High Court [in Barnes] did not say that the trustee was required to recover as much of their costs as possible seeking the balance from the estate”.

21. Having previously observed (at [128] in Northey v Juul (supra)) that the language of UCPR r 42.25(1) allows “that an order may be made conditioned on a failure to recover the costs from the unsuccessful party, who is primarily liable to meet those costs orders”, Slattery J acknowledged (at [134]) that UCPR r 42.25(1) “do[es] not prescribe any more than that the costs be “not paid” by another person”, and does not prescribe which matters must be established for the Court to determine such. In his Honour’s view (at [135]), “UCPR r 42.25(1) may be somewhat broader than the position at general law”, even having regard to prior authority that that clause “in substance reflects the position at general law” (Bovaird v Frost (supra) at [27]-[28]) – insofar as the position reached in Barnes assumed that costs “have not only not been recovered but are not recoverable from the object of the costs order”. (UCPR 42.25 was also found to differ from the position at general law, albeit in another respect, in Warton v Yeo [2015] NSWCA 115 at [10].)

22. Slattery J concluded (at [136] in Northey v Juul (supra)) that, for a trustee to demonstrate their entitlement to payment of costs of the proceedings out of the trust assets under UCPR r 42.25(1), it is sufficient that the trustee “show that the trustee’s bill of costs, whether in taxable form or not, has been presented to the party against whom the costs order was made and that after a reasonable time some part of the amount of the bill of costs has not been satisfied”. This was not asserted as a definitive, exhaustive requirement in every case; his Honour noted (at [136]) that “[t]here may be some circumstances in which more than this is required”.

23. The parties’ submissions in the present case did not advert to Northey v Juul. Argument between the parties in this regard was focussed upon the interpretation and application of the principles identified in Grizonic v Suttor (supra).

24. The circumstances of Northey v Juul (supra), including the desirability of protecting the trust assets against further “collateral damage”, rendered a conditional reimbursement appropriate in the interests of facilitating a just, quick and cheap resolution of the real issues in the proceedings.

25. In the present case, there is certainly the potential for disputes about costs to continue, and for such disputes to adversely affect the trust fund. It is desirable that any costs orders be framed in a way that subtracts from, rather than adds to, that potential. It is also desirable that the burden of the costs fall upon the unsuccessful plaintiff rather than Mr Barel.

26. I consider that the trustees should in the first instance seek to recover their costs from Dr Segal. As has been submitted on Dr Segal’s behalf, there is no suggestion that he is incapable of paying the costs. The trustees should submit a bill of costs and demand payment from Dr Segal. If payment is not forthcoming within a reasonable period (of, say, two months), it will be up to the trustees to decide whether it is in the interests of the trust to further pursue Dr Segal and, if so, to what extent.

27. However, I think that the trustees should then be able, if they consider it appropriate, to seek recovery of any unpaid costs from the trust assets.

28. This regime seems to me to be consistent with the principles laid down in Barnes (supra), UCPR r 42.25, and the approach taken by Slattery J in Northey v Juul (supra).

Costs of Late Completion

29. Mr Barel contends that, had Dr Segal been in a position to complete his purchase on 20 January 2014, the trustees would not have incurred costs in attempting to complete the contract between that date and 13 March 2014. Mr Barel argues that the recovery of these costs from the trust assets would adversely and unfairly affect him in circumstances where he is not at fault for Dr Segal’s failure to complete on the designated date. Mr Barel hence seeks that these costs be included within the costs of the trustees and, as with other costs, that Dr Segal be required to indemnify Mr Barel for any liability for these costs.

29. Mr Barel submitted that the Court had power to make such an order pursuant to s 98(6)(a) of the Civil Procedure Act 2005 (NSW). Dr Segal contests this, arguing that s 98(6)(a) is only intended to permit orders “in respect of the administrative costs incurred by trustees in, or incidental to, proceedings in the Court” (emphasis in original).

30. Subsections 98(1) and (6) of the Civil Procedure Act provide, relevantly, as follows:

(1) Subject to rules of court and to this or any other Act:

(a) costs are in the discretion of the court, and

(b) the court has full power to determine by whom, to whom and to what extent costs are to be paid, and

(c) the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis…

(6) In this section, costs include:

(a) the costs of the administration of any estate or trust, and

(b) in the case of an appeal to the court, the costs of the proceedings giving rise to the appeal, and

(c) in the case of proceedings transferred or removed into the court, the costs of the proceedings before they were transferred or removed.

32. In Foord v Brock [2005] NSWCA 156, Bryson JA considered the interpretation of the now-repealed s 76(1)-(2) of the Supreme Court Act 1970 (NSW) – expressed in relevantly equivalent terms to s 98(1) and (6) of the Civil Procedure Act. His Honour stated (at [48]) that the definition of ‘costs’ provided in s 76(2) of the Supreme Court Act should be read in light of the definition of ‘costs’ in s 19(1) of the Supreme Court Act, providing, relevantly, that “[c]osts includes fees, charges, disbursements, expenses and remuneration”. By extension, s 98 of the Civil Procedure Act should similarly be read in light of s 3(1) of the Civil Procedure Act, in which “costs” are defined as follows:

costs, in relation to proceedings, means costs payable in or in relation to the proceedings, and includes fees, disbursements, expenses and remuneration.

33. Having regard to this context, Bryson JA observed (in Foord v Brock (supra) at [49]) that “in its ordinary and natural meaning” s 76(2)(a) “refers to administration of estates and trusts which are proceedings in the Court, and to administration of estates and trusts which are incidental to proceedings in the Court”. Bryson JA stated (at [54]) that “circumstances may make an administration incidental to proceedings”, including in circumstances where “there were an order that the administration of an estate or trust be conducted under the directions of the Court”.

34. I am not satisfied that any costs arising from late completion of the contract are incidental to the present proceedings. While the reasons underlying the late completion were a matter in issue in the present proceedings, I am not satisfied that any costs incurred in the administration of the trust occasioned by Dr Segal’s conduct in this regard should be regarded as part of the costs of these proceedings.

Third Defendant’s Costs

35. The third defendant was not designated as such by Dr Segal. Mr Barel filed a Notice of Motion applying to be joined to these proceedings on 21 September 2015, and orders to this effect were made on 23 October 2015. Mr Barel argues that his appearance resulted from Dr Segal having brought proceedings “in such a way as to adversely affect his interests”, despite no orders having been sought against him; that he has achieved his object in participating in these proceedings; and that costs should hence follow the event. Mr Barel further argued that his “limited participation” in proceedings (including the retention of counsel) resulted from his participation as a witness and the need to respond to substantive allegations against him.

36. I am not satisfied that Dr Segal should pay Mr Barel’s costs of the proceedings.

37. Following his application to be joined to the proceedings, Mr Barel’s participation was in practice very limited. On the first day of the hearing, Mr Barel’s counsel noted that she did not intend to make submissions; no written submissions were filed on behalf of Mr Barel prior to the current dispute as to costs. Mr Barel’s counsel cross-examined none of the witnesses, including Mr Barel himself (who was called by the trustees).

38. I do not accept that Mr Barel’s participation as third defendant was a necessary response to the potential implications of any relief sought by Dr Segal. I have had regard, in this respect, to the limited scope and nature of Mr Barel’s ultimate contribution to the determination of those issues.

39. I note, in this regard, that Mr Barel argues that “[w]ere it not for the potential cost risk occasioned by the Trustees’ retention of the trust fund and their entitlement to draw on those funds for their costs, Mr Barel need not have appeared”. I am not satisfied that his participation in these proceedings prior to the current dispute as to costs was reasonably necessary to mitigate such “potential cost risk”.

40. Mr Barel’s submissions refer to “substantive allegations” made against him, which (it is argued) served to justify his participation in the hearing as third defendant. As noted in the principal judgment, Dr Segal’s counsel did not, during the course of cross-examination, put to Mr Barel that he was responsible for the removal of a kitchen cabinet or two wardrobes from the property – that is to say, Mr Barel was not accused of removing two of the three items said to have been taken from the property: Segal v Osborne (supra) at [62] and [67]. It was, furthermore, not contested between the parties that Mr Barel removed the third item (the dishwasher in the front residence) from the property prior to the completion of the contract. I do not accept that Mr Barel’s participation in the proceedings was a necessary response to any such “substantive allegations”. In my opinion, Mr Barel should bear his own costs.

Charging upon Shares of the Trust Assets and Indemnification of the Third Defendant

41. Dr Segal argues that s 98 of the Civil Procedure Act “does not confer power upon the Court to determine the fund from which costs are to be paid”. This submission appears, however, to be at odds with the Court’s discretion both to award costs and to determine “by whom, to whom and to what extent costs are to be paid” under s 98(1). In any event, orders for payment of costs arising from unsuccessful litigation against trustees from the shares of the beneficiaries responsible for such litigation are well-established: Barnes (supra) at 280-281; Grizonic v Suttor (supra) at [58] and [61]; Northey v Juul (supra) at [146]-[149].

42. In submissions, Dr Segal conceded that, should the Court permit the trustees to be indemnified from the trust assets, an order that the trustees have first recourse to his share of the trust assets would not be opposed. I am satisfied that this should occur if (in the circumstances described earlier) the trustees decide to seek recovery of any unpaid costs from the trust assets.

43. Mr Barel argues that, if the trustees are permitted to be indemnified against their costs from Mr Barel’s share of the trust funds, Mr Barel “would be placed in the position of being a non-party payer of costs when none of the bases for ordering costs against him as a non-party exist”. Mr Barel further argues, having regard to the protracted history of disputes between Dr Segal and himself, that “any attempt to recover costs drawn on Mr Barel’s share [of the trust assets] will result in further cost and delay”.

44. Counsel for Mr Barel cited two previous decisions in which equivalent orders in Mr Barel’s favour were made and enforced: Commonwealth Bank of Australia v Segal (No 2) [2015] NSWSC 656 and Commonwealth Bank of Australia v Segal [2016] NSWSC 1016. These decisions involved funds retained by the Commonwealth Bank (on account of the costs of enforcing and recouping a debt owed to that bank) drawn from the proceeds of the sale of the property; it was common ground (at least in the latter case) that Dr Segal and Mr Barel were each entitled to 50% of these retained funds.

45. In Commonwealth Bank of Australia v Segal (No 2) [2015] (supra), Campbell J recorded (at [60]) that Mr Barel’s counsel had argued that “none of the circumstances under s 98(1)(b) of the Civil Procedure Act 2005 (NSW) justify Mr Barel as he currently stands as a non-party paying any of the costs of a party against whom a costs order is made”. Campbell J proceeded to find (at [64]) that Mr Barel was “entitled to an indemnity from Dr Segal were [the Commonwealth Bank] to draw on the retained funds to [Mr Barel’s] detriment” – that is to say, should the Bank draw upon funds in excess of the 50% ($75,000) representing Dr Segal’s share.

46. Commonwealth Bank of Australia v Segal [2016] (supra) concerned the interpretation and enforcement of the prior orders of Campbell J. Having found (at [22]) that Dr Segal “has had the benefit of the whole of Mr Barel’s [share of the retained funds]” through the exhaustion of the retained funds by the Bank’s costs, Adamson J found it appropriate to order (at [26]) that Dr Segal be ordered to pay the sum of $75,000 to Mr Barel.

47. It is recognised that the trustees’ entitlement of indemnity ought to be “given effect to in such a way as to make the burden fall upon the beneficiaries equitably having regard to the circumstances under which the costs, charges and expenses were incurred”: Barnes (supra) at 279. However, no order was made (or, apparently, sought) in Barnes (or in Northey v Juul (supra)) requiring indemnification by the unsuccessful plaintiff beneficiaries.

48. The parties did not argue this point in terms of the doctrine of subrogation. I think, however, that the order sought could potentially be viewed in terms of “equity’s concern to prevent one party obtaining an advantage at the expense of another which in the circumstances of the case is unconscionable” (Cochrane v Cochrane (1985) 3 NSWLR 403 at 405), or the avoidance of the inequitable discharge of the liability of a debtor: J D Heydon, M J Leeming and P G Turner, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies, (5th ed 2015, LexisNexis Butterworths) at [9-345]; Registrar General v Gill [1994] NSWCA 261; (2015) 17 BPR 33,709. That is to say, Mr Barel seeks to be indemnified to the extent that his share of the funds held on trust is depleted to pay costs incurred because of the actions of the other beneficiary. It is asserted (although not in so many words) that this loss to Mr Barel (upon prospective distribution of the trust assets) would be inequitable, such that any portion of “Dr Segal’s” debt paid by the trustees from Mr Barel’s share of trust funds should be subrogated or otherwise preserved as a debt owing against Dr Segal personally for Mr Barel’s benefit.

49. I am not aware of any authority that the remedy sought by Mr Barel falls within in any recognised form of subrogation. Although the categories which permit subrogation are not closed, and the equitable principle underlying subrogation is potentially applicable to the present case, I would not, without explicit support from authorities, have been satisfied that this would be sufficient to warrant the grant of the order sought by Mr Barel against Dr Segal.

50. Similarly, were it not for the prior judgment of Campbell J, I would not have been satisfied that an order (exercising the broad discretion of the Court under s 98 of the Civil Procedure Act) that Dr Segal indemnify Mr Barel for any portion of the trustees’ costs drawn upon Mr Barel’s share of the trust assets would have been appropriate. Despite the Court’s undoubted power to fashion orders of this kind, the remedy sought remains novel in circumstances where, as in Barnes (supra) and Northey v Juul (supra), previous innocent beneficiaries have not been found to be entitled to equivalent indemnity against loss (albeit that there is no indication that such relief was explicitly sought in those cases).

51. However, given that orders equivalent to those presently sought by Mr Barel have previously been made, I am prepared to follow that course and order that, if the trustees are required to have resort to that part of the trust assets notionally held for Mr Barel, Dr Segal should indemnify Mr Barel to that extent.

Costs of Submissions on Costs

52. The trustees have been substantially successful in their submissions as to costs. I am satisfied that the trustees’ costs of this application should be included within the broader costs of the proceedings, and hence payable by Dr Segal on the indemnity basis. As with the costs of the trustees generally, if these costs are not paid within a reasonable period these costs may be paid or retained out of the funds held by the trustees on trust for Dr Segal and Mr Barel (and drawn, in the first instance, from the sum notionally held on trust for Dr Segal).

53. Mr Barel has succeeded in his argument that Dr Segal should indemnify him to the extent that the trustees resort to his notional share of the trust assets. I note, however, that this claim was also advanced by the trustees. To the extent that Mr Barel’s claims have diverged from those of the trustees (that is, in seeking that costs include costs occasioned by late completion, and in seeking that Dr Segal pay Mr Barel’s costs of the proceedings), Mr Barel has not been successful.

54. In light of the above, I make no order as to the payment of Mr Barel’s costs of these submissions as to costs, with the intention that he should bear his own costs in this regard also.

Conclusion

55. I make the following orders:

1. Order that the costs of the first and second defendants be paid by the plaintiff on the indemnity basis.

2. Order that, if the costs of the first and second defendants are not paid by the plaintiff within two months after the submission of a bill of costs and the making of demand for payment, the costs of the first and second defendants may be paid or retained out of the funds held by them on trust for the plaintiff and third defendant, in the following way:

1. in the first instance, from that part of the fund notionally held on trust for the plaintiff;

2. in the second instance, to the extent that such part of the fund is not sufficient, from that part of the fund notionally held on trust for the third defendant.

3. Order that, to the extent that costs are paid from that part of the fund notionally held on trust for the third defendant, the plaintiff pay to the third defendant an amount equal to those costs.

4. Order that the third defendant bear his own costs of the proceedings.

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Decision last updated: 19 September 2016