Thynne v Sheringham

[2023] NSWCA 181

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation:

Thynne v Sheringham [2023] NSWCA 181

Hearing dates:

4 July 2023

Date of orders:

9 August 2023

Decision date:

09 August 2023

Before:

Ward ACJ and Kirk JA at [1];
Basten AJA at [16]

Decision:

(1)   Grant the applicant leave to appeal from the judgment in the Equity Division of 22 December 2022.

(2)   Direct that the applicant file within seven days a notice of appeal in the terms of the draft notice contained in the white folder and dispense with service.

(3)   Dismiss the appeal.

(4)   Order that the appellant pay the respondent’s costs in this Court.

Catchwords:

EQUITY – trusts and trustees – mutual wills –memorandum of wishes – agreement that surviving spouse would leave property or proceeds of sale to sons of testator – power to expend proceeds for own needs – nature of trust arising at time of testator’s death – floating obligation that crystallises on repudiation of agreement

REAL PROPERTY – caveats – property acquired under will – owner subject to equitable obligation to leave property in accordance with agreement with testator – power to sell and expend proceeds of sale – whether the intended beneficiary under the agreement has a caveatable interest in the land

Legislation Cited:

Real Property Act 1900 (NSW), s 74F

Cases Cited:

Barns v Barns (2003) 214 CLR 169; [2003] HCA 9

Birmingham v Renfrew (1937) 57 CLR 666; [1937] HCA 52

Depsun Pty Ltd v Tahore Holdings Pty Ltd (1990) 5 BPR 11

Double Bay Newspapers Pty Ltd v A W Holdings Pty Ltd (1996) 42 NSWLR 409

Dufour v Pereira 1 Dick 419; 21 ER 332

Flocas v Carlson [2015] VSC 221

Forster v Forster [2022] QSC 30

Giumelli v Giumelli (1999) 196 CLR 101; [1999] HCA 10

Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq) (1965) 113 CLR 265; [1965] HCA 17

Masci v Masci [2015] QCA 245

Muschinski v Dodds (1985) 160 CLR 583; [1985] HCA 78

Palmer v Bank of New South Wales (1975) 133 CLR 150; [1975] HCA 51

Re Hagger [1930] 2 Ch 190

Westminster Bank Ltd v Lee [1956] 1 Ch 7

Texts Cited:

C E F Rickett, “Mutual Wills and the Law of Restitution” (1989) 105 LQR 534

Daniel Reynolds, “What are the Duties of Constructive Trustees?” (2018) 41 UNSW Law Journal 1297

Ford and Lee, Principles of the Law of Trusts, (2nd ed, Law Book Co, 1990)

Glister and Lee, Hanbury & Martin – Modern Equity (21st ed, 2018, Thomson Reuters)

Heydon and Leeming, Jacobs’ Law of Trusts in Australia (8th ed, LexisNexis, 2016)

Jacobs, The Law of Trusts in New South Wales (Butterworths, 1958)

Meagher and Trevorah, Jacobs’ Law of Trusts in New South Wales (2nd ed, Butterworths, 1967)

Rosalind Croucher, “Mutual Wills: Contemporary Reflections on an Old Doctrine” (2005) 29(2) Melb U L Rev 390

Category:

Principal judgment

Parties:

Harry Bernard Thynne (Applicant)
Jevny Pty Limited ACN 001737864 (First Respondent)
Victoria Diane Sheringham (Second Respondent)

Representation:

Counsel:
S Shepherd / J Sukkar (Applicant)
A Fernon SC (Respondents)

Solicitors:
I D Haege Solicitor (Applicant)
O’Neill McDonald Lawyers (Respondents)

File Number(s):

2023/00013223

Publication restriction:

N/A

 Decision under appeal 

Court or tribunal:

Supreme Court

Jurisdiction:

Equity

Citation:

[2022] NSWSC 1774

Date of Decision:

22 December 2022

Before:

Hammerschlag CJ in Eq

File Number(s):

2022/200220085

HEADNOTE

[This headnote is not to be read as part of the judgment]

James Bernard Thynne (the testator) died in 2011 leaving a residential property at Darling Point to his second wife, Victoria Diane Sheringham (the respondent). The Darling Point property was left subject to her agreement, set out in a Memorandum of Wishes signed by the testator and the respondent, that she would leave the property, or any proceeds of sale remaining at the time of her death, to the testator’s sons, Harry Thynne and Patrick Thynne in equal shares. Under the agreement, the respondent was able to sell the property and use the proceeds for her maintenance and upkeep and other purposes.

On 27 July 2022, Harry Thynne (the applicant) commenced proceedings in the Equity Division asserting that the respondent had exceeded her powers with respect to use of the Darling Point property and seeking a declaration that the respondent held the property on trust for the intended beneficiaries under the agreement. On 27 October 2022 he lodged a caveat on the title claiming an interest in the land as the beneficiary under a trust.

On 22 December 2022 Hammerschlag CJ in Eq, on the application of the respondent, ordered the withdrawal of the caveat. The applicant sought leave to appeal from that order.

The applicant accepted that the terms of the caveat as lodged did not reflect the terms of the agreement, but maintained his claim that he had an equitable interest in the property sufficient to support a caveat in appropriate terms.

The Court (Ward ACJ and Kirk JA, and Basten AJA) granted leave to appeal but dismissed the appeal, holding:

By Ward ACJ and Kirk JA, Basten AJA agreeing:

1. The ultimate beneficiaries under the agreement have an equitable interest in the property prior to the survivor’s death, which constrains the absolute ownership otherwise vested in the survivor when the testator dies: [9]-[10], [66].

Birmingham v Renfrew (1937) 57 CLR 666; [1937] HCA 52; Barns v Barns (2003) 214 CLR 169; [2003] HCA 9 applied.

1. The “floating obligation” referred to by Dixon J is a characterisation of the obligations imposed on the survivor through the “trust” which arises from the moment the first testator has irrevocably performed his part in the agreement. The ultimate beneficiary acquires personal rights against the survivor to ensure that the survivor complies with his or her obligations under the agreement: [11].

2. The ultimate beneficiaries may thus have an equitable right to complain about particular transactions which diverge from the survivor’s obligations under the agreement, but not a proprietary interest sufficient to support a caveatable interest in the Darling Point property; the primary judge did not err in so concluding: [15], [66].

by Basten AJA:

1. The statement of Dixon J in Birmingham v Renfrew, that the equitable obligation crystallises as a trust only at the date of the death of the survivor, was inimical to the applicant’s case, that he was, from his father’s death, a beneficiary under an existing trust, imposed by equity to give effect to the constraints on the survivor’s right to dispose of the property as she thought fit: [36].

Re Hagger (1930) 2 Ch 190 followed.

1. The identification in the agreement of an obligation arising at the date of the wife’s death, as well as the expectation that the respondent may need to use the proceeds of sale or rent of the Darling Point property for her own maintenance suggested that the testator recognised the possibility that the value of the Darling Point property might be exhausted before her death: [57]

Barns v Barns (2003) 214 CLR 169; [2003] HCA 9 referred to.

1. The applicant’s contention that the caveat would support a reasonably arguable claim of breach of the respondent’s contractual obligations turned on two propositions, namely that (i) the power of sale does not extend to a power to use the Darling Point property as security for a loan, and (ii) the uses of the proceeds of sale permitted by the agreement do not extend to investment in the farming business at Valla: [60]. As to (i), the judge held that a right to dispose of the property by sale must, by implication, include a right to a lesser disposition than selling. As to (ii), the contention that the testator intended that the land, as opposed to the farming business, was to be operated on a financially stable and profitable basis, verged on incoherence: [63]-[65].

JUDGMENT

1. WARD ACJ and KIRK JA: We have had the benefit of reading a draft of Basten AJA’s judgment, which sets out the facts in issue. We agree that it is appropriate to grant leave to appeal and that the appeal should be dismissed with costs. The caveat in its terms is inconsistent with the recognition by the testator that the respondent might sell the Darling Point property at some time during her lifetime and might need to use the proceeds of sale for the purposes identified in cl 5 of the Memorandum of Wishes. However, the more fundamental problem for the applicant is that the applicant has at present no caveatable interest in the Darling Point property.

2. The tension between the parties’ submissions, as elaborated on by Basten AJA, is that the applicant contends that he has an equitable interest in the property through the operation of a trust which automatically arose on the death of his father (the testator), whereas, on the respondent’s contention, the applicant has no trust interest in the property until her death (or perhaps earlier if the respondent were to repudiate the Memorandum of Wishes, amounting to a fraud on the testator). The applicant’s contention that he has a caveatable interest can of course only be sustained where it can be established that he presently has a legal or equitable estate or interest in the land in question (s 74F, Real Property Act 1900 (NSW)). Personal or contractual rights do not suffice (see eg Depsun Pty Ltd v Tahore Holdings Pty Ltd (1990) 5 BPR 11, 314).

3. The parties’ competing positions reflect the difficulty arising out of the concept of a floating obligation that was introduced by Dixon J, as his Honour then was, in Birmingham v Renfrew (1937) 57 CLR 666; [1937] HCA 52 (Birmingham v Renfrew) at 689:

The purpose of an arrangement for corresponding wills must often be, as in this case, to enable the survivor during his life to deal as absolute owner with the property passing under the will of the party first dying. That is to say, the object of the transaction is to put the survivor in a position to enjoy for his own benefit the full ownership so that, for instance, he may convert it and expend the proceeds if he choose. But when he dies he is to bequeath what is left in the manner agreed upon. It is only by the special doctrines of equity that such a floating obligation, suspended, so to speak, during the lifetime of the survivor can descend upon the assets at his death and crystallise into a trust.

4. Dixon J had earlier (at 683) explained that a contract to make corresponding wills gave rise to equitable obligations that were specifically enforceable when one of the parties acted on the faith of such an agreement and died leaving his or her will unrevoked so that the other took property under its dispositions. His Honour further explained the relevant obligations at 689-690:

No doubt gifts and settlements, inter vivos, if calculated to defeat the intention of the compact, could not be made by the survivor and his right of disposition, inter vivos, is, therefore, not unqualified. But, substantially, the purpose of the arrangement will often be to allow full enjoyment for the survivor's own benefit and advantage upon condition that at his death the residue shall pass as arranged.

…

But I do not see any difficulty in modern equity in attaching to the assets a constructive trust which allowed the survivor to enjoy the property subject to a fiduciary duty which, so to speak, crystallised on his death and disabled him only from voluntary dispositions inter vivos. On the contrary, as I have said, it seems rather to provide a reason for the intervention of equity.

5. The applicant gave particular emphasis to Dixon J’s reference to the survivor having a “floating obligation”, which could in some circumstances be enforced prior to the survivor’s death, pursuant to a “constructive trust”. These characteristics were said to give rise to a proprietary interest in the land in question. Properly understood, they do not do so.

6. The existence of a “floating obligation” which later “crystallise[s] into a trust” suggests that a trust in the ordinary sense does not yet exist regarding the assets of the deceased, as the primary judge held in the present case (Thynne v Jevny Pty Limited [2022] NSWSC 1774 at [38]). That is contrary to the proposition that a trust arose automatically on the death of the testator, as suggested by the applicant, in reliance on Jacobs’ Law of Trusts in Australia, 8^th ed at [13-42].

7. The answer to the tension between a constructive trust arising at the time of the first testator’s death and the concept of a floating obligation suspended during the lifetime of the survivor and then crystallising into a trust on the survivor’s death may be found in the notion of constructive trust as recognised by Deane J in Muschinski v Dodds (1985) 160 CLR 583; [1985] HCA 78 (Muschinski v Dodds) at 613 (with whom Mason J agreed). His Honour said that such a trust is imposed as “a personal obligation attaching to property, to enforce the equitable principle that a legal owner should not be permitted to use his common law rights as owner to abuse or subvert the intention which underlay his acquisition and possession of those rights”. Its flexibility as an equitable remedy ensures that it “may be moulded and adjusted to give effect to the application and interplay of equitable principles in the circumstances of the particular case” (Muschinski v Dodds at 615 per Deane J).

8. Consistently with that understanding, in Giumelli v Giumelli (1999) 196 CLR 101; [1999] HCA 10 at [4], Gleeson CJ, McHugh, Gummow and Callinan JJ observed that:

[S]ome constructive trusts create or recognise no proprietary interest. Rather there is the imposition of a personal liability to account in the same manner as that of an express trustee. An example of a constructive trust in this sense is the imposition of personal liability upon one "who dishonestly procures or assists in a breach of trust or fiduciary obligation" by a trustee or other fiduciary.

9. Equity’s intervention in cases such as the present “is by the imposition of a trust of a particular character” (Barns v Barns (2003) 214 CLR 169; [2003] HCA 9 at [85] per Gummow and Hayne JJ). That trust does not involve the ultimate beneficiary obtaining beneficial ownership of the property at the time of the first testator’s death, nor any other proprietary interest. Creation of such an interest in the ultimate beneficiary would be inconsistent with Dixon J’s indication that the survivor is able “to deal as absolute owner with the property”. In this type of case, "[s]uch rights of full enjoyment preclude the operation of fiduciary duties of self-abnegation” (Daniel Reynolds, “What are the Duties of Constructive Trustees?” (2018) 41 UNSW Law Journal 1297 at 1326). Here, the respondent is entitled to use the proceeds of sale or rental of the Darling Point property for her own maintenance and upkeep, amongst other things. The survivor might, consistently with her obligations, “use, and indeed even ultimately use up in their entirety the assets passing under the first will” (Barns v Barns at [152] per Callinan J). That entitlement is inconsistent with the argument that the applicant and his half-brother obtained a proprietary interest immediately upon the death of their father.

10. This characterisation does not preclude the ultimate beneficiaries from having some “interest” in the property prior to the survivor’s death. This “interest” is enforced through the obligations imposed onto the survivor by the agreement, effectively fettering the “absolute ownership” that the survivor is otherwise vested with (as recognised in Jacobs’ at [13-42], when dealing with this paragraph). Barwick CJ in Palmer v Bank of New South Wales (1975) 133 CLR 150; [1975] HCA 51 at 162 elaborates on this point:

When in [Birmingham v Renfrew] Dixon J spoke of “gifts and settlements, inter vivos … calculated to defeat the intention of the compact” he no doubt had in mind gifts and settlements which were either testamentary in nature or which were in contravention of the terms of the particular contract, spelled out of the expressions actually used, bearing in mind the circumstances in which it was made.

11. The “floating obligation” referred to by Dixon J is a characterisation of the obligations imposed on the survivor (i.e., here, the respondent) through the “trust” which arises from the moment the first testator has irrevocably performed his part in the agreement (i.e., by dying with the will unrevoked), consistent with Dixon J’s recognition of a fiduciary duty fettering the survivor’s right to enjoyment of property; see further Barns v Barns at [29] per Gleeson CJ, [85] per Gummow and Hayne JJ, and [152] per Callinan J. Through this particular type of trust, the ultimate beneficiary acquires in personam rights against the survivor to ensure that the survivor complies with his or her obligations under the agreement (see C E F Rickett, “Mutual Wills and the Law of Restitution” (1989) 105 Law Quarterly Review 534 at 538-539). Rickett characterises (in the “very loose sense”) these rights as the “interests” the ultimate beneficiaries have in the property from the date of the first testator’s death.

12. The interest of the applicant, in this analysis, is better characterised as a mere equity (see eg Bryson J, as his Honour then was, in Double Bay Newspapers Pty Ltd v A W Holdings Pty Ltd (1996) 42 NSWLR 409 at 423-5, referring to Westminster Bank Ltd v Lee [1956] 1 Ch 7 and the High Court’s observations in Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq) (1965) 113 CLR 265; [1965] HCA 17). This characterisation of the ultimate beneficiary’s interest neatly captures the qualities of the “floating obligation” and “trust” which arises upon the death of the first testator. As a “claim to have an equitable interest”, the mere equity may, depending on all the circumstances, “crystallise” into an equitable interest once the beneficiary can establish a claim for equitable relief arising out of a fraud by the survivor or to enforce the underlying agreement between the survivor and the testator. The obligations will crystallise into a trust over the impugned assets the subject of the obligations once those obligations are breached, which may not be until the death of the survivor if the survivor does not leave a will consistent with (here) the Memorandum of Wishes. This explains the “floating” nature of the obligations referred to by Dixon J.

13. Hence, the ultimate beneficiary or beneficiaries may have an equitable claim, allowing them to complain about particular transactions which diverge from the survivor’s obligations under the agreement with the first testator, but not a specific equitable, proprietary interest in particular assets (see Rosalind Croucher, “Mutual Wills: Contemporary Reflections on an Old Doctrine” (2005) 29 Melbourne University Law Review 390 at 407).

14. The applicant argued that he may not know in advance of actions being taken which by the respondent which would undermine or defeat her obligations, hence his desire to maintain his caveat on the Darling Point property. That fact illustrates that “in human affairs, even in legal affairs, perfection, and the complete effectuation of intention are sometimes not possible” (Barns v Barns at [152] per Callinan J). It does not metamorphose his potential equitable claim into a proprietary interest.

15. On this analysis, the applicant does not presently have a caveatable interest in the Darling Point property and the primary judge did not err in so concluding.

16. BASTEN AJA: The applicant, Harry Bernard Thynne, sought leave to appeal from a judgment of Hammerschlag CJ in Eq requiring the applicant to withdraw a caveat he had lodged over the title to a residential property in Mona Road, Darling Point, Sydney (Darling Point property). ^[1] The applicant required leave, the judgment below being an interlocutory judgment dealing with a notice of motion brought in the course of substantive proceedings presently pending in the Equity Division. Although the matter was set down for a concurrent hearing of the leave application and the proposed appeal, the question of leave loomed large during the hearing.

    1. Harry Bernard Thynne v Jevny Pty Ltd [2022] NSWSC 1774.

11. The late James Bernard Thynne (the testator) left the bulk of his estate, including the Darling Point property, to his second wife, the first respondent, Victoria Diane Sheringham (the respondent). The respondent is the registered owner of the Darling Point property the subject of the caveat. The testator left the Darling Point property to the respondent on the understanding that the property, or its proceeds of sale, to the extent that they remained in her hands at the time of her death, would pass in equal shares to the applicant and his half-brother, Patrick. That condition was said to give rise to a constructive trust in favour of the applicant; it was his interest under the trust which was said to be capable of being protected by the caveat preventing the registration of any dealing with the land.

12. The terms of the condition expressly allowed the respondent to sell the property. It was accepted by counsel for the applicant in the course of the hearing that, whatever the scope of his interest, it was a qualified interest which was not reflected in the broad terms of the caveat, nor in the terms of a proposed alternative wording. On one view, this Court should refuse leave on the basis that the applicant’s challenge to the orders made below lack any real prospect of success.

13. On the other hand, the problem with formulating the possible terms of a legitimate caveat raises a larger question as to whether, as a matter of principle, the applicant enjoys any legal or equitable interest capable of being protected by a caveat over the property. For the Court to fail to resolve that issue would leave the parties uncertain as to their rights and would invite further litigation. On that view, there should be a grant of leave to appeal to allow the Court to dispose of the substantive issue. For the reasons explained below, the appropriate course is to grant leave to appeal and determine whether the applicant has an interest capable of supporting a caveat over the title to the Darling Point property.

Background

20. On 25 March 2011, the testator executed two documents, a Last Will and Testament (the Will) and a Memorandum of Wishes (the Memorandum). The Memorandum was said to be directed to “My Executors, Trustees, children and the Trustees of The Thynne Family Trust and of any Trusts created under my Will”. It was witnessed by two independent parties and countersigned by his wife. In part, the Memorandum explained in straight-forward terms aspects of the gifts made under the Will and how the testator wished them to be given effect.

21. Paragraph 6 in the Memorandum declared a wish that the contents be kept confidential, although the extent of confidentiality was not explained. Paragraph 7 stated:

“The terms of this letter are agreed and acknowledged by Victoria Sheringham by her signing below.”

22. Central to the present case was paragraph 5 of the Memorandum which read as follows:

“5.   The Darling Point Property

I have left the family home at … Darling Point … and its contents to Victoria. Victoria hereby agrees to leave the Darling Point Property or any other property that she has bought to replace the Darling Point Property or the proceeds of sale of any such property to both Harry and Patrick in equal shares (as reflected in her will dated on or about the date of this Memorandum) at the time of her death, having taken into account any advances (including the $100,000 bequeathed to Harry under my last will and testament or gifted to Harry by Victoria after my death using funds derived from my Superannuation) made to either Patrick or Harry in anticipation of the payment of their share. I acknowledge that Victoria may need to use the proceeds of the sale or rental of the Darling Point Property for her maintenance and upkeep, the maintenance and education of Patrick and the maintenance of the Darling Point property and of the Farm.”

23. A subsidiary issue, which will not be resolved on this application, but which was agitated in the course of the hearing, was the scope of the acknowledgement with respect to maintenance of “the Farm”. The Farm was either the land at Valla in northern NSW used for cattle grazing and for a macadamia orchard, or the business run on the land, or both. The applicant raised an argument that the respondent could use the proceeds of sale and rental income to maintain the land and houses at Valla, but not to invest in the business.

24. The applicant submitted that paragraph 5 of the Memorandum created a trust with respect to the Darling Point property. On that view, the terms of the Will were irrelevant. The respondent contended that the Will, being the final testamentary document providing for the disposition of the Darling Point property, was also relevant and that any difference between the Will and the Memorandum must be resolved in favour of the Will. ^[2] As the Will was in evidence, it is convenient to set out cl 6, so far as relevant:

“6.   I GIVE my interest in the property known as [the Darling Point Property] to my wife VICTORIA DIANE SHERINGHAM. This bequest is made on the understanding made at the time of execution of this Will that she will in her Will provide that the said interest in the property or in any interest acquired as a result of the sale of the property less any expenditure required for the maintenance of my said wife … and my said son PATRICK LACHLAN THYNNE or of the properties known as [the Darling Point property] (or such other principal place of residence of my said wife … from time to time) and known as [the Valla Property] will be left by her in her Will to my sons … in equal shares per stirpes.”

2. Respondents Supplementary Response, 19 June 2023, par 7.

25. Accepting for present purposes that the contractual obligation created by the Memorandum should be understood in its own terms, three matters may be identified from that paragraph.

26. First, the Darling Point property could be sold, and might be replaced by another property or might not, or might simply become “the proceeds of sale”. Secondly, what the respondent agreed to leave to Harry and Patrick in equal shares was, assuming sale, the remaining proceeds of sale, if any, at the time of her death. Thirdly, the amount available to be so distributed would be reduced by the amount of any advances made to Patrick or Harry in anticipation of payment of their shares, and by such amount as the respondent might need for her own maintenance and upkeep and the maintenance and education of Patrick and the maintenance of the properties.

27. It is convenient then to turn to the language of the caveat, the operative parts of which read as follows:

“Based on the claim to an Estate or Interest in Land in the land specified, the Caveator prohibits the Registrar General from taking the actions specified in this Caveat.

ACTION PROHIBITED BY THIS CAVEAT

1.   The recording in the Register of any dealing other than a plan affecting the estate or interest claimed by the Caveator.

ESTATE OR INTEREST CLAIMED

Estate In Remainder

By virtue of: Beneficial Interest In Trust

Details Supporting The Claim: Victoria Diane Sheringham acknowledged and agreed by Memorandum of Wishes (MOW) between her and the late James Bernard Thynne to hold the land for the benefit of the Caveator and Patrick Lachlan Thynne in equal shares as tenants in common.”

28. It is not possible to reconcile that statement of the supporting particulars with par 5 of the Memorandum. So much was conceded by counsel for the applicant, both orally and in writing. ^[3] Rather, the written submissions sought an order in the following terms in place of the orders made by the Chief Judge on 22 December 2022, namely:

“1.   An order that Harry Bernard Thynne be entitled to lodge and retain a new caveat in the same terms and restricting the same dealings as previously registered caveat … until final determination of such part of proceedings … as relate to the plaintiff’s claims concerning [the Darling Point Property] being as set out in the Statement of Claim ….”

3. Applicant’s written submissions, 29 May 2023, par 33.

29. As counsel also conceded, that formulation failed to address the fact that the applicant had no power to prohibit all dealings with the Darling Point property in circumstances where the Memorandum expressly envisaged its sale.

Legal principles

30. The leading authority in Australia dealing with agreements by which a beneficiary under a will might be bound as to a later disposition of the property is the 1937 decision of the High Court in Birmingham v Renfrew. ^[4] It and subsequent authorities have been reviewed recently by single judges in Victoria and Queensland. In a 2015 Victorian decision, Flocas v Carlson,^[5] McMillan J addressed the issues in circumstances involving a brother and sister who, it was alleged, had entered into an agreement that half of a jointly owned property would ultimately be left by the survivor to the brother’s daughter: It will be appropriate to return to the critical finding made by McMillan J after considering Birmingham. The principles identified by McMillan J were referred to without dissent by the Queensland Court of Appeal in Masci v Masci. ^[6]

    4. (1937) 57 CLR 666; [1937] HCA 52.

    5. [2015] VSC 221.

    6. [2015] QCA 245 at [32] (Gotterson JA, Morrison and Philippides JJA agreeing).

31. In 2022, in the Queensland decision of Forster v Forster,^[7] Ryan J gave detailed consideration to the growing list of authorities dealing with mutual will agreements, from which she deduced a number of relevant principles.

    7. [2022] QSC 30.

32. Given these recent reviews, which need not be replicated, it is sufficient to turn to the critical statements relied on in submissions in this case, commencing with Birmingham and, in particular, two passages in the judgment of Dixon J which have been the subject of subsequent analysis and consideration.

33. It may be noted that the applicant sought to distinguish Birmingham on the basis that the mutual wills in Birmingham conferred unqualified authority on the surviving spouse to deal with the property during his or her lifetime, but to dispose of it in accordance with the agreement upon death. In the present case, the applicant contended, there was no unqualified authority to deal with the Darling Point property, the subject of the agreement; rather, the respondent was subject to constraints on the uses to which she could put the property. Secondly, the applicant submitted that, even if not distinguishable, Birmingham was authority for the proposition that equity imposed a trust on the Darling Point property immediately upon the death of the testator.

34. The first passage in the judgment of Dixon J was as follows: ^[8]

“I think the legal result was a contract between husband and wife. The contract bound him, I think, during her lifetime not to revoke his will without notice to her. If she died without altering her will, then he was bound after her death not to revoke his will at all. She on her part afforded the consideration for his promise by making her will. His obligation not to revoke his will during her life without notice to her is to be implied. … It is true that he cannot be compelled to make and leave unrevoked a testamentary document and if he dies leaving a last will containing provisions inconsistent with his agreement it is nevertheless valid as a testamentary act. But the doctrines of equity attach the obligation to the property. The effect is, I think, that the survivor becomes a constructive trustee and the terms of the trust are those of the will which he undertook would be his last will.

…

[T]he equitable obligation to fulfil the contract attaches to the property the subject of the contract and converts the party into a trustee for the objects to be benefited. … That consideration consists in the death of one of the parties leaving a will in the form agreed. The result is a disposition of property made upon the faith of the survivor’s carrying out the obligations of his contract. It is an element which brings such a case under the equitable jurisdiction for the prevention of fraud.”

8. Birmingham at 682-683, 687-688.

35. That reasoning was expressed with the benefit of hindsight, namely that the husband had in fact changed his will so as to disentitle the members of the wife’s family who were to take under the agreement. As will be seen, commentators have understood that passage to create a trust at the date of death of the first to die, after which it is not open to the survivor to renege on the agreement. ^[9] However, a later passage in Birmingham read as follows: ^[10]

“The purpose of an arrangement for corresponding wills must often be, as in this case, to enable the survivor during his life to deal as absolute owner with the property passing under the will of the party first dying. That is to say, the object of the transaction is to put the survivor in a position to enjoy for his own benefit the full ownership so that, for instance, he may convert it and expend the proceeds if he choose. But when he dies he is to bequeath what is left in the manner agreed upon. It is only by the special doctrines of equity that such a floating obligation, suspended, so to speak, during the lifetime of the survivor can descend upon the assets at his death and crystallize into a trust.”

9. The Wills Act 2007 (NZ), s 30, addresses the issue, but seems only to apply where there are actually mutual wills, and not merely an agreement.

10. Birmingham at 689-690.

36. The proposition that the equitable obligation crystallises as a trust only at the date of death of the survivor was inimical to the applicant’s case, that he was, from his father’s death, a beneficiary under an existing trust, imposed by equity to give effect to the constraints on the survivor’s right to dispose of the property as she thought fit. However, the applicant relied upon a passage in Jacobs’ Law of Trusts in Australia. ^[11] After setting out the first passage from Dixon J, the authors commented:

“The preferred construction of Dixon J’s words, applying them to the facts of Birmingham v Renfrew, is that the trust arises automatically on the death of the first to die because she made her will in reliance upon the promise of the survivor and by her death that will has become irrevocable. …

…

It follows from the establishment of the constructive trust with the death of the first testator to die that the interest of a beneficiary designated under the arrangement to take on the death of the survivor, is vested from that time and throughout the life of the survivor and will not lapse if the beneficiary predeceases the survivor but will pass to the beneficiary’s personal representatives as part of the beneficiary’s estate. ^[12] ”

11. JD Heydon and MJ Leeming, Jacobs’ Law of Trusts in Australia (8th ed, LexisNexis, 2016) at [13-42].

12. Re Hagger [1930] 2 Ch 190.

37. It is not entirely clear what was meant by applying the principles to the facts in Birmingham. The facts in Birmingham involved the wife predeceasing her husband, at which point the husband’s will accorded with the agreement. The date at which the husband changed his will is unclear, but it was described by Latham CJ as occurring after the wife’s death. ^[13] Before the wife’s death, there had been no fraud so that the occasion for intervention by equity appeared not to have arisen. Further, inconsistently with the commentary in Jacobs’, Dixon J addressed the temporal element in the later passage set out above, which expressly stated that there was a “floating obligation” during his lifetime which crystallised into a trust, not on the death of his wife, but on his death as the survivor.

    13. Birmingham at 674.5.

38. Further, the first sentence of the extract from the current edition of Jacobs’ set out at [36] above concludes with a footnote referring to Barns v Barns. ^[14] The critical passage in Barns is found in the judgment of Gummow and Hayne JJ (footnotes omitted):

“85   … That outcome in Birmingham does not support the proposition for which the first respondent contends on this appeal. The contention (rejected in most academic writing on the subject) is that, in these cases, a beneficial interest of the survivor in the assets of the first testator to die arises before the death of the first testator and the due administration of that first estate; the consequence is the withdrawal of the subject-matter from that estate. What is particularly significant for present purposes are the points emphasised in Birmingham and in other decisions. The propositions are: (i) it is the disposition of the property by the first party under a will in the agreed form and upon the faith of the survivor carrying out the obligation of the contract which attracts the intervention of equity in favour of the survivor; (ii) that intervention is by the imposition of a trust of a particular character; (iii) the subject-matter is ‘the property passing [to the survivor] under the will of the party first dying’; (iv) that which passes to the survivor is identified after due administration by the legal personal representative whereupon ‘the dispositions of the will become operative’; (v) there is ‘a floating obligation’ over that property which has passed to the survivor; it is suspended during the lifetime of the survivor and ‘crystallises’ into a trust upon the assets of the survivor at death.”

14. (2003) 214 CLR 169; [2003] HCA 9 at [85]-[86].

39. The applicant sought support in proposition (iii) for the submission that the trust must arise when the property passes to the survivor, but that must depend on the terms on which the property passes. Furthermore, it is difficult to read the explicit temporal proposition (v) as consistent with that submission. Subsequently, the same section of Jacobs’ set out the later passage of Dixon J’s judgment at 689, describing the trust as crystallising at the death of the survivor, but without comment and without revisiting the earlier commentary relied upon by the applicant.

40. The first edition of Jacobs’, published in 1958, made but brief reference to Birmingham in discussing constructive trusts: ^[15]

“There may be included in this class ‘secret trusts’ because, in that type of case, equity, on the grounds of fraud, refuses to recognise the strict legal effect of words used by a settlor or testator. So also, where two persons execute mutual wills in pursuance of any arrangement as to their property, if the survivor takes the benefit under the will of the person first dying but does not leave his property in accordance with the arrangements, his executors or administrators will hold his property on a constructive trust to carry out the terms of that arrangement.” ^[16]

15. KS Jacobs, The Law of Trusts in New South Wales (Butterworths, 1958) at 174; footnote (22) at p 14 merely identified it as a contract case where a trust was found in favour of third parties.

16. The passage was unchanged in the 2nd edition: RP Meagher and PF Trevorah, Jacobs’ Law of Trusts in New South Wales (2nd ed, Butterworths, 1967) at 329; and p 116, footnote (24).

41. On that view, the constructive trust fixed on the estate after the death of the survivor. That understanding may have derived from the “floating charge” passage, but no page reference was identified in the footnote. The current commentary first appeared in the fourth edition published in 1977.

Nature of the “floating obligation”

42. In Ford and Lee, Principles of the Law of Trusts, published in 1990, the authors distinguished two situations but expressed some doubts arising from the “floating obligation” reasoning in Birmingham:^[17]

“Where the surviving party is given, by the terms of the contract, no more than a life interest in the property passing to her or him, the third-party beneficiary will be entitled in remainder and can be regarded as having an interest from the death of the first contracting party to die. Accordingly, if the third-party beneficiary dies before the surviving contracting party, her or his personal representative will take when the surviving contracting party dies later. ^[18] Where, as in Birmingham v Renfrew, the survivor has powers of disposition over the capital it is possible to equate the third-party beneficiary to a taker in default of appointment so as to be regarded as having, from the date of the first contracting party to die, an interest which is vested but liable to be divested and to which a personal representative could succeed if the third-party beneficiary dies before the surviving contracting party. Some doubt as to whether that is the correct view arises from dicta of Dixon J in Birmingham v Renfrew referring to the survivor’s obligation as being ‘a floating obligation, suspended, so to speak, during the lifetime of the survivor’ [which] ‘can descend upon the assets at his death and crystallise into a trust’.”

17. HAJ Ford and WA Lee, Principles of the Law of Trusts, (2nd ed, Law Book Co, 1990), at [2232].

18. Referring to Re Hagger.

43. In the current looseleaf edition of Ford and Lee, the passage seeking to equate the third-party beneficiary with a taker in default of appointment is retained, but there is an additional paragraph, suggesting an analogy with a trustee under an express trust who has the power to sell or exchange the trust property. The commentary continues: ^[19]

“The analogy with the trustee of an express trust should not, however be pressed too far. The survivor is beneficial owner of the property included in the agreement, which will often include the survivor’s own property, as well as property received under the will of the deceased party. The duties to which the survivor is subject when the trust is passing through its ‘floating’ phase depend on the terms, express and implied, of the agreement. In Forster v Forster … at [201] Ryan J was of the opinion, following an extensive review of the authorities, that, in the absence of fraud, the property subject to a mutual wills agreement was not held on trust during the survivor’s lifetime, trusteeship being inconsistent with the survivor’s beneficial ownership. The imposition of the constructive trust is therefore a remedial response to any dealing with the property that is, or is likely to be, inconsistent with the terms of the agreement.”

19. Ford and Lee at [22A.290].

44. In Barns, although in dissent as to the outcome, Callinan J compared the floating obligation envisaged by Dixon J in Birmingham to a floating charge: ^[20]

“152   The reference by Dixon J to a floating obligation which crystallises invites comparison with a floating charge. It is well established that effect can readily be given to the latter. Until the occurrence of certain defined events the owner of [the charged] assets may deploy them generally as it deems fit, subject to the covenants in the instrument of charge, and not deliberately in such a way as to destroy or diminish the value or utility of the rights and interests of the person in whose favour the charge is created. In the same way, a ‘floating obligation’ or a ‘constructive trust’ of the kind contemplated by Dixon J may, and should be given concrete effect by crystallisation to, and for the benefit of the promisees under the agreement for the mutual wills on the death of the surviving mutual contractor. The fact that the surviving contracting party, who is the beneficiary under the will of the first of the two to die, may use, and indeed even ultimately use up in their entirety the assets passing under the first will, provides a reminder that in human affairs, even in legal affairs, perfection, and the complete effectuation of intention are sometimes not possible. That is not a reason for a court not to give as much effect as possible to the intentions of the parties. What the second testator may not do, as Dixon J points out, is diminish or devalue the first testator's estate by acts calculated to produce that result.”

20. See also Ford and Lee (2nd ed) at [2232], p1043, not included in the current service.

45. The possible difficulties inherent in this aspect of Birmingham were adverted to by McMillan J in Flocas in the following terms: ^[21]

“192   Finally, there is to my mind an aspect of this doctrine that remains unsatisfactorily unsettled, but need not be resolved for the purposes of this case. It concerns the ‘floating obligation’ suggested by Dixon J that is said to crystallise on the death of the survivor. It is plain that the property the subject of the promise is not held on trust during the survivor’s lifetime, and the survivor is entitled to retain the income and dispose of the capital if they so choose. The extent, and nature of an obligation not to dispose of the property inter vivos by a gift ‘calculated to defeat the intention of the compact’ seems to me to be difficult to articulate. Although it may be readily ascertainable in circumstances where the survivor deliberately disposes of the property in their lifetime in order to avoid the terms of the agreement, it may be more difficult where the disposition is outside the survivor’s control due to bankruptcy or mental incapacity. The only comment I would venture is that such an obligation is more readily accommodated if, as I consider, the mutual wills agreement is a contract, and the floating obligation is an obligation that must be determined by reference to the express and implied terms of that contract. A court can confidently apply established principles concerning the incorporation, implication and interpretation of contractual terms in deciding the extent of that floating obligation and whether it has been breached in the circumstances of the case. If, on the other hand, the mutual wills agreement is a unique equitable beast, the nature of Dixon J’s floating obligation will be far more difficult to discern.”

21. Footnotes omitted: see also Ford and Lee at [22A.260].

46. This passage assumes that the trust would not crystallise in circumstances where there was an inter vivos disposition by the survivor inconsistent with his or her equitable obligations. Indeed, that the trust does not crystallise in such circumstances may be inferred from the fact that Dixon J raised the possibility of such a breach of an equitable obligation not to act inconsistently with the agreement only after identifying the time at which a constructive trust would crystallise. Further, Dixon J did not suggest that the trust crystallised at the moment the husband altered his will inconsistently with the agreement, as had in fact occurred in Birmingham. ^[22]

    22. Birmingham at 681.

The predeceasing beneficiary – Re Hagger

47. One way of testing the applicant’s contention is to ask what the position would be if the applicant predeceased the respondent. If the applicant had a vested interest during the respondent’s lifetime, that interest would vest in those entitled to his estate. That was the result accepted in Re Hagger,^[23] a case decided seven years before Birmingham and referred to by Dixon J in the paragraph next following his reference to a “floating obligation”. ^[24] Clearly no inconsistency was perceived: the reason is apparent when the facts of Re Hagger are identified, which distinguish it from the present case.

    23. (1930) 2 Ch 190 (Clauson J).

    24. Birmingham at 690.

48. Hagger involved a “joint will” of husband and wife by which they recorded “that they had agreed to dispose of [their joint property] by their joint will, which they declared should not be altered or revoked save by their mutual agreement, they gave everything they possessed at the time of the death of such one of them as should first die to their trustees to pay their debts, funeral and testamentary expenses and certain legacies, and to pay the income of the whole of their estate to the survivor of them during his or her life, and… as to their freehold and leasehold properties at Wandsworth upon trust after the death of the survivor to sell the same, and, after payment of expenses, to pay and divide the net proceeds as follows…”.

49. One of the proposed beneficiaries of the sale of the properties, Ms E Palmer, predeceased Mr Hagger. Clauson J stated: ^[25]

“As a matter of construction it is clear that at the moment this document came into operation its effect was to confer a life interest on the survivor of the husband and wife and a vested interest in remainder, as to one-sixth of the Wandsworth property, on Eleanor Palmer.”

25. Hagger, p 194.

50. Clauson J referred to the earlier authority of Dufour v Pereira ^[26] relied on in Birmingham, and concluded:

“The effect of the will was that the husband and wife agreed that the property should on the death of the first of them to die pass to trustees to hold on trusts inconsistent with the right of survivorship, and therefore the will effected a severance of the joint interests of the husband and wife. By the will they made a provision which was inconsistent with the survivor taking by survivorship. Therefore the property at the moment when, on the wife’s death, it came within the ambit of the will ceased to be held by the two jointly, and the husband had no title to the wife’s interest on her dying in his lifetime, save in so far as he took a life interest under the joint will. From the moment of the wife’s death, the Wandsworth property was held on trust for the husband for life with a vested interest in remainder as to one-sixth in E Palmer. So far as the husband’s interest in the property is concerned the will operated as a trust from the date of the wife’s death.”

26. (1769) 1 Dick 419; 21 ER 332.

51. Ford and Lee, in the passage set out at [42] above, recognised that Re Hagger was different. The current looseleaf addition notes that the duties of the survivor “when the trust is passing through its ‘floating’ phase depend on the terms, express and implied, of the agreement”: see at [43] above.

52. That conclusion may be accepted, but it appears English texts are less flexible. Glister and Lee, in Hanbury & Martin, rely on Re Hagger for the proposition that “where a beneficiary died between the date of the death of the first to die and the survivor, the estate of that beneficiary was able to claim its share on the ground that the interest was vested and there was no lapse”. ^[27] However, the uncontroversial nature of the reasoning in Re Hagger does not support this broad and unqualified statement of principle. The answer will turn on the terms of the particular agreement.

    27. J Glister and J Lee, Hanbury & Martin – Modern Equity (21st ed, 2018, Thomson Reuters) at 12-015.

Distinguishing Birmingham

53. Before leaving Birmingham, it is convenient to deal with the applicant’s attempt to distinguish it. The applicant’s proposition was that, because the mutual wills in that case left each party with an unfettered right to absolute ownership of the property during the lifetime of the survivor, there was no occasion for the trust to crystallise before the death of the survivor. By contrast, it was submitted, the agreement between the testator and the respondent involved constraints on her use of the Darling Point property she inherited from her husband, which could be enforced during her lifetime.

54. The assumption that the “full ownership” referred to in Birmingham at 689 was unqualified did not fully reflect the reasoning of Dixon J who, after the later passage set out above, continued:

“No doubt gifts and settlements, inter vivos, if calculated to defeat the intention of the compact, could not be made by the survivor and his right of disposition, inter vivos, is, therefore, not unqualified.”

55. This passage recognises that there may be an implied qualification, and therefore accommodates the possibility of an express qualification. The point of distinction relies upon the fact that where the right of full ownership is qualified in some way, Birmingham simply did not address the consequence of the need to enforce the qualification during the life of the survivor. That submission should not be accepted.

56. For the purposes of this discussion it is assumed that there has been no breach of the respondent’s obligations with respect to the Darling Point property; certainly none was relied on for the purposes of the present application. The possibility that the applicant had a reasonably arguable case that the respondent was in breach of those obligations by mortgaging the property, or by using it as security for the raising of funds which in turn were expended in breach of the constraints imposed by the agreement, will be addressed later.

Application of principles

57. There are a number of features of par 5 of the agreement which are significant for present purposes. First, the intention was not that the family home be preserved and passed on to the testator’s two sons in equal shares, but rather that it, or any other property bought to replace it, or the proceeds of sale of any such property be passed on in equal shares. Secondly, that which was to be passed on in equal shares was identified as the property or proceeds of sale of “at the time of [the respondent’s] death”. The identification of an obligation as arising at the date of the wife’s death is at least suggestive of the absence of any interest in the ultimate beneficiaries in the property in the meantime. Thirdly, the testator expected that his wife may need to use the proceeds of sale or rental of the Darling Point property for her own maintenance and upkeep, and for that of their son Patrick, and the maintenance of the two properties which he owned. In keeping with the comment of Callinan J in Barns, the testator recognised the possibility that the value of the Darling Point property might be exhausted in its commitment to those purposes.

58. If it were open to the Court to have regard to the terms of the testator’s will, in order to know what precisely was meant by the statement, “I have left the family home… and its contents to Victoria”, cl 6 would reinforce the proposition that the obligation imposed by the agreement was to take effect by a disposition to be made in her will. Further, cl 6 confirmed that it was not the Darling Point property itself which was to be passed on, if it had in the meantime been sold, and that the proceeds of sale were not necessarily to be preserved, as they might be expended for any of the nominated purposes, including the wife’s own maintenance and upkeep, which would continue until the time of her death. In particular, neither the agreement nor the will imposed any constraint on sale of the Darling Point property. Accordingly, the applicant had no power to prevent the sale of the property. Subject to the argument that power of sale did not extend to the power to grant a lesser interest such as a mortgage, it followed that the applicant had no caveatable interest in the Darling Point property.

59. This conclusion is consistent with that set out by the trial judge at [31]-[38].

Power to grant mortgage

60. In the pending proceedings in the Equity Division, the applicant contends for two breaches of fiduciary obligation on the part the respondent. One asserts that the power of sale acknowledged in the agreement does not extend to a power to use the Darling Point property as security for a loan: execution of the current bank mortgage was, on that view, a breach of the respondent’s fiduciary obligations. The second breach asserts that if the Darling Point property is sold, the uses of the proceeds of sale permitted by the agreement do not extend to investment in the farming business at Valla. (As the property has not been sold, any breach must depend on use of moneys secured by the mortgage for that purpose.) The applicant did not seek to prove in this Court that such breaches of the agreement had been established but rather that he had a reasonably arguable case and that a caveat should be available on an interlocutory basis to protect the property pending resolution of his claims.

61. The primary judge dealt with these submissions in three stages. The first, discussed above, was the rejection of the proposition that the applicant had any trust interest at the present time. ^[28] The second was a finding that there was “no suggestion” (that is, it was no part of the applicant’s pending proceedings) that the respondent was acting in a manner “calculated to defeat the intention of the compact”, to adopt the language of Dixon J in Birmingham at 689.

    28. Judgment at [38].

62. Thirdly, the judge held that, on the basis that the corpus of the trust cannot be ascertained until the respondent dies, the trust does not crystallise until the corpus of the property (if any) is capable of identification, so that the proposed caveat cannot be supported. While the applicant might have a basis for injunctive relief against a breach of fiduciary obligations, merely by establishing a breach of those obligations he did not acquire a proprietary interest in the Darling Point property. It was therefore unnecessary to determine the further issues. ^[29]

    29. Judgment at [39]-[42].

63. The judge nevertheless rejected the basis of the further claims. The rejections were stated succinctly. With respect to the submission that the respondent could sell the Darling Point property, but not mortgage it, he reasoned that as the agreement expressly recognised a right to dispose of the property by sale, it must, at least by implication, have recognised a right to a lesser disposition than selling. ^[30]

    30. Judgment at [42].

64. With respect to use of the funds for maintenance of the farm, the judge said that the distinction sought to be drawn “between the land and the business operations on it, is artificial”. ^[31] The distinction thus rejected relied on reading the opening sentence of par 3 of the agreement, expressing the testator’s wish for the respondent to assume the sole management of the testator’s farming business conducted at a particular address, and described as “the Farm”, so that the defined term referred only to the address and not to the farming business. However, par 3 of the agreement also stated:

“I wish for Victoria to use her reasonable endeavours to ensure that the Farm is operated on a financially stable and profitable basis from year to year and not to sell the farm unless financially obliged to do so.”

That “wish” is clearly not a constraint, nor a specific grant of power to a person otherwise unable to use her financial resources for such a purpose. The contention that the testator intended that the land, as opposed to the farming business, was to be operated on a financially stable and profitable basis, verges on incoherence. Thus, to read “the Farm” as limited to the land is barely tenable, when considered in context.

31. Judgment at [41].

65. Whether upon full argument a different view may emerge need not be determined. At the interlocutory stage, the judge’s observations were entirely plausible. They fed into a further contingent finding that, if otherwise of the view that a caveat was available, the balance of convenience supported its lapsing. That reasoning should be accepted.

Conclusions

66. Given the different views amongst text writers as to the proper understanding of Dixon J’s judgment in Birmingham, it is appropriate to grant leave to appeal. Nevertheless, the weight of judicial authority in this country supports the legal principle articulated by the primary judge. For the reasons set out above, and the joint reasons of Ward ACJ and Kirk JA, that approach should be accepted. The appeal should therefore be dismissed.

67. The Court should make the following orders:

1. Grant the applicant leave to appeal from the judgment in the Equity Division of 22 December 2022.

2. Direct that the applicant file within seven days a notice of appeal in the terms of the draft notice contained in the white folder and dispense with service.

3. Dismiss the appeal.

4. Order that the appellant pay the respondent’s costs in this Court.

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Endnotes

Decision last updated: 09 August 2023