Walker v Harwood

[2017] NSWCA 228

Court of Appeal

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

Walker v Harwood [2017] NSWCA 228

Hearing dates:

20 June 2017

Decision date:

07 September 2017

Before:

Basten JA at [1];
Macfarlan JA at [37];
Payne JA at [73]

Decision:

(1)   Grant the applicants leave to appeal from the orders made in the Equity Division on 25 November 2016.

 

(2)   Allow the appeal.

 

(3)   Set aside orders 3 and 4 made in the Court below and in lieu thereof order that:

 

(3)   The costs of the proceedings up to and including 10am on 23 May 2016 be paid out of the estate of the deceased on an indemnity basis.

 

(4)   The defendants pay the costs of the plaintiff from 10am on 23 May 2016 on an indemnity basis.

 (4)   No order as to the costs of the parties in this Court, so that each party must bear their or her own costs.

Catchwords:

COSTS – Calderbank offers – respondent made a Calderbank offer on terms less favourable to the respondent than the result the respondent obtained by judgment – whether it was unreasonable for the applicants to reject the Calderbank offer – whether the respondent’s costs should be paid by the applicants on the indemnity basis from the day after the date of expiration of the Calderbank offer

 

COSTS – offers of compromise – application of r 42.14 Uniform Civil Procedure Rules 2005 – circumstances in which a court should exercise its discretion to “order otherwise”

  COSTS – probate actions – exceptions to the principle that “costs follow the event”

Legislation Cited:

Civil Procedure Act 2005 (NSW), Pt 6 Div 1, s 98
Succession Act 2006 (NSW), Pt 3.2
Supreme Court Rules 1970 (NSW), Pt 22, Pt 52 r 17
Trustee Act 1925 (NSW), s 63
Uniform Civil Procedure Rules 2005 (NSW) rr 20.26. 42.1, 42.14

Cases Cited:

Banks v Goodfellow (1870) LR 5 QB 549
Barakat v Bazdarova [2012] NSWCA 140
Bull v Felton (1941) 66 CLR 295
Calderbank v Calderbank [1975] 3 WLR 586
Estate Sue [2016] NSWSC 721
Graham v Kahler (17 July 1991, unrep; BC 9101779)
Houatchanthara v Bednarczyk [1996] NSWCA 253
Maitland Hospital v Fisher [No 2] (1992) 27 NSWLR 721
Miwa Pty Ltd v Siantan Properties Pty Ltd (No 2) [2011] NSWCA 344
Morgan v Johnson (1998) 44 NSWLR 578
New South Wales Insurance Ministerial Corporation v Reeve (1993) 42 NSWLR 100
Phillips v Phillips (No 3) [2017] NSWSC 409
Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368
Re Hodges (1988) 14 NSWLR 698
Revie v Druitt [2005] NSWSC 965
Shorten v Shorten (No 2) [2003] NSWCA 60
Soulemezis v Dudley (Holdings) Pty Ltd (1987) 10 NSWLR 247

Texts Cited:

G E Dal Pont and Mackie, Law of Succession, (2013, Butterworths)

Category:

Principal judgment

Parties:

David Channon Walker (First Applicant)
Christopher Channon Walker (Second Applicant)
Jay Lily Harwood (Respondent)

Representation:

Counsel:
L Ellison SC (Applicants)
J Needham SC / R Bianchi (Respondent)

  Solicitors:
E H Tebbutt & Sons (Applicants)
Helping Hand Legal (Respondent)

File Number(s):

CA 2016/380578

 Decision under appeal 

Court or tribunal:

Supreme Court

Jurisdiction:

Equity

Date of Decision:

25 November 2016

Before:

Lindsay J

File Number(s):

SC 2014/304451

HEADNOTE

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

The applicants were the executors named in a purported will of their sister (“the deceased”) dated 23 March 2012. Without objection from the deceased’s daughter (the respondent), they obtained probate of the will in common form. Subsequently, on the application of the respondent, Lindsay J revoked probate of that will and a grant of probate in solemn form was made to the respondent in respect of an earlier will dated 24 October 2000.

Under that earlier will, the deceased left the whole of her estate, valued at about $1.6 million at the time of her death, to the respondent. Under the later will, after making some limited specific gifts, the deceased left one-quarter of her residuary estate to the respondent and the balance to other family members including one-sixteenth to each of the applicants.

There was a separate hearing regarding costs orders. In her submissions as to costs, the respondent relied upon her unaccepted Calderbank offer dated 27 June 2014 and unaccepted Offer of Compromise dated 9 May 2016. The result the respondent achieved in the proceedings was considerably better for her than the terms of both these offers.

Lindsay J ordered first that the costs of the proceedings up to and including 31 July 2014 (a date approximating the date upon which the Calderbank offer expired) be paid out of the deceased’s estate on the indemnity basis, and secondly that the applicants pay the respondent’s costs from 1 August 2014 on the indemnity basis.

The applicants sought leave to appeal against the second of these costs orders, including on the basis that his Honour failed to consider a significant relevant factor, namely, whether the applicants’ rejection (by non-acceptance) of the Calderbank offer was unreasonable.

Held, appeal allowed in part:

Per curiam:

It was not unreasonable for the applicants to reject the respondent’s Calderbank offer dated 27 June 2014. The primary judge’s order that the applicants pay the respondent’s costs on the indemnity basis from 1 August 2014 should be set aside: [7]; [61]; [67]-[69]; [78].

Per Basten JA (Payne JA agreeing):

When an offer of compromise attracts the operation of r 42.14 of the Uniform Civil Procedure Rules (UCPR), the plaintiff is entitled to be awarded costs on the indemnity basis unless the court, in its discretion, orders otherwise. The reasonableness of an offeree in rejecting an offer will not, of itself, justify a departure from the ordinary costs rule applicable in that context. The applicants in the present case did not demonstrate sufficient reason for the court to order otherwise. Discussion of principles relevant to the exercise of the discretion to make such an order, and the date upon which such orders are to take effect: [10]-[31]; [79].

The applicants should therefore be required to pay the respondent’s costs on the indemnity basis from 23 May 2016: [11]-[12]; [32]; [80].

Per Macfarlan JA, dissenting in relation to the Offer of Compromise issue:

A number of circumstances justified the making of “an order otherwise”, rendering the Offer of Compromise of no assistance to the respondent. In the circumstances, each party should bear their own costs incurred from 1 August 2014: [59]; [65]-[70].

Judgment

1. BASTEN JA: The background to this appeal is fully explained by Macfarlan JA and need not be repeated here. In the principal judgment the trial judge held that the last will of the deceased, which the applicants (being the executors) had sought to defend, was not valid because of the testamentary incompetence of the deceased. [1] That decision is not challenged. The respondent (the plaintiff in the proceedings below) was the sole residuary beneficiary under an earlier will, which was admitted to probate. She obtained an order for indemnity costs against the applicants, based on a Calderbank offer made prior to the commencement of proceedings.

   1. Estate Sue [2016] NSWSC 721 at [93]-[95].

2. The appeal relates only to the costs order. The order was contested, there having been a separate hearing with respect to costs, preceded by written submissions filed by both parties, with oral argument from senior counsel on both sides of the record.

Leave to appeal

3. The judge gave no reasons for his orders, despite the fact that the appropriate orders were indisputably contentious and dealt with costs which totalled some $360,000.

4. Rather than seek reasons and consider their position, the applicants have sought to appeal, pursuant to leave, to this Court. Had the application for leave been dealt with separately, there may have been good reason to refuse leave. As it is, the parties have now incurred the additional expense of a concurrent hearing and the applicants have established at least an arguable case that the order made below was erroneous. Given those circumstances, together with the significant amount in dispute, it is appropriate to grant leave to appeal. Nevertheless, the process by which the matter came before this Court should be taken into account in dealing with the costs of the appeal.

Basis of order

5. In written submissions, the applicants referred to a statement by the trial judge made shortly before ordering that the applicants pay the costs of the respondent on and from 1 August 2014 on the indemnity basis. The statement was as follows:

“With a very heavy heart because I had every hope that this would be sorted out by the family, I think I have to give effect to the Calderbank letter of 27 June 2014. What is the date from which that would operate?”

The offer having been open for 28 days, counsel for the respondent accepted that the relevant date was the end of July; the judge ordered that the costs be assessed on an indemnity basis from 1 August 2014.

6. It is generally wrong in principle to seek to glean from remarks made by a judge in the course of submissions the reasons for later orders. However, the passage set out above immediately preceded the making of the order which clearly followed from the statement and it may be seen, as the applicants submitted, as an informal explanation for the order.

7. I agree with Macfarlan JA that it was not unreasonable for the applicants to reject the Calderbank offer at the time it was made. (Proceedings had not then been commenced.) Accordingly, order (4) must be set aside.

Offers of compromise – principles

8. It remains to consider the consequence of an offer of compromise served by the respondent, concededly in accordance with r 20.26 of the Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”), on 9 May 2016. The offer was open for acceptance until 10am on Monday, 23 May 2016, being the first day fixed for the trial.

9. The offer was made by the respondent (the plaintiff below), who was the party challenging the final will of the deceased. The applicants (who were also minor beneficiaries under the last will) were the defendants. Under the challenged will the respondent obtained only 25% of the residuary estate (as compared to 100% under the earlier will). Her offer allowed a distribution of approximately 10% of the estate to the beneficiaries under the disputed will, with the executors’ costs to be paid on an indemnity basis out of the estate. As the respondent was successful in obtaining probate of the earlier will, under which she took the whole of the residuary estate, the judgment bettered her offer.

10. Where an offer made by a plaintiff is not accepted and the plaintiff obtains an order or judgment on the claim no less favourable than the terms of the offer, the costs provisions in UCPR r 42.14 apply. Sub-rule (2) provides:

(2)   Unless the court orders otherwise, the plaintiff is entitled to an order against the defendant for the plaintiff’s costs in respect of the claim:

(a)   assessed on the ordinary basis up to the time from which those costs are to be assessed on an indemnity basis under paragraph (b), and

(b)   assessed on an indemnity basis:

(i)   if the offer was made before the first day of the trial, as from the beginning of the day following the day on which the offer was made, and

(ii)   if the offer was made on or after the first day of the trial, as from 11 am on the day following the day on which the offer was made.

11. These cost consequences are not entirely consistent with the time allowed by the offer. UCPR r 20.26 provides that the offer “must specify the period of time within which the offer is open for acceptance”. [2] Where an offer is made two months or more before the date set down for the commencement of the trial, the closing date is to be no fewer than 28 days after the date on which the offer is made. [3] In any other case, the closing date is to be “reasonable in the circumstances.”[4] Despite those provisions, the costs consequences are to run from the day after the offer is made and not from the last date on which it can be accepted. That appears to be inconsistent with the principle that an early offer must remain open for consideration for 28 days. The assumption underlying that provision appears to be that the offeree is entitled to consider its position and to have at least 28 days to do so. The order which will flow from the application of the costs rule means that throughout that period costs are running against the offeree, should the offer not be accepted and the offeror betters the offer in the judgment.

    2. UCPR r 20.26(2)(f).

    3. UCPR r 20.26(5)(a).

    4. UCPR r 20.26(5)(b).

12. In my view the Court should readily “otherwise order” to the extent that indemnity costs should run, as was conceded with respect to the Calderbank offer, from the day following the closing date for acceptance of the offer. That course would reconcile the apparent inconsistency.

13. The central issue, however, is the approach the Court should take in determining whether to depart from the substance of the costs consequences of the rule, as the applicants submitted that it should. The alternative order sought by the applicants was that the costs of all parties be paid out of the estate on an indemnity basis.

14. Provisions similar to those now found in the UCPR were contained in the Supreme Court Rules 1970 (NSW), Pt 22 and Pt 52, r 17. In New South Wales Insurance Ministerial Corporation v Reeve,[5] Gleeson CJ stated (with the agreement of Clarke and Cripps JJA): [6]

“The authorities to which I have referred contain some discussion of the availability of the discretion which is conferred by Pt 52, r 17(4) [to order otherwise], but this is done in the context of a recognition that in an ordinary case where an offer of compromise has been rejected by a defendant and the plaintiff has subsequently obtained more than the amount for which the plaintiff was prepared to compromise, the defendant should pay indemnity costs from the time specified in the rule.

It is impossible exhaustively to state the circumstances in which a discretion to contrary effect might be exercised, and it would be imprudent to attempt any such exhaustive statement. However, I do not read Maitland Hospital v Fisher [No 2] [7] as authority for the proposition that a discretion should be exercised against making an order for indemnity costs in any case in which it was reasonable for the defendant to take the view that it had a good chance of successfully defending the action. The prima facie consequence, which will apply in the ordinary case, is that in the circumstances postulated by the rule an order for indemnity costs will be made.”

5. (1993) 42 NSWLR 100.

6.    Reeve at 102D-F.

7. (1992) 27 NSWLR 720.

15. Five years later, in Morgan v Johnson,[8] the Court considered a similar question with respect to an offer of compromise made in the District Court prior to trial. From 1 January 1998, the unconstrained language, “unless the Court otherwise orders” was varied to read “unless the Court in an exceptional case and for the avoidance of substantial injustice otherwise orders”. Morgan was concerned with the earlier form of the rule. Mason P identified the following principles (omitting references to authority): [9]

    8. (1998) 44 NSWLR 578.

    9.    Morgan at 581F-582D.

“(1)   The purpose of the rule is to encourage the proper compromise of litigation, in the private interests of individual litigants and the public interest of the prompt and economical disposal of litigation ….

(2)   The aim is to oblige the offeree to give serious thought to the risk involved in non-acceptance ….

(3)   The prima facie consequence of non-acceptance will be that the rule will be enforced against the non-accepting party …. This is because, from the time of non-acceptance ‘notionally the real cause and occasion of the litigation is the attitude adopted by [the party] which has rejected the compromise’ ….

(4)   Lying behind the rule is the common knowledge that ‘litigation is inescapably chancy’: …. For this reason, the ordinary provision is expected to apply in the ordinary case …. The mere fact that it was reasonable for the litigant to take the view that he or she did in rejecting the offer is not enough to displace the rule …. As Clarke JA expressed it …:

‘The rule lays down the general principle that should be applied, and the order provided for in that rule should only be departed from for proper reasons which, in general, only arise in an exceptional case. …’

(5)   The discretion to displace the rule is a judicial one, requiring the private and public purposes of the rule to be borne in mind …. Reasons must be given for ‘otherwise ordering’ ….”

16. The statement of Clarke JA set out in principle (4) came from Houatchanthara v Bednarczyk. [10] In Regency Media Pty Ltd v AAV Australia Pty Ltd [11] this Court doubted the propriety of requiring a case founded on “exceptional circumstances”; however, in Barakat v Bazdarova,[12] after referring to the leading authorities, including Regency Media, the Court found it unnecessary to determine how the discretion should properly be described. [13]

    10. [1996] NSWCA 253, p 2.

    11. [2009] NSWCA 368 at [15] (Spigelman CJ, Beazley and McColl JJA).

    12. [2012] NSWCA 140 at [42]-[49] (Tobias AJA; Bathurst CJ and Whealy JA agreeing).

    13. Barakat at [50].

17. That view is understandable; if the rule is to apply in the “ordinary case”, so that to order otherwise requires identification of circumstances which take the case out of the ordinary, and thus might be described as “extra-ordinary”, there would seem to be no harm in describing such a case as “exceptional”. The question is not really one of semantics, but rather the readiness of the court to otherwise order. What is clear, however, is that the reasonableness of the offeree in rejecting the offer will not of itself justify a departure from the ordinary costs rule.

18. In Maitland Hospital v Fisher[No 2],[14] dealing with the predecessor to the current rule,[15] the Court stated that one of the objects of the rule was: [16]

“To indemnify the plaintiff who has made the offer of compromise, later found to have been reasonable, against the costs thereafter incurred. This is deemed appropriate because, from the time of the rejection or deemed rejection of the compromise offer, notionally the real cause and occasion of the litigation is the attitude adopted by the defendant which has rejected the compromise. In such circumstances, that party should ordinarily bear the costs of litigation.”

14. (1992) 27 NSWLR 721 (Kirby P, Mahoney JA and Samuels AJA).

15. Supreme Court Rules 1970, Pt 52, r 17(4).

16.    Maitland Hospital at 724F-G.

19. The same idea may be expressed in terms of the general rule, now contained in UCPR r 42.1, that costs should follow the event “unless it appears to the court that some other order should be made as to the whole or any part of the costs.” Following an offer of compromise, “the event” is redefined as whether or not the offeror obtains a better result than that proposed in the offer. So understood, not only does r 42.14 give effect to a similar principle as the general rule in r 42.1, but the structure of the rule is similar. Thus, the power is to be exercised in a particular way, unless the court exercises its discretion to order otherwise.

20. Reasons why the court may order otherwise under r 42.1 are generally to be found in the nature of the proceedings or the manner in which they have been conducted by the successful party. The fact that an adverse costs order will cause hardship to the unsuccessful party, and that the unsuccessful party had reasonable grounds on which to defend the proceedings, will not be sufficient to resist the usual order. So they should not be sufficient to avoid the usual order under r 42.14.

21. It may be accepted that the role of executors, particularly where the executors have no personal interest in the defence of the will, may be relevant to the possible exercise of the discretion to order otherwise. Nevertheless, there is no general principle that r 42.14 does not apply in the case of a dispute over the validity of a will; if the executors do not wish to be personally at risk, there are protective strategies available to them. For example, they may seek an indemnity from sui generis beneficiaries, or, being a trustee within the terms of the Trustee Act 1925 (NSW), may seek advice from the court, pursuant to s 63 of that Act.

19. There is a further consideration to be taken into account in determining how willing the court should be to depart from the ordinary rule. Satellite litigation in relation to costs imposes a significant drain on both public and private resources and should be discouraged so far as justice permits. Access to the appellate jurisdiction to challenge costs orders is inconsistent with the obligations of the courts and the parties under Pt 6, Div 1 of the Civil Procedure Act 2005 (NSW) “to facilitate the just, quick and cheap resolution of the real issues in the proceedings”. The “real issues” should be understood as the substantive issues and not ancillary issues, such as those relating to costs. That purpose of facilitation will best be achieved by maintaining a tight leash on the circumstances in which the court should otherwise order, thereby promoting certainty in the operation of the provisions relating to offers of compromise and discouraging offerees from seeking to “game the system”.

Application of principles

23. The applicants submitted that the Court should otherwise order for three reasons. The first was that the offer to pay the applicants and the deceased’s nephews and nieces an amount of $120,000 (being approximately 10% of their expectation under the new will), but to allow all of the costs of both parties to be paid on an indemnity basis out of the estate was, in effect, a “walk-away” offer. In other words, the element of compromise was minimal.

24. Secondly, they submitted, as they had to the trial judge, that the amounts which the applicants themselves expected to obtain under the later will, being in each case one-sixteenth of the residue of the estate, meant that the applicants were acting primarily in their representative capacity as executors and not for personal interest. (Counsel conceded, however, that the other beneficiaries, their children, who appear not to have been minors, would together have received five-eighths of the estate.)

25. Thirdly, the applicants relied upon the proposition that in circumstances where the precise nature of the incapacity of the testator was not clearly identified, the executors acted properly and in the public interest in seeking to defend the validity of the later will.

26. In my view, the factors relied upon by the applicants as justifying the non-acceptance of the offer of compromise do not warrant the Court otherwise ordering. While it is true that the amount offered to the individual beneficiaries of the later will was a relatively small proportion of the estate, it is necessary to take account of the offer with respect to costs. The availability of special orders for costs being included in an offer of compromise is partly novel, being introduced in June 2013. There is, on one view, an anomaly in taking proposals with respect to costs into account in determining the order as to costs in circumstances where the offer was not accepted. In any event, the changed rules clearly permit that assessment to be made.

27. The offer in this case to permit the executors to recoup their costs from the estate on an indemnity basis effectively diminished the residuary estate to which the respondent would otherwise be entitled. Although the quantum of their costs as at that time is not known, it would not have been an insignificant financial benefit to them, nor an insignificant diminution in the value of the estate, which would also be diminished by the full amount of the plaintiff’s costs.

28. It is, of course, arguable that the executors might have expected to receive their costs out of the estate, or at least not to have to pay the plaintiff’s costs, even if they lost. Nevertheless there was a risk, in the face of a statutory offer of compromise, that they would indeed face an adverse costs order if they did not accept the offer.

29. The offer was not derisory so that it could be dismissed as not a genuine offer of compromise. Given that assessment, in my view the Court should be slow to treat the amount of the offer as determinative, or even a significant element, in considering whether to vary the prima facie costs order.

30. In relation to the second matter raised by the applicants, it is true that they were defending a will, apparently valid on its face, in a representative capacity. Nevertheless, there was no evidence that the beneficiaries were not all adults and able to contribute to the costs of the litigation if it were sought to be pursued in the face of the offer of compromise. Whether the executors chose to seek such indemnities is not revealed on the evidence, but if they did not it was no doubt because the beneficiaries were their own offspring. It is also true that they did not act entirely in a representative capacity, but had not insignificant financial interests of their own, amounting to perhaps $100,000 each, to protect.

31. With respect to the third issue, the public interest in defending the last apparently valid will should not be overestimated. Ultimately, it comes down to a matter of money. The distribution of a small estate will often not warrant Supreme Court litigation. In such circumstances, which are very common, the public interest in defending the will may usually be ignored. Similarly, there are often proceedings under Pt 3.2 of the Succession Act2006 (NSW) which allow for the variation of a distribution preferred by the testator. Where the beneficiaries include children or persons under a disability, circumstances may be different. That, however, does not arise in this case. Accordingly, the applicants have failed to justify the Court otherwise ordering, generally.

Costs of trial

32. Applying the position as to the date from which the respondent accepted that indemnity costs should run with respect to the Calderbank offer, and the approach to r 42.14 noted at [12] above, the applicants should be required to pay the costs of the respondent of the trial (that is, from 10am on the first day of the trial) on an indemnity basis.

33. Prior to that time there was no point at which it was suggested that their conduct of the proceedings should deprive the executors of their expectation of obtaining the costs of defending the validity of the will from the estate. Those costs should be allowed from the estate.

Costs in this Court

34. For two reasons, the parties should be left to bear their own costs in this Court.

35. The first reason is that each has had a degree of success. The second reason is that, had the parties (and particularly the applicants) sought reasons from the trial judge for the costs order, the proceedings might have been resolved differently and an appeal may not have been necessary.

Orders

36. I would propose the following orders:

1. Grant the applicants leave to appeal from the orders made in the Equity Division on 25 November 2016.

2. Allow the appeal.

3. Set aside orders 3 and 4 made in the Court below and in lieu thereof order that:

(3)   The costs of the proceedings up to and including 10am on 23 May 2016 be paid out of the estate of the deceased on an indemnity basis.

(4)   The defendants pay the costs of the plaintiff from 10am on 23 May 2016 on an indemnity basis.

4. No order as to the costs of the parties in this Court, so that each party must bear their or her own costs.

37. MACFARLAN JA: The applicants are the executors named in a purported will of their sister (“the deceased”) dated 23 March 2012. Without objection from the deceased’s daughter (the respondent), they obtained probate of the will in common form. Subsequently, on the application of the respondent, and as a result of a judgment of Lindsay J of 7 June 2016 (Estate Sue [2016] NSWSC 721), probate of that will was revoked and a grant of probate in solemn form was made to the respondent in respect of an earlier will, dated 24 October 2000.

38. Under the earlier will, the deceased left the whole of her estate, valued at about $1.6 million at the time of her death, to the respondent. Under the later will, after making some limited specific gifts, the deceased left one-quarter of her residuary estate to the respondent and the balance to other family members including one-sixteenth to each of the applicants.

39. In his judgment of 7 June 2016 Lindsay J found, adopting the language of Banks v Goodfellow (1870) LR 5 QB 549 at 565, that “the deceased lacked testamentary capacity [to make the later will] because a disorder of the mind poisoned her affections, perverted her sense of right and prevented an exercise of her natural faculties – influencing her will in disposing of her property and bringing about a disposal of it which, if her mind had been sound, would not have been made” (at [93]; see also Bull v Felton (1941) 66 CLR 295).

40. Subsequently his Honour received evidence and submissions as to costs orders that should be made. The respondent relied in this context upon her unaccepted Calderbank offer dated 27 June 2014 and unaccepted Offer of Compromise dated 9 May 2016. By both offers, the respondent agreed to settle the proceedings upon the basis that probate of the earlier will was granted in solemn form, with the costs of all parties being paid out of the estate on the indemnity basis and the residuary beneficiaries under the later will being paid 10% of what they would have been entitled to under that will. Plainly, the result the respondent achieved in the proceedings was considerably better for her than the terms of her offers.

41. At the conclusion of argument, his Honour ordered first that the costs of the proceedings up to and including 31 July 2014 (a date approximating the date upon which the Calderbank offer expired) be paid out of the deceased’s estate on the indemnity basis, and secondly that the applicants pay the respondent’s costs from 1 August 2014 on the indemnity basis. These were orders 3 and 4 respectively made on 25 November 2016. His Honour did not give reasons for making these orders beyond saying:

“With a very heavy heart because I had every hope that this would be sorted out by the family, I think I have to give effect to the Calderbank letter of 27 June 2014” (Transcript p 5).

42. The applicants seek leave to appeal against the second of these costs orders, including on the basis that his Honour failed to consider a significant relevant factor, namely, whether the applicants’ rejection (by non-acceptance) of the Calderbank offer was unreasonable. The application for leave to appeal was heard concurrently with the appeal that would lie if leave were granted. To determine the application and appeal it is necessary to refer in more detail to the events leading up to the making of the costs orders and to principles applicable to the making of costs orders in probate actions.

The substantive proceedings

43. Some months after the applicants were granted probate of the later will, in a letter to the applicants’ solicitors dated 28 February 2014 the respondent’s solicitors stated that, based on their instructions and “certain medical [and] other records” in their possession, there appeared to be some doubt as to the deceased’s capacity to make that will. The applicants’ solicitors replied on 12 March 2014, stating that the deceased had made that will during an attendance upon the author of the letter (Mr Michael Sainsbury, a partner of the firm) and that he had no concerns about her capacity to make the will. He said that she appeared to have “an extremely good grasp of the appropriate considerations”. By a subsequent letter Mr Sainsbury provided, inter alia, copies of notes given to him by the deceased, a written statement made by the deceased at the time that she made the later will, and Mr Sainsbury’s file note of the deceased’s attendance on him. In both letters he requested that the respondent’s solicitors provide any material in their possession which related to the deceased’s will-making capacity.

44. The respondent’s solicitors replied on 5 June 2014. They referred to medical evidence and various circumstances relevant to the question of the deceased’s capacity, but did not enclose any supporting documentation. On 27 June 2014 they made, on the respondent’s behalf, the Calderbank offer to which I have earlier referred. In their letter of that date they asserted that the deceased had changed her will because the respondent had anglicised her name following her marriage.

45. The applicants’ solicitors again requested, in a letter of 9 July 2014 to the respondent’s solicitors, that any available documentary material in support of the respondent’s position be provided. This did not occur however until August 2014. By that time the Calderbank offer had expired.

46. The respondent commenced the subject proceedings by statement of claim filed on 16 October 2014. In it, she particularised her allegation that the deceased lacked testamentary capacity to make the later will as follows:

“a)   The deceased was suffering from a paranoid-type delusional disorder.

b)   The deceased was suffering from the delusional false belief that the plaintiff had stolen two boxes of her belongings.

c)   The deceased was suffering from the delusional false belief that the plaintiff’s alteration of her Christian names and her surname at the time of her marriage in 2010 was an act of disrespect.

d)   The deceased’s judgement was so affected by reason of the matters set out in the preceding sub-paragraphs that the deceased was unable to comprehend and appreciate the claims to which she ought to have given effect.”

47. The Offer of Compromise to which I have referred earlier was made on 9 May 2016. The proceedings were heard before Lindsay J over three days in June 2016.

The judgment of 7 June 2016

48. In his judgment, the primary judge stated that the psychiatrists who gave expert evidence at the hearing agreed that “the deceased suffered from a delusion that she was the subject of repeated thefts of her property and ongoing, persistent efforts of thieves to steal her property”. He said that they however disagreed as to whether this affected the deceased’s decision-making ability (at [8] and [9]).

49. His Honour found that the deceased’s theft delusion emerged within a month or so of her move to Ulladulla (at [48]). This occurred in 2010. He referred to the deceased’s engagement with mental health professionals subsequent to the making of the disputed will and to her being “scheduled” under the Mental Health Act 2007 (NSW) in February 2013 (at [52]-[54]).

50. His Honour did not accept the opinion of the applicants’ expert psychiatrist that “the deceased’s delusional disorder was confined to a delusion involving theft, that it did not affect the deceased’s patterns of thought generally [and] that it did not affect the will-making processes of, and incidental to, [the making of the will of] 23 March 2012” (at [63]).

51. The primary judge also rejected the applicants’ contention that the deceased’s condition as observed by health professionals subsequent to the date of her later will was explained by circumstances that occurred after she made the later will (at [64]). Although the deceased had made a written statement at the time she made the later will, which in terms was inconsistent with the respondent’s contention that the deceased was then suffering relevant delusions, his Honour concluded that this statement should not be read literally (at [87]).

Costs in probate actions

52. The general provisions of the Civil Procedure Act 2005 (NSW) and Uniform Civil Procedure Rules (“UCPR”) are applicable to probate actions, as they are to other types of proceedings. Thus, the court has a broad discretion to determine what costs orders should be made (s 98 of the Civil Procedure Act). Ordinarily orders for costs should “follow the event” (UCPR r 42.1), with the consequence that the unsuccessful party is ordered to pay the successful party’s costs. There are two exceptions to the rule that costs follow the event that are applicable in probate actions. These have developed due to the existence of considerations peculiar to probate actions. The first consideration is that probate litigation is sometimes caused by the conduct of a third party, namely the deceased. His or her “conduct, habits and mode of life” may, for example, provide reason to question his or her testamentary capacity (Shorten v Shorten (No 2) [2003] NSWCA 60 at [19]). The other consideration is that there is a public interest in providing interested parties with the opportunity to support apparently regularly executed wills without being deterred by the costs consequences of doing so.

53. The most frequently cited statement of the exceptions is that of Powell J in Re Hodges (1988) 14 NSWLR 698 at 709 as follows:

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

2. if circumstances led reasonably to an investigation in regard to the document propounded, the costs may be left to be borne by those who respectively incurred them.”

54. The first exception does not arise simply because the testator’s mental state, and consequently testamentary capacity, is in issue in probate proceedings. For example, merely because the testator was suffering from severe depression prior to his or her death (Re Hodges at 710) or was disabled as a result of a stroke (Shorten v Shorten at [27]) does not mean that the testator was the “cause” of the litigation. It was not suggested that this first exception was applicable in the present case.

55. The second exception will only be applicable if the named executor, who unsuccessfully sought to support the will, acted bona fide in the reasonable belief that the will could be supported (see for example Phillips v Phillips (No 3) [2017] NSWSC 409 at [22] and [25]).

56. Young J stated in Graham v Kahler (17 July 1991, unrep; BC 9101779) that “unless there are some special circumstances, if a person has obtained probate in common form and the grant is revoked and probate in solemn form is granted [of] an earlier will, that person usually pays the costs of the whole proceedings personally and is not entitled to any costs out of the estate” (BC 9101779 at 6). However, as Windeyer J pointed out in Revie v Druitt [2005] NSWSC 965 at [9], this statement should be understood as only relevant where the executor had no faith in the validity of the will in respect of which he or she obtained a grant in common form.

57. If the second exception is applicable, the Court may, depending upon the circumstances of the case, either make no order as to costs or order the costs to be paid, wholly or partly, out of the estate (G E Dal Pont and K F Mackie, Law of Succession, (2013, Butterworths) at [23.5] and the cases there cited).

58. Principles concerning attempts to compromise proceedings by Calderbank offers (Calderbank v Calderbank [1975] 3 WLR 586) or Offers of Compromise (see UCPR rr 20.25-32 and 42.14-15A) are applicable in probate actions. Under the Calderbank principle, a court may consider it appropriate to make a different costs order to that which it would otherwise have made if the unsuccessful party rejected an offer to settle on terms less favourable to the successful party than the outcome which the successful party ultimately achieved in the proceedings. It will however only do so where the unsuccessful party’s rejection of the offer was unreasonable (see for example Miwa Pty Ltd v Siantan Properties Pty Ltd (No 2) [2011] NSWCA 344 at [8]).

59. In relation to an Offer of Compromise served in accordance with r 20.26 of the UCPR, r 42.14(2) creates a presumption that where the successful party made an offer (that was unaccepted) on terms more favourable to the unsuccessful party than the result the successful party ultimately achieved, the unsuccessful party pays the successful party’s costs on the indemnity basis from the date of the offer. This is only a presumption because under r 42.14(2) the Court has a discretion to order otherwise. When deciding whether to depart from the presumption, whether it was unreasonable for the unsuccessful party to reject the Offer of Compromise in question is a relevant but not determinative factor.

Determination of the application for leave and the appeal

60. As noted in [41] above, the primary judge ordered that the costs of all parties up to a date proximate to the date of expiration of the Calderbank offer be paid out of the deceased’s estate on the indemnity basis and that the applicants pay the respondent’s costs incurred after that date on the indemnity basis. The former order reflected the primary judge’s preliminary indication, made before he was apprised of the respondent’s offers, that he was disposed to order all of the costs of the proceedings to be paid out of the estate (see judgment of 7 June 2016 at [119]). His partial departure from this preliminary indication was clearly related to the subsequent tender of evidence of the Calderbank offer. As indicated in [41] above, when making the costs orders his Honour said “I have to give effect to the Calderbank letter of 27 June 2014”.

61. In my view, this was a statement of his Honour’s reason for making the second of his costs orders, albeit a reason that discloses error. The error is in his Honour’s indication that he considered himself obliged to “give effect to” the Calderbank offer. The implication of the statement is that his Honour did not consider it necessary or appropriate to decide whether the applicants’ rejection of the offer was unreasonable. As noted above in [58], this was a material consideration. It was not addressed, despite the applicants having contended before his Honour that they acted reasonably in rejecting the offer. The fact that it was not addressed vitiated the exercise of his Honour’s costs discretion. As I consider that error has been clearly established, and as the costs order challenged is undoubtedly of considerable financial significance to the parties, leave to appeal should be granted.

62. During the course of argument in this Court, a question arose as to whether the applicants should have requested the primary judge to give reasons, or at least more extensive reasons, for his decision to make the costs orders. However, I do not consider that the applicants’ position is prejudiced by the absence of any such application. On occasions, such as when making certain rulings on the admissibility of evidence, a judge need not give reasons for the making of orders (Soulemezis v Dudley (Holdings) Pty Ltd (1987) 10 NSWLR 247 at 279). As McHugh JA said in that case “[i]t all depends on the importance of the point involved and its likely effect on the outcome of the case” (ibid). In some cases a party may need to request reasons for a decision if they are not volunteered by the judge. However in the present case in my view the primary judge needed to give reasons for the costs orders irrespective of any request to do so. It was obvious that the orders were likely to have a considerable financial impact on the parties, bearing in mind that the hearing before his Honour had occupied three days and that the parties had been represented by senior counsel. Moreover the question of costs orders was the subject of vigorous oral and written submissions.

63. As his Honour’s exercise of the discretion was vitiated, it is necessary for this Court to re-exercise the discretion. The following considerations are relevant in this respect.

64. First, my view is that the applicants’ rejection of the respondent’s Calderbank offer of 27 June 2014 was not unreasonable. Consequently the Calderbank offer is not relevant to the exercise of the costs discretion. I give my reasons below at [68] for taking that view.

65. For the same reasons I do not consider that the Court should apply the presumption as to costs created by UCPR r 42.14 (see [59] above). Rather it should, as it is entitled to do under that rule, “order otherwise”, with the consequence that the Offer of Compromise should also be treated as not relevant to the exercise of the costs discretion. In exercising its discretion to “order otherwise” the Court is not limited to matters known to the offeree at the time of the offer which rendered rejection of the offer reasonable. The matters identified in [67] below in my view make out a case for ordering “otherwise” which goes beyond the proposition that rejection of the offer was reasonable (see Morgan v Johnson (1998) 44 NSWLR 578 at 581-2). They indicate that there was a public interest in there being an enquiry into the circumstances of the will, particularly when (as it transpired) there was little clarity, at least until his Honour’s judgment, as to the reasons why the duly executed will might be vitiated.

66. Those conclusions have the consequence that, in re-exercising the discretion, consideration must be given to the particular principles as to costs orders in probate actions to which I have referred above (see [52]-[57]).

67. As I have earlier indicated, the parties did not contend that the present proceedings fall within the first probate exception to the general principle that costs follow the event. However, in my view the proceedings fall within the second exception because the executors named in the later will acted reasonably in attempting, albeit unsuccessfully, to uphold that will. The following circumstances lead to this conclusion:

1. The will was regular on its face.

2. The will was executed in the presence of a senior solicitor who made a detailed note of his hour-long consultation with the deceased and had no doubts as to the deceased’s testamentary capacity.

3. The principal observations of the deceased by medical professionals which supported the view that she lacked testamentary capacity were made after the date of the later will (see [49] above). Arguably, her incapacity arose out of circumstances occurring after the date of that will, although his Honour concluded that that was not so ([51] above).

4. There were competing psychiatric expert views expressed at the hearing as to whether the deceased’s delusions impacted on her testamentary capacity.

5. The delusions that the primary judge found justified the relief he granted were more extensive than those that the respondent pleaded in her Statement of Claim (compare [46] to [48] and [50]).

6. The reason given in the respondent’s solicitors’ letter of 27 June 2014 as to why the deceased changed her will was more limited than the reasons (arising from the deceased’s delusions) that his Honour found had influenced the deceased to change her will (compare [44] to [48] and [50]).

7. The applicants would have personally benefited from the later will being upheld only to a limited extent (see [38] above). Otherwise they were acting in a representative capacity.

8. There is a public interest in wills that are properly executed under the supervision of a solicitor not being set aside without due enquiry into the circumstances in which they were executed.

68. These considerations are also relevant to the conclusion I have expressed above (at [64]) that the applicants’ rejections of the Calderbank offer and the later Offer of Compromise were not unreasonable. In relation to the Calderbank offer, there should be added the fact that, at no time prior to the expiration of the period for acceptance of the Calderbank offer, did the respondent’s solicitors make available to the applicants’ solicitors copies of the documents that allegedly supported the respondent’s case. This was despite a number of requests from the applicants’ solicitors that such documents be provided. In addition, the financial concession that the respondent was prepared to make, as reflected in both offers, was very limited. She offered to pay the residuary beneficiaries under the later will only 10% of that to which they would have been entitled if probate of that will had been confirmed.

69. As the second probate costs exception referred to in [53] above is applicable, it is open to the Court either to make no order as to costs or to order that the applicants’ costs (as well as those of the respondent) be paid out of the estate. I do not consider that the latter course should be adopted. As the respondent is the sole beneficiary under the earlier will, the effect of such an order would be that the respondent would pay the applicants’ costs of the proceedings. Although the applicants’ defence of the later will was reasonable, it would in my view be going too far to impose such a costs burden on the respondent in circumstances where she was successful in the proceedings. Such an order would reverse the normal rule (albeit that there are exceptions that apply in probate actions) that costs follow the event.

70. In my view it is appropriate that no order be made as to the applicants’ costs, with the result that they will bear the costs themselves. Likewise, no order should be made that the applicants pay the respondent’s costs.

71. As the applicants only challenge the primary judge’s order that they pay the respondent’s costs on and from 1 August 2014 on the indemnity basis, his Honour’s order that the costs (of all parties) up to and including 31 July 2014 be paid out of the estate on the indemnity basis should not be disturbed. The respondent did not seek to challenge that order by cross-appeal or otherwise. As the respondent is entitled to the whole of the estate, it is understandable that she did not seek an order that her costs incurred after 31 July 2014 be paid out of the estate.

Orders

72. For the reasons I have given, I propose that the following orders be made:

1. Grant the applicants leave to appeal.

2. Allow the appeal.

3. Set aside order (4) made on 25 November 2016.

4. Make no order as to the applicants’ costs of the proceedings at first instance incurred after 31 July 2014, to the intent that the applicants bear those costs themselves.

5. Order the respondent to pay the applicants’ costs of the proceedings in this Court.

6. Grant the respondent a certificate under the Suitors’ Fund Act 1951 (NSW), if qualified.

73. PAYNE JA: In this case, as Macfarlan JA explains, the substantive proceedings concerned a grant of probate over the estate of the deceased who made two relevant wills. In 2000, the deceased made a will leaving her entire estate (excluding some small bequests) to her daughter, the respondent. In 2012, the deceased made another will, leaving one quarter of the estate to each of the respondent and two nieces. The final quarter was divided equally between the deceased’s brothers, who are the applicants in this Court, and her remaining niece and nephew.

74. On 4 October 2013, probate in common form of the 2012 will was granted to the applicants who were named as executors. The estate was valued at approximately $1.618 million. On 7 June 2016, the primary judge ordered that the grant of probate of the 2012 will be revoked, and granted probate to the respondent of the 2000 will.

75. The key findings of the primary judge were as follows:

1. There was no dispute that the deceased was able to understand the nature and significance of making a will;

2. What was in dispute was whether the deceased was able to comprehend and appreciate the claims on her estate, and whether she suffered from a disorder of the mind that poisoned her affections towards the respondent;

3. The experts agreed that the deceased suffered from a delusional disorder. The dispute between them was the extent to which (if at all) this affected her testamentary capacity;

4. The primary judge found that the deceased had a well-established delusional disorder of the “persecutory type”. He found that it was present at the time she executed the 2012 will and that she had disordered thoughts regarding the respondent in that time;

5. The primary judge found that the deceased lacked testamentary capacity and that the applicants did not discharge their onus of proving that the 2012 will was the last will of a free and capable testatrix.

76. On 25 November 2016, following the exchange of written submissions, the parties were heard about costs. As Macfarlan JA explains, the background to that application was that on 27 June 2014, the respondent made a Calderbank offer, under which the grant of probate of the 2012 will would be revoked, a grant in solemn form of the 2000 will would be made, and payments made to each of the beneficiaries in the 2012 will. The offer provided that the costs of the parties “be borne by the estate on an indemnity basis”. On 9 May 2016, the respondent made an Offer of Compromise in essentially the same terms.

77. The primary judge made the following orders:

“1.    Note the parties’ respective written submissions on costs; namely:

(A)   The plaintiff’s written submissions dated 25 November 2015 entitled ‘Plaintiff’s submissions on costs’ and signed by Jane Needham SC; and

(B)    The defendants’ written submissions dated 24 November 2016 entitled ‘Defendants’ submission as to costs’ and signed by Lindsay Ellison SC.

2.    Order that the grant of probate issued to the plaintiff on 5 September 2016 be delivered to the registry for endorsement by the registrar as a grant in solemn form.

3.    Order that the costs of the proceedings up to and including 31 July 2014 be paid out of the estate of the deceased on the indemnity basis.

4.    Order that the defendants pay the costs of the plaintiff on and from 1 August 2014 on the indemnity basis.

5.    Order that these orders be entered forthwith.

6.    Order that the defendants be entitled to be reimbursed all costs and disbursements incurred by them in administration of the estate.”

78. For the reasons given by Macfarlan JA, I would grant leave to appeal and set aside order 4 requiring the applicants to pay indemnity costs from 1 August 2014 based on the respondent’s Calderbank offer.

79. I have also read the reasons of Basten JA in draft. For the reasons his Honour gives, I would reject the applicants’ challenge to the primary judge’s orders in so far as they required the applicants to pay indemnity costs by reason of their rejection of the Offer of Compromise.

80. I also agree with the orders proposed by Basten JA about the applicants’ entitlement to recover their costs on an indemnity basis from the estate up to 10am on the first day of the trial and the orders proposed about the costs of the appeal for the reasons his Honour gives.

81. Accordingly I agree with the orders proposed by Basten JA.

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Endnotes

Amendments

07 September 2017 - Headnote, holding 1 (per curiam), "cost" changed to "costs".

[15]: First sentence, "order" changed to "offer".

[59]: Final sentence, "relative" changed to "relevant".

[74]: "under the 2000 will" changed to "of the 2000 will"

[76]: "probate on" changed to "probate of".

Decision last updated: 07 September 2017