Yizhu Zaknic v Russel Phair &; Russel Phair v Yizhu Zaknic

[2017] NSWSC 827

Supreme Court

New South Wales

Medium Neutral Citation:	Yizhu Zaknic v Russel Phair &; Russel Phair v Yizhu Zaknic [2017] NSWSC 827
Hearing dates:	On the papers
Decision date:	08 September 2017
Jurisdiction:	Equity - Expedition List
Before:	Sackar J
Decision:	See para [35]
Cases Cited:	Re the Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia and Anor ex parte Lai Qin (1997) 186 CLR 622
Category:	Procedural and other rulings
Parties:	Yizhu Zaknic Russel Phair
Representation:	Counsel: T Morahan L Ellison SC   Solicitors: Proctor Phair Lawyers Chen Shan Lawyers
File Number(s):	2016/296449 & 2016/304804
Publication restriction:	n/a

Judgment

The Issue

1. Two sets of proceedings namely 2016/296449 and 2016/304802 were due to be heard before me for three days commencing 7 August 2017. The matters settled in advance of that hearing. The outstanding matter between the parties is the question of costs.

Background

2. In late October 2011 the late Frank Zaknic instructed Mr Russel Phair, his solicitor, to prepare a new will which he executed on 27 October 2011.

3. Mr Phair alleged Mr Zaknic said he wanted him to deal with the administration of the estate, take care of his son’s interests in the estate and do all the legal work necessary in this regard. Mr Phair was appointed co-executor pursuant to the will along with Mr Zaknic’s wife.

4. Mr Phair suggested Mr Zaknic insert a clause in the will so as to enable him to charge for all work done in connection with the estate at professional rates, whether that work involved legal work or the just administration of the estate.

5. Mr Zaknic died suddenly on 28 November 2015. This left his wife and their infant son as sole beneficiaries pursuant to the will. Mrs Zaknic and Mr Phair were co-executors. Probate was granted on 4 April 2016.

6. Whilst in theory it was prudent to have co-executors, sadly the testator could not have made a worse choice. Within a very short time of Mr Phair commencing necessary work in relation to the estate, disputes arose between himself and Mrs Zaknic. This covered a wide range of matters, including Mr Phair accusing Mrs Zaknic of not cooperating with him so as to enable him properly to administer the estate.

7. On 10 December 2015 Mr Phair asserted he sent a costs disclosure by email to Mrs Zaknic.

8. Mr Phair further alleged that from the very outset Mrs Zaknic began interfering in the administration of the estate by making direct contact with managing agents of a number of investment properties of the deceased. He asserted she also transferred a property into her own name while a mortgage debt remained on that property.

9. Mr Phair asserted that he attempted unsuccessfully to explain the difficulties Mrs Zaknic had created and that there were deficiencies on rentals received on some properties as against mortgage commitments. She was allegedly unable or unwilling to accept his various explanations.

10. Mr Phair asserted that Mrs Zaknic instructed him not to investigate properties in Hong Kong or Croatia against his advice. I should also mention in passing that the deceased owned properties in various states of Australia including Victoria and Queensland.

11. On 18 April 2016 Mrs Zaknic lodged a complaint against Mr Phair to the Legal Services Commission. She also informed the Commonwealth Bank that Mr Phair was no longer acting for the estate.

12. Mr Phair asserted Mrs Zaknic told him she wanted to sell various properties and would not listen to him as to the need for valuations.

13. On 19 May 2016 the Legal Services Commission explained to Mrs Zaknic that she and Mr Phair had to jointly administer the estate. The Commission advised each should, if they wished, approach the Court to have the other removed. It otherwise dismissed the complaint.

14. Over the next little while Mr Phair wrote numerous letters on estate matters. Mrs Zaknic however in the meantime instructed Chen Shan Lawyers to act for her. The difficulty as Mr Phair saw it was that Mrs Zaknic had not worked since 2006, her child was a minor and various investment properties were not self-sustaining. From his vantage point much work was to be done. He was also getting no cooperation from Mrs Zaknic as he saw it.

15. On the other hand Mrs Zaknic said the cause of the breakdown in cooperation was the insertion on Mr Phair’s advice of what is submitted is a defective charging clause in the will. This permitted Mr Phair to charge professional fees for administrative work and legal work alike. Mrs Zaknic alleged the clause put Mr Phair in a position of conflict between his role as executor and trustee, and lawyer. She alleged that Mr Phair was in breach of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 (the Solicitors’ Rules), in particular Rule 12.1.

16. She asserted it was at a time when she was exceedingly vulnerable and in mourning. Mrs Zaknic also asserted Mr Phair was unhelpful and failed constructively to assist her to understand the basis for his charging. The consequence, according to Mrs Zaknic, was that he also failed to make any proper and/or adequate disclosure and for any number of reasons the charging clause was void.

17. Mrs Zaknic also asserted that the lack of a timely costs agreement, failure to establish an estate account, and failure to reimburse her for legitimate estate expenditure was unacceptable.

Proceedings are commenced

18. On 5 October 2016 Mrs Zaknic commenced proceedings by way of summons. Mr Phair initially commenced to file a cross claim but by necessity had to resort to a statement of claim. He therefore commenced separate proceedings.

19. The effect of both sets of proceedings would have been to remove either Mr Phair or Mrs Zaknic as executors. Indeed on 8 November 2016 Mr Phair proposed that both executors should resign and a new executor be appointed. He offered Mrs Zaknic a proposal to appoint an additional executor if she wished.

20. Again on 16 November 2015 Mr Phair offered by way of compromise that both executors renounce probate and nominated a Mr Blair Pleash accountant of Hall Chadwick to be appointed executor and trustee.

The Parties’ positions

21. Mr Phair submitted the deceased is presumed to know of any conflict. That potential conflict is no ground for removal. Mrs Zaknic as co-executor was, he submitted, equally in a position of conflict by reason of her position as co beneficiary and the person responsible for the person of the infant beneficiary.

22. Mr Phair also submitted that he is merely entitled to his proper costs and disbursements pursuant to the charging clause. It seems to be accepted that Mr Phair is entitled to his costs as co-executor with regard to that office and the administration of the estate. Whatever he has or has not done should, he said, be irrelevant on the question of the litigation. The overriding objective is and was the due and proper administration of the estate. That is all he was seeking to achieve.

23. Mr Phair submitted he was entitled to refuse to reimburse Mrs Zaknic in respect of her claims and was further not in breach of the Solicitors Rules. Mr Phair asserted the charging clause was one approved by the deceased. Mr Phair’s evidence which of course remains untested due the settlement is that he explained to the deceased that he was required to insert a charging clause into the will for the express purpose of allowing him to charge his professional costs in acting as executor and trustee. Mr Phair also asserted he provided a draft will to Mr Zaknic and gave him a detailed explanation. He therefore submitted he satisfied the provisions of Rule 12.4. He further submitted that in the circumstances the deceased was aware and consented to any prospective conflict.

24. Mr Phair submitted his costs of the proceedings (both sets) should be recovered by him on an indemnity basis and ought to be paid out of the deceased’s estate.

25. Faced with the inevitable conflict of interest problem and the defective charging clause on the other hand, Mrs Zaknic submitted Mr Phair should have resigned from this position.

26. Further she submitted that this is not a case where either or both executors approached the court for guidance. The ordinary principles of costs in litigation, she submitted should apply.

27. Further Mrs Zaknic submitted Mr Phair changed his position on 4 August 2017 agreeing that Mrs Zaknic should remain as executor and trustee with an additional executor to be appointed. Mr Phair did, it is accepted, make offers to resign as executor from Mary 2017 but always on condition his costs were paid including the costs of the proceedings. Mrs Zaknic has consented to pay Mr Phair’s invoice of $19,538.28 for obtaining probate and its reseal in Victoria. All other work, she submitted, showed, from the relevant invoices concerned, the administration of the estate and/or these proceedings. Mrs Zaknic submitted Mr Phair should pay the costs of both proceedings on an ordinary basis.

Consideration

28. When cases settle and what is left to be determined is costs, problems can obviously arise. The exercise of the ultimate and undoubted discretion on costs depends on the ability of the Judge to make an informed prognosis about the outcome of the issues in the litigation. It is also appropriate for the Judge to examine the manner in which the litigation has been conducted.

29. In Re Minister for Immigration & Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 624-625, McHugh J said:

In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order. When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order.

In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action. In administrative law matters, for example, it may appear that the defendant has acted unreasonably in exercising or refusing to exercise a power and that the plaintiff had no reasonable alternative but to commence a litigation. Thus, for example, in R v Gold Coast City Council; Ex parte Raysun Pty Ltd the Full Court of the Supreme Court of Queensland gave a prosecutor seeking mandamus the costs of the proceedings up to the date when the respondent council notified the prosecutor that it would give the prosecutor the relief that it sought. The Full Court said that the prosecutor had reasonable ground for complaint in respect of the attitude taken by the respondent in failing to consider the application by the prosecutor for approval of road and drainage plans.

Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried. This is perhaps the best explanation of the unreported decision of Pincus J in South East Queensland Electricity Board v Australian Telecommunications Commission where his Honour ordered the respondent to pay 80% of the applicant's taxed costs even though his Honour found that both parties had acted reasonably in respect of the litigation. But such cases are likely to be rare.

If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases.

(Footnotes omitted)

30. On the basis of Mr Phair’s evidence, albeit untested, the charging clause was arguably not defective in the sense that it had been the subject of appropriate explanation and dealt with pursuant to Rule 12.4 of the Solicitors’ Rules. On the strength of that evidence, at least on a prima facie basis, the insertion of the clause would likely have survived a legal challenge. On the other hand, in my view, it is always prudent when a solicitor is performing a task here performed by Mr Phair that he or she is meticulous to ensure that the client receive independent advice, so as to avoid the very issue in this case. I hasten to add that independent legal advice is not a requirement of Rule 12.4, but it is in my view a common sense safeguard. A good solicitor is a prescient one. Foreseeing the likelihood of problems is what lawyers should be trained to do. This is especially so when on one view of Mr Phair’s evidence the testator informed him that he thought his wife was a difficult person. That should have sent a warning signal.

31. Whilst this case may not have revolved around a conflict of interest in the technical sense it very soon became a conflict of personalities after the deceased died. There was fault it seems to me on both sides. There is a basis for the proposition that Mrs Zaknic’s lack of understanding and strong personality undoubtedly led her to engage in perhaps unnecessary disputation. Quite frankly however, she and her infant son were the sole beneficiaries and she felt rightly entitled to assert her proprietorial rights. However she was not able, as I read the materials, to take advice and could not or would not understand her role and that of Mr Phair. Whilst I perfectly understand Mr Phair’s concern and loyalty for his erstwhile client, the moment conflict arose he had a difficult but obvious decision to make.

32. Mrs Zaknic and her young son were as a matter of reality the beneficiaries. He was not. In my view there was simply no purpose perpetuating the conflict which he was incapable of resolving by persuasion or otherwise.

33. It must have become clear to him almost at the outset in order to avoid unnecessary expense that he should step aside.

34. It seems to me that both sides have to an extent on the materials I have examined, acted unreasonably. It seems to me it is a separate matter as to whether Mr Phair has or has not overcharged for the work he has undertaken.

35. In all the circumstances, I consider the appropriate order should be that each party pay their own cost of the litigation.

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Decision last updated: 08 September 2017