Lang v Southen HC Christchurch AP 15/01

[2001] NZHC 666

IN THE HIGH COURT OF NEW ZEALAND
CHRISTCHURCH REGISTRY AP 15/01

BETWEEN DAVID MILLAR LANG
Appellant

AND ANDREW SOUTHEN
Respondent

Hearing: 24 July 2001

Counsel: H A Evans for Appellant
D J C Russ for Respondent

ORAL JUDGMENT OF PANCKHURST J

Solicitors:
Young Hunter, Christchurch for Appellant
Dean Russ - Lawyer, Christchurch for Respondent

[1] At issue in this appeal is the personal liability of a trustee for a debt of a trust. The respondent, Mr Southen, is a plumber. He undertook work for the Cashel Trust of which the appellant was one of two trustees. The appellant is a solicitor and hence his trusteeship was in a professional capacity. His co-trustee, Mr Wilson, ran the building project in the context of which the debt was incurred. He, that is Mr Wilson, has left New Zealand. The question is whether Mr Lang, the appellant, is personally liable in his trustee capacity for the balance of the plumbing debt.

The Facts:

The Cashel Trust was formed in July 1997. As I have said there were two trustees, Messrs Wilson and Lang. The sole beneficiary of the Trust was Mr Wilson. The settlor was another solicitor, a partner of Mr Lang, who settled a nominal sum in order to establish the Trust. Its purpose was to develop five townhouses on a city section. To that end a section was purchased by the trustees at 469 Cashel Street, Christchurch. It was suitable for development. Clause 21.3 of the trust deed provided under the description of the Trustees’ General Powers the further hearing “Sub-divide and Develop Property”. The balance of the clause, which is expressed in the widest possible terms, authorised the trustees to do all such things as may be required in order to complete a development of the kind contemplated.

[3] In October 1997 the trustees applied to the Westpac Bank and obtained a mortgage advance. The priority sum indicated in the mortgage was $770,000. Significantly, in relation to that liability Mr Lang ensured that there was a clause in the mortgage limiting his liability to “the extent of the funds and assets” of the Trust itself.

[4] It appears that the Trust was formed at the instigation of Mr Wilson. He, at the relevant time, was an employee of a company, Timberlock Limited which, it seems, was not in sound financial circumstances. Indeed, it subsequently went into liquidation. In any event, at about the same time as the arrangements in relation to the land purchase and the mortgage took place, Mr Wilson called for quotes in relation to the building development. In August the respondent submitted a quote for plumbing work in the sum of $19,462.50 inclusive of GST. That quote was addressed to Mr Wilson at Timberlock. However the following month, September 1997, the quote was accepted by the provision of a purchase order from the Cashel Trust. At least from that stage then Mr Southen was aware of the entity with whom he was in contract, albeit he gave evidence that Mr Wilson would not reveal to him the name of his co-trustee or trustees as the case may be.

[5] Work began on the development and in December, and again on two occasions in April 1998, progress payments were made by the Cashel Trust to Mr Southen. On 30 May 1998 he rendered a final invoice for $8,232.75 payable by the 20th of the following month. That account was not met.

[6] As I have already noted, Mr Wilson left New Zealand and hence the present proceeding was brought against Mr Lang alone. He, I should mention, was not directly involved in the dealing with Mr Southen. He had no knowledge of the contract at the relevant time. Likewise, Mr Southen did not know of Mr Lang’s identity or existence since Mr Wilson had declined to provide such information.

[7] In the end result the development was described in evidence as a “disaster”. There were significant cost overruns. Two of the townhouses were transferred to the original owner of the land in satisfaction of its cost. The three remaining townhouses were eventually sold by the Westpac Bank as mortgagee. This left a number of unpaid and unsecured creditors.

The District Court Decision:

[8]The essence of the decision in the Court below is captured in five paragraphs from the judgment. The learned Judge said:

“[34] I am satisfied on the evidence that the defendant knew precisely the business to be undertaken by the Trust. It was the purchase of land and its re-development into townhouses. He was aware that this would involve the letting of contracts with the tradesmen necessary to carry out the work. He accepts this would include plumbing services.

[35] The defendant was personally involved in the conveyancing associated with the buying of the land and the raising of finance for the venture. He was a signatory to the bank account and entitled to receive bank statements and other banking records.

[36] In those circumstances he becomes subject to the general obligations described in Halsbury’s Laws of England (4th ed) 2000 Reissue, vol 48, para 850:

“Subject to the rights of delegation and the employment of agents, a trustee is personally responsible for the exercise of his judgment and for the exercise of his duty, and cannot escape responsibility by leaving to another person the exercise of that judgment or the performance of that duty, even if he is one of several trustees and the person to whom he leaves it is his co-trustee; . . . ”

and see Lee v Sankey [1873] LR XXVI, 809.

[37] In Lewin on Trusts (16th ed) page 181, the authors put it this way:

“In the case of co-trustees of a private trust, the office is a joint one. Where the administration of the trust is vested in co-trustees, they all form as it were but one collective trustee and therefore must execute the duties of the office in their joint capacity . . . . However, the act of one trustee done with the sanction and approval of a co-trustee may be regarded as the act of both, though such sanction or approval must be strictly proved.””

Against this background he later concluded:

“[44] Once Mr Southen (sic Mr Lang) permitted Mr Wilson to unilaterally manage the project, he ran the risk that the building development might not be adequately managed to the detriment of third parties such as the plaintiff. In the event that risk materialised. The plaintiff is entitled to say that his contract was with both trustees of the Trust. They have benefitted from the plaintiff’s work and he is entitled to be paid for it. The law draws no distinction between what the defendant terms as “professional trustees” and others; in the eyes of the law they are all “trustees”.”

Hence, in the end result, judgment was entered in favour of Mr Southen for the amount of the claim.

[9] I observe that the facts in the case are not seriously in dispute. Rather, the issue is where they lead. What are the legal consequences which flow from the factual conclusions which were reached? Even as to that it seemed to me that there was a large measure of agreement between counsel as to the key legal principle. It is that the act of one co-trustee which has the sanction and approval of the other, is binding upon both. The difficult question is what constitutes sanction and approval in the present context? May a trustee sanction and approve the act of his co-trustee in entering into a number of contracts, or must sanction and approval relate to each individual contract? That, I think, was the essential difference between counsel. Put another way, can a trustee sanction and approve entry by his co-trustee into a number of contracts generally, or must there be specific approval on a contract by contract basis?

The Arguments:

[10] For the appellant it was submitted that despite his reference in paragraph 37 to Lewin on Trusts and to the principle that an act of a co-trustee approved by another is binding upon both, the Judge did not confront that issue in his consideration of the case. Rather, it was argued that he erred by finding that unilateral management of the building project by Mr Wilson, and acquiescence in that by Mr Lang, resulted in the latter being bound by the acts of his co-trustee. In short, it was submitted, this was not a correct application of the relevant principle.

[11] In developing the submission, considerable reliance was placed upon a recent Court of Appeal decision in Niak v MacDonald and BNZ, CA 97/00, judgment 5 April 2001. There the contest was between the bank and trustees (the plaintiffs) as to entitlement to the sale proceeds from a yacht. The background was that the trust was a private or family trust which derived funds from Jersey, being inheritance monies of a Ms Somerville. At the relevant time Ms Somerville and the defendant, Mr MacDonald, were husband and wife. Mr MacDonald purchased in his own name a yacht using trust funds for the purpose. Subsequently he and his wife separated. He borrowed against the yacht on the security of a chattel security and subsequently, as I noted earlier, a dispute arose concerning whether the Trust was entitled to the proceeds of sale as against the bank.

[12] One issue which fell for determination was whether the use of the trust funds was authorised or not, that is authorised by the three trustees being Mr MacDonald, his wife and a solicitor. The Court of Appeal concluded that there was no authority given by either Ms Somerville or the solicitor to Mr MacDonald to borrow money from the trust. At paragraph [19] the Court said:

“The facts that she (the wife) was content to allow Mr Macdonald to deal with trust money matters and she was aware he intended to purchase a yacht do not establish that she gave specific authority to the specific transaction as the law required her. She was not entitled to delegate to Mr Macdonald the Trustees’ power to approve loans and a general delegation of the type found to have existed, leads to the inevitable conclusion she too failed to exercise her powers and discretions in accordance with her requirements as a trustee under the Trust deed. Neither of Mr Macdonald’s co-trustees at the relevant time legally authorised use by him of Trust funds to purchase the yacht, certainly not for him personally, as distinct from or on behalf of the Trust.”

Counsel relied on this passage and, in particular, upon the reference to “specific authority” for “the specific transaction”.

[13] The contrary argument was to the effect that the facts of the present case were determinative of the result. First was the circumstance that this was a specific trust which was established for a defined trading purpose. To that end land was acquired and funds were raised on mortgage from a bank. Development of five townhouses was not only intended, but thereby able to proceed. At that point the trustees had taken the significant and necessary decisions to purchase land, to borrow a substantial sum, and to build the five townhouses. Put another way, the trustees had exercised various discretions in terms of the trust deed. All that remained was implementation of the project or plan.

[14] As to that counsel submitted it was competent for Mr Lang to leave the necessary acts, the day to day running of the project, to his co-trustee Mr Wilson. He sanctioned and approved his co-trustee entering into those contracts which were necessary in order for the townhouses to be built. He did so “by class”, not on an individual or specific basis. However, Mr Wilson’s authority was not open-ended, but limited to entry into contracts which were within the scope of the defined business venture.

[15] Here, counsel argued, there was no suggestion that the contract with Mr Southen to provide plumbing services was not squarely within the scope of the venture. It was indeed work which was integral to successful completion of the project.

[16] These were the two divergent points of view. To sum up, one was to the effect that there must be specific sanctioning and approval of the very contract sought to be enforced against the now one remaining trustee. On the other hand counsel for Mr Southen argued that there may be a general approval of a number of contracts, as a class, such as to lead to the remaining trustee being bound by the act of his co-trustee.

Conclusions:

[17] In my view Niak is a rather different case. In the first place it concerned the borrowing of trust money by a trustee. The issue was whether such borrowing was authorised by all of the trustees or not. The circumstances that one of the trustees (the wife) had acquiesced on previous occasions in the husband using trust funds for non-trust purposes, and her awareness of his intention to acquire a yacht, did not confer authority. There was, in any event, a third trustee. The Court did not hesitate in concluding that a joint trustee decision, or the exercise of a trustee discretion, to authorise an advance had simply not occurred. Hence the conclusion followed that the advance of trust funds was unauthorised.

[18] Here, to my mind, the situation is quite different. This was a purpose trust. There is no question that the trustees took certain significant decisions in relation to the acquisition of land, the raising of funds on mortgage, and the decision to embark upon a development project. Against that background one trustee attended to the day to day management of the project. There is no question but that the present contract was clearly within the scope of the project itself and that the contract was between the plumbing contractor and the Cashel Trust. Part-payment was made over a period of time by the trust. In these circumstances, whether the act of Mr Wilson in entering into the contract was sanctioned and approved by the appellant is, I think, a question of fact.

[19] The District Court Judge concluded that it was established to the necessary standard that Mr Lang had, in all the circumstances, approved the actions of his co-trustee in entering into a contract of this kind. In my view, in light of the evidence which I have outlined at reasonable length, that was a conclusion which was open. It follows that I am not persuaded the Judge erred, either in relation to the application of the applicable principle or because there was inadequate evidence upon which he could reach the view he did concerning sanctioning and approval of the contract. For these reasons the appeal is dismissed.

[20] Costs are awarded on a 2B basis as for a half day hearing.